Sunrun Inc (RUN) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SunRun Inc. Q3 2016 earnings conference call.

(Operator Instructions)

As a reminder to our audience, this conference is being recorded for replay purposes. Now, it is my pleasure to him the conference over to Ms. Charlotte Coultrap-Bagg, Investor Relations. Ma'am, the floor is yours.

Thank you everyone, for joining us. Before we begin, please note that certain remarks we make on this conference call constitute forward-looking statements. This includes but is not limited to statements related to our financial and operating guidance, and expectations regarding our business, future growth rates and key operating metrics. Although we believe that these statements reflect our best judgment based on factors currently known to us, forward-looking statements by their nature address matters that are uncertain and actual results may differ materially and adversely.

Please refer to the Company's filings with the SEC for a more inclusive discussion of risks and other factors that may cause our actual results to differ from projections made in any forward-looking statements. Please also note these forward-looking statements are being made as of today, and we disclaim any obligation to update or revise them. If this call is reviewed after today, the information presented during this call may not contain current or accurate information.

We will also discuss non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of GAAP and non-GAAP results is provided in the press release we have filed today with our Form 8-K and on our website. And now let me turn it over to Lynn.

Thank you Charlotte, and good afternoon, everyone. I'm pleased to share with you SunRun's Q3 financial and operating results. Year to date, we have taken market share, expanded our unit-level economics and have kept our cash balance flat at $200 million. I'm also pleased to raise our deployment guidance for the full-year by 10 megawatts to approximately 285, which reflects our market strength and continuing customer demand for cheaper, cleaner energy.

In the quarter, we realized a 43% year-over-year increase in megawatts deployed, a 53% year-over-year increase in net present value creation, a 10% year-over-year improvement in our costs, and an improvement in our already-leading customer satisfaction scores. We have achieved these record results by consistently executing on strategy to build the industry's most satisfied and valuable customer base. All despite short-term retail rate uncertainty and negative investor sentiment.

We and our customers will help lead the United States' inevitable transition to clean energy. As I've said before, the market size and industry fundamentals support a long-term annual growth rate of more than 20%, and this estimate is informed by only the technology improvements and cost reductions in sight today. In parallel, some of the most important developments supporting rooftop solar over the long run are being unappreciated by many observers.

First, the regulatory market is evolving positively. Market leaders like California and New York are laying the regulatory foundation for the value provided by distributed solar, to enable a lower cost, modernized grid.

Second, consumers continue to want and demand rooftop solar. As we've been saying for quarters, rooftop solar enjoys strong bipartisan support. 85% of the public and 84% of Republicans, so we do not see this election as changing its course. Homeowners go solar as a matter of choice.

Furthermore the investment tax credit has been passed by Republican congresses and signed by a Republican President. When it comes to market opportunity, state-level regulations are really what matters. On Tuesday, even as the state voted Republican in the Senate and Presidential elections, Florida voters defeated a ballot measure funded by the utility establishment that spent over $200 million to slow the growth of rooftop solar.

And less than a year after we were forced to exit Nevada, the Utility Commission has grandfathered existing solar customers, and on Tuesday, Nevada voters had their first chance to respond with a proposed constitutional amendment to establish a competitive retail electricity market, and an overwhelming majority voted for energy choice. Perhaps most importantly, the solar industry employs hundreds of thousands of solar workers across the country, adding workers at a rate nearly 12 times faster than the overall economy.

Finally, innovation and cost reductions are happening faster than experts have predicted. We far surpassed our initial forecast of bookings for BrightBox Solar plus PV products, with hundreds of orders. And the terms of our supply agreement with LG for batteries would have been unimaginable just a few quarters ago.

As the largest state market, California has been a focus this year. We expect industry growth in California to be approximately 10% in 2016. We are pleased to taking share in this attractive market, with growth in our SunRun managed business that continues to outpace the industry.

Our multi-channel approach is showing its strength. Close industry observers will know that in California, the middle tier of the market representing regional sellers has grown this year relative to the long tail. And partnering with regional sellers in California and nationally is where we have focused our channel strategy.

Our estimate remains that California has five times more solar ready homes than currently installed, and will continue to be an important market. Over the next two to three years, our SunRun-managed solar cost declines, paired with utility rate increases, promises to open new states that can double the number of single-family homes in our addressable market.

A 20% industry CAGR for ten years would mean just 15 million solar homes, or an estimated 19% of US single-family homes at that point. And markets like Australia and Hawaii have already reached this level of penetration, proving that consumer interest and housing stock supports it at the right value proposition.

Another positive trend is that the residential solar industry has repositioned to a more stable and healthier model, setting the stage for long-term value creation. Especially during this time of industry transition, our consistent execution has become a differentiator. Our access to capital and strong liquidity has enabled us the ability to sell the products that customers want, whether it's through PPAs, leases, or for cash.

