Sunrun Inc (RUN) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SunRun third-quarter FY15 earnings results conference call.

(Operator Instructions)

As a reminder, today's program is being recorded.

I would now like to introduce your host for today's call, Nicole Noutsios, Investor Relations. Please go ahead.

Thank you and good afternoon.

On the call today are Lynn Jurich, SunRun's CEO; Ed Fenster, SunRun's Chairman; and Bob Komin, our CFO. Our press release was issued after close of market today and is posted on our website. This conference call is being broadcast live via an audio webcast, and following the call, an audio replay will be available on our website. In addition, along with the audio, we are webcasting our slides.

Please note that some remarks we make on the call constitute forward-looking statements. This includes statements related to financial and operating guidance and expectation for our fourth quarter, full-year 2015, and 2016; momentum in our business and our business strategies; expectations regarding customers' cost reduction; project value; megawatts booked, megawatts deployed, and NPV.

Ability to raise debt and tax equity, leverage our platform services; plan investments, including products, services, sales, and facilities; as well as expectations for the growth of the industry, macroeconomic trends, and the legislative and regulatory environment of the industry. These statements reflect our best judgments based on factors currently known to us and actual events or results may differ materially.

Please refer to the documents we file with the SEC, including the Form 8-K filed with today's press release. Those document contain risks and other factors that may cause our actual results to differ from those contained in our forward-looking statements. Our SEC filings are available on the Investor Relations section of the Company's website and on the SEC's website.

These forward-looking statements are being made as of today and we disclaim any obligation to update or revise these statements. If this call is reviewed after today, the information presented during this call may not contain current or accurate information.

With that, let me turn it over to Lynn.

Thanks, Nicole. Good afternoon, everyone.

Ed, Bob, and I are excited to share with you our achievements in this third quarter. We're executing on our ambitious plans for growth, cost reductions, and increasing value accretion through 2016 and beyond. We believe the results we will share with you today showcase our progress towards delivering the industry's most satisfied and valuable customer base.

In the third quarter, our net bookings topped 94 megawatts, a 115% year-over-year increase. Our direct to consumer channel continues to gain market share with growth rates well north of 100% year-over-year and the partner business has contributed nicely with its steady capital efficient growth. For installations, we delivered results above our guidance of 55 megawatts for the quarter, with 55.7 megawatts deployed.

We removed $0.36 from our total creation cost stack, an 8% overall cost reduction in the quarter. This means that in the last six months we've removed $0.61 per watt. At the same time, we nearly tripled the volume of SunRun-managed installations versus last year. Remember, we only made the acquisition enabling our direct business six quarters ago.

I am extremely proud of our execution to date and the additional cost declines that our efforts will achieve. The key value driver for our business is customer net present value. NPV is the value of our projects less their creation costs. There has been a lot of focus in the industry on lowering creation cost, but less focus on maintaining and maximizing project value.

Our disciplined customer targeting strategy and strong demand, combined with cost improvements, have enabled us to deliver unlevered NPV in the third quarter of $0.95 per watt from $0.92 in the previous quarter. On our larger volumes, we see our aggregate NPV increasing to over $49 million in the quarter; that's a 33% quarter-over-quarter increase and a 112% increase in two quarters.

I want to put these results in broader contexts to explain why SunRun is poised to prosper over the coming years. We're at the forefront of a sector that is proving out customer value and demand and seeing on balance far more regulatory stability than change. Let's start with the consumer.

The customer experience we provide is our proudest achievement, and will be a durable advantage in a service- and referral-driven industry like ours. We're proud to be customer-obsessed, and we recently welcomed our 100,000th SunRun customer. Our focus on the customer is also why we are thrilled to see such high-quality performance on our service contracts.

Our earliest customers are now a third of the way through their 20-year initial terms, and we've continue to see billing loss rates below comparable consumer finance categories. We've had thousands of our homeowners move, and have maintained or even increased contracted NPV through the accompanying service transfers.

Finally, the industry has now reached the scale to demonstrate that homes with solar sell more quickly and at a premium. Our customer value proposition is not only attractive from day one, with significant savings against utility prices, it's highly durable.

