VIVINT SOLAR, INC., 10-Q filed on 11/7/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2017
Nov. 1, 2017
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
VSLR 
 
Entity Registrant Name
Vivint Solar, Inc. 
 
Entity Central Index Key
0001607716 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock Shares Outstanding
 
114,762,517 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 101,755 
$ 96,586 
Accounts receivable, net
29,517 
12,658 
Inventories
19,802 
11,285 
Prepaid expenses and other current assets
29,519 
46,683 
Total current assets
180,593 
167,212 
Restricted cash and cash equivalents
45,593 
26,853 
Solar energy systems, net
1,622,561 
1,458,355 
Property and equipment, net
17,040 
23,199 
Intangible assets, net
1,002 
1,420 
Prepaid tax asset, net
482,446 
419,474 
Other non-current assets, net
36,889 
29,843 
TOTAL ASSETS
2,386,124 1
2,126,356 1
Current liabilities:
 
 
Accounts payable
42,315 
46,630 
Accounts payable—related party
476 
191 
Distributions payable to non-controlling interests and redeemable non-controlling interests
11,664 
16,176 
Accrued compensation
23,199 
20,003 
Current portion of long-term debt
13,454 
6,252 
Current portion of deferred revenue
32,283 
19,911 
Current portion of capital lease obligation
4,571 
5,163 
Accrued and other current liabilities
25,044 
19,364 
Total current liabilities
153,006 
133,690 
Long-term debt, net of current portion
882,672 
750,728 
Deferred revenue, net of current portion
33,680 
34,379 
Capital lease obligation, net of current portion
2,294 
5,476 
Deferred tax liability, net
491,834 
395,218 
Other non-current liabilities
13,999 
10,355 
Total liabilities
1,577,485 1
1,329,846 1
Commitments and contingencies (Note 17)
   
   
Redeemable non-controlling interests
127,833 
129,676 
Stockholders’ equity:
 
 
Common stock, $0.01 par value—1,000,000 authorized, 114,763 shares issued and outstanding as of September 30, 2017; 1,000,000 authorized, 110,245 shares issued and outstanding as of December 31, 2016
1,148 
1,102 
Additional paid-in capital
554,420 
542,348 
Accumulated other comprehensive income
6,027 
7,631 
Retained earnings
29,186 
5,217 
Total stockholders’ equity
590,781 
556,298 
Non-controlling interests
90,025 
110,536 
Total equity
680,806 
666,834 
TOTAL LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY
$ 2,386,124 
$ 2,126,356 
[1] The Company’s assets as of September 30, 2017 and December 31, 2016 include $1,479.2 million and $1,303.5 million consisting of assets of variable interest entities, or VIEs, that can only be used to settle obligations of the VIEs. These assets include solar energy systems, net, of $1,434.7 million and $1,273.8 million as of September 30, 2017 and December 31, 2016; cash and cash equivalents of $28.0 million and $23.2 million as of September 30, 2017 and December 31, 2016; accounts receivable, net, of $9.6 million and $4.0 million as of September 30, 2017 and December 31, 2016; other non-current assets, net of $5.8 million and $1.8 million as of September 30, 2017 and December 31, 2016; and prepaid expenses and other current assets of $1.2 million and $0.8 million as of September 30, 2017 and December 31, 2016. The Company’s liabilities as of September 30, 2017 and December 31, 2016 included $55.3 million and $64.2 million of liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include distributions payable to non-controlling interests and redeemable non-controlling interests of $11.7 million and $16.2 million as of September 30, 2017 and December 31, 2016; deferred revenue of $37.7 million and $41.7 million as of September 30, 2017 and December 31, 2016; accrued and other current liabilities of $4.5 million as of September 30, 2017 and December 31, 2016; and other non-current liabilities of $1.5 million and $1.9 million as of September 30, 2017 and December 31, 2016. For further information see Note 12—Investment Funds.
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2017
Dec. 31, 2016
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
1,000,000,000 
1,000,000,000 
Common stock, shares issued
114,763,000 
110,245,000 
Common stock, shares outstanding
114,763,000 
110,245,000 
Total assets
$ 2,386,124,000 1
$ 2,126,356,000 1
Solar energy systems, net
1,622,561,000 
1,458,355,000 
Cash and cash equivalents
101,755,000 
96,586,000 
Accounts receivable, net
29,517,000 
12,658,000 
Other non-current assets, net
36,889,000 
29,843,000 
Prepaid expenses and other current assets
29,519,000 
46,683,000 
Total liabilities
1,577,485,000 1
1,329,846,000 1
Distributions payable to non-controlling interests and redeemable non-controlling interests
11,664,000 
16,176,000 
Accrued and other current liabilities
25,044,000 
19,364,000 
Other non-current liabilities
13,999,000 
10,355,000 
Variable Interest Entities
 