We've also been able to reach more customers by expanding our flexible channel model. As a result, we have grown market share with growth in deployments of 52% year to date, even while pruning certain activities to focus on near-term cash flow positive efforts. Our strategy of focusing on customer value, driving net present value, leveraging our platform through channel partners, and a low-cost nonrecourse capital structure is delivering strong results. I'll now turn it over to Bob to review our financial performance.

Thanks, Lynn. Our strategic focus is creating high net present value over the long run, through delivering the industry's most valuable and satisfied customer base. In Q3, we made solid progress against the key financial and operating goals we set for this year.

First, NPV. $For NPV, we achieved $1.06 per watt in NPV in Q3, and remain on to meet our goal for the second half of 2016 of achieving our $1 NPV target. This means we would generate about $140 million in aggregate NPV just in the second half of the year.

NPV is calculated as project less creation costs, so let's go through each of the components next. Project value. Q3 project value of $4.43 per watt was $0.18 per watt or 4% below Q2, and within 2% of our average estimate of approximately $4.50 per watt for this year.

As a reminder, project value is very sensitive to modest changes in geographic, channel, and tax equity fund mix. We expect project value will continue to decline slightly over time, but caution to decline more, although in the short run, there can be quarterly fluctuation.

In Q3, total creation costs were $3.37 per watt, an improvement of $0.30 or 8% from Q2 2016 levels. This is slightly ahead of the $3.46 per watt target we set for the year-end described in our Q1 2016 earnings call, and within a few percentage points variation we can see quarterly basis due to factors like changes in channel partner, mix, and the timing of fees related to closing additional project finance transactions. We expect Q4 creation costs will meet our target for the year.

As a reminder, our cost stack is not directly comparable to those of peers because of our channel partner business. Blended installation cost per watt, which includes both solar projects deployed by our channel partners as well as by SunRun, decreased by $0.17 from Q2 to $2.63 per watt. Install costs for systems built by SunRun improved even more to $2.01 per watt, a reduction of $0.26 from Q2 and $0.34 year-over-year, and is now comparable to other residential solar peers.

We're realizing the benefits of several favorable trends mentioned last quarter, including higher utilization of SunRun installation facilities and infrastructure, increased labor efficiency and lower equipment costs. We expect SunRun built install cost to be flat in Q4.

In Q3, our sales and marketing cost were $0.64 per watt, an improvement of $0.14 or 18% over Q2. This improvement reflects the focus we have previously described on adjusting investment levels and channel mix at the local market level, to achieve our near-term net present value goals, and optimize for cash flow.

Next, G&A costs per watt declined $0.24, a $0.09 or 27% decrease from Q2. We continue to tightly manage costs in this area, which have been largely flat for the last several quarters, excluding transaction costs for project financings, which we expect to increase in Q4. Finally when we calculate creation costs, we subtract the GAAP gross margin contribution realized from our platform services. This includes our distribution, racking, and lead generation businesses, as well as solar systems we sell for cash or with third-party loans.

We achieved platform services gross margin of $0.15 per watt, a reduction of 38% or $0.09 over Q2. This reduction was primarily due to lower cash system deployments in the quarter.

Installs. In the third quarter, deployments were up 43% year over year to 80 megawatts.

Through the first three quarters of this year we deploy 205 megawatts, an increase of 52% over the same period last year. We expect to deploy approximately 80 megawatts in Q4, which would bring us to approximately 285 megawatts for 2016, which is a slight raise from our most recent guidance of 270 to 280 megawatts. This implies a 40% annual growth rate, and means that we are taking market share.

Our channel partner mix grew in the third quarter, and we expect it to remain at a similar level in the fourth quarter. We had previously expected a moderate decline in channel partner deployment mix during the year, but in the current market environment, we are seeing more opportunities that are favorable to work with partners, while meeting our NPV goals.

As we previously described, this trajectory can fluctuate quarter to quarter, since we do not manage a mix target. We instead prioritize unit level margin and mutually beneficial outcomes. Our cash and third-party loan mix was 10%, somewhat below the 16% in Q2, due to lower deployment volume and the higher channel partner mix, which includes only lease systems. We're forecasting cash product mix to be in the low to mid-teens in the near-term.

As discussed previously, we believe our PPA and lease product mix of over 80% better matches consumer preferences, and delivers our customers significant value, which is one of the reasons we have been able to grow faster than the market in 2016. In Q3, our net bookings were 79 megawatts, up 5 megawatts from Q2. Now let me turn it over to Ed.

Thanks, Bob. We get a lot of questions on how to value our lease systems. We think a good starting point for how to think about it is our upfront non-recourse finance proceeds, which you can calculate from our GAAP financial statements. We continue to expect total non-recourse proceeds for leased systems of at least 70% to 75% of reported project value.

