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Good day, ladies and gentlemen, and welcome to the Sunrun Incorporation Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to introduce your host for today’s conference, Patrick Jobin from Investor Relations. Sir, you may begin.
Thank you, operator and thank you to those on the call for joining us today. Before we begin, please note that certain remarks we will make on this conference call constitute forward-looking statements. Although we believe these statements reflect our best judgment based on the factors currently known to us, 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 statements are being made as of today and we disclaim any obligation to update or revise them.
On the call today are Lynn Jurich, Sunrun’s Co-Founder and CEO; Bob Komin, Sunrun’s CFO; and Ed Fenster, Sunrun’s Co-Founder and Executive Chairman. The presentation today will use slides, which are available on our website at investors.sunrun.com.
And now, let me turn the call over to Lynn.
Thanks, Patrick. We are pleased to share with you Sunrun’s second quarter financial and operating results along with progress against our strategic priorities. In the second quarter, we added more than 12,000 customers representing 20% growth in megawatt deployments. This result exceeds guidance and represents the highest quarterly volume in the company’s history.
In the first half of 2018, we generated $142 million in net present value and created NPV per watt of $1.03 or over $7700 per customer. We are excited to announce that we have surpassed 200,000 customers. For a company that is disrupting a multi-trillion dollar industry, we learned a lot from winning these first customers that will make the next million easier.
Throughout the past 11 years, we have solidified our position as the industry leader with scale, brand, technology and financial strength. I am most excited by what the next decade means for Sunrun and the families that want a superior energy service. A service that is customized to their energy means is more resilient and offers back-up power and contributes to healthier communities.
Sunrun makes going solar simple, and we are committed to creating an exceptional customer experience, because our customers have chosen to be with us for decades. We are reiterating our full year guidance of 15% growth in deployments and growth in cash generation above this rate. This growth, plus investments in customer acquisition and product innovation will be achieved while delivering NPV above a $1 per watt for the full year.
The opportunities in front of us are increasing our confidence for growth acceleration and continued market leadership.
As the leading solar company in the U.S., Sunrun has the largest national footprint. We are capitalizing on this position by investing in our direct-to-customer acquisition, onboarding platform and customer experience capabilities which we believe will increase the most around our business and deliver a superior cost structure over time.
Our Direct business grew over 40% year-over-year. This current success combined with the opportunities in front of us which include multiple retail expansion opportunities lays the foundation for a strong 2019 growth rate. Strategic partnerships like retail are a place for national capabilities, track record, brand and scale all matter and separate Sunrun from the back.
We are also well positioned to take advantage of the recent California new home mandate. While the volumes aren’t large yet, we already have installed new home installations and are engaged with half of the top-10 homebuilders in California. Most importantly, Sunrun has the opportunity to be the loved energy provider for homeowners, the utilities are falling short in providing what customers want.
Sunrun is leading in product development to extend our value proposition to customers and the grid. Our Brightbox Home Solar and Battery service continues to gain traction and exceed expectations. We have installed thousands of Brightbox systems thus far and we will more than double Brightbox installations in the second half of 2018 as compared to the first half.
This has caused short-term cycle time and cost headwinds. However, financial returns are attractive and the service further differentiates Sunrun as the nation’s leader. This superior energy service has been launched in seven states and Puerto Rico and already represents about 10% of our direct business. In California, well above 20% of the time our direct customers are choosing to add a Brightbox.
In certain markets in Southern California, this rate is now nearly 60%. With increasing while fires and extreme weather-causing outages, we are a solution for resilient, clean power that could be rapidly deployed. For instance, customers are being told by utilities in California that they will cut off power proactively when the temperature is high and the wind is blowing.
Homeowners want reliable, affordable power and our Brightbox Home Solar and Battery service can deliver. In the second quarter, we entered Puerto Rico through channel partners offering residence the freedom to create their own energy and enjoy back-up power during outages. We also officially launched Brightbox in Florida.
