Sunrun Inc (RUN) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sunrun Incorporated fourth-quarter and full-year earnings conference call.

(Operator Instructions)

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

I would like to introduce your host for today's conference, Ms. Charlotte Coultrap-Bagg, Director of Investor Relations.

Ma'am, please go ahead.

Thank you.

Welcome everyone.

Please note that certain remarks we make on the call constitute forward-looking statements.

This includes statements related to financial and operating guidance, and expectations for our first quarter and full-year 2016, momentum in our business and our business strategies, expectations regarding customers, cost reduction, project value, megawatts booked, megawatts deployed, product mix and NPV.

As well as our ability to raise debt and tax equity, manage cash flow liquidity, leverage our platform services and deliver on planned innovations and investments.

Including in product services, sales and facilities, as well as expectations for our growth, the growth of the industry, macroeconomic trends, and the legislative and regulatory environment for the industry.

These statements reflect our best judgment based on factors currently known to us, and actual events or results may differ materially.

Please refer to documents we filed with the SEC, including the Form 8-K filed with today's press release.

Those documents 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 Jurich, CEO.

Thanks, Charlotte.

Good afternoon, everyone.

Today we are proud to announce our achievements in the fourth quarter and for the full-year 2015.

For the year, we deployed 203 megawatts and generated $160 million in NPV, while reducing creation costs by 17% since Q1.

In 2007, when Ed and I developed the solar-as-a-service business model -- the core innovation that unlocked consumer demand for rooftop solar -- we recognized the extraordinary opportunity, but didn't expect the growth to happen as fast as it has driven by accelerated cost reduction and growing consumer demand.

The as-a-service business model puts the power of choice in consumer's hands by giving them access to money-saving technology without high upfront costs.

And consumers love it.

We've already saved our customers $100 million.

Solar-as-a-service is just the first element of a modern energy infrastructure, and through innovation, we intend to deliver on the promise this holds for a better customer experience and customer-centric growth.

2016 is shaping up to be a year well-suited to Sunrun's strategy.

With the certainty of the extension the ITC brings, we are ramping our direct business, and expect Sunrun-built deployments to continue to grow at rates near 100% this year -- well above GTM's predicted industry growth rate of 34%.

We believe we can grow the direct business at such strong rates, while managing our liquidity, through disciplined pricing and geographic mix, positive contributions from our channel partner and platform services business, and attractive tax equity and debt advance rates that are secured well into Q4.

As industry fundamentals continue to improve, we believe that our consistent focus on customer net present value and careful management of liquidity positions us very well in the year.

We expect our overall growth rate in megawatts deployed to be 40% for the year, as we focus our channel partner business on our best partners, and may prune where appropriate.

As a quick reminder, some of our built systems comprise solar service offering installed by Sunrun.

We also operate our channel partner business, where we purchase solar panels from integrated local and regional solar partners that are enabled by our platform services.

We expect to achieve this growth of 40% in 2016, despite headwinds from our Nevada exit.

Because of this market's closure, we canceled approximately 12 megawatts of backlog which would have been built in Q1.

As a result, in the next quarter, we will install 56 megawatts, which is 53% year-over-year, but down 18% from Q4.

It's important to note that we enjoy ever-increasing geographic diversity.

Outside of California, which enjoys regulatory stability, no individual state represents more than 10% of our 2016 deployment forecast.

Furthermore, with the extension of the ITC, GTM expects rooftop solar will be cost effective in 40 states by 2020.

We continue with our strategy of focusing on customer net present value, and delivering the industry's most valuable and satisfied customer base.

Over 2015, we produced our total cost back by 17%, while project value declined by only 10%, delivering strong operating leverage -- even as we nearly tripled the scale of the Sunrun-built deployment.

From Q3 to Q4 alone, our Sunrun-built deployments grew 44%.

In the fourth quarter, our net bookings were 80 megawatts, a 117% year-over-year increase.

We deployed 68 megawatts in Q4 for a total of 203 on the year, slightly below our guidance of 205, due primarily to the closure of the Nevada market.

The organic deployment growth rate for the year was 76%.

In 2015, we generated $160 million in NPV, with steady quarterly growth.

Given the robust price realization we're also seeing, we are creating an environment for durable NPV margin throughout the coming year.

Generating net present value is only part of the picture in generating cash.

We consistently have been able to monetize this NPV up front at attractive rates through the tax equity, bank debt and ADF markets.

A studied long-term view has helped us as the nation's solar industry has shifted from Wild West explosive growth to a more disciplined, but still rapidly growing industry.

On this note, I want to speak with comments on the industry.

The scaffolding for long-term growth and even greater value for consumers and solar providers can be seen in places like the northeast in California.

This is where regulators are creating models for the grid that appropriately forecast and value the benefits of distributed energy.

California has made it clear that uncapped net metering in the enablement of the two-way flow of energy will be a core component of this moderate energy infrastructure.

The same approach is reflected in net metering decisions in 41 other states today.

The aggregate benefit of distributed solar is becoming clear through higher penetration.

The New England grid operator reduced the amount of generating capacity as requested, due to the anticipated reduction in load from distributed solar.