It's possible we haven't been clear enough about the contemporaneous timing of these receipts, and how close they have come to covering our costs, even with growth. As such, we want to demonstrate that these proceeds can easily be reconstructed and measured, using our GAAP financial statements. We lay out how to perform these calculations on appendix pages 18 and 19 of our quarterly presentation. You'll see that beginning in the first quarter of 2016, we simplified our cash flow statement presentation to make the calculation more straightforward. Further detail on how to do this, and how to do the calculation is contained in the appendix.

Finance proceeds are all nonrecourse, and from sophisticated lenders, who perform significant asset level diligence, and price the risk of their capital at or below 6%. As such, one can safely assume that project value meaningfully exceeds proceeds, no matter what equity discount rate you want to use for those cash flows.

From those slides, you can see that the total components of proceeds sums to about $902 million over the trailing 12-month period. Since we deployed about 237 leased megawatts during the last 12 months, you can calculate that we received about $3.81 a watt, or actually more than 75% of project value and proceeds in that period.

Because of variations in the timing of proceeds, mix of tax equity and back leverage facilities in use and fees, we have set guidance in the range of 70% to 75%. We do occasionally see more significant variations. For instance, in Q4 2015, to the low side, and Q1 2016 to the high side, but that's not typical.

We believe GAAP calculated proceeds represent the fair measure of our ability to generate cash proceeds on a rolling 12-month basis. However, because of the variations I just mentioned, we caution against extrapolating from only one or two quarterly periods.

Project financing continues to be an area of strength for us. Our ability to execute on back leverage, tax equity, and the growth of our corporate revolver has allowed us to maintain a relatively flat cash balance of over $200 million this year. We are sufficiently well-positioned not to need to raise further equity capital to achieve our growth plans. Including executed term sheets, we have project finance capacity through approximately Q2 2017.

Finally, I will close by highlighting that our steady strategy has allowed us consistently to add to our net earning assets, which have increased 55% year over year. As a reminder, net earning assets is a measure of the value of our solar facilities after debt, and is further defined in the materials. With that, I'll turn it back to Lynn for guidance.

Thanks, Ed. As Bob mentioned, in Q4, we expect to deploy approximately 80 megawatts, with our focus in the back half continuing to be delivery of $1 per watt in customer net present value. And we'll open it up to questions now, and just before we do, I do want to clarify one point from earlier in the script. I believe I said that the utility spent $200 million in the Florida ballot, and it's really $20 million.

So there you go. We may have still won, but who knows? We will turn it over to questions.

(Operator Instructions)

Andrew Hughes from Credit Suisse.

Lynn, you discussed some of the evolving state policy landscapes, and you guys have always had to address them. It does seem as though they're evolving faster and different states pursuing different strategies. Curious from your point of view if it becomes easier to rely on partner network or sales and installs? In that case as these various state policies continue to evolve or do you think the direct business is more advantaged to address some of these issues on a state-by-state basis?

No, I think first of all, I'm glad you point out that state issues. I think one of the reasons why we are so bullish on the long-term growth rates in this industry is we are achieving this 40% growth rate this year without a lot of new market expansion. And we are seeing lot of states want to really bring solar into their communities, and with our cost reductions, I would see that as a real tailwind in the business, is state-level expansion.

We are thoughtful about where we invest in our direct resources, and where we invest in partner. I think we are continually getting better at variablizing our cost in the direct business. So today, I think we're pretty confident that we can move in and out, if necessary, in that direct business, in a pretty cost-effective way. Although again, as we've said, the market has been pretty stable for us this year.

So we look more to is there a customer segment that is better reached with the channel partner? Do they have a competitive advantage in their cost structure in that market? It's more about how do you stitch together the lowest cost value chain and reach the most customers? It's really complementary from that standpoint.

And then I would just also offer that overlap rate between when we sell out -- how many of our customers receive a proposal from one of our partners versus our direct business still remains well below 10%. It's very small. And so again, that really is underscoring that this is a fragmented market, and so with the channel piece of the business that we have, we are able to reach a broader swath of customers.

That's great, and then just in terms of relative success across some of your different sales channels, are you seeing ones with greater success than others? And any that are having higher cancellation rates than others?

Again, glad you asked that question. We talked about more on the last call than this call, but we have been very deliberate about weeding out any lead channels any markets, any partners that aren't on a path to near-term cash flow positive. So we have been quite deliberate in that over the past couple quarters, and yet we are still able to take share, which we are quite proud of. So yes, the more attractive ones are the ones we are pursuing now, and everything we are pursuing really hits that investment criteria.

Great, thanks. I will jump back in the queue.

Brian Lee with Goldman Sachs.