Now let's turn to value creation at the unit level, as we look toward 2017 in our approach to deliver strong margins in the potential 10% ITC environment. SunRun has built a strategy to provide a competitive service for all target homeowners, while focusing on markets and customers with higher revenue potential.

Continued cost structure improvements are essential and a primary focus of ours, however we can also drive value through pricing and customer targeting, while maintaining strong growth rates. For a significant portion of our current markets, we're currently pricing on a per kilowatt hour basis at 25% or more below utility rates, even before anticipating future increases.

Because of the strong consumer demand we expect to see in 2016, we have begun and will continue to selectively raise price. With the staging levels we've already delivered, this will not have a material impact on our addressable market, and will not impede our growth. In doing this, we also expect to develop clarity on further refinements we can make in pricing to recover a portion of the potential ITC decline in 2017.

Let's turn to regulatory and policy. First, there is real momentum to extend the ITC, particularly from elected officials in states where solar has recently gained momentum. The reasons are straightforward. Competition is good for consumers; clean energy is good for the country; solar has created hundreds of thousands of jobs; the ITC is succeeding in enabling innovation. SunRun will plan for the decline and grow no matter the outcome, but we believe many will be surprised on this issue.

Turning to the state level, there is a meaningful disconnect between the fears and facts. The fact is that after three years after the utilities started trying to eliminate solar competition, not a single state has stopped solar and we have the same number of states with net metering as we did three years ago. The only state that has previously stopped solar was Wisconsin and the courts reversed this just two weeks ago.

This track record reflects the depth of popular support for solar. In poll after poll, over 90% of the country supports solar across all political parties, regions, and demographics. Since the last earnings call, we've had the new regulatory wins in the Wisconsin, Arizona, New Mexico, and North Carolina. In California, solar continues to enjoy strong support from policymakers.

For those of you interested in the details, please subscribe to our regulatory review by emailing publicpolicy@SunRun.com. I also want to cover Hawaii, where we have seen some regulatory changes recently. First, we believe solar has a strong future in Hawaii and we intend to be a part of it.

Let's put Hawaii in context. With one out of every six utility customers there already adopting solar, penetration levels are far higher than in the rest of the nation. If we apply this depth of consumer demand to just the 14 other states we currently operate in, this could mean an additional 8 million solar homes and $52 billion in NPV.

Second, it would be a significant misreading to interpret Hawaii's penetration level as any type of endgame. Rather, it's just a milepost on the way to the decentralized grid of the future. Hawaii's regulators have for now slowed, but not stopped, solar. Keep in mind, the issues we've seen and won on in Wisconsin are very similar to those in Hawaii.

The bottom line is that shifting from centralized to decentralized energy needs real change. We view these state-level regulatory fights as the inevitable noise that comes from disrupting an monopoly sector, as big as retail electricity. They should be read as an acknowledgment by the utilities that rooftop solar is their first genuine competitive threat. These fights are proof of our scale potential. Solar is here to stay.

Beyond the noise, study after study has shown that distributed generation is a net benefit to the aging infrastructure that utilities struggled to manage cost effectively. The structural shift toward the decentralized grid is happening even more quickly than we anticipated when we founded SunRun. We will continue to lead this change in the energy landscape and continue to innovate.

Back to SunRun specifically. In pioneering the solar as a service model, we've carefully built an operating platform and strategy to deliver on the massive opportunity in front of us. There are three key elements to our strategy to bring solar to our next 100,000 customers and beyond.

First, we created a strong customer value proposition, with a widening addressable market. We have stayed NPV-driven on our trajectory for growth and scale. We deliver a fantastic customer experience that pays off over 20 years with predictable customer payment performance, referrals, smooth service transfers, and low customer care costs. This permits us durable access to low-cost capital.

Second, we have positioned ourselves for a competitive cost structure. We believe our multi-channel reach will lead to the widest customer distribution and low acquisition costs. Scale advantages, combined with strong execution, will be important to all market leaders, and we're already proving our ability to deliver on these.

And SunRun has the unique opportunity to lower our cost through monetizing our platform services. These are the open software racking, fulfilment, and lead-generation services we provide for our internal efforts and sell to third-party industry participants.