The result was lower cost for all rate-payers.

This is why you should thank your solar neighbor for investing their own capital to strengthen the grid at lower costs for everyone.

We believe that the direction bellwether states like California and New York are taking is a much more significant and durable trend than the reactive [nuke of wild] customer choice and competition in Nevada.

Actions like those in Nevada will not hold up in the face of consumer demand and technology progress.

Even a push poll just completed by a utility industry group found that four out of five people believe net metering should occur at or above the retail rate.

Further innovation will expand the capacities and penetration of local renewable-based energy.

Our solar and storage offering, called BrightBox, was just launched in Hawaii, and delivers compelling economics for both Sunrun and the customer, that were deemed to be far on the horizon just a few quarters ago.

BrightBox will enable customers to manage net metering constraints or time-of-use rates to deliver predictable, lower overall energy costs.

This is just the first of the offerings we believe we will be able to bring back to our existing customer base to deepen the benefits they enjoy from having an energy provider delivering directly to their needs.

So, looking forward to working together with regulators and utilities to create the business models to integrate these resources to the grid.

The opportunity in front of Sunrun in the broader rooftop solar industry remains enormous.

Electric utility revenue is $400 billion per year.

An estimated 70% of grid infrastructure is nearing the end of useful life and will need to be replaced in coming years.

This has almost a $1 trillion price tag, according to EEI.

The modern grid we are building with our service offering will help reduce this expense and benefit all Americans, not just our customers.

In relation to the scale of this business opportunity, the industry continues to prove that there meaningful and increasing barriers to entry.

This is evidenced by large players continuing to take share, and limited success of new entrants.

Throughout 2016, we will expand the moat around our business through an increasing customer base, brand awareness, distribution footprint, operations infrastructure and differentiated access to capital.

I will now hand it over to Bob, our CFO, for our financial review.

Thanks, Lynn.

We continued to improve total creation costs and benefit from scale and cost management in Q4.

Since Q1 2015, we significantly reduced our total creation costs per watt by $0.72 or 17%.

In Q4, our total creation cost was $3.64 per watt, an improvement of $0.11 from last quarter.

Blended installation cost per watt, which includes both solar projects deployed by our channel partners as well as by Sunrun, was down $0.06 from Q3 to $2.81 per watt.

It also continues to reduce G&A cost per watt, which declined to $0.30, a $0.05 decrease from Q3.

Sales and marketing costs were up $0.03 to $0.64 per watt, an increase over Q3, due primarily to typically lower seasonal Q4 sales volumes.

Finally, when you calculate creation costs, we subtract the gross margin realized in our platform service businesses, which include solar systems we sell for cash or with a third-party loan products.

The mix of cash systems has increased during 2015, reaching approximately 15% of total deployments in Q4.

We expect this mix to continue to increase a few percentage points throughout 2016.

We realized platform services gross margin of $0.11 per watt, an improvement of $0.03 over Q3, during the quarter.

As a reminder, our cost stack is not directly comparable to those of our peers, because of our channel partner business.

Installation costs for solar systems built by Sunrun was $2.33 per watt in Q4.

We expect the closure of the Nevada market and the resulting cancellation of approximately 12 megawatts of backlog in Q1.

As well as a lower mix of channel partner business, as we focus more on key relationships that are accretive to NPV and cash generation, to reduce total deployments and net sales volumes sequentially in Q1 compared to Q4.

Due to the strong expected ramp in the back half of the year, we will continue to invest in capacity to support doubling the volume of our direct business.

Which will increase our per watt Sunrun-built installation cost in the first half of the year, but delivers the best NPV outcome for the full-year 2016.

As Lynn mentioned, our increasing scale and efficiency improvements have delivered expected cost benefits during 2015.

While leaving the Nevada market was unfortunate, Nevada is a case study in how quickly and efficiently we can scale our direct business in a market.

As this volume grew from almost zero to reach about 20% of Sunrun's deployment over only a few quarters, while also becoming one of our lowest-cost regions.

Our channel partner business continues to offer low fixed-costs, additional scale and the potential for nimble market-level adjustment.

But also provides somewhat less visibility into future performance, and cannot scale as rapidly as we can in our direct business.

In 2016, we will focus on key channel partner relationships that are mutually beneficial, and enable us to reach incremental customers and markets in a complementary way, while being positive contributors to NPV and cash generation.

Both our channel partner business and our platform services business are positive contributors.

And they continue to be a critical component of our balanced strategy to effectively participate in each market based on unique merits.

Moving on to NPV in Q4.

As a reminder, project value represents the value of upfront and future payments by customers, upfront benefits received from utilities and state incentives, plus the present value of net proceeds from tax equity investors.

In Q4, we delivered a project value of $4.50 per watt, with total creation costs of $3.64, and a resulting NPV of $0.86 per watt.

Our outlook for project value for 2016 remains the same as last quarter.

We expect project value to remain relatively stable throughout the year.

The strong barriers to entry that exist due to our scale, including cost advantages and uninterrupted access to financing that Ed will discuss in a moment, plus our strong customer value proposition, we have begun selectively raising prices without significantly impacting demand, which has positively impacted project value as these systems are installed.