Thanks for some of the state-by-state color. To build on that, can you give us some sense of how much percentage exposure you have to Arizona currently on a run rate basis, and then what your updated thoughts might be on growth, or potential declines on that market next year, given the recent election outcomes, and potential for any rebate changes? And I have a follow-up.

Brian, it is Ed. First, worth mentioning, we operate exclusively or almost exclusively in the Arizona Public Service territory in Arizona, and first I want to reiterate there will be no changes to rate structures in that market until July of 2017, and those changes will affect only newly sold customers at that time. And as such, the current rate structure will support installations in Arizona through Q3, and possibly into Q4.

Certainly, the Arizona Corporation Commission has said that we should be expecting some form of rate reform. At the same time the commissioners have also stated they want to preserve a growing solar market in the state. I'd also note that 75% of even Arizona Republicans have said they're materially less likely to vote for a public official who acts to reduce the size of the rooftop market and obviously commissioners in Arizona are elected.

So we feel pretty good about the long-term prospects in Arizona. And we are increasingly diversified in our customer origination -- at least nationally. And feel very good about that risk.

Great, thanks for the color. And the follow-up would be around the cost structure here. It encouraging to see the SunRun direct install costs were down pretty significantly, ahead of most expectations. Can you talk to how much was driven by component cost?

Module inverters separately, versus how much was driven by labor and overhead? And I'm a little surprised you are guiding to Q4 being flat. Any color you can provide on why that is not going well? And just lastly, how low do think you can drive the direct install cost in 2017 given where component prices are trending right now? Thank you.

Brian, this is Bob. I will start with the last part first. We're at about $2. I think when we look forward at where the SunRun managed install cost can go, some of it is geo mix base, but if you look at the $2, roughly half is material costs. When we look out to 2017, it's pretty well known that at least on the module side in particular, we think we can see of the material cost part of the stack, perhaps 20% additional reduction there.

We think on the labor efficiency side, we've grown into our capacity, and we've also gotten more efficient. In this year, there has been a significant portion of improvement in our cost structure, that has come from that combination of efficiency, both better utilization and labor cost. And efficiency in the hours. The material costs in 2016, while the contract pricing has come down, it will take us will to work through the inventory, which is closer to historical costs. So we haven't seen a lot of material cost benefit yet, most of that's going to come in the first half of 2017.

I can hit on the megawatt growth, but just also getting back to the cost stack. I think the -- again, we want to caution people that are only looking at that cost stack in isolation. The NPV is really in our view what drives value. That's what matters, that's what the equity holders are going to get.

So if you just look at many of our -- we have a low-cost play book, we have low-cost channels, and we've stitched those together. We're below $2.50 a watt all-in in certain markets. And if we wanted to participate in commercial, we would be at that level. That's our goal, our goal is to drive the NPV market by market.

When we look at that cost side, we have to look at that revenue side too, to really understand the value creation. In terms of the megawatt growth in Q4, I'm surprised by the phrasing of the question a little bit. I think the way you phrased was, I'm surprised it'd not going down.

I think this is our point. We been saying for quarters the industry fundamentals are very strong. We're delivering the growth. I think sometimes perhaps people are latching into other competitors that maybe weren't in the offensive position, but the fundamentals are sound in this industry, and consumers are wanting to adopt this.

The forecast in Q4, we, as Bob mentioned, booked 79 megawatts in this quarter, and we're getting better turning those booked megawatts into realized installs, and we have good visibility into it and that is the demand of the business. We will say that the shape of the year does have seasonality in it. And so, we expect that this year we will experience the same kind of seasonality we experienced last year, which was you have your peak sales period in the summer, you install those in Q4.

Sales dip in the fourth quarter and first quarter, as customers aren't thinking as much solar or holidays, weather, et cetera, and it comes back. We will expect that shape again this year. But the 80 megawatts in Q4 is a reflection of the roughly 80 we booked this quarter.

Okay great. If I misspoke, I was referring to being a little surprised that your direct install costs were flattish for Q4.

I see. We will accept that. Volume, yes.

I appreciate that. Thanks a lot. I will pass on.

Sophie Karp of Guggenheim.

Congrats on the strong quarter. I just wanted to drill down a little further on your sales costs, which has come down quite significantly quarter over quarter. Just wondering, this has been a challenging point for the industry. Maintaining the contingency, of course, should I say. Where do think you can take it from here? Maybe in 2017 and into 2017 and beyond?

Sure, great question. And we think about customer acquisition costs, like most businesses, in relation to how much value are you acquiring. This is one of the education points I think we as an industry need to do better on, and I wrote a blog post on this, which you can find on our Investor Relations page. If you look at that installation cost of the acquisition, I'm going to use abstract numbers here, rough numbers, industry numbers. $3,000 to $6,000 customer, but if you're going to be delivering a contribution margin of $15,000 for that customer, that's where the market customer acquisition cost is going to be. Because that is the ratio of a solid business and solid industry.