Finally, we like to keep flexible in our model. We have a favorable blend of fixed and variable costs, as well as the ability to tune our partner and direct channel mix in response the dynamics of individual markets. Through flexibility in module supply, we have continually been able to [thrust] modules at competitive prices.

We've also kept flexible to in our capital structure. We have focused on raising callable asset-level debt with staggered and long-dated maturities. We have demonstrated success in the securitization market and we have no recourse debt in SunRun Inc, outside of our working capital line.

We believe this strategy will support market share gains, especially where value and cost align for great NPV, while minimizing risk and maintaining flexibility. We are staying on high-growth trajectory.

Now over to Bob, our CFO, for our financial review

Thanks, Lynn. Good afternoon, everyone.

We showed strong execution on cost reduction again in Q3, and continued to march down the cost curve to meet the needs of 2017 and beyond. Over the last two quarters alone, we've reduced our total creation cost per watt by $0.61. In Q3, our total cost stack was $3.75 per watt and was $0.33, or 8%, lower than in Q2.

All components of creation costs again improved. The largest reduction was in blended installed cost per watt, which includes both solar projects installed by our partners, as well as those managed by SunRun, and were down 20% from Q2 to $2.87 per watt. Sales and marketing costs declined $0.08 to $0.61 per watt. Total G&A expense also continued to come down, improving $0.07 to $0.35 per watt.

We calculate creation cost, we subtract the gross margin realized in our platform service businesses during the quarter. This cash gross margin was $0.08 per watt. I want to highlight that our cost stack is not directly comparable to those of our peers because of our multi-channel business. The directly comparable systems deployed by SunRun had an installation cost of $2.35 per watt in the quarter.

During the quarter, SunRun directly deployed nearly 3 times the volume we did a year ago, and for these installations, we're reaching substantial parity with scale competitors. We anticipate more modest total creation cost to clients in the upcoming winter months, as regular seasonality causes sequential quarterly growth to be lower than what we've seen over the last couple of quarters in some areas, but we expect this to accelerate again in the month following.

Even while we're opening new branches and markets, with our direct install capacity doubling quarter-over-quarter in some markets, we've been consistently with focusing on improving operations. For example, field labor productivity has increased over 20% year-over-year. I'm also pleased report that we have locked in supply agreements with key module and inverter vendors for 2016 on terms that advance us towards our target cost structure for next year.

Now I'll move on to project value and NPV. As a quick reminder, project value represents the present value of upfront and future payments from customers, upfront benefits received from utilities and state incentives, plus the value of net proceeds from tax equity investors.

Our estimated project value was $4.70 per watt for systems of deployed in the quarter. This total now includes contracted SRECs, as we have increased the percentage of installations in SREC markets, and with these higher volumes, we will be more consistently contracting and monetizing them. In our slide presentation, we show how we have tracked ahead of our expectation for NPV expansion in the second and third quarters of this year.

In Q4, we anticipate a similar decline in project value as we saw in Q3, as a result of the mix shift from continued growth in lower revenue markets and a higher percentage of direct to consumer business. These declines in project value will be greater than the in-period cost reductions and seasonally slower Q4.

As we move forward into 2016, we expect project values to stabilize and possibly increase and we expect to continue to follow the general trend illustrated on the slide over the next five quarters, with product values flat to declining, and that is going to happen more slowly than cost, leading to improved NPVs per unit above $1 per watt during 2016.

Looking to 2017, we believe that we will be cost competitive with large-scale peers and that that will enable us to deliver industry-leading NPV. We will achieve this by driving the project values and costs needed to deliver NPV on a market-by-market basis. Because of the variance we see in revenue and cost between markets, we believe that that is more meaningful than focusing only on a single overall cost target. We will provide further updates on our progress over the coming quarters.

To sum this up at the Enterprise level, at the end of the third quarter our estimated retained value was $1.37 billion. On a net basis, after subtracting our net debt and liabilities related to our lease pass-through financing obligations, our net retained value was $1.04 billion. Also it's very important to recognize, that outside of our working capital line with a balance of $133 million at the end of Q3, none of our debt is recoursed to the Company. It all sits at the asset level.

We've carefully managed our capital structure to preserve flexibility. We face no debt maturity of any kind before April 2018, and then have only $32 million in debt other than our working capital lines scheduled to mature during the rest of this decade.