Sunrun continues to advance the role distributor energy resources will play in the country’s future energy system. Together with National Grid, we are already active in California and have recently started to work on a small program in Massachusetts where certain customers are able to participate in grid services. We are encouraged by the growing interest from utilities and regulators.
In addition to our market and product leadership, we continued to deliver strong financial performance. As a result of our capital allocation discipline and financing strategy, we are cash flow positive even while investing in future growth and product leadership and have maintained a strong balance sheet.
I’ll now turn the call over to Bob Komin, our CFO to review Q2 performance and to discuss guidance in more detail.
Thanks, Lynn. Customer NPV in the second quarter was approximately $7400 or $0.98 per watt. In the first half of the year, NPV per watt was $1.03, in line with our target levels despite the headwinds from tariffs and tax reform, along with the investments we are making to accelerate our direct business and product leadership.
Project value per customer was approximately $31,100or $4.10 per watt in Q2, and for the first half 2018, it was $4.32 per watt. As a reminder, project value is very sensitive to modest changes in geographic channel and tax equity fund mix, we expect project value will decline slightly over time but with cost declining more, although in the short run there can’t be quarterly fluctuations.
For instance, in Q2, we had a higher mix of lower value and also lower cost, projects in our channel business that affected our metrics. We expect project value will return to levels more consistent with recent trends in Q3.
Turning now to creation cost on Slide 6. In Q2, total creation costs were approximately $23,700 per customer or $3.12 per watt and were $3.29 for the first half of the year. Similar to project value, creation cost can fluctuate quarter-to-quarter.
Creation cost per watt were 7% lower year-over-year. We expect creation cost will return to levels more consistent with the last few quarters in Q3 and expect them to sow modest declines for the full year even with the module tariff impact and as we continue to invest in growth in our direct business as Lynn described.
As a reminder, our cost deck is not directly comparable to those appears because of our channel partner business. Blended installation cost per watt, which includes the cost of solar projects deployed by our channel partners, as well as installation cost incurred for Sunrun built systems improved by $0.35 year-over-year to $2.35 per watt largely due to the higher mix of lower value and lower cost projects in our channel business as I mentioned earlier.
In the first half of 2018, total installation costs were $2.48 per watt. We also expect installation cost will return to levels more consistent with recent trends in Q3. Install cost per systems built by Sunrun were $1.95 per watt reflecting an $0.08 or 4% year-over-year increase. Most of this increase is related to a higher mix of batteries.
We expect the adoption rate of home batteries to continue to increase which will carry a higher per watt cost but also a higher project value. In Q2, our sales and marketing cost were $0.69 per watt reflecting an $0.08 improvement from Q1. We are pleased to report that we are seeing strong sales efficiency improvements year-over-year.
Our total GAAP sales and marketing expenses increased 40% year-over-year, but our volumes in the Sunrun Direct business grew at a faster rate. Our sales and marketing unit costs are calculated by dividing the cost we record in the period by total megawatts deployed. Most of these expenses relate to our direct business and these sales activities occur somewhat earlier than the related systems are deployed.
And we are growing direct sales rapidly this causes reported unit sales and marketing cost to increase. A higher mix of direct business will result in higher reported sales and marketing cost per watt over time, but this also means there will be lower blended installation cost per watt over time due to lower channel business mix.
In Q2, G&A cost were $0.25 per watt, a $0.04 or 14% improvement. In Q2, G&A cost per watt excluded a non-recurring item of $1.9 million for settlement of the consolidated state court class action lawsuit related to the IPO.
Finally, when we calculate creation cost, 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 sought for cash with third-party loan. We achieved platform services gross margin of $0.16 per watt in line with recent trends.
In the second quarter, we deployed 91 megawatts above our guidance of 88 megawatts, reflecting 20% year-over-year growth. While we don’t manage the business for a particular mix between channel partner and direct, our direct business is growing at a strong rate and is the platform that enables Sunrun to be the desired partner for large national strategic and retail partners.