 
Total assets
1,479,230,000 
1,303,503,000 
Solar energy systems, net
1,434,679,000 
1,273,813,000 
Cash and cash equivalents
27,983,000 
23,190,000 
Accounts receivable, net
9,575,000 
3,958,000 
Other non-current assets, net
5,814,000 
1,781,000 
Prepaid expenses and other current assets
1,179,000 
761,000 
Total liabilities
55,286,000 
64,193,000 
Distributions payable to non-controlling interests and redeemable non-controlling interests
11,664,000 
16,176,000 
Deferred revenue
37,700,000 
41,700,000 
Accrued and other current liabilities
4,456,000 
4,458,000 
Other non-current liabilities
$ 1,455,000 
$ 1,875,000 
[1] The Company’s assets as of September 30, 2017 and December 31, 2016 include $1,479.2 million and $1,303.5 million consisting of assets of variable interest entities, or VIEs, that can only be used to settle obligations of the VIEs. These assets include solar energy systems, net, of $1,434.7 million and $1,273.8 million as of September 30, 2017 and December 31, 2016; cash and cash equivalents of $28.0 million and $23.2 million as of September 30, 2017 and December 31, 2016; accounts receivable, net, of $9.6 million and $4.0 million as of September 30, 2017 and December 31, 2016; other non-current assets, net of $5.8 million and $1.8 million as of September 30, 2017 and December 31, 2016; and prepaid expenses and other current assets of $1.2 million and $0.8 million as of September 30, 2017 and December 31, 2016. The Company’s liabilities as of September 30, 2017 and December 31, 2016 included $55.3 million and $64.2 million of liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include distributions payable to non-controlling interests and redeemable non-controlling interests of $11.7 million and $16.2 million as of September 30, 2017 and December 31, 2016; deferred revenue of $37.7 million and $41.7 million as of September 30, 2017 and December 31, 2016; accrued and other current liabilities of $4.5 million as of September 30, 2017 and December 31, 2016; and other non-current liabilities of $1.5 million and $1.9 million as of September 30, 2017 and December 31, 2016. For further information see Note 12—Investment Funds.
Condensed Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Revenue:
 
 
 
 
Operating leases and incentives
$ 45,909 
$ 33,394 
$ 119,711 
$ 80,033 
Solar energy system and product sales
29,230 
7,868 
81,537 
13,363 
Total revenue
75,139 
41,262 
201,248 
93,396 
Operating expenses:
 
 
 
 
Cost of revenue—operating leases and incentives
34,731 
39,268 
103,564 
115,566 
Cost of revenue—solar energy system and product sales
22,168 
6,468 
63,664 
10,606 
Sales and marketing
9,808 
8,617 
28,037 
32,078 
Research and development
896 
842 
2,687 
2,218 
General and administrative
19,379 
19,022 
60,259 
60,006 
Amortization of intangible assets
139 
342 
418 
762 
Impairment of goodwill
 
 
 
36,601 
Total operating expenses
87,121 
74,559 
258,629 
257,837 
Loss from operations
(11,982)
(33,297)
(57,381)
(164,441)
Interest expense
16,148 
9,361 
47,707 
22,539 
Other expense (income), net
195 
(434)
1,186 
(95)
Loss before income taxes
(28,325)
(42,224)
(106,274)
(186,885)
Income tax expense (benefit)
9,375 
(2,959)
23,932 
10,245 
Net loss
(37,700)
(39,265)
(130,206)
(197,130)
Net loss attributable to non-controlling interests and redeemable non-controlling interests
(44,605)
(55,961)
(155,383)
(194,978)
Net income available (loss attributable) to common stockholders
$ 6,905 
$ 16,696 
$ 25,177 
$ (2,152)
Net income available (loss attributable) per share to common stockholders:
 
 
 
 
Basic
$ 0.06 
$ 0.15 
$ 0.22 
$ (0.02)
Diluted
$ 0.06 
$ 0.15 
$ 0.21 
$ (0.02)
Weighted-average shares used in computing net income available (loss attributable) per share to common stockholders:
 
 
 
