Sunrun Inc. (RUN) Earnings Call Transcript & Summary

Good afternoon, and welcome to Sunrun's Fourth Quarter and Full Year 2024 Earnings Conference Call. Please note that this call is being recorded and that 1 hour has been allocated for the call, including the Q&A session. [Operator Instructions]. I will now turn the call over to Patrick Jobin, Sunrun's Investor Relations Officer.

Thank you, operator. Before we begin, please note that certain remarks we will make on this call constitute forward-looking statements. Though we believe these statements reflect our best judgment based on factors currently known to us, actual results may differ materially and adversely. Please refer to the company's filings with the SEC for more inclusive discussion of risks and other factors that may cause our actual results to differ from exceptions made in any forward-looking statements. Please note that the statements are being made as of today, and we disclaim any obligation to update or revise them. On the call today are Mary Powell, Sunrun's CEO; Danny Abajian, Sunrun's CFO; and Paul Dickson, Sunrun's President and Chief Revenue Officer. The presentation is available on Sunrun's Investor Relations website along with supplemental materials. And the audio replay of today's call, along with a copy of today's prepared remarks and transcripts, including Q&A, will be posted to Sunrun's Investor Relations website shortly after the call. We've allocated 60 minutes on today's call, including the question-and-answer session. And now let me turn the call over to Mary.

Thank you, Patrick, and thank all of you for joining us today. The fourth quarter was an exceptionally strong quarter for Sunrun and our execution positions us well for 2025. We are delivering high-quality growth, generating meaningful cash, increasing our book value of deployed systems and paying down our parent debt. We are poised to further improve our operating and financial results and deliver a very strong '25 with meaningful cash generation. In 2024, we adapted to the rapid increase in interest rates. Innovated through changes in state regulations, built a robust supply chain with strong domestic content focus, remains steadfast in the face of irrational behavior from several industry participants. We are improving in every dimension, focusing on fast effective execution, delivering strong financial and operating results, gaining share in a disciplined way and building a long-term foundation of valuable grid resources. Executing on our plan does not require equity funding. In 2024, we optimized our product mix, prioritize the highest-value geographies and routes to market with an intense focus on cost efficiency. At the same time, we increased storage attachment rates, resulting in the highest net subscriber values Sunrun has ever reported. We have now posted positive cash generation for three consecutive quarters and expect to do so in every quarter throughout 2025, including the first quarter, which is seasonally the weakest. We have allocated excess cash to pay down our parent debt by $186 million since Q1 of last year, while making strategic long-term investments in AI to lower cost, streamline operations and create a differentiated customer experience. We also allocated excess cash to execute our end-of-year safe harbor equipment purchases to mitigate what we view as unlikely but still potential policy changes. The fundamental long-term demand drivers for our business are incredibly strong and unrelated to any political party affiliation. Americans want greater energy independence and control of their lives and their pocketbooks. The country also needs more power from all sources to fuel rapid growth in electrification and data centers and our growing fleet of energy resources will be part of that solution. For these reasons, it is no surprise that support for the energy we provide spans across all party lines. Turning to more specifics for the quarter. In Q4, we grew contracted total value generated or the aggregate net contracted value of systems installed in the quarter using capital costs observed in Q4 by 125% compared to the prior year and 48% compared to the prior quarter. We did this by growing our customer additions sequentially and by increasing subscriber values, from higher battery attachment rates and ITC realization, while holding our creation costs flat. Cash generation was $34 million in the quarter. We elected to invest $18 million of working capital in safe harbor equipment, which obviously lowered our cash generation results in the