The direct business is also the platform behind the Comcast partnership and where we focused our initial Brightbox sales and installation efforts. Our cash and third-party loan mix was 13% in Q2, also in line with recent levels and consistent with our outlook of low to mid-teens.
Turning now to our balance sheet. Our liquidity position remains strong. We ended Q2 with $270 million in total cash and 11% or $27 million increase from last quarter. We continue to forecast our cash generation will grow 15% or more, which would be $50 million or higher for the year 2018.
Quarterly cash generation can fluctuate due to the timing of project finance activities, so we provide forecast on a multi-quarter basis. We define cash generation as a change in our total cash less the change in recourse debt. Also please note that our cash generation outlook excludes any strategic opportunities beyond our current plans.
Moving on to guidance on Slide 8. We remain confident in our full year guidance of 15% growth in deployments and unit economics of $1 NPV or higher. In Q3, we expect to deploy 100 megawatts reflecting 10% sequential growth from Q2. Our full year guidance implies just over 13% sequential growth from Q3 to Q4, or just over 20% year-over-year growth for the second half.
Now let me turn it over to Ed.
Thanks, Bob. Today, I plan to address three topics. The benefits in the next decade of June’s IRS guidance to margins, especially to providers of residential solar as a service; changes during the quarter to gross and net earning assets and finally, our near-term capital strategy and pipeline.
First on Slide 9, I want to illustrate how the recent guidance issued by the IRS regarding the investment tax credits will make managing the step-downs of the investment tax credit, especially comfortable. And we believe will cause increased market share for solar as a service.
This June, the IRS clarified that by incurring at least 5% of project cost in advance, for instance through advance purchase of inventory, a company can delay the step-downs in the investment tax credits. In the most extreme example by making a large advance purchase in December 2019, we can continue to claim a 30% investment tax credit through December 2023, rather than have it phase down to 26% in 2020, 22% in 2021 and 10% in 2022.
While we’ve not finalized our strategy regarding this opportunity, the rule has clearly a favorable development for the company and it presents more options to extend the higher tax credit levels. Our strong balance sheet and relationship with capital providers position us well to benefit from this guidance.
In addition, the ability to delay the step-downs of the investment tax credit through this guidance exists only for solar systems owned by businesses such as Sunrun. It does not exists for homeowners buying and owning systems themselves.
Although businesses and homeowners both enjoy a 30% tax credit today, the business and individual tax credits exists in different sections of the code and are subject to different phase out schedules and rules.
As such, we would expect to see an industry-wide mix shift of volumes from customer-owned to at least begin in 2020 when individuals buying directly would face a 26% tax credit and solar service providers like Sunrun could benefit from a 30% tax credit.
This advantage would peak in 2022 when individuals would receive no tax credit and solar service providers like Sunrun would benefit from a 22% to 30% tax credit. Neither after this advantage would settle a 10% as solar service providers like Sunrun enjoy a 10% permanent tax credit, but the individual tax credit expires in December 2021.
DTM estimates that approximately half of the market today is customer purchase systems. Importantly, this guidance makes managing the step-down of the investment tax credit even easier. Assuming we raise consumer prices by approximately 2% per year in the phase of expected retail rate escalation of about 3.6% in our main markets, we only need to achieve just under a 4% annual cost reduction to maintain 2018 margins in 2024 under a 10% tax credit.
To be clear, we think we can do significantly better. Historically, we have achieved 9% annual cost reductions for the last three years and since inception, we have managed through federal and state subsidy reductions three times the size of the full step-down between today and the 10% in ITC.
Turning now to Slide 12, in Q3, net earning assets grew slightly while cash increased $27 million to $270 million. Net earning assets is our way to describe the value of the cash flows that Sunrun’s shareholders after payments to tax equity index counterparties. Because there are different accounting treatment for different tax equity structures, I want to point out where you can find the components on the financial statements to calculate these figures.