 
Basic
114,505 
108,692 
112,554 
107,516 
Diluted
119,465 
113,344 
117,825 
107,516 
Condensed Consolidated Statements of Comprehensive Income (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net income available (loss attributable) to common stockholders
$ 6,905 
$ 16,696 
$ 25,177 
$ (2,152)
Unrealized losses on cash flow hedging instruments (net of tax effect of $(331), $286, $(1,076) and $286)
(497)
429 
(1,612)
429 
Less: Interest expense on derivatives recognized into earnings (net of tax effect of $62, $0, $5, and $0)
94 
 
 
Total other comprehensive (loss) income
(403)
429 
(1,604)
429 
Comprehensive income (loss)
$ 6,502 
$ 17,125 
$ 23,573 
$ (1,723)
Condensed Consolidated Statements of Comprehensive Income (Unaudited) (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Unrealized losses on cash flow hedging instruments, tax
$ (331)
$ 286 
$ (1,076)
$ 286 
Interest expense on derivatives recognized into earnings, tax
$ 62 
$ 0 
$ 5 
$ 0 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net loss
$ (130,206)
$ (197,130)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
44,671 
32,376 
Amortization of intangible assets
418 
762 
Impairment of goodwill
 
36,601 
Deferred income taxes
98,493 
124,912 
Stock-based compensation
9,501 
6,145 
Loss on solar energy systems and property and equipment
5,024 
4,576 
Non-cash interest and other expense
7,355 
4,963 
Reduction in lease pass-through financing obligation
(3,545)
(3,279)
Losses (gains) on interest rate swaps
1,193 
(258)
Excess tax detriment from stock-based compensation
 
(1,280)
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
(16,859)
(8,444)
Inventories
(8,517)
(5,891)
Prepaid expenses and other current assets
16,289 
98 
Prepaid tax asset, net
(62,972)
(122,313)
Other non-current assets, net
(5,921)
(4,255)
Accounts payable
874 
664 
Accounts payable—related party
120 
(1,480)
Accrued compensation
1,500 
8,334 
Deferred revenue
11,673 
3,396 
Accrued and other liabilities
6,235 
(2,377)
Net cash used in operating activities
(24,674)
(123,880)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Payments for the cost of solar energy systems
(211,225)
(318,273)
Payments for property and equipment
(672)
(2,697)
Proceeds from disposals of solar energy systems and property and equipment
1,952 
693 
Change in restricted cash and cash equivalents
(18,740)
(8,434)
Proceeds from state tax credits
2,216 
 
Purchase of intangible assets
 
(291)
Net cash used in investing activities
(226,469)
(329,002)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Proceeds from investment by non-controlling interests and redeemable non-controlling interests
162,291 
237,148 
Distributions paid to non-controlling interests and redeemable non-controlling interests
(33,774)
(22,230)
Proceeds from long-term debt
306,750 
500,257 
Payments on long-term debt
(164,935)
(224,400)
Payments for debt issuance and deferred offering costs
(13,677)
(16,774)
Proceeds from lease pass-through financing obligation
2,467 
1,417 
Principal payments on capital lease obligations
(3,413)
(4,357)
Proceeds from issuance of common stock
603 
2,645 
Net cash provided by financing activities
256,312 
473,706 
NET INCREASE IN CASH AND CASH EQUIVALENTS
5,169 
20,824 
CASH AND CASH EQUIVALENTS—Beginning of period
96,586 
92,213 
CASH AND CASH EQUIVALENTS—End of period
101,755 
113,037 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
Accrued distributions to non-controlling interests and redeemable non-controlling interests
(4,512)
5,092 
Change in fair value of interest rate swaps
(3,868)
973 
Costs of solar energy systems included in changes in accounts payable, accounts payable—related party, accrued compensation and accrued and other liabilities
(1,901)
503 
Vehicles acquired under capital leases
715 
1,868 
Sale-leaseback of property under build-to-suit agreements
 
(28,456)
Costs of lessor-financed tenant improvements
 
7,850 
Property acquired under build-to-suit agreements
 
2,896 
Solar energy system sales
 
 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
Receivable for state tax credits recorded as a reduction to solar energy system costs
$ 82 
$ 1,364 
Organization
Organization

1.

Organization

Vivint Solar, Inc. and its subsidiaries are collectively referred to as the “Company.” The Company primarily offers solar energy to residential customers through long-term customer contracts, such as power purchase agreements (“PPAs”) and legal-form leases (“Solar Leases”). The Company also offers its customers the option to purchase solar energy systems (“System Sales”) through third-party loan offerings or a cash purchase. The Company enters into customer contracts primarily through a sales organization that uses a direct-to-home sales model. The long-term customer contracts under PPAs and Solar Leases are typically for 20 years and require the customer to make monthly payments to the Company.