Now I will turn the call over to Ed, our Chairman, to provide some detailed thoughts on this net retained value calculation, including renewal value and economics and an overview our capital availability. Ed?

Thanks, Bob, and good afternoon, everyone.

I want to take some time today to discuss the assumptions that support project value and retained value, why we think they are conservative, and why we see potential upside to these reported figures. Although we believe it's appropriate to be conservative in the assumptions on which we base our reported key operating metrics, we estimate SunRun could realize additional cash flows of as much as $1 a watt higher than that are currently included in these figures.

First I want to talk about renewals. It's frequently reported that our retained value assumes that 90% of customers renew. This is not correct. Estimated retained value assumes that all customers renew for 10 years, at an initial rate equal to 90% of the customer's contractual rate in effect at the end of their initial contract term. By contrast, our actual customer contracts renew at a 10% discount to prevailing utility rates.

These are very different. Looking at Q3, we can achieve the estimated retained value estimate if only 57% of customers renew at a 10% discount to the then-prevailing utility rate. Assuming a 100% renewal at a 10% discount to prevailing utility rates, Q3 project value would increase by approximately $0.50 a watt.

Because solar panels have been demonstrated to survive for three or more decades, and because the renewal price is necessarily below future utility prices, the primary risk to recontracting is a competing solar company undercutting the rate we assume in retained value. To induce homeowners to replace their solar systems, we estimate a competitor would only realize a contracted project value of about $1.85 per watt in 2016 dollars, even if re-roofing weren't required.

If our industry can achieve a cost structure enabling attractive margins at that contracted project value, solar will be everywhere. Further, assuming only 50% of customers extend their contract to year 35, we would add approximately $0.10 a watt to Q3 project value, even when using the lower kilowatt hour rate assumed in retained value.

Next I want to discuss operations and maintenance expense. Project value, as reported, is already reduced by $0.50 a watt on a present value basis to account for future expense. The reason we remove $0.50 a watt is that the independent engineers our lenders hire, have opined that this is the amount a third party would likely charge to cover both cost of service and necessary profit using today's cost estimates. Using reasonable assumptions for our own cost of service, and assuming a 20% further reduction in inverter prices, we would realize another $0.12 a watt in Q3 project value.

One other source of value heavily discounted in project value is solar renewable energy credits, or SRECs. We only include in project value the SRECs we initially contract, typically only three to five years out of a total 15- to 20-year stream of value. Had we included Bloomberg's current estimate of future SREC value, Q3 project value would have been $0.09 a watt higher for the entire pool.

Lastly, I note that the net retained value we report is effectively discounted at about 10% for the many funds we have back leveraged. This is because we use a 6% unlevered discount rate when reporting gross retained value, from which we deduct the face value of debt to arrive at net retained value. Because market debt costs only about 4.5%, the present value of the actual debt service at 6% is a materially less than the face value of the debt itself. Applying a 6% discount to gross retained value less debt service would result in the addition of about $0.13 a watt to Q3 project value.

I also want to address the potential risks to retained value. In this category, first I want to discuss interest rates. Although the Fed may raise short-term interest rates soon, long-term interest rates already incorporate the presumption of future rate increases. Hence, long-term interest rates are not as volatile as short-term rates.

For instance, the seven-year swap rate is the key rate on which our ABS and bank deals are priced. Even decades in the future, the futures market does not currently predict the seven-year swap rate will rise even 100 basis points above its June 30, 2015 actual cost. We priced our last ABS transaction on June 30, with a weighted average interest rate of 4.5%.

Lastly, I want to address consumer credit. With an average 758 FICO, our customers enjoy credit scores consistent with the nation's lowest risk lenders, such as First Republic Bank. Our average FICO score is better than the average score achieved by prime auto ABS issuers such as USAA, AutoLine Honda for whom securitization market expects a 1% loss rate.

The market for homeowners with these good credit scores is also exceptionally deep. For instance, Fannie Mae and Freddie Mac, which together represent 63% of the market for single-family loans, have an average FICO score of 750 and face assumed loss rate of about 2%. We could fuel decades of growth from customers in this credit category.