This quarter, we used a structure called the pass-through, which we haven’t used in several years. So I want to explain how to unpack it. Tax reform has made pass-throughs more competitive with partnership flips, so we may use more of them in the future.
The pass-through financing obligation used to calculate net earning assets is reduced by $36 million, which is the portion of that liability we expect will be eliminated when the pass-through financing provider receives investment tax credits on assets that has funded. At that time, the $36 million would be recognized as revenue.
Due to a short-term nature, this amount is reflected in the current portion of the pass-through financing obligation. In a pass-through financing, we book the value of tax benefits on the revenue line. For partnership flip structures, because GAAP requires it, we book the value of tax benefits at the bottom of the P&L as a loss allocated to non-controlling interest.
For pass-throughs, we book the value of tax benefits upon receipt of interconnection permission from the local utility. For partnership flip structures, we book this value earlier, beginning a deployment. As such, in a period, such as this one, where we begin to use a pass-through, income moves above the operating line but lags. This effect resulted in the depressed EPS in the quarter.
Each method generates net income to Sunrun’s common shareholders although under GAAP, the timing and geography is different.
Turning to our upcoming capital strategy and pipeline. As we shared on the prior call, we expect the remaining annual cash build will occur in Q4 due to project finance timing, but also increased operating leverage.
As such, we expect principally to increase net earning assets rather than cash during Q3. We believe we will achieve the best possible execution by sequencing our transactions first in the public senior debt markets, next is applicable in the subordinated debt market and finally to the extent desired in the project equity market.
We are still on track to generate at least $50 million of cash this year. Our 2018 outlook does not require refinancing of post-flip assets which opportunity is still on the come for 2019, between operational growth and refinancing opportunities, cash generation could double to $100 million next year. Our debt and tax equity capital commitments already provide runway into next year.
And with that, I will turn the call back over to Lynn.
Thanks, Ed and just wanted to correct one thing quickly at about 18 minutes in, Ed said, in Q3, net earning assets grew slightly while cash increased and that he meant Q2. So, we are through. Let’s open the line for questions please.
Operator can you queue up the questions?
[Operator Instructions] And our first question comes from the line of Michael Weinstein with Credit Suisse. Your line is now open.
Hi guys.
Hello.
Good afternoon.
So, Ed, thank you very much for that explanation of pass-through financing and how that’s going to be changing things going forward and also in this quarter. I guess, if things are lagging and this isn’t the first quarter we are really seeing an increase and it has a lag effect. So we should expect, if you look at Slide 13, we expect net earning assets to increase in future quarters to catch-up basically with the lags that’s happening there?
Sure, good question. So there are two components to the lags. The first one is on the income statement which depressed net income in the quarter, that should normalize beginning approximately next quarter and in a period where you might discontinue using a pass-through, you would actually see excess income. In terms of how we are describing net earning assets, on the slide, we are making a pro forma adjustment for that $36 million which we describe a little bit more details in the foot note. And at the time that that fund completes deployment and the assets are placed in service, that pro forma adjustment will go away.
Okay, so basically, it’s already factored in there and that’s so we are seeing, at least on Slide 13 it’s factored in?
Correct.
Okay. And one other question I had was, the – your guidance for the third quarter for megawatts deployed would imply a pretty steep number for Q4. Is there any reason why Q4 would be higher than past Q4s?
Yes, absolutely. So, Q4, so, a couple things that the growth particularly in the direct business is really strong and it’s supporting strong growth. So as we talked about, that’s 40% year-over-year and if you look sequentially, the growth rate from Q3 from Q2 was 10% and then that would imply the 13% again into Q4, which we feel very confident in hitting.
I think what you are seeing with the Q3 year-over-year comp is that, on the channel side, it’s a little bit of a tough comp because, last year we had a lot of installations in Arizona due to the pull-forward of the change in the rate structure that was happening. So the channel comp is tough for Q3. But this year, we are seeing such strong order flow that’s a long-term trajectory overcoming the normal seasonality we’d see in the business.