The Company has formed various investment funds and entered into long-term debt facilities to monetize the recurring customer payments under its long-term customer contracts and the investment tax credits, accelerated tax depreciation and other incentives associated with residential solar energy systems. The Company uses the cash received from the investment funds, long-term debt facilities and cash generated from operations, including System Sales, to finance a portion of the Company’s variable and fixed costs associated with installing solar energy systems.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2.

Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K dated as of March 16, 2017. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2017 or for any other interim period or other future year.

The unaudited condensed consolidated financial statements reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company uses a qualitative approach in assessing the consolidation requirement for variable interest entities (“VIEs”). This approach focuses on determining whether the Company has the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and whether the Company has the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. All of these determinations involve significant management judgments and estimates. The Company has determined that it is the primary beneficiary in the operational VIEs in which it has an equity interest. The Company evaluates its relationships with the VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. For additional information, see Note 12—Investment Funds.

Use of Estimates

The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect the Company’s principles of consolidation; U.S. federal investment tax credits (“ITCs”); revenue recognition; solar energy systems, net; the impairment analysis of long-lived assets; stock-based compensation; the provision for income taxes; the valuation of derivative financial instruments; the recognition and measurement of loss contingencies; and non-controlling interests and redeemable non-controlling interests. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates.


Stock-Based Compensation

Effective January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) 2016-09, which simplifies several aspects of the accounting for share-based payment transactions. The resulting changes were as follows:

 

All excess tax benefits and tax deficiencies resulting from stock-based compensation are now recognized as income tax expense or benefit in the condensed consolidated income statements, and excess tax benefits are now recognized regardless of whether the benefit reduces taxes payable in the current period;

 

Excess tax benefits are now classified along with other tax cash flows as an operating activity on the condensed consolidated statements of cash flows;

 

The Company elected to recognize forfeitures as they occur beginning on January 1, 2017;

 

The Company may withhold up to the maximum statutory tax rate for each employee without triggering liability accounting; and

 

Cash paid by the Company when directly withholding shares for tax withholding purposes is now classified as a financing activity on the condensed consolidated statements of cash flows.

Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures were adopted using a modified retrospective transition method by means of a cumulative-effect adjustment, resulting in a net $1.2 million reduction to retained earnings as of January 1, 2017.

Amendments related to the presentation of employee taxes paid on the statements of cash flows when an employer withholds shares for tax withholding purposes was adopted using the retrospective method, but had no impact on prior periods.

Amendments related to the recognition of excess tax benefits and tax deficiencies in the condensed consolidated income statements and the presentation of excess tax benefits on the condensed consolidated statements of cash flows were adopted prospectively. No prior periods were adjusted.

In the second quarter of 2017, the Company adopted ASU 2017-09, which clarifies when changes to equity awards require the use of modification accounting guidance. This update clarifies that if the fair value, vesting conditions and classification of an award remain the same after modification, then modification accounting is not required. This guidance was adopted prospectively and no prior periods were adjusted. The adoption of this ASU had no material effect on the condensed consolidated financial statements.

Inventory

Effective January 1, 2017, the Company adopted ASU 2015-11, which simplifies the measurement of inventory by changing the measurement principle for inventories valued under the first-in, first-out (“FIFO”) or weighted-average methods from the lower of cost or market to the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company adopted this ASU prospectively and no prior periods were adjusted. The adoption of this ASU had no material effect on the condensed consolidated financial statements.

Liquidity

In order to grow, the Company requires cash to finance the deployment of solar energy systems. As of the date of this filing, the Company will require additional sources of cash beyond current cash balances, and currently available financing facilities to fund long-term planned growth. If the Company is unable to secure additional financing when needed, or upon desirable terms, the Company may be unable to finance installation of customers’ systems in a manner consistent with past performance, cost of capital could increase, or the Company may be required to significantly reduce the scope of operations, any of which would have a material adverse effect on its business, financial condition, results of operations and prospects. While the Company believes additional financing is available and will continue to be available to support current levels of operations, the Company believes it has the ability and intent to reduce operations to the level of available financial resources for at least the next 12 months from the date of this report, if necessary.


Recent Accounting Pronouncements

New Revenue Guidance

From March 2016 through December 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-20, ASU 2016-12, ASU 2016-11, ASU 2016-10 and ASU 2016-08. These updates all clarify aspects of the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which represents comprehensive reform to revenue recognition principles related to customer contractsThe effective date of these updates for the Company is January 1, 2018. Adoption of this ASU is either full retrospective to each prior period presented or retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. The Company is currently considering adopting the standard using the full retrospective method, but no final decision has been made. The Company continues to evaluate the impact of the new standard on its accounting policies, processes and system requirements.