quarter. In Q4, we also hit all-time highs for storage attachment and capacity installed, we installed storage for 62% of our new customers, an increase of 17 percentage points from a year ago. We installed a 392-megawatt hours of storage in Q4 up 78% from a year ago. Our fleet of network storage capacity has reached 2.5 gigawatt hours with over 156,000 storage systems installed. We continue to advance programs that generate value for customers, the grid and Sunrun. We have 16 grid service programs active across the country with over 20,000 customers participating. During 2024, Sunrun's grids and power plants successfully supported power grids across the country with a combined instantaneous [indiscernible] of nearly 80 megawatts. A capacity greater than many traditional fossil fuel power lands. Sunrun is leading in establishing a platform to turn homes and vehicles into smart controllable load that can be dispatched into and improve the electric grid. I want to spend a minute on what we are seeing in recent industry data. We don't manage the market share, we view our leading position in the industry as a natural long-term result of pursuing a customer-first, disciplined growth strategy. There have been periods where there are rational competitive behavior, such as pricing firms, loan providers offered a few years ago and more recently prices being offered by certain financing only new entrants. But our view is that a focus on the fundamentals and first rate execution always prevails in the long term. We lead with the best possible customer experience, underwrite healthy and financially sound business and grow in a sustainable strategic way. We have seen some new entrants become more rational in recent periods, while others continue to scale with uneconomic cash-consuming activities. We have seen our share of residential storage installations expand to over 50% in the U.S., while Residential Solar installations nationwide picked up significantly in the last few quarters from 13% in Q1 to 19% in Q4. I'm pleased to see these trends, but I'm more pleased that we are doing it in a way that is consistently generating cash and delighting our customers. Sunrun is well positioned to drive meaningful value for shareholders in 2025 and beyond. The grid continues to become less reliable and more expensive. Consumers are demanding more energy independence and choice and technology advancements continue to unlock more opportunities. Our primary focus is furthering our differentiation, launching additional products and services to expand customer lifetime values and remaining the disciplined margin and customer-focused industry leader, growing cash generation in the business for years to come. I know we are living in uncertain times, and no one can predict the future perfectly. But what we can do is continue building incredibly resilient and efficient organization that can pivot and respond to whatever is thrown at it. I recall just a few years ago, investors were skeptical because Sunrun had negative cash generation and was facing large regulatory changes in California, massive increases in interest rates and a challenging supply chain. Sunrun not only managed to adapt to these pressures, but has now started to generate significant cash on a recurring basis with higher rates while operating under [ NOMI ] and navigating the various supply chain dynamics. This is the team that knows how to focus on first rate execution and lead this industry. Before handing it over to Danny, I want to take a moment to share how Sunrun employees responded during the devastating in Los Angeles wildfires in January. As soon as high winds and wildfire threats emerged, our team initiated our planned response to support customers and employees. In an emergency like this, the homes we serve become critical infrastructure in impacted communities supporting both our customers and the communities they live in. Boundaries were automatically adjusted to maximize backup power ahead of widespread lockouts. When I visited our Los Angeles teams and customers during that time, I heard numerous stories of how Sunrun customer homes provided essential power and a safe haven for so many who are impacted by this tragedy. These events highlight the urgent need to more safely generate and deliver energy to customers and to have on-site power generation and storage systems, providing critical power during those emergencies. Demand for our storage offering remains robust following this event. With that, let me turn the call over to Danny for our financial update.