Okay. Thank you. I think that’s it for me now. I’ll pass it on to somebody else. Thanks.
Thanks.
Thank you. And our next question comes from the line of Brian Lee with Goldman Sachs. Your line is now open.
Hey, it’s Rebecca again on for Brian. So, tariffs have impacted the cost structure negatively to some degree, but the supply chain is being a lot of oversupply. So I was just wondering with the interplay of these two forces, where you stand on inventory.
And what magnitude of pricing decline do you be expecting from what’s embedded in current Q2 results for the next several quarters and if that extends into 2019 what cost declines do you expect to see in panels and maybe inverters as well as you see pressure there?
Great questions. So, I think in terms of equipment cost, we definitely are seeing spot prices sort of across the board declining, panel prices on a spot basis are probably approximately back where they were a year ago prior to the run up in price ahead of the section 201 tariffs. We likely, due to inventory wouldn’t see that rolling through the P&L until the fourth quarter of this year.
We also are seeing, generally speaking, declines in inverter prices. Those could fluctuate a few pennies one way or the other depending on how the tariff situation plays out. But generally speaking, I think any price increase arising from tariffs ought to be temporary, because our – the suppliers in the industry are just playing a little bit of musical chairs on what factories and what market supply, what markets and we also just are in such a global world these days that supply chains can adapt.
That said, the increased attachment rate of batteries will drive costs higher. Although we do believe that over the next year, battery cost power electronics related to batteries and labor cost related to the installation of batteries will all be declining. So those factors are all at play. Can you, let me know if there are other components to your question that I didn’t answer. I tried to reach all of them, but I may not have been writing fast than others.
Because from - like a – from a headline number that you are going to see slight declines in the overall installation cost through the rest of the year, but there is going to be these competing factors, so it’s like we are going to see the operating leverage from the strong growth offset by the pickup in the battery cost adding to this back.
Yes, okay. Thanks for the color and I think you got it all. So, and just as a follow-up, you have a number of growth avenues kicking here in here in 3Q with further leasing, the Comcast partnership and a battery entry and then new state with Illinois. Can you just rank order of those? And how they are going to contribute to volume growth in the near-term and any comments?
Sure, sure. We – again, we are really thrilled with the demand environment and our position here on the direct. So, you hit the big one. So, retail, we are really bullish on retail. That’s an area that, it’s a channel we like. We know how to operate it.
We’ve been in cost and –for a while now and we are given that retailers are also recognizing that this is a really profitable category for them. We are in discussion with four national chains that we are talking to today. So, I mean, you won’t see that that short-term. You are not going to see that in Q3, but it sets us up for really nice position for next year. Similarly with Comcast.
The Comcast partnership is also progressing very well. The thesis we entered into is really holding, meaning the acquisition cost is attractive for us. For Comcast it’s delivering the funnel expectations that they were expecting and so, as we said in the past, it’s something that is a multi-year partnership. They are a large company and we are learning into it together.
But we are also encouraged by the potential for that partnership, again, not in Q3 by contributor, but something that sets us up for longer-term growth rates. And then the new markets as well. I think all the new markets we entered into over the last couple of quarters are strong and are proving to be good long-term markets.
So they are meeting our expectations. We think they are durable and they also help – will certainly help contribute. So, that’s part of getting back to Michael’s question why we are so confident that the back half in aggregate will grow above 20% year-over-year and why we are confident that this growth acceleration is happening and should happen into 2019.
Okay, thanks. I’ll pass it on.
Thank you. And our next question comes from the line of Philip Shen with Roth Capital Partners. Your line is now open.