Though planning that creation costs will be higher in the first half of the year as we scale to handle the doubling of our direct business and work through the Nevada volume loss, and the decline in the back half of the year.

As a result, we expect to achieve our $1 per watt NPV target for the year 2016, but we will be below it in the first half, and above it in the second half.

70% to 75% of project value is a reasonable estimate we expect to receive from asset financing on average.

However, individual quarters can vary, based on timing of specific transactions.

Because we closed our recent $250 million credit facility in January 2016 rather than at the end of Q4, we did not receive some proceeds related to 2015 deployed systems.

So this caused our overall cash burn in Q4 to appear higher than normal.

We benefit from the timing of receiving these upfront proceeds in Q1, and expect to be approximately cash-flow breakeven as a result, in the quarter.

When our creation costs decline to levels consistently below approximately 70% to 75% of project value, we expect to turn cash-flow positive.

Finally, estimated retained value increased to $1.5 billion at the end up 2015 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 billion.

We believe focus on NPV through delivering exceptional customer value and consistent cost improvement are critical for growing our market share and creating long-term value.

There's also significant external investor and internal focus on capital availability and its costs.

As of today, we have sufficient tax equity and non-recourse debt committed or subject to executed term sheets to fund our growth plans well into the fourth quarter.

I'd now like to turn the call over to Ed, our Chairman, to go deeper in this topic, and explain why this continues to be an area of strength for Sunrun.

Thank you, Bob.

The debt and tax equity markets are performing excellently for us.

Our committed but undrawn tax equity and debt capacity today stands at an all-time high.

Just since December 2013, we have closed five non-recourse debt transactions, and done so with steadily decreasing interest rates.

We credit two factors with our low-cost and plentiful project capital.

First, the performance of our 20-year service contracts have been outstanding, and the credit quality of our customers is high.

We have eight years of system performance exceeding expectation.

Customer collections are $0.99 for every $1 of build.

And thousands of successful service transfer outcomes when customers move.

We sell a necessary good -- energy.

We sell it cheaper than the competition.

And we sell to homeowners with excellent credit.

We've also saved customers $100 million so far.

Independent analysis demonstrates homes with solar sell more quickly and at a premium, than those without.

Our customer value proposition is strong and durable.

Second, Sunrun's position as a financial innovator has sustained beyond our own expectations.

Our consistency, smart structuring and standardization of our transactions, has proven to be a more enduring advantage than we expected.

Our historical track record has contributed to a large number of investors doing repeat and larger transactions with us.

We take care to raise debt with lengthy maturities, and to obtain committed, long-term capital before we originate our customer contracts.

Many companies in capital-intensive industries make significant investments without knowing whether customers will materialize.

Others know customers exist, but don't know what cost or advance rate will apply to them in the capital market.

We know both.

This order of operation gives us greater control of our own liquidity.

And as a reminder, we finance our systems with a combination of tax equity and debt.

Turning first to tax equity, we have seen little variation in pricing since we closed our first transaction in 2008.

We have both added new investors and executed increasingly large transactions with existing investors.

Between 2014 and 2015, we increased the average number of megawatts financed per tax equity fund by 40%.

And in 2015, we expanded the number of tax equity investors with whom we partner.

These facts position us well for 2016 and 2017.

Although we continue to add additional investors, we believe we can finance our needs over this time period with our new existing investor base.

As of today, we have submission-committed tax equity capacity, or executed term sheets, to fund our growth plans into November.

At all times in the Company's history, including throughout the 2008 financial crisis, we have maintained an uninterrupted supply of tax equity.

We do not see constraints in the availability of tax equity.

Residential solar is the most scalable and repeatable type of tax equity investment.

Due diligence involves the underwriting of process, procedure and form contract, rather than the spoke asset contract and counter-party analysis.

Residential tax equity transactions can be executed in any size.

The size of our project doesn't matter, and no cumbersome syndicates of tax equity investments must be assembled.

The constant stream of systems that we placed in service also generate smooth tax and GAAP benefits for our investors, and continuous opportunities for further investment.

Cash flow available for distribution after tax equity can be monetized in several markets, including debt markets.

We have focused on commercial bank market, where our costs have inconsistently declined.

We've also used asset-backed securities.

The commercial bank market is currently the most attractive.

Our cost of senior debt in this market has dropped from 6.25% in 2013 to 4.66% in 2014, and then again to about 4% so far this year.

Maturities produce facilities that range from five years to nine years, and are all non-recourse.

We have continued investment from lenders at this approximately 4% cost of debt.

As with the tax equity market, we are enjoying deeper market support as well.

From last year to this year, the average ticket size in our syndicated transactions more than doubled.

The $250 million transactions we closed in January provides sufficient capital for our growth plans through December.

We generally target five- to seven-year maturities, because we believe refinancing our non-recourse debt at that time offers potential, with limited risk.

When tax equity is repaid, we can grant lenders senior liens in our assets, which typically lower debt costs.

Meanwhile, principal repayment has decreased loan balance, while the present value of remaining contracted customer payments, after tax equity dividend, generally holds or increases.