Thank you, Mary. Today, I will cover our operating and financial performance in the quarter, along with an update on our capital market activities and outlook. Turning first to results for the quarter on Slide 10. We have now installed over 156,000 solar and storage systems with storage attachments ranging 62% of installations during the quarter. We expect storage attachment rates to remain around this level or slightly higher for the next few quarters. This higher mix of storage continues to drive net subscriber values higher. During the quarter, we installed 392-megawatt hours of storage capacity, well above the high end of our guidance and an increase of 78% compared to the same quarter last year. Our total network storage capacity is now above 2.5 gigawatt hours. In the fourth quarter, solar energy capacity installed was approximately 242-megawatts within our guidance range of 240 to 250 megawatts and an increase of approximately 7% compared to the prior year. Customer additions were approximately 32,900 including approximately 13,700 subscriber additions, our subscription mix remained at 96% of deployments in the period. Customer additions with storage was approximately 20,400 in the quarter, an increase of 50% compared to the same quarter of last year. We ended Q4 with approximately 1 million customers and 889,000 subscribers, representing 7.5 gigawatts of network solar energy capacity, a 13% increase year-over-year. Our subscribers generate significant recurring revenue with most under 20 or 25-year contracts for the clean energy we provide. At the end of Q4, our annual recurring revenue or ARR stood at over $1.6 billion up 23% over the same period last year. We had an average contract life remaining of nearly 18 years. Turning to Slide 10. In Q4, subscriber value was approximately $55,800 and creation cost was approximately 36,600 delivering a net subscriber value of $19,177. A strong growth was from higher battery attachment rates, a higher average investment tax credit level and sequential growth in volumes leading to improved fixed cost absorption. Our [ Q4 ] subscriber value and net subscriber value reflect a blended investment tax credit of 39.8%. We realized stronger-than-expected achievement in the 2024 low- to- middle income ITC adders allocation process, which provided an approximate $750 benefit to our reported subscriber value in Q4. Modification for the domestic content ITC adders is picking up, although at a slower ramp within our [ OE Partners ] segment. Our blended investment tax credit was at approximately 42% for January installations and we expect this level to increase further to 45% later in 2025. Total value generated, which is net subscriber value multiplied by the number of subscriber additions in the period, was $589 million in the fourth quarter. Our present value-based metrics are presented using a 6% discount rate, but our financial underwriting already account for our current cost of capital, which was approximately 7.3% to Q4. At a 7.3% discount rate, net subscriber value was approximately $14,400 and total value generated was $441 million. Excluding the noncontracted portion of subscriber value but still adjusting a 7.3% discount rate, contracted net subscriber value was approximately $11,600 and total value generated was $357 million, an increase of 125% compared to the prior year. On Slide 11, you can see our progress increasing subscriber value through higher value mix and higher ITC levels, while keeping creation costs largely flat, generating expanded net subscriber values. Efficiency improvements in hardware cost declines coupled with [indiscernible] comp leverage from sequential volume growth have largely offset the increased costs associated with higher storage attachment rates. Turning now to gross and net earning assets and our balance sheet on Slide 13. Gross earning assets of $17.8 billion at the end of the fourth quarter. Gross earning assets, the measure of cash flows we expect to receive from subscribers over time, net of operating and maintenance costs, distributions to tax equity partners and distributions to project equity financing partners all discounted at a 6% unlevered capital cost. Net earning assets were $6.8 billion at the end of the fourth quarter, up $536 million from the prior quarter. Net earning assets, gross earning assets, plus cash, less all debt. Net earning assets does not include inventory, other construction and progress assets or any net derivative assets related to interest rate hedges, all of which represent additional value. The value creation upside we expect from future grade service opportunities and selling additional products and services to our customer base are not reflected in these metrics. In our prudent risk management approach, we programmatically [indiscernible] into interest rate hedges to insulate our capital costs from adverse near-term fluctuations. The vast majority of our debt is either fixed coupon long-dated securities or floating rate loans that have been hedged with interest rate swaps. As such, we do not adjust the discount reviews in net earning assets to match current capital cost [ renewing ] installations. Turning to our capital markets activities. Sunrun's industry-leading performance as an originator and servicer of residential solar assets continues to provide deep access to attractively priced capital. As of today, closed transactions and executed term sheets provide us with expected tax equity capacity to fund over 500 megawatts of projects for subscribers beyond what was deployed through the fourth quarter. Thus far in 2025, we have added more than $1.3 billion in tax equity, resulting in the strong win way. We also have over $680 million in unused commitments available in our nonrecourse senior revolving warehouse loan after our January securitization. This unused amount would fund approximately 230 megawatts of projects for subscribers. Our strong debt capital running allows us to be selective in timing term out transactions. In January, we priced the industry's second largest securitization, behind only our own transaction from June of last year. The oversubscribed transaction was structured with three separate classes of A-rated notes only two of which were publicly offered. The weighted average spread of the notes was 197 basis points, which was an improvement of approximately 38 basis points from our prior securitization in September. Similar to prior transactions, we raised additional subordinated nonrecourse debt financing, which increased the cumulative advance rate, as measured against our contracted subscriber value metric to above 80%. When we think about our balance sheet, we prioritize a strong cash position and use of asset-level nonrecourse debt financing. This strategy lies the lowest cost of capital to finance cash flow-producing assets backed by highly creditworthy