The benefits of our saving money for our credit-worthy customers are evidenced by our performance. Over our eight-year operating history, we have collected $0.99 for every $1 we billed. In addition, we've completed thousands of contract assignments when customers move.

In these assignments, we've maintained 99% of original contracted present value. Because customers who move may get a SunRun system at their new home, customers moving has actually generated profit for SunRun globally. These results have been consistent throughout our history. I want to close with a few remarks on our recent project finance capital raising effort. Since our last call, we closed tax equity transactions with four counterparties for firm commitments that will support the purchase of over $900 million, or about 200 MW, in solar assets.

The market for this capital, as well as back leverage for these and other tax equity funds, continues to be robust. One of these four tax equity counterparties was a first-time investor in residential solar, one a new partner for SunRun, and two repeat SunRun counterparties. For guidance, I will pass things back to Lynn.

Thanks, Ed. We always love a good Professor Ed moment, so hopefully that brought some clarity into how we think about this business and our asset class.

For the full year of 2015, we expect to install approximately 205 MW, which would be 78% inorganic growth year-over-year. We will provide more specific 2016 guidance next quarter, but we do anticipate a very strong growth year. We're seeing no deceleration in consumer demand for solar for SunRun.

Finally, we are excited about where we are. We believe our momentum on cost reductions, growth, and partnerships will power as forward into continued value creation next year, in 2017, and beyond.

Thank you for joining us today and we welcome your questions.

(Operator Instructions)

Patrick Jobin, Credit Suisse.

Hi. Good evening. Thanks for taking the question and nice work on the execution and volumes and NPV in the quarter. First question. Lynn, just following up on your comments on 2016, with others dialing back growth it seems, at least relative to expectations, are you seeing anything in the end markets that would suggest deceleration or how should we get comfortable thinking about keeping growth rates where they are? Is it more of the market share game at this point or is it funding constraints? That's the first question and I have a follow-up?

Sure, thanks, Patrick. We're not seeing any deceleration. In fact, we think the fact that consumers may become increasingly aware of the potential accessible [step down], will drive increased demand. It's our view that, given stated growth rates by other folks in the industry, that 2016 would be a share growth year for us, but again all leading indicators are positive. We see no deceleration.

Got it. Then a question for Bob here. The first part is how should we think about funding environment to the mix of tax equity consumption of various types and debt? How are you optimizing your capital structure for incremental deployment over the next few quarters? That might be helpful.

And then a follow-up on project value declining. Your comment that project value will come down a little bit faster than the realized cost reduction, so maybe could you river bank it for us? Relative to the $0.95 of NPV you printed in Q3, are we talking about a net loss of $0.05 or $0.10, or just some context around that would be helpful? Thanks.

Sure, Patrick. This is Ed. I can go first on capital structure. We're not seeing a change in our approach towards capital structure. We're seeing robust availability of debt and tax equity. As we've described before, there's an efficient mixture of debt and tax equity that maximizes our capital availability and project value. Generally speaking, you want to maximize tax equity subject to ensuring you have enough cash available for distribution to efficiently place debt.

That continues to be our strategy. We will continue to execute financings in all fashions, likely including securitization, for instance, on the one hand and bank market debt financings on the other. So we continue to have a very positive robust view towards capital markets and debt availability. We will continue to make use of very different tools in the coming year and continue the strategy of maintaining a flexible capital structure while optimizing those two pieces.

On the second question about project value declines, we think that, on the project value side, we think that in Q4 we are going to see something similar in terms of the compression to we saw in Q3. Then offsetting that on the cost savings side and cost reduction side, we think that will be less than what we've seen over the last couple of quarters. So we will have compression. We expect that as we go forward into 2016, that will reverse and we'll start to get back to the $1 target that we've been talking about.

And Patrick, maybe to add on to that, some of those things that are driving that specifically are, first of all, we were expecting this compression to happen and it happened more slowly than we expected, which is why you saw us overperform in the Q2 and Q3 period. The overall shape and the overall aggregate NPV is tracking exactly how we were expecting it, but there will be a negative trend in Q4 balancing back.

The reason why we get confident that it's going to bounce back is we can tell that some of the success we had in the market, like in Nevada, were there's a huge acceleration in consumer demand flows through and sells in Q4, and that's a lower project value market, that becomes a less piece of the mix rolling forward.