We also typically hedge interest rates based on customer contract length, not debt maturities, so we are largely insensitive to changes in interest rates.

Next I want to address the ABS market.

At the moment, complexities largely specific to this market have made it less attractive for all issuers, and especially so for small- and long-dated issuances.

Because we want to have access to as many markets as possible, we will continue to participate in the ABS market in some fashion, despite these conditions.

But we do not expect to see the most efficient pricing from this market in the near term.

We do expect the ABS market to become attractive again in time, and the securitization we closed in July 2015 demonstrates that Sunrun is well-received by ratings agencies and ABS buyers alike.

The technical challenges facing the ABS market have not repriced other markets, for a variety of reasons.

As one example, capital market turbulence and risk of investor redemption can drive institutional investors to liquid or shorter-term investments.

By comparison, bank deposits are plentiful and a comparatively stable source of capital.

Next, I want to briefly address consumer loans.

When we originate systems with loans, we sell these loans to third parties.

Unlike power purchase agreements, loans carry no renewals, maintenance requirements or production guarantees.

At the same time, customer savings are typically lower on a loan than a lease.

The sales price of these loans flows through the product and services revenue line item.

Finally, I want to reiterate that we have maintained that we'll continue to maintain flexibility in our capital structure to allow us to continue to grow, even under changing debt and tax equity market conditions.

Of our current committed asset finance capital, almost 80% is callable today by the Company, providing us the ability to change our capitalization structure as desired.

The asset aggregation facility we closed in January includes a three-year revolving period, followed by a two-year term period, for a five-year total maturity.

This allows us to hold assets in the facility, or opportunistically to refinance them into the bank term loan or asset-backed security market, and then to recycle the capital.

Our only recourse debt is our working capital line, which matures in December 2018.

As of December 31, the collateral securing this line formulaically would have supported a credit line 50% greater than the one we have in place.

Although our liquidity has not made expanding this facility a priority, and upsizing of our working capital facility is a potential for us with capital to the Company.

Finally, based on our actual cost of debt, including two transactions entered into in 2016, we continue to believe that 6% represents a reasonable unlevered discount rate for our contracted cash flows, after tax equity payments.

This 6% unlevered discount rate would imply the discounting of our levered contracted cash flows at approximately 10%.

With that, Professor Fenster returns the call back to Lynn.

(laughter)

Thank you, Professor Fenster.

Just quickly, on the Cliff Notes version, I would just say is, you have the -- the short story is, we [fit relative decade] into this Company, and the capital availability has been consistent, the cost have been steadily improving.

We even hesitated to spend so much time on it in the call, but because we've gotten so many questions on it, we've decided we would hit it and we would hit it thoroughly.

So thanks, Ed, for that.

I'll turn it back to [two items].

For 2016, we expect to deploy approximately 285 megawatts.

Again, we expect our Sunrun-built business is growing at nearly 100%.

We will continue to target $1 per watt of NPV across the full year, despite compression due to the Nevada exit and capacity investments to support the doubling of that direct business.

In Q1, we expect to deploy 56 megawatts.

We have are moved 12 megawatts of backlog from Nevada that would have been deployed in the quarter.

Finally, I want to thank all of our employees for their amazing contributions to the achievements.

I'd love to send a particular thank you to the Nevada team, that took that market so far in such a short time.

Nobody knows better than the Sunrun employees who have been making it happen that it's no small feat to scale a business like ours at the rates we've been growing.

Thank you all for joining us today.

We will now open it up to questions.

(Operator Instructions)

Patrick Jobin, Credit Suisse.

Hi, thanks for taking the questions here.

First question, just thinking about 2016 guidance a little bit more, with 40% growth, I'm kind of surprised.

I thought from Q3 you were expecting share gains in the industry.

I think I commented, the growth not decelerating.

What's changed since then?

And then on the comment on the channel partners, I think it was -- pruning where appropriate.

Have you experienced any churn amongst the channel partners, or have you seen the negotiated terms change, or something that makes the channel less effective for you?

That's the first question.

Thanks.

Sure.

Thanks Patrick.

Happy to take that one.

First, I think we're not seeing any consumer demand drop off.

And that's -- I think you can see that in our direct business growing at that 100% growth rate.

And so, I believe that we really are executing to a pretty significant share-taking plan in that piece of the business.

What's changed and what is different for us, I would say, are two things.

First is, the ITC got extended.

And so that gives us an additional incentive to really build that directive.

The second thing that has changed is, we all know there's just a huge focus on liquidity.

And it's clear that equity markets aren't open to really fund growth.

And so what that means in terms of the partner business is, we really want to focus on partners that our cash-generative.

And so in the past, where partners -- our partner business has always been a nice contributor of capital-light.

It's a nice contributor, and it will be.

But there are times where there is a working capital usage.

And that is just, again, something that we're going to be a little bit more disciplined about using in our current business.

So I think you are right to infer that business will be smaller.

The majority of that is because we will be focusing on that business to be a very near-term cash generator.

But as Bob mentioned, it's an important piece of the strategy, and we're going to continue to support it.

Thank you.