First I think there are improvements in customer acquisition costs. We're focused on it, we are going to see more. But it's not out of whack, as is often advertised in our view. Certainly, when you benchmark it to the other industries.

Part of why we have been able to see the success of it is the efforts we've made in pruning these more expensive channels. And we are going to continue to see that. As we continue to grow, we will see leverage in the piece of that, that's more of a fixed cost expense, and we are getting smarter and smarter at which channels we operate in.

We do see that coming down. We do not see it coming down significantly, because we operate in a market and the customer values are supportive of that acquisition cost.

Thank you, this is helpful. On the more conceptual regulatory question, if I may. Something that came up with investors in the last few days, over the election. Do you think it's a possibility that FERC may interfere with the NAM standards in the state level and move that somehow against the residential industry?

That's extremely unlikely, and I don't think there's a good legal argument for it. The net metering periods are deliberately designed to be inside the billing periods. That's why, for instance, in California, customers receive one annual bill. That's very deliberately set up to ensure that under interstate commerce, that's a state level and not a federal level item, so I don't perceive that to be something that we are worried about right now.

Thank you.

Krish Sankar with Bank of America.

I have a few of them. First, Lynn, just to follow-up on your earlier comments. Historically for you on a sequential basis, Q1 has been the low watermark for megawatts installed. Now as you grow in size, is it fair to assume that seasonality creeps into Q4 that Q4 and Q1 could sequentially be down on a go-forward basis?

Are you talking about in terms of installations?

Yes.

I think the shape would be not Q4 but Q1, yes. So Q4, because you are starting to see the summer, you're still selling the summer attractive time in Q4, but then Q4 will slow down, so you will see a seasonally lower Q1

Got it. And then the other thing, the cash alone sales obviously dipped down to 10%, and it looks like you are running well below where the rest of the industry and your peers are. Is it out of the because most of the cash sales is through Costco versus any other channel? Is it are you running below the industry or is something else going on with SunRun customers?

I think it is just that when you offer a cash product and a lease to someone and you don't push them towards one product or the other, they traditionally end up as a lease customer, because it's really a better customer offering. I think there are some people in the market who either from accounting, or cash, or capital availability reason, may be steering people to one product rather than the other.

Specifically to the cash product. And that is influencing what you see in the marketplace. It is also the case that through our channel business, we only have leased customers and so that is why how it depresses our mix also.

Got it, got it. Had a question on the Arizona front, not many of the solar companies actually have much exposure to Arizona, but some of the regulation has been coming out relatively more pro-utility versus solar. I had a question even though California is the bigger market for solar, is there any concern that Arizona might be used as a benchmark by other states, given that Arizona has more traditionally utility model, compared to like the dealer ones in California?

So we have obviously -- Arizona has had a pitched relationship between the solar companies and the utilities for years. And up until this point, there actually hasn't been a lot of numbers driven. I think we are going to see some more of that this time around, but generally speaking, I still think that nationally, when regulators look for the leaders who are going to figure out the future of solar, and where as a society we want to go, they are more likely to look at a New York or a California type market probably, than they are and Arizona market.

You just look at the staff of the California Public Utility Commission has relative to other utilities commissions they have so much more resources, the same for New York, to try to figure this out. And generally speaking, we're seeing regulators realize that rooftop solar gets built more quickly, it uses the existing infrastructure, it generates the most jobs, it is highly popular amongst their customers, and it is cost effective for all rate payers, and so they are supporting it.

I guess I'm not seeing that broader trend is coming down in favor of the utilities. Let's just take Nevada as example. It's been overturned, and when you see the vote that just happened, people opted for a competitive market. Ad so in the state where a couple calls ago we were talking about, is everyone following Nevada, now you actually saw pretty significant backlash against that, and reversal on items. So that, plus the fact our two biggest markets that are leaders are very much going in the direction of distributable, I would argue significantly that's tied behind residential solar not the existing utility model.

Got it, got it. Very helpful. Just a final question for Bob, I know based on your definition of cash flow positive, were you cash flow positive in Q3, or if not do you still expect to be cash flow positive exiting this year?

Based on our definition we weren't cash flow positive in Q3, and I don't think that we will be in Q4. Our goal has been to get there a soon as we can. We think that we are very close to it, and we look forward to 2017 hopefully being the time that we can turn that corner.

Got it, thank you very much.

Julien Dumoulin-Smith with UBS.

Just a follow-up on the last one if you could actually. Can you expand a little bit on the cash position? What has shifted such that you no longer expect that to be the case?

I don't think that we've changed our expectation. It's not that we no longer expect it, we've been working our overall cost structure down. On the other side of the equation, we've been working hard on advanced rates for up front proceeds, and we need to get to a spot, and I think we have describe this, where not just our external cost stack, but there's also some additional cash items that need to be covered above that. So there is working capital that is not reflected in that.