Under the current accounting guidance, the Company accounts for PPAs and Solar Leases as operating leases. The Company has determined that these agreements do not meet the definition of a lease under ASC 842, Leases, and will be accounted for in accordance with Topic 606. The Company is still evaluating the impact of Topic 606 with respect to the PPA revenue stream. The Company currently accounts for certain Solar Leases, rebates and incentives as minimum lease payments under ASC 840, Leases. For the Company’s Solar Leases, the Company has preliminarily concluded that the impact of adopting Topic 606 will be immaterial. Revenue from all of the Company’s Solar Leases will now be recognized on a straight-line basis over the contractual term; currently a significant majority of Solar Leases are recognized on a straight-line basis. The Company has also preliminarily concluded that there will be no change related to revenue recognition for rebates and incentives.

The Company has evaluated the accounting for incremental costs of obtaining a contract, which under current accounting policies are capitalized as initial direct costs and amortized over the lease term. The Company has preliminarily concluded that it will continue to capitalize the costs of obtaining a PPA, Solar Lease or System Sale contract, which are primarily comprised of sales commissions. For PPA and Solar Lease contracts, the amortization period will remain the life of the related contract, which is 20 years. For System Sales, the capitalized costs of obtaining a contract will continue to be recognized when the related solar energy system is interconnected to the local power grid and granted permission to operate. This will result in minimal changes to the Company’s condensed consolidated financial statements.

The Company has analyzed the impact of Topic 606 on System Sales, photovoltaic installation and software products, and has preliminarily concluded that it will not have a material impact on the condensed consolidated financial statements.

The Company has assessed the impact of Topic 606 as it relates to the sales of ITCs through its lease pass-through fund arrangement. The Company has preliminarily concluded that revenue related to the sale of ITCs through its lease pass-through arrangement will be recognized when the related solar energy systems are placed in service. Currently, the Company recognizes this revenue evenly over the five-year ITC recapture period. This earlier recognition of the ITC lease pass-through revenue is anticipated to be material to fiscal 2016 and could increase the revenue recognized in fiscal 2016 by approximately $12 million and will reduce revenue in fiscal 2017 by approximately $5 million.

New Lease Guidance

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update primarily changes the recognition by lessees of lease assets and liabilities for leases currently classified as operating leases. Lessor accounting remains largely unchanged. This update is effective in fiscal years beginning after December 15, 2018 for public business entities and early adoption is permitted. The amendments are required to be applied using a modified retrospective approach. Due to the Company’s determination that its PPAs and Solar Leases do not meet the definition of a lease pursuant to ASC 842, Leases, the Company is currently considering early adopting ASC 842 to coincide with the adoption of ASC 606, however a decision to early adopt is not final. The Company has operating leases that will be affected by this update and the Company is still evaluating the full impact on its condensed consolidated financial statements and related disclosures. The impact is not expected to be significant to the Company’s condensed consolidated financial statements.


Other Recent Accounting Pronouncements

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This update makes targeted improvements to accounting for hedge activities by easing certain documentation and assessment requirements and eliminating the requirement to separately measure and report hedge ineffectiveness. This update is effective for annual periods beginning after December 15, 2018 for public business entities and early adoption is permitted. The amendments in this update should be applied using a modified retrospective transition method by recording a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year of adoption. The Company is evaluating this update but currently does not anticipate it will have a material impact on its condensed consolidated financial statements and related disclosures. The Company plans to early adopt the new standard effective January 1, 2018.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). This update clarifies that transfers between cash and restricted cash are not part of the entity’s operating, investing and financing activities, and details of those transfers are not reported as cash flow activities in the statements of cash flows. This update is effective for annual periods beginning after December 15, 2017 for public business entities. The amendments in this update should be applied using the retrospective transition method. The Company is evaluating this update but currently anticipates it will have a material impact on its condensed consolidated financial statements and related disclosures as changes in restricted cash will no longer be presented as cash flows from investing activities.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This update will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This update is effective for annual periods beginning after December 15, 2017 for public business entities. The amendments in this update should be applied using a modified retrospective approach. The Company has evaluated this update and currently anticipates it will have a material impact on its condensed consolidated financial statements and related disclosures as the Company will no longer record prepaid tax assets on the condensed consolidated balance sheets and will record the income tax consequences of intra-entity transfers through income tax expense on the condensed consolidated statements of operations. As of September 30, 2017, the prepaid tax asset, net is $482.4 million and it is anticipated that the vast majority of this amount will be written off to retained earnings upon adoption. Once adopted, the ongoing income tax impacts of these intra-entity transfers will be reported as income tax expense.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update clarifies how certain cash flows should be classified with the objective of reducing the existing diversity in practice. This update is effective for annual periods beginning after December 15, 2017 for public business entities. The amendments in this update should be applied using a retrospective transition method and must all be applied in the same period. The Company is evaluating the impact of this update on its condensed consolidated financial statements and related disclosures.