Plus, as we described in the script, we've been experiencing with raising pricing in markets and again, have not seen any TAM reduction from that and those we will start to see wash through on the numbers as well. That's the trend you can expect over the next five quarters.

That is very helpful. Thanks much.

Stephen Byrd, Morgan Stanley.

Good afternoon and congratulations on a good quarter. You gave a lot of color on the call about financing condition, but I just wanted to focus first on ABS debt. Just wondered if you could give us an update. There have obviously been a lot of questions in the market about access to capital for solar companies more broadly, but could you give some color on your take on the state of ABS appetite for the solar product?

Sure, absolutely, Stephen. This is Ed. Good question. The access to capital constraints that folks have been seeing has been more in the types of capital which don't have defined returns. For instance, if one were to invest in a yieldco, one has to make estimates for dividend growth and future drop downs, whereas when one buys a debt security, you know you are getting a 4.5% return on that security, hell or high water.

And so there's a lot less uncertainty surrounding the pricing of and capital availability in those sorts of -- types of capital. We continue to see capital availability in both the ABS markets and the bank markets. And as I said, expect next year, we will likely do transactions in each of those two markets.

Great, thank you. Then just wanted to shift over, Lynn, to the point you raised about pricing in different markets. Thinking forward a little bit. 2017 looks like an interesting year in the sense that it could be a year of shake-out of weaker competitors who have a higher cost structure.

If you were to think about the environment for competitive pricing maybe a little bit further out, 2017 and beyond, is it your sense that there is some potential for you to actually be able to raise prices, both because of utility bills, as well as change in competitive landscape or should we be a little more reserved in thinking about the potential for pricing to change?

Good question, Stephen. There is absolutely room. If you look at our current savings versus what customers are paying it's about 25%. Again, that is pretty variable market by market, so there is certainly room there. That's one of the things that we're doing is we're -- our dynamic pricing and our analytics is starting to experiment and play around with that and actually understanding the consumer elasticity associated with price changes.

What we're seeing is as long as you hit a certain savings threshold, consumers will transact. That doesn't need to go as far as 30%-plus. There are very many markets where we can adjust accordingly. That's going to be a key piece of the 2017 story. I'm sure people are going to ask us and it's on their mind.

We are planning for the 2017 step-down. As I mentioned in the call, we think there's -- we think people are going to be surprised. We think there's a lot of reasons why we think it's going to get extended, but we're obviously preparing for the step-down. We have a lot of work to do on the cost side.

We're going to do it. We're on track for that and we have no reason to believe we won't be at a cost structure that's competitive with the largest scale players in the market. But where you're really going to see us be innovative is thinking about managing that price, managing that market mix, and then also using our partner channel where we are able to really flex that up and down to meet with shifts in the demand.

The other -- a lot of people will say, hey, these smaller players can't survive in 2017. I have a slightly different view on that. I think they can survive when they're plugged into our scale advantages. In many cases, and we've seen this -- we have been doing this for eight years -- we've seen a lot of subsidy declines through our eight-year history.

What happens typically is these guys, they are entrepreneurs, they will find a way to hit what the market clearing price is, and particularly if they can benefit from SunRun, use our software, use our equipment that we are sourcing. In many ways, the local guys can acquire customers in a more cost-effective fashion. So the market is also going to be surprised that we will remain a piece of the market and it's [because] a market that SunRun uniquely can service.

That's great. Thank you very much.

Brian Lee, Goldman Sachs.

This is Hank Elder on for Brian Lee. That's for taking the questions. One of your biggest peers scaled back their growth to sharpen the focus on getting to a right-sized cost structure ahead of the ITC and maybe to avoid needing equity capital Is there a right-sized cost target that you guys need to hit by 2017? Do you know what amount of tax equity and debt you are assuming will make up that mix to cover the costs? I don't know if you could quantify on a per watt basis, that would be great?

Yes, sure. Completely understand the question. Again, the way we are planning this business is to a healthy NPV margin in 2017. Certainly, it is going to compress, so we've given the guidance around north of $1 through 2016 there be some compression in 2017, undoubtedly. Again, we hesitate to give a specific cost target number because we just frankly think it's pretty misleading.