Remember we have a distribution business in addition to having inventory for our own internal business. There is also capital investments, there is other costs like R&D that don't get picked up in the way the industry looks at the external cost stack. So we have some margin above that, that we need to cover. And then once we are consistently at a place where the up front proceeds are than that, that's when we turn structurally cash flow positive in our definition. We have been getting closer and closer, and we think that it will still be another quarter or a few quarters before we get there.

I want to be really clear on this point, because there is maybe a misunderstanding that we were guiding to a specific period of time, where we were going to turn cash flow positive. That's not the way we operate the business. We continue to look at, this is a long-term business for us. We have a lot of growth areas to invest in.

Cash flow positivity is a goal but if we see investment opportunities, the ability take share like we are right now at really attractive unit economics, and we can manage our liquidity and don't think we need to raise excess capital, we're going to do that. So we very deliberately never put a target on it.

Can you expand a little bit on, bookings were obviously flattish versus deployed, but I suppose also in terms of new markets, et cetera, obviously there have been some positive developments in Nevada. Would you expect to start expanding again year over year as you trend into 2017 here and seeing that contributing to accelerating sales? Or would you be again focused because of the cash considerations, and the desire to get to that SCF breakeven metric, that you would be focusing your core markets array?

I think we can -- we're putting together the plan today. The 2017 plan, and I can maybe preempt the question that maybe someone will ask on what's your 2017 guidance? We are not doing that now. We are in the process of going through a bottoms-up plan to really focus on which markets, doubling down on our existing markets that we like, which markets are -- have a sustainable path to cash flow positive.

Now with our new low-cost play book and our lower cost structure we will be in a position to be able to expand into new markets profitably to hit our growth targets. And so we will tally all those up and take look at it. But we are pretty excited about the prospects.

We grew 40% this year without a lot of new market expansion, and with no Nevada. Nevada is not currently in our plans. It is not a meaningful -- it's not meaningful, but there certainly are other new large markets that we're eyeing.

Got it. And just with Arizona, actually just in terms of percentage, did we get that?

No, we do not disclose the specific market by market share mix, but we're well-diversified.

Got it, thank you.

Vishal Shah with Deutsche Bank.

Lynn, can you talk about the PPA pricing trends? I know last year you had started to raise prices. Do you think along those same lines this year? And also, in your guidance in the second half, NPV was $1 a watt, which would imply that in Q4 NPV would go down. Can you just expand on that please?

So your first question was, sorry? What was the first question?

The PPA environment.

Got it. So the pricing environment has been stable. We raised pricing at the beginning of the year, as did a couple other of our peers, peers that may have even raised pricing again, although we do not believe that is the right move in terms of the elasticity. So it's held.

That is one of the beauties of the industry being out-of-favor is people are pretty disciplined and they are focused on a sustainable growth. I love the language we are hearing out of Elon, talking about how you don't become the market leader by discounting. And so I think that all bodes for a really healthy pricing dynamic in the industry.

Remember, we are on average 20% to 25% cheaper than the utility day one. So there is an incentive to switch. So the pricing has held. But we are certainly not counting on any price increases, and we're building our plan as well around being able to offer lower PPA rates in new markets with a lower cost archer at similar NPVs.

So getting to your NPV question, in Q4, we do expect that the year will be a dollar on average, so I think you are safe to assume that -- or the second half, excuse me will be a dollar on average so we would expect that Q4 may come in slightly below that.

Is there a function of greater mix of channel partner business or what is going on?

When we look at these numbers, these are 2% fluctuations. So it's not -- they are not, there is no operating story to really tell on any of that. It is -- you have a little bit of a different market next year, 2% lower NPV, but it is small variance here.

Maybe like 1% actually on revenue realization.

Great and one last question, just on the California market, PG&E territory. I know that 2.0 has slowed down the market. How are you seeing trends there, and then how do see a California market evolve, especially as some of the other territories reach their rebate caps next year?

Sure. The California market, just really a San Diego question. I believe there was one month that was down in applications, but that it recovered just after that. I think it was July that was down, but it's back up to where was previously. So I think that was more of a one-time blip.

The way we think about California is, there are five more times the amount of homes that can go solar then there are solar homes today. That doesn't even include new homes, it doesn't include what's going to happen with the rental market. We today -- we only operate in half the state. California is going to be a growth market for us.

When you look at the savings, we have a third-party and ourselves we calculated, what were the customer savings before and after TOU in each one of the territories. For PG&E, the savings were roughly the same. So they ranged between -- these on the slides, so you should check the slides for the exact figures, but it was between 25% and 30% at PG&E. And in San Diego Gas and Electric, I believe it moved from 39% savings in the old regime to 35% savings in the new regime. So they are not meaningful changes.