Hey guys. Thanks for the questions. The first one is a follow-up on the Q4 outlook. You just talked about the strength coming from your direct business. To what degree does that gives you confidence that you can see that strength going into 2019? And if you can quantify in anyway, I know you are not providing official guidance, but, and so far as you can kind of give us your view of how 2019 might be shaping up. That will be great?
Yes, absolutely. So, I think, we’ve – the question I just answered previously kind of hits on a lot of the driver that are going to help support that strong growth. But if you just look at again, with the Q3 guide, what that implies for Q4 is, I believe that would be north of, kind of 30% year-over-year growth rate.
If you look at Q1, from last year versus what we expected in this year, certainly, we expect very, very strong year-over-year growth. And so, it’s too early for us to make a comment on officially the guidance for 2019. But it’s certainly accelerating the growth rate.
Great, thanks for the color there. Let’s shift to storage. You talked about, I think 20% attach rates in California and some regions within California being 60%. There is tightness of battery availability and we are hearing of lead times of six to seven months.
So, my sense is that the release there might be in first half of next year in terms of supply anymore batteries come online. But assuming supply was not a constraint today, how much lean demand would there be? For example, what I mean by that is, how much are you not able to serve because of batteries, of supply constraints?
We are in a position where we are comfortable with battery supply through the end of the year and already have procurement in place for that. So, as we stated in the prepared comments, we will expect to install more than double the amount of Brightboxes back half of the year versus first half of the year. So, very strong growth with supply.
And so, I do – we do agree with you that given how big this market is, there is we are seeing a lot of people come into the market and that should bode well for next year both on the cost side and on the supply side. But we are well positioned through the end of the year which should again give us an advantage when other people are going to take them.
And particularly, as more battery manufacturers come online, cost will decline making the value proposition more attractive. So those are all positive features, but to Lynn’s point, our supply situation for the year is secure.
Great, thank you both. I’ll pass it on.
Thank you. And our next question comes from the line of Colin Rusch with Oppenheimer. Your line is now open.
Thanks so much. It’s Colin.
Hey Colin.
So, thinking about this advantage on the tax equity structure and rising rates, can you talk a little bit about the pricing strategy over the next three or four years? It seems like you might be in a position to accelerate some growth by not raising prices quite so much, especially free up the managed cost. So, I just want to think about the puts and takes that you guys are considering and how you might go through that decision-making process?
Yes, great question. I think if you are referring to my discussion around the investment tax credit, I think what we are just trying to illustrate is, the many degrees of freedoms and ways one can end up with a higher margin business in 2024 than today.
And so, what we tried to chart here was just – what you have to believe for neutral and there we said, look, let’s conservatively assume 2%, that will charge 2% more per year to the customers. PA consulting performance studies, looking at our top markets and concluded a 10 year CAGR of approximately 3.6% in those markets. So, we thought like the 2% is conservative.
We have a history of taking out about 9% from our cost structure every year. So the 4% number here is conservative. So we feel like we have a lot of degrees of freedom in that department. In terms of interest rates, obviously, we are continuing to see spreads decline. So far spreads have been declining faster than base rate has been increasing.
If that trend works, you see we still have a nice tailwind which is that, we are not the only energy company that cares about interest rate. So, our major competitor is the electric utility. About two-thirds of the cost of a residential utility bill in the markets that we operate in is the amortizing capital cost of the utility and as utilities caused us debt and equity increases, regulators pass those cost through to customers and utility rate escalate.
And if you look at a 50 year history of retail extra grade, you’ll see a very strong correlation between rate escalation and interest rates. So if we do end up in a higher interest rate environment, then the market expects which the future interest rate market does show it’s approximately flat around 3 or the low 3s for a 10% - sorry, for a ten year treasury. You would expect to see escalating retail rates.
Finally, as it relates to our existing book of business, we are approximately 90% hedged on our existing fleet. So those rates are locked in and most of those are slots which are even independent of the specific loans that we have on the balance sheet.