If we wanted to just manage to a low cost number, we would just build a ton of commercial projects and ton of projects in lower-cost markets, when you'd rather have projects in expensive-to-build markets like Hawaii, Massachusetts, California. So the cost target is pretty misleading. What we're managing the business to is that margin, market by market, where we know we can have a sustainable business.

Because probably someone is going to ask about cash flow and cash flow positive, our view on that is we're going to continue to balance fast growth and making progress and reaching cash flow positive, but we know how to manage our liquidity. We're certainly planning for the scenario that the equity markets aren't open or attractive, but we're going to continue to watch it.

If we're growing, if we're taking share, if we have really healthy and strong unit economics and the markets are open, we will go back to the markets. But we have proven as a Management team we can operate these businesses, cash flow positive. We did it in 2013. If you looked at our business in 2013, that was a year where we weren't -- the market was a little more out of favor.

We slowed growth a bit and we delivered a cash flow positive year. So it's something -- we know the levers and we're going to change to plan accordingly. But it's a little early in the game to put a specific number on 2017, but we're going to keep talking to guys every quarter. I'm sure going to have a conversation about this.

Okay, thanks. That's very helpful.

Krish Sankar, Bank of America.

Hi everyone. This is Andrew Hughes on for Krish. Thanks for taking the question. Lynn, picking up on something you mentioned earlier about a minimum bill savings threshold to attract customer, curious, what is the minimum bill threshold that you believe you need to offer in order to enter a new market? What is that minimum bill savings threshold you think customers want to see? And then I have a quick follow-up as well?

Yes. Good question. I would say it's in the 10% to 20% range.

Great. Then you also mentioned earlier on the call that you have some of your earliest customers reaching the point that they are one-third of their way through their contract lives. I'm curious, for some of those earlier customers, even though it might be a small number of them.

As you see changing electricity rates tiers in California and potentially in other states, where do you project those older customers stack up in some of the new rate tiers? How have their savings compressed? Is there any risk that some of those contracts could go underwater relative to the utility price? Thanks. I'll jump back in the queue.

Thanks, Andrew. It's a good question. First of all, I would say -- I would clarify one thing in the question to say one-third of the way through their life, that's the initial contract life. That's a great [change] to detail [out in] the call. We think these assets last for 30 or 35 years and that there is real value in those renewals. That is the first quick clarification I would make.

On the other question, we have seen no difference in terms of the production of performance of the older customer versus the newer customer. So it's just not a dynamic that we are worried about. We've been pretty smart about having controls in our pricing where we have discounts to what they are currently paying. So maybe there are a few things here or there on the margin, but big picture, structurally, we don't think we're exposed at all on that.

And in fact -- this is Ed -- I might just add one thing. You know that in the appendix to the deck, we showed what the recovery rate has been on the signed contracts by year of transfer. You can look at even the 2015 transfer year was a 99.2% recovery. Certainly you are probably most exposed to the kind of dynamics you are talking about in a home move and so even in that cohort of systems, we have seen very strong recovery rates.

Matt Tucker, KeyBanc.

Hi, good afternoon. Congrats on the quarter. You sound maybe increasingly optimistic or at least incrementally on the ITC extension. Could you maybe add a little color there in terms what you're seeing?

Sure, absolutely. This is Ed. Really in the last month or so, we have really gotten really significant traction in Washington on this topic. A lot of it has come from conservative or Republican senators and congressmen whose district have very obviously thriving markets, at a 30% credit, but not necessarily at a 10% credit. The momentum that they are being able to generate is significant.

We think there's a reasonable shot at getting a multi-year extension in the appropriations bill that would part of the budget process this year. If that does not happen, we will have other chances next year, either generally, as part of a potential oil export trade, or certainly in tax-related measures that might come in the lame-duck, but we definitely have seen -- all the leading indicators are pointing right way and are looking increasingly positive over the last month or so.

Great. Thanks, Ed. Then Lynn, I believe on the last call in the Q&A you had talked about a 2017 cost target of something around $2.50 per watt. It sounds like you maybe are thinking about that a little differently now. Should we not be considering that to be any official guidance? Is that accurate?