consumers and is designed to avoid the use of parent capital to fund our recurring origination activity. Cash generation was $34 million in Q4, the 3rd consecutive quarter of positive cash generation. Cash generation would have been approximately $66 million and has not been for a few factors. First, we decided to invest $18 million in cash for safe harbor equipment purchases in late Q4. Second, our affiliate partners experienced a slower ramp in domestic content ITC adder qualification. These two primary matters, along with other minor working capital timing differences collectively represented over $32 million in reductions to cash generation for the period. During the fourth quarter, we executed a safe harbor program to insulate various [ poll tax ] risks. The program was executed in a very capital efficient thing, securing $350 million in equipment purchases, while only consuming about $18 million of net working capital. These purchases provide risk mitigation for volumes throughout 2025 for solar projects and midway through 2025 for storage projects. We will explore additional safe harbor initiatives if circumstances weren't in the future, and we intend to maintain availability of nonequity capital advocated for this purpose. We have a strong balance sheet with no near-term corporate debt maturities. We ended the quarter with $947 million in total cash. During the fourth quarter, we repurchased $126 million in principal of 2026 convertible notes at a discount. As of the end of 2024, we had only $8 million in principal outstanding of these notes which we plan to repurchase in 2025. Since March 2024, we have paid down recourse debt by $186 million by repurchasing our 2026 convertible notes and reducing borrowings under our recourse working capital facility. We expect to further pay down $100 million or more in recourse debt in 2025. Aside from the $8 million outstanding of our 2026 convertible notes, we had no recourse debt maturities until March 2027. We have no current capital needs at this time. Over time, we will explore further capital allocation options to maximize shareholder value based on market conditions and long-term outlook. Turning now to our financial outlook. The underpenetrated nature of our industry gives us confidence we can sustain robust growth throughout this decade. In this strong long-term demand backdrop, our priority is to generate cash by continuing to increase customer values through growing our mix of higher-value products and by keeping our costs low. Our margin-focused growth is yielding strong results and provides a high growth outlook for aggregate value creation, which will translate into cash generation and growth in our book value of deployed systems or net earning assets. Turning to Slides 17 and 18. Before I share our specific guidance for Q1 and the full year 2025, I want to detail a few of the key metrics we will report and guide to you, commencing with our Q1 2025 release that we believe align with our strategy. Over a year ago, we started reporting subscriber value and net subscriber value pro forma for the market cost of capital we have served each period and used to make our financial underwriting decisions. This additional disclosure showed our ability to substantially grow unit margins even as capital costs remained elevated and fluctuated. Importantly, we also directly address critiques about our use of a fixed 6% discount rate in the higher capital cost environment. Going forward, we will report subscriber value, net subscriber value, total value generated and any similar metrics derived from subscriber value using only a floating discount rate that reflects market observed cost of capital for each period. Gross earning assets, our book value measure will continue to use a fixed discount rate. As I noted, because the vast majority of our customer cash flows are not subject to floating rate exposure, adjusting the discount rate in each quarter is not appropriate, continuing to increase our aggregate value creation correlates with growth in cash generation over time. Accordingly, we will start guiding to aggregate value creation metrics, while moving away from guiding to specific solar and storage deployment volumes and unit margins each period. We will continue to report and provide commentary on the deployment of unit margins, including our optimization between the two so that analysts and investors can continue to track the fundamental building blocks in our business. On our next call, we will provide guidance on the following primary metrics. First, aggregate subscriber value, which is subscriber value multiplied by the number of subscriber additions in a period. Second, contracted net value creation, which is the contracted only portion of aggregate subscriber value conservatively excluding noncontracted value, less aggregate creation costs; and third, cash generation. On Slides 19 and 20, we detail our guidance. Strong value creation will allow us to deliver cash generation of $40 million to $50 million in Q1, which will be our fourth consecutive quarter of positive cash generation. Underpinning our Q1 cash generation guidance storage installations are expected to grow at a robust pace, while solar installations are expected to be approximately flat compared to the prior year, with higher growth in our direct business that our affiliate partner business. In Q1, storage capacity installed is expected to be in a range of 265 to 275-megawatt hours and solar capacity installed is expected to be in a range of 170 to 180 megawatts. For the full year 2025, we expect cash generation to be in a range of $200 million to $500 million. This is a revision from our prior guidance of $350 million to $600 million, driven by a slower ramp in domestic content ITC adders in our affiliate partner business, higher capital cost assumptions and slightly lower volume expectations, partially offset by higher storage mix. On Slide 20, we outlined the assumptions and sensitivities related to key variables that would affect our achievement of our 2025 outlook. We expect a 44% weighted average ITC level in 2025 and further underpinning our guidance, our assumption of 7.5% to 8% average cost of project level capital, battery attachment rates around 66% and slight improvements in the timing of tax credit transfers as that market further matures. Our cash generation outlook does not reflect additional safe harbor equipment purchases. We expect solar installed volumes to be approximately flat next year -- this year. As we achieve cash generation, we will continue to allocate excess unrestricted cash to deleverage with a target to pay down current recourse debt by $100 million or more by the end of 2025. We are committed to a capital allocation strategy beyond this initial deal [indiscernible] period that drives significant shareholder value. With that, let me turn it back to Mary.