Fair Value Measurements
Fair Value Measurements

3.

Fair Value Measurements

The Company measures and reports its cash equivalents at fair value. The following tables set forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy (in thousands):

 

 

September 30, 2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

12,283

 

 

$

 

 

$

12,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

1,834

 

 

$

 

 

$

1,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

14,317

 

 

$

 

 

$

14,317

 

Time deposits

 

 

 

 

100

 

 

 

 

 

 

100

 

Total financial assets

$

 

 

$

14,417

 

 

$

 

 

$

14,417

 

 

The interest rate swaps (Level 2) were valued using a discounted cash flow model which incorporates an assessment of the risk of non-performance by the interest rate swap counterparties and the Company. The valuation model uses various observable inputs including contractual terms, interest rate curves, credit spreads and measures of volatility. Time deposits (Level 2) approximate fair value due to their short-term nature (30 days) and, upon renewal, the interest rate is adjusted based on current market rates. The Company did not realize gains or losses related to financial assets for any of the periods presented.

The carrying values and fair values of the Company’s long-term debt were as follows (in thousands):

 

September 30, 2017

 

 

December 31, 2016

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Floating-rate long-term debt

$

710,918

 

 

$

710,918

 

 

$

771,852

 

 

$

771,852

 

Fixed-rate long-term debt

 

202,749

 

 

 

241,314

 

 

 

 

 

 

 

Total

$

913,667

 

 

$

952,232

 

 

$

771,852

 

 

$

771,852

 

The Company’s outstanding principal balance of long-term debt is carried at cost. The Company estimated the fair values of its floating-rate debt facilities to approximate their carrying values as interest accrues at floating rates based on market rates. The Company’s fixed-rate debt facilities (Level 2) were valued using quoted prices for corporate debt with similar terms.

Inventories
Inventories

4.

Inventories

Inventories consisted of the following (in thousands):

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

Solar energy systems held for sale

$

19,097

 

 

$

10,540

 

Photovoltaic installation devices and software products

 

705

 

 

 

745

 

Total inventories

$

19,802

 

 

$

11,285

 

Solar energy systems held for sale are solar energy systems under construction that have yet to be interconnected to the power grid and that will be sold to customers. Solar energy systems held for sale are stated at the lower of cost, on a FIFO basis, or net realizable value. Photovoltaic installation devices and software products are stated at the lower of cost, on an average cost basis, or net realizable value.

Solar Energy Systems
Solar Energy Systems

5.

Solar Energy Systems

Solar energy systems, net consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

System equipment costs

$

1,392,886

 

 

$

1,238,968

 

Initial direct costs related to solar energy systems

 

318,658

 

 

 

261,318

 

 

 

1,711,544

 

 

 

1,500,286

 

Less: Accumulated depreciation and amortization

 

(114,728

)

 

 

(73,793

)

 

 

1,596,816

 

 

 

1,426,493

 

Solar energy system inventory

 

25,745

 

 

 

31,862

 

Solar energy systems, net

$

1,622,561

 

 

$

1,458,355

 

 

Solar energy system inventory represents the solar components and materials used in the installation of solar energy systems prior to being installed on customers’ roofs. As such, no depreciation is recorded related to this line item. The Company recorded depreciation and amortization expense related to solar energy systems of $14.5 million and $11.1 million for the three months ended September 30, 2017 and 2016. The Company recorded depreciation and amortization expense related to solar energy systems of $41.0 million and $29.1 million for the nine months ended September 30, 2017 and 2016. 

Property and Equipment
Property and Equipment

6.