And then just a follow-up question here.

Sorry to dig into the weeds, but 20% exposure for deployments in Nevada was higher than at least I was expecting.

Maybe a suggestion.

Does it make sense to break out geographic exposure, just for risk assessment purposes, as we think about the business, and maybe reduce some of the volatility?

And then in that light, from the Massachusetts standpoint, what are your expectations for how you approach that market if there is a period of uncertainty with the transition from SREC II to the SREC III program?

Is there any potential headwind in volumes when we think about Q2 timeframe?

Thanks.

Sure, Patrick, thanks.

And I'm glad you brought up Nevada because, of course, that's related to your first question as well.

Certainly if that market hadn't abruptly stopped, as we couldn't anticipate, the growth rate would've been much higher than 40, as you can see in the numbers.

In terms of geographic exposure, we think we are well-positioned here.

As we mentioned earlier in the call, outside of California, where we believe California has good long-term stability -- outside of that, no individual market is more than 10% of the deployment plan.

So we believe that we are well-diversified there, and protected against any sort of single action.

Ed, you want to take Massachusetts?

Yes, and then just quickly on Massachusetts, I would just underscore, Massachusetts is one of the most pro-renewable states in the country.

I do want to underscore, of course, that residential systems are exempt from NEM passages in place in Massachusetts.

It's also the case, the regulator in the state already has an RFP out for a successor incentive program.

They have already, once before, where a program ran out more quickly than expected, bridged it to the successor program.

So, consistent with the state's long-standing support of renewable energy, we are confident policymakers there will provide a successful transition to the new program.

We are obviously watching the situation very carefully, but view it as business as usual for now.

Thank you.

Krish Sankar, Bank of America/Merrill Lynch.

Hi, thanks for taking my question.

I have two of them, either Lynn or Ed.

The first on the -- is there a way to quantify impact of Nevada on full-year guidance?

Should we just analyze the 12 megawatts, or do you think there is more than 48 to 50 megawatts for 2016?

Let me see if I'm answering your question, and then if I'm not, feel free to ask again.

The cancellation we're going to take in Nevada, we will likely take a larger cancellation against our bookings in Nevada than the 12.

The 12 was what we were going to build.

So if you just look at the performance of the business, if we would have built what was in the pipeline to be built in Q1, we would have had 12 megawatts higher.

Which would have been flat to Q4, which is very strong in a business where seasonally, Q1 tends to be lower than Q4.

So we're quite pleased about that.

You will likely see in the first quarter again a cancellation that runs through the bookings calculation.

But in terms of our guidance around the installs of 285 for the year, that fully incorporates the Nevada loss.

Right.

So Lynn, to just follow up on that, what would the 285 megawatts look like into (multiple speakers)?

I see.

What would it have been?

Yes.

Yes, in the [worn out 50] megawatts?

Yes, I think that's a fair number.

Got it.

All right, that's helpful.

And then as a follow up, I just wanted to find out, when you look at the policy [in ramen], what are the next battlegrounds for net energy metering outside of Nevada, Arizona and Hawaii?

And how big a deal do you think is the plan among the California utility to fight the rule change?

Hi, its Ed.

First, I do want to underscore that over the past three years, we've had 60 public policy decisions.

Solar has won 98% of those, obviously very recently and importantly, a major outcome in California.

We actually expect a relatively calm current year on the policy front.

And certainly Hawaii, which is now moving forward with a battery product, has stability under that regime, as well.

Certainly there will continue to be discussions in Arizona heading into next year around rate structures, in the rate case that is coming.

But at the same time, I might also mention that APS recently dismissed its solar fee request, and that the market there over the last two years remains open and strong in over 35,000 solar homes in Arizona.

So if you think about the existing markets, California and the Northeast have always been strong markets.

Hawaii has a new regime, with storage that we believe we can operate in.

So we feel good about the policy outlook over the course of the year.

And I would just add also, just given that we're still experiencing cost declines, and consumer rates continue to go up, we will be cost-competitive in additional markets that we're not talking about today.

And the thing that's the bright side of the Nevada thing, is that we know how to operate now, we know how to open up a market.

And it's clear there is huge pent-up consumer demand across the country for this.

Got it.

And if I could just squeeze one last in, Ed, you mentioned the Hawaii solar and storage product.

I'm curious -- is that path a viable solution to take in other markets where you are having regulatory issues?

Sure.

I think we probably expect a very long-term solution around net energy metering, time-of-use, and overtime batteries.

For sure, in markets where there is an export rate that is lower than the self-consumption rate, batteries make for an elegant solution to that problem.

And we're seeing that play out in real-time, effectively, in Hawaii.

So as batteries continue to get more cost-competitive -- you know, we've seen 50% declines over the last year -- we expect compounding declines over the next several years.

That will continue to be a tool in the tool chest, another revenue source for us, and another way that we can interact with our customers.

Okay, thanks, Ed.

Thanks, Lynn.

Brian Lee, Goldman Sachs.

Hello.

Thanks for taking the questions.

Can you hear me?

Yes.

Okay, great.

Just two from my end.