And then, I would also - I think, I think, Colin, you had also just asked about, there is implicit in that question I think price elasticity and what we have found historically is that, there isn’t a huge difference in adoption when you – once you kind of hit a 20% savings threshold.
If you go further there isn’t a real increase in adoption necessarily people are choosing for other reasons and particularly over the long run, our vision for this in over time, probably a 100% of systems that are going to have batteries attached to them which changes the value proposition, again, away from a savings type of methods to more of a control, reliability type of value prop to the consumer. So, we will always look at that price elasticity trade-off. But, we do believe that with the expected rate escalation, there is room to move the price up.
Great. And then, I guess the next question is related to the attach rates on the batteries and the portfolio impact to actually enter into the grid services market as an incremental source of cash flow. There is a fair amount of speculation around how prepared the technology is really enabled that functionality.
I guess, my question is two-fold. One, can you talk about how much of your portfolio really is capable of that sort of modular control? And then, secondarily, how should we think about that just starting to enter into our future cash flows and from a timing perspective just initial cash flows and how it might scale up?
Great question. I think the short story is the capability all exists today, it’s a little bit more manual than I expected will be in a few years as it scales. We will be putting over top of it automation to make that simpler. But certainly the plumbing to provide grid services with batteries today exists.
And I would also add that, consumers are willing to do it as well. So the early indications around our consumers willing to what the utility drop in the battery have been positive. So, that’s obviously an important factor as well.
But in terms of major contributing to cash flow, I mean, again a lot of these projects that we are working on these were, these are long-term planning cycles. So these are two, three years out, when you think about the projects in any sort of meaningful scale that we are looking at. But we feel confident that technology will work and will be there.
Perfect. Thanks so much to you guys.
Thanks, Colin.
Thank you. And our next question comes from the line of Julien Dumoulin-Smith with Bank of America Merrill Lynch. Your line is now open.
Hey guys. This is actually Eric on for Julian. But, just a quick question on – you discussed further lower project value. In 2018 that there was some lower value higher cost projects in the quarter and do you expect it to be more normalized going forward? But what is driving that primarily? Is that entry into lower value markets? Just wanted to clarify.
Yes, we said, to be clear, we said, lower value also lower cost and remember, in our channel business, especially we price to NPV. So, the mix – there is a bunch of mix effects and when we look at those projects, it’s NPV-driven. So, the NPVs on those were fine, but they were lower in this quarter than in some previous quarters.
Gotcha, gotcha. And then, so, what was primarily driving that? Just choosing to go for maintaining the NPV in the unit economics presumably?
Yes, it really – it can fluctuate quarter-to-quarter. It’s sensitive and it fluctuates depending on just various mix effects that we have.
To mix, the pricing that the channel has on their contracts…
I mean, just very simplicity, if someone presents you a contract that you think is worth $4, you might pay $3 for it and if someone presents you one that’s worth $3, you might pay $2 for it.
Gotcha. And then, just going on touching upon the ITC Safe Harbor. What sort of strategy was that in terms of expanding? Are you planning to expand more aggressively into new markets as well with the ITC Safe Harbor in hand and that’s what’s changed like long-term deployment guidance expectations?
So the ITC Safe Harbor obviously provides us fantastic optionality and we have a good deal of time to decide exactly how we want to execute it. As we watch our own costs and political forces and other things unfold. It also certainly will drive, we think a mix shift towards solar as a service or leased product and away from homeowner owned or loan products.
The exact size and execution strategy, we won’t be determining and so we get closer to the end of next year, but we have a lot of options and are starting to consider that in due course. Our balance sheet is strong. We have good relationships with capital providers as well. So, we have a lot of flexibility on how we might execute against that strategy.
Gotcha. So we should expect further commentary on the strategy in later calls.
Correct.
Correct.
Correct.
Okay, thank you.
Thanks, Eric.
Is that everything?
That’s everything.
All right. Well, thanks everybody and we’ll speak with you again soon. Take care.
Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone have a wonderful day.