Property and Equipment

Property and equipment, net consisted of the following (in thousands):

 

 

 

Estimated

 

September 30,

 

 

December 31,

 

 

 

Useful Lives

 

2017

 

 

2016

 

Vehicles acquired under capital leases

 

3-5 years

 

$

16,029

 

 

$

20,384

 

Leasehold improvements

 

1-12 years

 

 

15,041

 

 

 

14,694

 

Furniture and computer and other equipment

 

3 years

 

 

6,501

 

 

 

6,270

 

 

 

 

 

 

37,571

 

 

 

41,348

 

Less: Accumulated depreciation and amortization

 

 

 

 

(20,531

)

 

 

(18,149

)

Property and equipment, net

 

 

 

$

17,040

 

 

$

23,199

 

 

The Company recorded depreciation and amortization related to property and equipment of $1.9 million and $3.0 million for the three months ended September 30, 2017 and 2016. The Company recorded depreciation and amortization expense related to property and equipment of $6.4 million and $8.2 million for the nine months ended September 30, 2017 and 2016.

The Company leases fleet vehicles that are accounted for as capital leases and are included in property and equipment, net. Of total property and equipment depreciation and amortization, depreciation on vehicles under capital leases of $0.7 million and $1.5 million was capitalized in solar energy systems, net for the three months ended September 30, 2017 and 2016. The Company capitalized depreciation on vehicles under capital leases of $2.7 million and $4.8 million in solar energy systems, net for the nine months ended September 30, 2017 and 2016.

Intangible Assets and Goodwill
Intangible Assets and Goodwill

7.

Intangible Assets and Goodwill

Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

Cost:

 

 

 

 

 

 

 

Internal-use software

$

1,314

 

 

$

1,314

 

Developed technology

 

522

 

 

 

522

 

Trademarks/trade names

 

201

 

 

 

201

 

Customer relationships

 

164

 

 

 

164

 

Total carrying value

 

2,201

 

 

 

2,201

 

Accumulated amortization:

 

 

 

 

 

 

 

Internal-use software

 

(763

)

 

 

(434

)

Developed technology

 

(241

)

 

 

(191

)

Trademarks/trade names

 

(74

)

 

 

(59

)

Customer relationships

 

(121

)

 

 

(97

)

Total accumulated amortization

 

(1,199

)

 

 

(781

)

Total intangible assets, net

$

1,002

 

 

$

1,420

 

 

The Company recorded amortization expense of $0.1 million and $0.3 million for the three months ended September 30, 2017 and 2016, which was included in amortization of intangible assets. The Company recorded amortization expense of $0.4 million and $0.8 million for the nine months ended September 30, 2017 and 2016.


Goodwill Impairment

The Company’s market capitalization decreased significantly during the first quarter of 2016 from $1.0 billion as of December 31, 2015 to $283.0 million as of March 31, 2016 in conjunction with the Company’s determination to terminate an agreement and plan of merger with SunEdison, Inc. (“SunEdison”) and SEV Merger Sub Inc. The Company considered this significant decrease in market capitalization to be an indicator of impairment and the Company performed a goodwill impairment test as of March 31, 2016. The impairment test determined that there was no implied value of goodwill, which resulted in an impairment charge of $36.6 million. This charge was recorded in impairment of goodwill for the nine months ended September 30, 2016.

Accrued Compensation
Accrued Compensation

8.

Accrued Compensation

Accrued compensation consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

Accrued payroll

$

14,594

 

 

$

12,558

 

Accrued commissions

 

8,605

 

 

 

7,445

 

Total accrued compensation

$

23,199

 

 

$

20,003

 

 

Accrued and Other Current Liabilities
Accrued and Other Current Liabilities

9.

Accrued and Other Current Liabilities

Accrued and other current liabilities consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

Accrued unused commitment fees and interest

$

7,287

 

 

$

3,827

 

Current portion of lease pass-through financing obligation

 

4,910

 

 

 

4,833

 

Accrued professional fees

 

4,114

 

 

 

3,222

 

Sales, use and property taxes payable

 

2,897

 

 

 

1,785

 

Accrued inventory

 

1,695

 

 

 

2,117

 

Current portion of deferred rent

 

924

 

 

 

1,155

 

Other accrued expenses

 

3,217

 

 

 

2,425

 

Total accrued and other current liabilities

$

25,044

 

 

$

19,364

 

 

Debt Obligations
Debt Obligations

10.