Thanks, Danny. I so appreciate the work of the entire Sunrun team at our scale, even with more modest growth in new additions. We are adding over 100,000 customers a year, which is double-digit growth to our fleet and with 66% battery attachment rates that's well over 1 gigawatt hour of valuable storage capacity suite or the peak capacity of a nuclear plant on an annual basis. The strategic shift we undertook nearly 2 years ago to emphasize high-quality growth is yielding strong results in terms of repeatable and meaningful cash generation, along with providing customers with a greater sense of independence, stability and security in their own home. With that, operator, let's open the line for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Praneeth Satish with Wells Fargo.

I guess I wanted to start first on the safe harbor, maybe this is too simplistic of a way to look at this. But if I take the $350 million of safe harbor that you did and divide it by 5% get to $7 billion. So that kind of seems like you could cover a few years' worth of solar and storage installations. So I'm just trying to square that with the commentary you made on how the safe harbor will cover, I think, solar installs for 1 year and storage for half a year.

Yes. It's Danny. I can help bridge that a little bit. So we said on the prepared remarks, it's about 12 months for solar deployments and approximately half the year for storage deployments. One element of bridge is with the amount of equipment purchases and the kind of the ticket price, if you will. It's not a perfect optimization for every project to exactly 5%. So the actual amount of purchase could represent more than 25% that simple division, what caused you to overstate the amount of value. And then the amount of aggregate value against which it implies is the fair market value of projects. So you should be looking at aggregate system value created over an annual period or any period to bridge that kind of remainder of difference. But it is 6 months for batteries, about 12 for storage-only projects.

Got it. That's helpful. And then secondly, on the guidance here. So you're guiding to $200 million to $500 million of cash generation in '25. You're committing to pay down $100 million of recourse debt basically, I guess, the working cap facility. So that leaves a good amount of unallocated cash generation. Maybe if you could just kind of walk us through your priorities for deploying that additional cash? And I guess, why not pay down more debt?

Yes. I think the priority is to continue to deleverage as far as deleveraging target, I think we're looking at a target range of 1.5 to 3x free cash flow [indiscernible] which for us, we would use cash generation. And it's important to build multiple quarters of trailing [indiscernible] back of cash generation as we do that and with an outlook to continue. So we're obviously multiple quarters into that with the Q1 guide achievement that would make 4 consecutive quarters of positive cash generation that we would want to continue to use this period of time to delever the balance sheet to within those targets. That's about 1-year outlook beyond that, there could be more deleveraging or during the period of time, there could be substantially more than $100 million. I think you would view that as the floor. And the ultimate priority is to strengthen balance sheet over this period of time as we get closer and closer to our deleveraging targets, what comes into focus is capital allocation beyond that period which would be in the interest of maximizing shareholder value.

Our next question comes from the line of Philip Shen with ROTH Capital Partners LLC.

Congrats on your solid execution, cash generation, debt paydown and stable performance overall during this challenging time. This stands in contrast with some peers in the industry who are struggling. I wanted to see if you could comment on the tax equity and upfront funding dynamics. It seems like things may be slowing down on the front end, especially following the election. Can you give some color on this? And importantly, how are you guys managing through perhaps a lengthening of the tax equity payment terms?