So I think California will continue to be a strong market. California will continue to be a growth market for us. We are taking share there today. But there 49 other states that we are eager to get into, too.

Thank you.

Matt Tucker with KeyBanc.

Congrats on the quarter. I appreciated that you addressed the election results in your prepared commentary, and addressed the key ITC policy, and pointed out that the state policies are of utmost importance. I just wanted to ask, are there any other federal policies that you view as driving your business, that could be at risk under a Trump administration? And then with regard to the Clean Power Plan, clearly not really implemented yet, given it is under court stay, and arguably the chances of it being implemented in its current form be diminished, but if it were implemented how much of a driver would that be if at all, for residential solar in your view?

The Clean Power Plan was really a utility scale item, that didn't really affect rooftops. In fact, you could easily argue that it could be positive as negative for rooftop. Around the edges it is hard to say. But it is certainly not material one where the other.

The only two policies that exist federally that are relevant to us are the ITC, and then obviously, to a much lesser extent, Accelerated Depreciation. We continue to feel good about that. The bipartisan support is strong, and in fact, the renewal that we just went through last year was led by prominent Republicans like Senator Heller, Senator Grassley, Senator Hatch, who is Chairman of the Senate Tax Committee. We continue to feel good about the federal situation.

And I think this is an important -- this is a really important point, because rooftop solar is very different from other renewable energy sources, I think politically. And I said this in the script, but I think this is worth repeating. Our job growth is 12 times the rest of the economy. 12 times.

These are jobs that aren't going to be exported. These are blue collar jobs. These are well-paying jobs. This is massive. This is 200,000 jobs that we have created. And the psychology of our customers.

First of all, most of our customers are Republicans. The psychology is, I want competition, I want freedom from monopoly, I want people telling me what to do. Rooftop solar is the anti-establishment energy choice, and that's what we offer. It is very of the moment.

I do want to be very clear. The Clean Power Plan is something very different. That is, I think, we are talking about the threat there. For us, we are creating the exact policy goals that the administration is saying they want to achieve.

Make sense. Thank you. And then we have heard a notion out there that in California specifically that the low hanging fruit has been picked in terms of the most credit-worthy customers, the most suitable houses for solar. I think the numbers you suggested or you presented suggest not really the case, but I'd just be curious what your response is to that concept.

I think in this fear world, people are trying to attach anything to make their negative thesis right. That would be my main assessment. Because when you look at the numbers, it just don't support it. So I would love for some into articulate that with numbers.

That would be, I think, a useful exercise. Just like I would love for someone to articulate how are we losing the regulatory battle with numbers. So when we look at the numbers, that five times more solar ready homes. We have cut it by all the dimensions.

We've already cut it by shaded homes or estimate of shaded homes. We've cut it by only single family homes, so there's no multi-tenant in there. We have cut it by FICO score. We've cut it by all those factors. You still see a lot of growth.

The other thing I think people are California's a nice profitable long-term market. You don't want to underestimate that, and we will continue to take share there. But in California, while you are able to charge a higher PPA rate, there is a lot of reasons why your costs might be a little higher. It is smaller system sizes, because people use more energy efficiency, so what we will actually see is even if we go to new markets, and maybe your PV per watt might be lower, but your cost structure is lower as well in the markets, and so we are very optimistic about generating these $1 NPV levels across new markets, not just California. Across many markets, not just California.

Great, thank you and I just wanted to ask about the LG battery supply agreement. I think you had suggested that you were able to secure very attractive terms there. Maybe you could just expand on that? And then your thoughts on timing of starting to bring that to the mainland, maybe what you are looking for, in order to do that?

It's Ed. Both Tesla and LG make excellent storage products. And I imagine that will probably be the case with UID shortly, as well.

When you look at the amount of storage that will be necessary to support the extremely high level of penetration of solar that we expect in the long run, obviously it's important that there be multiple manufacturers. The quality of the product that we get from LG is great. It also comes with an investment-grade warranty, which is fantastic.

We still also do love the Tesla powerwall, we will continue to install those, and we continue to evaluate other options. What we're just excited about is finally for the first time, we have quality product, at a low cost, being manufactured at scale, by a number of companies who are all rapidly growing their manufacturing capability and rapidly increasing their energy density and rapidly lowering their cost. So the overall picture there is just awesome. And we are very excited to see where it's going to go into 2017.

As to more BrightBox installations, on the -- in the continental United States, we have been trialing that in small numbers, that's probably up on our 2017 list of things to do, and there certainly things that need to be resolved before you'd see mass adoption, say in California such as what are the time of use rates exactly, and what might be the value you can really get out of the capacity market, and do you strike that with utilities or with the grid operator? So there is some work to do there but I think you will definitely be seeing significant continental US deployments in 2017.