On the volume guidance for the year, if I look at the implied 40% growth rate, it's still about half of what you were able to book on a year-over-year run rate basis here in the quarter.

I know if you adjust out Nevada, that explains some of the delta, but it seems like the delta would still be pretty big.

So I'm wondering if you can help reconcile what the gap is between the run rate on bookings exiting the year, or entering the year?

And then what you're guiding for for the full year, in terms of deployment?

Sure, Brian, good question.

I think Nevada definitely impacts it.

The other one is, again, when you look at the partner business, we are deliberately exiting a few of those that we just don't like the near-term financial picture on.

So you will see some of those come out of the plan.

And that's really what's driving it.

But if you look at -- again, if you look at the growth in the bookings in the direct business, that continues quite strong.

And we are also planning for a little seasonality too, in Q4, as we always experience Q4, Q1 are a little bit slower.

Okay, great, that's helpful.

As a follow-up to that, Lynn, it sounds like there's adjustments for Nevada -- there's some adjustments for some pruning of the channel installer base, or the channel base, as you said earlier in the call.

If you were to give us a normalized bookings number, is there sort of a ballpark number you could provide here, given what you're expecting to come out of the backlog?

We're not going to guide to bookings.

But I think you will see something similar in the past, where the business tends to run -- all-in, run at something like 120-day cycle time.

So you could back in to get a sense of that.

That's helpful, thank you.

Last one for me, and I will pass it on.

Just on the target for NPV per watt of $1 for 2016, can you give us your assumptions for what that project value will be, and what creation costs are going to be to achieve that number in the year?

Thanks.

Sure, absolutely.

So the project value -- given one of the things I think we've done well at Sunrun is, we've really focused on that project-value piece of the number, not just the creation cost.

And that's a message we want people to hear.

And I think that shows in our margin, is that we've really been able to -- and we've been thoughtful on our strategy to try to hold the premium on that project-value side.

That's through the right market mix, that's through smarter pricing, that's through our channel business, which reaches customers that are less competitive.

And so we've seen that be at a premium throughout the peer companies.

We expect that stays at a premium to the peer companies.

We expect that number -- it was 450 in the fourth quarter -- we expect that, that stays consistent through the year.

I think we, as we mentioned, have seen price increases and strong price realization in the market.

Those have an influence to close rates.

And we feel good about that project value holding.

On the cost side, what you're going to see happening in Q1 is, because we have lower volume to absorb a lot of the costs that we're investing in to support the growth, the Q1 cost deck is going to be higher than it has been historically.

We think it's the right move.

You don't want to whipsaw the business.

We want to plan for the strong growth in the back half of the year.

So you're going to see that cost back increase.

So your NPV will compress Q1 versus the levels we've seen to -- I would say, well-under the $1 target.

But then you're going to see, in the back half of the year, that project value hold.

We're going to get back on the path of the cost declines that we've been always projecting and forecasting with you folks.

And you'll see that NPV climb above a dollar.

And if you look at the whole year in aggregate, it will be at that dollar level.

Okay, thanks a lot, that's helpful.

Stephen Byrd, Morgan Stanley.

Hi, good afternoon.

Hi, Stephen.

I wanted to discuss BrightBox in a little more detail.

Could you give us a little bit of information in terms of the equipment, in terms of [nerger] and storage technology that you intend to fuse with BrightBox?

Sure, absolutely.

The way the system is designed is, it's a self-supply system.

So what the system does -- so as you know or may know, in Hawaii we cannot export the power.

So what it enables us to do is produce the electricity, when the home is not using all of it, we're storing it in the battery and we're drawing it at night.

And there is also a curtailment feature where we can stop the energy from flowing back into the grid.

So that's how the product works, in a sum.

We can finance the whole thing.

We expect to finance the whole thing.

So it will be a lease model; people can buy for cash, but we can also do it through a lease model.

And all-in consumers are same value proposition holds, no upfront investment, and customers are saving money.

So we're really excited about this.

In terms of the manufacturer, we're not able to disclose who our partner is at the moment.

But it's a high-quality lithium-ion battery.

It has a 10-year manufacturer's warranty.

And we're on our way to getting those in-market.

Understood.

And in terms of the all-in economics, it sounds like when you add that cost into the cost of the solar panels, you're still able to offer -- even with oil prices having reduced twice, you are still able to offer a product that's below the all-in utility cost?

We are.

In fact, it's pretty remarkable what's happening to the cost of batteries, and the innovation that's happening there.

I would say it's similar to what we've seen on the PV side.

PV came down much faster than we would have ever guessed.

And I think I was on record earlier in the year saying: hey, I think batteries are, for real, up scale in three to five years.

I now think that it's going to be much faster than that.

Not tomorrow, but much faster than three to five years.

Today in Hawaii, it's 20% savings, plus or minus, with the battery.

That's very helpful.

And just one last question, just on financing for 2015.

You highlighted your cash position in Q1.

Could you give us, at a high level perhaps, just a sense of -- as we think about your financing plans for the year, cash flow position, et cetera, any further color you can provide for 2016 overall?

I think, again, we know that the equity markets aren't open, that's for sure.