Yes, I think -- so on the prepared remarks, we talked about $1.3 billion in tax equity added to our runway this year. If we include debt, I know your question is not specific to debt, but we've had a very busy start to the year in terms of raising capital and front-ending our capital raises and being on a pretty high velocity deal base. And that's $2 billion or more in aggregate of capital if you have the 2 together. But on the tax equity piece specifically, we're continuing to see both the REIT emergence of certain traditional tax equity buyers might have been -- for reasons unspecific to the space in the market for a little bit of time, we've seen traditional tax equity continue to participate in greater and greater ways in hybrid transaction format and we've definitely seen most significantly a big broadening out of the transfer credit buyer universe, very large corporates increasing in the mix. And we're certainly seeing our investor universe broaden out and the deal activity to be quite active at the front end of the year.

Right. And so as that broadening of that buyer universe happens and with the uncertainty with the IRA, have you seen payment terms change as a result, perhaps the traditional tax equity investors who are syndicating for lack of a better word, the deals now instead of participants being the entire source of the tax equity that you might be bringing in other tax credit investors, but those guys might be getting a little bit skittish with the IRA. How are you guys managing through that, where some of the traditional tax equity might be very comfortable with the situation, but some of the new players who may not have deep expertise in this space to be dealing with that? And then shifting to my other topic on domestic content. And last quarter, you guys talked about Powerwall 3 not having shortages for you guys. And so they recently shared some new allocations for Q2 in terms of how much people are getting in terms of Powerwall 3. Are you getting the full allocation that you've been expecting?

Sure. Phil. I'll take the [indiscernible] on that first question, and then I'll pass it over. But on the tax equity dynamics, I would say if you track our commentary of the past, which is, as we moved into [ transact ] tax credit transfer market, there have been impacts to the price of credits that we sell. I would say not much future report there, low to mid-90s on a cents per credit basis continues to be the price. I would say those have actual forged by the system, and we're expecting to continue with potential for upside. As far as policy, tax policy, uncertainty, risk and how it's being digested by the market. I think people are generally comfortable at this point on if we're talking about any calendar year 2025 tax credit sales, people are generally comfortable with the current law that's in place and underwriting those credits. So we're not really seeing an impact that's noticeable there.

And then this Paul, just to add a question on Powerwall supply, generally in great shape there. As you're seeing, we're steadily raising our guidance [indiscernible] particular, remains a strong partner for us generally keeping up with demand. We do have other [indiscernible] in our fleet portfolio that we use to have a great partnership and then really the line supply chain and have very little issues whatsoever.

Great, thanks guys. Keep up good work, and I'll pass it on.

Our next question comes from the line of Maheep Mandloi with Mizuho Securities.

Nice to see this cash generation hitting at the 200, including that $18 million applied to that. But maybe one question just on the guidance for '25. You talked about solar being slightly flattish. Is that due to your affiliate partners or just broader market slowdown you're seeing or just more competition with other leasing companies? If you could you just highlight any color on that would be great.

Yes. So for sure, this is Mary. Thank you for the question. Our volume outcome is a bottoms of go-to-market approach. Our direct business is seeing solid growth. We are seeing some less growth in affiliate partners. As you know, we shifted to a storage first strategy, margin-focused strategy that's generating cash. So again, we feel we're growing market share and the data clearly indicates this. So that's our view.

Got it. And maybe just on top of that. So you talked about one of the reasons for reduced cash generation for '25 was a slower ramp in domestic content, as for affiliate partners. Could you elaborate on that? Is that the -- are your partners getting less domestic equipment or like batteries or solar or anything specific there?

Yes, I think you did exactly that. So I think there's some challenges with obtaining qualifying domestic cloud hardware. And then as the rules evolve and clarity comes on them operationalizing processes to be able to [indiscernible] life can be challenging for some smaller partners since we've seen slower adoption with our affiliate business.

Thank you. Our next question comes from the line of Colin Rusch with Oppenheimer.

Can you just talk a little bit about the labor pool that you're seeing now in shifts in terms of any impact of immigration law or other folks exiting the business and being able to pick up some new folks?