Sounds good, thanks Ed, thanks Lynn, I will leave it there.

Colin Rusch with Oppenheimer.

As you look at the potential for a lower corporate tax rate coming through in the next year or two, have you started preliminary conversations with your tax equity partners? Obviously, there is potentially a very deep pool of tax equity, but what are the specific dynamics that you've started to engage on at this point around that issue?

Sure, so in our entire group of tax equity investors, we actually only have one who has been constrained by their tax capacity. And has told us that -- and they do more like $1 billion than $100 million in tax equity, and we are at top of their call list. So given that we don't really hear from tax equity investors that they're constrained by their tax capacity, like many finance professionals they are actually constrained by the quality of the transactions and their abilities to close transactions.

Not so much by available capital. I don't see that as having a material effect. There certainly is broad-based Republican support for tax reform, but it is nevertheless still an impossibly difficult matter. And so I don't think it's going to happen altogether too soon, but we obviously watch it carefully and are in conversation with people, and don't consider it to be a risk to our tax equity capacity.

Okay, and then the final question is really around interest rates. Obviously, there has a sharp move in terms of treasuries in the last few days. And you are certainly a yield-sensitive entity. As you look at your portfolio and the levers you have to pull from a financing perspective, what you expecting and preparing for over the next call it three to four quarters for your debt capacity and some of those financing options that you have on the table?

Sure. A couple things. Obviously we manage our interest rate risk carefully. We hedge our existing books, not for the duration of our loans, but for our contracts, and we think about that in terms of new business as well.

First, I think it's important to note that our current debt facilities are constrained by advance rate and not coverage ratio. And so even if you did have higher interest rates, the amount of cash that we would receive in proceeds is unlikely to change. It would start to reduce slightly the equity retained value cash stream, but it wouldn't have an effect on the upfront proceeds.

It's also the case that utilities pass through interest expense to their customers, in the form of higher rates. And if you actually really see a higher rate they will also pass-through higher ROE. So our competitors pass through capital costs and two-thirds of the cost of residential power is capital assets that are depreciating over 60 years.

Finally, accelerated depreciation reduces our interest-rate sensitivity. So because a good chunk of our capital structure is tax equity and not debt, higher interest rate paradoxically actually makes tax equity more valuable and often lower cost, both because it is deferring, the deferral of a liability to a bank is worth more when interest rates are higher, and then also, there is more tax capacity at a higher interest rate. All in all, we continue to watch it carefully. We manage our risk but that is not something again that is in our top eight things that we focus on right now.

Perfect, thanks a lot.

(Operator Instructions)

Joseph Osha with JMP Group.

Two questions. First, looking at what happened with question three in Nevada, I know that's been a little fraught. Do think there's any possibility now that you might try and reenter that market?

I think the current rate structure in Nevada doesn't support a rooftop solar market. But there are many potential avenues where that could change, either through the legislature or the regulator.

To Lynn's point, we haven't baked any of that into our own 2017 planning at this point in time. It certainly a non-- it's a potential -- it's something that might happen. And it certainly something that we track carefully. But it's not something that we are planning on.

Not to put too fine a point on it, given the fact that it seems like the tide has turned a bit. Is or any possibility that you all might try to engage the legislative process there a little bit, or are you just going to stand back and see how the cards fall?

We obviously are very engaged in policy nationally, and are active in most states, and also at times with our peer companies divide and conquer. So it is certainly the case I think the solar energy, the rooftop solar business, the industry will be active in Nevada policy. And we may or may not be as a Company as reactive.

Okay thank you and then the second question, you are very apparently taking share, and just at a high level, I'm curious given the fact that some of your competition seems to be making more noise about trying to go to cash alone, whereas you are still very committed to your PPA and lease strategy. Do you think that is maybe why you are picking up share? I'm curious as to what read you might have on that.

I think it's probably a factor. It's not all of it. But again I want to clarify that we are not committed to the lease strategy. We are committed to giving customers the product that they want. And I think that is the difference.

But this is an execution business. This is a, what are your distribution channels, market by market. What unique customer acquisition channels do you have? How good are you -- how happy is your existing customer base of 100,000 plus customers in terms of how active of referrers are there. A number of execution in this business that we believe we have been focused on, and that has helped us deliver those growth gains.

Okay. Thank you, that will be all for me.

Ladies and gentlemen, this concludes our question-and-answer session for today. So no it's my pleasure to hand the conference over to Lynn Jurich, Chief Executive Officer, for closing comments and remarks. Ma'am.

Thank you everybody, and as always if you have anybody who owns a home, friends and family, send them our way. We can save money on your electric bill. We will look forward to speaking with you again next quarter. Take care.

Ladies and gentlemen thank you for your participation on today's conference. This does conclude the program, and you may all disconnect. Everybody have a wonderful day.