And we know how to manage our liquidity, and I think you've hopefully seen that, those of you who have talked to us and followed us over our almost decade now of operation.

And we believe that with the current liquidity we have, we can build a sustainable business, and don't need to go back to the equity markets.

So we're not giving a specific cash flow-positive target or timeline, but we are saying that we believe we're in a place where we have sustainability.

Understood.

Thank you very much.

And I think -- thank you, Stephen.

Maybe if I could also add, I believe this came through in the script, but I think we feel better than ever on the project finance side.

We have very strong visibility into what our proceeds are.

We have good control over the levers of this business.

We know where our consumer pricing is.

We've raised the capital ahead of time.

We know what the proceeds levels are.

We know what the pricing level is.

We know what our Op Ex is.

We have good visibility and control over these levers for the year.

And this is Ed.

I might just also add, one advantage -- in addition to the credit facilities becoming low-cost, the point at which we can borrow against our assets has been improving.

So for instance, where we used to have to place systems and services in [decon] billing to draw on a credit facility, now we can do that at the substantial completion of construction.

And our working capital facility actually allows us to advance against that as modules on-route.

So we continue to work carefully to manage that process, and maintain and maximize our liquidity.

Matt Tucker, KeyBanc Capital Markets.

Hi, good afternoon.

Just wanted to ask first about the guidance.

Does that assume essentially status quo net metering policies through the year in the states you operate in?

Thanks, Matt.

It does, yes.

Okay, thanks.

And I'm just curious what you think happens in Nevada, with the various challenges or efforts being made to change that decision through various avenues?

Hi, this is Ed.

I might say, once before, we've seen a state eliminate a solar market -- that was in Wisconsin -- which also put in a draconian change in rate structure.

We overturned that successfully in the court system.

We're now turning to the legal system in Nevada.

Because it is a matter of litigation, we don't want to comment expressly on it.

But we feel the facts in the Nevada litigation are least as friendly as they were in Wisconsin.

Hey, one other thing, Matt -- thanks.

One other thing I would add to the earlier comment is just, yes, we are fracturing-in our plan -- the plan is built bottoms up, market by market.

Keep in mind, remember, average savings is well over 20% on the utility bill for a customer.

So changes like, when you see a small fixed charge came in Arizona, we weathered that.

We have three times the customers in Arizona than we did before that was introduced.

The plan doesn't include any new entry into any new states.

So our view is, it's appropriately balanced from any regulatory risk.

So there you go.

Thanks, understood.

And then Ed, on the ABS market, you gave the comparison of ABS versus, I believe, bank loans.

But could you discuss more specifically what it is you see affecting the ABS market for those of us not as close to it?

Yes, sure.

I would probably leave this to real market experts, but the things we've seen in the ABS market include some of the following.

First, what with the economic uncertainty causing macro investor nervousness, folks who are the investors in the ABS market often are our institutional investors who are subject to funds flows.

So in an environment where potentially people panic about the economy and pull their money out of such bond funds, those investors need to be able to sell the assets that are in their funds.

And so they focus on very short-term maturities so that they are rolling off frequently.

Or they are focusing on loans that have a 1 or 2 basis points [thin-out] spread.

That is multi-billion-dollar issuances: auto ABS, things like that.

There is also a massive wall of commercial mortgage-backed securities maturing.

So those are 10-year securities that were originated in the boom, before the crisis.

They are maturing now.

So there's just a lot of technical aspects like that, that we expect may persist over the next approximately year or so.

But ultimately, those technical imbalances tend to work themselves out.

And we expect that market will return to how it was last year, in a reasonable period of time.

Thanks, Ed, that's very helpful.

I'll leave it there.

(Operator Instructions)

Julien Dumoulin-Smith, UBS.

Good afternoon, team.

Hi, Julian.

So perhaps just to follow up on the math, last question here, could you elaborate a little bit on the liquidity and the potential upsizing of your liquidity resources you mentioned in the script there?

And then perhaps to hit the second question at the same time -- can you elaborate on what you've seen in the bank loan market, and the dynamics there?

And specifically the debt, as you see it out there, and who's getting involved, if you see an evolution of the players, et cetera?

Sure, Julien.

So first, our working capital facility is a borrowing base facility.

It looks at the value of our current assets, among other things, and then calculates what the maximum loans that those assets support.

That borrowing base support the loans, that's over 50% larger than the loan that we had in place at December 31.

There may be approximately six or seven lenders in that facility; we're well-received.

And so our point is that, potentially, if we were looking for a source of liquidity, increasing the size of that facility would be one potential avenue.

In terms of the bank loan market, we are seeing both new participants in the market, and we're also seeing increased appetite from existing participants.

We've been developing this market for a few years, and it took a little bit of time in particular to get international lenders involved, because of some of the complexities of the tax equity market.

So with that education having started years ago, we are starting to see those lenders show up now.

So we continue to see interest in those facilities, including from new lenders, both domestic and international, and feel very good about the state of that market.

Got it.

And then just a follow-up here.

Just, you mentioned you've got financing through the 4Q period, or at least the end of 4Q, let me be specific.