I would not consider that official guidance. Again, it's misleading to put a single number out there and we're going to continue to manage and see, hey, what can we pick up on the revenue side, where do we need to be on the cost side, and we will continue to talk to you guys, but I wouldn't say $2.50 is a guidance.

Okay, got it, thanks and--

I would add, in a lot of ways -- but I also wouldn't say that's an optimistic number. I would say in many ways over the last quarter, as we've seen a lot of things that have given us increased confidence in the cost structure so don't interpret my comments to say, hey, we can't hit $2.50, don't interpret them, but I'm not giving any guidance on what that number is. We will keep talking to you guys.

Sure. Got it. And then last question, you commented on the utility opposition that we've obviously seen, but I'm curious are there any utilities who are actually looking to collaborate with you or do you see any opportunities to partner with utilities who aren't maybe trying to fight against you so much?

Yes. This is Ed. In fact, I just returned from the EEI this week. Certainly, there are utilities who either see a future in rooftop solar or have been dismayed by their track record fighting it, or both, and are looking at potentially ways to partner. We have always said and believed that one of the benefits of our multi-channel model is that we make the natural partner for a large public company.

Particularly one that is valued on cash flow and earnings and doesn't have $300 million of at-risk SG&A to plow into starting a residential solar business. So we continue to have those discussions with multiple utilities and we feel about it. Obviously those are slow-moving discussions, but it does feel a little bit like the tide is beginning to turn.

And I would add as an example -- and again, that's why we believe our acquisition strategy leads to the lowest customer acquisition cost because these partnerships are a powerful way to acquire customers. For example, we've talked about our partnership with Comcast, which we've piloted in California. They view that as successful. We've rolling that out nationwide, as an example, so that would be another utility-like brand that we're able to leverage their existing customer base and bring an exciting service from their perspective.

Thanks. Appreciate the color.

Mahesh Sanganeria, RBC Capital Markets.

This is Shawn Yuan for Mahesh. Thanks for taking my questions. I have one question regarding the net metering situation in Hawaii, but really it's a three-part question. First I'm wondering do you see any significant change in demand in that market after the net metering ruling, basically they stopped accepting net metering application from new customers?

And then second, even in the market that net metering is no longer acceptable, do you think you can provide a PPA or price structure the offering in a way that still provides customers 10% to 20% savings so they can still come back? And then third, I remember the industry talks about trying to challenge the ruling on both legal and political front. I'm just wondering, do you have any update on the challenges?

Hi. This is Ed. First, want to underscore that the changes in Hawaii are not going to have any material effect on our overall Company plans, even if they may be material for certain actors in Hawaii. We are limited in what we can say about the recent Hawaii decision because it is a matter of a pending litigation, but some publicly available facts on the topic are the following.

In both Wisconsin and Hawaii, neither commission conducted a cost-benefit study of solar before making changes. The message from Wisconsin is clear, that if a commission tries to make changes unsupported by the record, the solar industry will sue and we expect that we will win. The Hawaii decision is actually even less defensible legally than this Wisconsin one because the Hawaii commission failed to even hold a hearing.

The judge in the Hawaii case has already asked to see a copy of the Wisconsin decision and we expect a good outcome from that legal case. In addition, the political support within Hawaii with rooftop solar also remains strong, so we feel good about that. Legally or technically, it is possible to offer services in a variety of different tariff cards, but again, I want to restraint our comments a little bit while we push through the pending litigation matter in front of us.

That is very helpful. Thanks, Ed.

Patrick Jobin, Credit Suisse.

Thanks for taking the follow-up question. A clarifying question. Lynn, you mentioned not coming back to the equity markets at this depressed price. I want to better understand, in growth not decelerating, so similar levels of growth for 2016, you have the capital and capability for fund-level debt and tax equity, et cetera, where you won't need to come back to the equity markets for the 2016 plan, assuming growth remains comparable. Is that a fair statement? Or are there any other moving pieces we need to be aware of? Thanks

Thanks Patrick. That is a fair statement. Yes.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Lynn Jurich for any further remarks.

Thanks, everybody. We appreciate your time and attention we look forward to speaking with you guys again shortly. Good afternoon.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.