Thanks for the question. This is Mary. We're not seeing any labor impact changes. We have, if I run repeatedly, comes out as one of the best companies to work for. We have a really good pipeline to support our needs across the business. So we're feeling really good in that area.

I think on the second part of the question, just as others slowdown in the space, I was picking up talent, I would say, yes, I mean, people do see Sunrun as kind of a safe haven in place to go really long, stable career. And on the sales front and on the installation front, we see people who have been out of the industry kind of migrating to Sunrun.

Our next question comes from the line of Dylan Nassano with Wolfe Research.

Good afternoon, everyone. And I just want to start with -- it looks like sales and marketing has been kind of one of the more meaningful tailwinds for creation costs, which were flat in the quarter. Can you just talk a little bit about what you're seeing with commissions and is the competitive dynamics that you've talked about? Is that kind of -- how has that been factoring into how you're kind of paying and paying commissions?

Yes. I think one of the areas of focus for us has been standardization [indiscernible] and the installation of our operations business. Our operations team, I think is I can confidently say the best in the industry and the fastest and most efficient they've ever been. And so as sales people evaluate where do they want to sell the experience that their customers get is first class at Sunrun. So that's really helped us to be able to have commission leverage, if you will, by providing a superior operations experience for some people. The second would be the product that we sell and being a storage first business. So when you're out there trying to compete on price or deliver customer savings against the utility rate versus talking about the benefits of resiliency and battery backup and future revenue sources for the customers through virtual power plants. It's completely different offering and more sophisticated thoughtful salespeople are recognizing that and are seeing -- they're able to generate assets that have higher value that are in the more attractive commission but on a relative basis, we create good economies of scale for us on a per unit basis.

And then I guess, just a more timely question. Trump administration seems like it's trying to keep everybody on their toes with the tariffs. I guess specifically for Sunrun I'm assuming that would kind of go through the [ Snap ] and [ RAC ] business in terms of exposure to test whether that be China, Canada or Mexico. Can you just speak to any exposure that you might have?

Yes. I'll talk through it at a high level as we think about it from the holistic financial picture. So first as a reminder, there have been various forms of tariffs burdening the industry since 2012. Today, as we look at the total cost stack, hardware is about 1/3 of our total costs, and we estimate that when you kind of put -- it's about a $0.20 per watt aggregate cost between all of the elements, not just racking equipment, that would be about a 13-ish percent increase to overall hardware cost. But then when you cut that down for what is our overall capital -- the creation cost stack, if you will, that's about a 4% increase in the overall cost. So I would say a large portion of which we've already also baked into our expectations. And so if we look at it and we take that in combination with the fact that pricing related to our safe harbor purchases has already been locked in. There's a good mitigation for cost impacts this year and ultimately, 2026, that's a few percentage points of potential impact, and we'll continue to grind costs down around it to be best positioned to kind of continue to grow cash generation beyond '25.

Our next question comes from the line of Brian Lee with Goldman Sachs.

This is [ Tyler Bisset ] on for Brian. Just wanted to first touch on your updated key assumptions for the different cash generation metrics. Can you just discuss like what drivers led you to revise those? It's just higher costs you're seeing? Or is it something else?

Yes, I think just in the course of the planning exercise, we talked about the ITC realization at 44. So that's mainly a reflection of not ultimately where we'll end up, but delayed near-term [ RAP ], we discussed and covered and is mainly related to the affiliate partner. We said also expecting to reach 45% for the year, but maybe obtaining 44% for the whole calendar year. So long term, not a change, but near term impacts the [indiscernible]. On cost of capital, I would say today, obviously, we gave the 7.3% discount rate looking back on Q4 actuals, and we've planned a little bit more conservative way. Obviously, there's been multiple quarters now with rates fluctuating. So we planned a little bit higher than where we are currently running for the sake of conservatism and then battery attachment rates, that's just updating to the normal run rate. Of course, we also gave commentary both on the call and during the Q&A here on volume and how that's moved around from the past quarter's outlook.

Great. Super helpful. And then just on safe harboring you mentioned spent $18 million in cash in 4Q to secure the $350 million. Should we expect any continued cash deployment for that, like incrementally here like the first half or anything?