Can you elaborate on how many megawatts or what the total cumulative availability into dollar terms that it would equate to, just to make sure we are very clear about it?

For the megawatts, it would be basically the guidance of 285 megawatts.

The least megawatt portion of that?

Oh, I'm sorry, the least megawatt portion, you're right, yes.

And then as to cost, so Julien, you can see there's data that we added to the PowerPoint presentation on the website that you might want to look at.

There are two components to that loan.

There is an A loan, which is 250 basis points over LIBOR, with no floor.

And there's a B loan, which is 500 basis points over, with a floor of 1. If you look at the combined interest rate and you swapped it at today's rates, including even a swap premium, you end up with an interest rate of about 4.45%.

And you can see some of the math around that in the PowerPoint.

Got it.

And then in terms of nominal -- or maybe you were about to hit that -- the total amount in dollar terms?

I think I need to clarify my comment on the megawatts, because the financing -- Bob, go ahead.

To speak to how much capacity is available, it's really the least megawatt portion of our 285 megawatt guidance, which is roughly 80% of that.

Got it.

Hey, Julien, just to be clear, it's currently a $250 million facility.

Right.

And in addition to that, how much do you have, just to be clear?

Is it just 250, or just trying to get a holistic picture of how much financing you have available to you to make that happen?

It's 250 that is the committed debt.

In addition to that is the tax equity.

Right.

And what's the total equivalent in dollar terms, if you could?

I'm sorry -- you're asking the dollar terms associated with which, Julien?

The tax equity piece, sorry.

The tax equity component is a couple multiples of the debt amount.

Got it.

Okay, fair enough.

Leave it there.

Thank you.

Vishal Shah, Deutsche Bank.

Hi, thanks for taking my question.

I was just trying to understand if there is any change in your strategy around the channel business longer term, if you have any thoughts on percentage of mix between channel and direct business?

And many of your competitors over the past have also thought about getting into commercial.

Are you changing your strategy on that as well, given your focus on direct business?

Thank you.

Thanks, Vishal.

No change to the change to the strategy of the business.

I think increasing mix in the direct, a lot of that is brought on by confidence we have with the ITC being extended, where we want to invest more in that area.

But what exists and what will always exist are certain segments of consumers in certain markets, where they are best served locally.

And those are the players that reach the consumers at the lowest cost and deliver the highest quality.

In sum, they always going to be -- we have the infrastructure to support them, and that's a win-win there.

So that's always going to be a piece of the market.

It's not as fast-growing as what we are able to do with our direct business, but no change in the strategy there.

What I think makes us also interesting and unique on the strategy is that, because we have all of these partner-facing APIs and infrastructure, we're also able to be very effective in bringing onboard strategic partners who want to get into the residential solar industry.

These are people we have mentioned previously, people like a Comcast or other people who have big, nationwide installed base.

Utilities: we made a few announcements along those lines as well.

And so that's an ever-increasing piece of our partner business.

It just looks a little bit different than the fully integrated part we're breaking out here from the direct.

But no change there.

And then on the commercial question, we look at this all often, particularly in a market like this, where we believe people are a little unnecessarily fearful.

There is opportunity there.

So we are looking around to be opportunistic wherever we can.

As you know, our COO, Paul, ran a commercial developer.

So we're intimately familiar with the business.

And we look at it, we continue to not believe there's strong entry barriers or strong margins, and that it's a -- the traction with the opportunity we have in the existing residential business.

That's helpful.

Just one other question.

Your guidance of 285 megawatts -- does that assume any additional states besides the ones you been currently operating?

It does not.

It does not, okay.

Can you just talk a little bit about what your plans are for some new states?

Do you feel like there is potential for further penetration?

And then also one last question.

When you talk about your cost-reduction road map, where do you think the biggest opportunity is on the cost-reduction side this year?

Thank you.

Sure, absolutely.

Well, in the later part of 2015, we did add South Carolina and New Hampshire, which are strong markets for us, and Maryland, as well.

So those would be less prominently featured in the 2016 numbers, and we will see more of that to support the 2016 growth plan.

But outside of that, again, we're not forecasting anything.

We still are long-term bullish believers in the GTM prediction, whereby 2020, this is 40 states.

And we certainly believe that we're going to be the Company to lead the way on that.

But as I mentioned, nothing else -- no planned expansion is built into the plan.

I think the other question was on cost reduction.

The biggest area -- we're going to see cost reductions across the board as we scale into the capacity investment.

The reality is, we grew our Sunrun-built more than 2x almost within one year -- it's just a huge amount of scaling.

We continue to build that out.

We are continuing to build that out now that we are really doubling down on this piece of the business.

So where you're going to see the biggest gains is definitely going to be in the absorption of a lot of the investment in that infrastructure on the installation cost side.

Continued leverage in the G&A area is where you're going to see the primary gains.

Thank you.

Thank you.

And I'm showing no further questions, and I like to turn the conference back over to Lynn Jurich for any closing remarks.

Terrific.

Thank you, everybody.

We look forward to continuing our dialogue.

And of course, please remember to thank everyone you come across who has solar on their rooftop, because they are making this country a better place.

Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.

Everyone, have a great day.