It will -- not in a onetime fashion. I would say it would probably look more like a run rate activity through the year. The one thing we've also mentioned is we don't assume, yes, right? So there's also -- is a step back. There's also consumption of equipment through the year occurring with -- which is cash timing of monetization and install occuring concurrently with equipment payments for committed purchases. So the onetime activity we call out for Q4 will run rate out for the year. And then, as far as any future safe harbor activity, we haven't planned for that in the numbers, that could be incremental activity as we plan out the year. So there could be future forthcoming impacts if we took on more safe harbor purchases to extend that out.

Our next question comes from the line of [ Tim Moore ] with [ Clear ] Street.

Investors are clearly starting to appreciate your cash generation and focusing that is the main metric. And we like that you're doing profitability and cash generation rather than solely focusing on the top line. I guess I'm just wondering with your guidance commentary on [indiscernible] solar energy, capacity installation versus the robust growth on the battery energy stores and just kind of factoring in new home sales should be a driver this year. You've been doing good on that since last summers. You got California rebound, retrofits, battery attachment rate might go up [ 108% ]. In the first half of the year as you lap the 52% first half, last year. So can you just any color maybe on what you think revenue growth could be even though it's not the main metric. I mean, is it too assertive to think upper single digits growth for the year?

So from a top line revenue growth perspective, the revenue could be growing faster than the units, because we're creating higher-value units. I think you already hit all the factors, the storage attachment rate, continuing to focus and grow in the highest value markets and deprioritization, if you will, of solar only. And as we do that, the other thing we noted is just the ability to hold the cost discipline and the creation cost fret, inclusive of sales and marketing enables us to expand margin, reduce cost as a percent of revenue, and that's correlating with cash generation. So the other part of this is I did shed a little bit of light for a few minutes on new metrics. We're excited about that, and I think they'll be able to better illustrate all those dimensions over time to see better how the top line growth is not just units, but it's higher value units and margin expansion.

That's helpful. And the only other question I had was just on irrational competitive behavior. I know Mary mentioned that some new entrants aren't irrational, but there's probably some incumbents that still haven't changed their ways. I mean can you just give us a flavor or at least benchmark, if irrational behavior peaked sometime last summer, I don't know if it did, but if it was something like 5 out of 10 last summer. How have you seen it in the last few months? Has it improved overall a little bit?

Yes, great question. I would say it's about stable when prices there actually, they have a tendency would not be able to do it forever. And so it's one kind of unwinds a new one has kind of replaced them. and then quickly gets filled up with volume with sales reps that are happy to take advantage of someone paying more for assets than the proceeds you can generate on them. And so I would say it's largely stable in terms of a percent of the market that is overpaying for assets, whether there's kind of been some exchange of [indiscernible].

Great. That's very helpful that it hasn't worsened. I appreciate that.

Our next question comes from the line of [ Macro Bay ] with [ iBank ]. Please proceed with your question.

Just going back to the safe harboring of the equipment. Are you able to quantify whether you will face any higher inventory costs on those modules and storage that you're safe harboring this year? Is there any incremental warehousing costs that you might face on that?

Yes. We've been able -- so you could look at the Q4 inventory balance that did tick up in the range of $60 million. So that there is a little bit higher carrying, but as you also see, that number is not $350 million. So it's not necessarily showing up as a big front-ended impact on inventory warehouse costs. But we also did know we did it in a very capital-efficient manner on use of corporate cash, which implies we use third-party capital to fund it, which have some interest costs. So I'd say that the bigger share cost, probably more on the financing charges as opposed to the holding costs, which I think we're going to be very quite efficient on.

Got it. And just one follow-up. Maybe I might have missed it earlier, but what was the rationale for having a little bit of the longer lead time on the modules as opposed to storage?

Could you repeat that question?

What was the thinking behind having a bit of a longer runway for safe harboring on the module side as opposed to on the storage side?

Yes. I think it's just relative availability of the equipment in the market, 1 year of modules being available, 1 year of batteries not being available.

Thank you. And that concludes the time that has been allocated for Q&A. You may now disconnect.