Debt Obligations

Debt obligations consisted of the following as of September 30, 2017 (in thousands, except interest rates):

 

Principal

 

 

Unamortized Debt

 

 

 

 

 

 

 

 

 

 

Unused

 

 

 

 

 

 

 

 

Borrowings

 

 

Issuance Costs

 

 

Net Carrying Value

 

 

Borrowing

 

 

Interest

 

 

Maturity

 

Outstanding

 

 

Current

 

 

Long-term

 

 

Current

 

 

Long-term

 

 

Capacity

 

 

Rate

 

 

Date

2017 Term loan facility

$

201,446

 

 

$

(174

)

 

$

(5,088

)

 

$

6,510

 

 

$

189,674

 

 

$

 

 

 

6.0

%

 

January 2035

2016 Term loan facility(1)

 

291,293

 

 

 

(149

)

 

 

(8,131

)

 

 

4,969

 

 

 

278,044

 

 

 

 

 

 

4.2

 

 

August 2021

Subordinated HoldCo facility

 

198,125

 

 

 

(39

)

 

 

(3,812

)

 

 

1,961

 

 

 

192,313

 

 

 

 

 

 

9.3

 

 

March 2020

Credit agreement

 

1,303

 

 

 

(2

)

 

 

(146

)

 

 

14

 

 

 

1,141

 

 

 

 

 

 

6.5

 

 

February 2023

Revolving lines of credit(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregation facility(3)

 

100,000

 

 

 

 

 

 

 

 

 

 

 

 

100,000

 

 

 

275,000

 

 

 

4.5

 

 

September 2020

Working capital facility(4)

 

121,500

 

 

 

 

 

 

 

 

 

 

 

 

121,500

 

 

 

15,000

 

 

 

4.5

 

 

March 2020

Total debt

$

913,667

 

 

$

(364

)

 

$

(17,177

)

 

$

13,454

 

 

$

882,672

 

 

$

290,000

 

 

 

 

 

 

 

Debt obligations consisted of the following as of December 31, 2016 (in thousands, except interest rates):

 

Principal

 

 

Unamortized Debt

 

 

 

 

 

 

 

 

 

 

Unused

 

 

 

 

 

 

 

 

Borrowings

 

 

Issuance Costs

 

 

Net Carrying Value

 

 

Borrowing

 

 

Interest

 

 

Maturity

 

Outstanding

 

 

Current

 

 

Long-term

 

 

Current

 

 

Long-term

 

 

Capacity

 

 

Rate

 

 

Date

2016 Term loan facility(1)

$

297,506

 

 

$

(169

)

 

$

(9,643

)

 

$

4,788

 

 

$

282,906

 

 

$

 

 

 

3.6

%

 

August 2021

Subordinated HoldCo facility

 

149,500

 

 

 

(47

)

 

 

(4,851

)

 

 

1,453

 

 

 

143,149

 

 

 

50,000

 

 

 

8.6

 

 

March 2020

Credit agreement

 

1,346

 

 

 

(1

)

 

 

(161

)

 

 

11

 

 

 

1,173

 

 

 

 

 

 

6.5

 

 

February 2023

Revolving lines of credit(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregation facility

 

187,000

 

 

 

 

 

 

 

 

 

 

 

 

187,000

 

 

 

188,000

 

 

 

4.2

 

 

March 2018

Working capital facility(4)

 

136,500

 

 

 

 

 

 

 

 

 

 

 

 

136,500

 

 

 

 

 

 

3.9

 

 

March 2020

Total debt

$

771,852

 

 

$

(217

)

 

$

(14,655

)

 

$

6,252

 

 

$

750,728

 

 

$

238,000

 

 

 

 

 

 

 

 

(1)

The interest rate of this facility is partially hedged to an effective interest rate of 4.0% for $263.9 million of the principal borrowings. See Note 11—Derivative Financial Instruments.

(2)

Revolving lines of credit are not presented net of unamortized debt issuance costs.

(3)

The Aggregation facility was amended in March 2017. See the section captioned “—Aggregation Facility.”

(4)

Facility is recourse debt, which refers to debt that is collateralized by the Company’s general assets. All of the Company’s other debt obligations are non-recourse, which refers to debt that is only collateralized by specified assets or subsidiaries of the Company.

2017 Term Loan Facility

In January 2017, the Company entered into a long-term fixed rate credit agreement (the “2017 Term Loan Facility”) pursuant to which the Company borrowed $203.8 million with certain financial institutions for which Wells Fargo Bank, National Association is acting as administrative agent. The borrower under the 2017 Term Loan Facility is Vivint Solar Financing III, LLC, a wholly owned indirect subsidiary of the Company. Proceeds of the 2017 Term Loan Facility were used to (1) repay existing indebtedness of $140.3 million under the Aggregation Facility with respect to the portfolio of projects being used as collateral for the 2017 Term Loan Facility (the “2017 Term Loan Portfolio”), (2) fund a debt service reserve account and other agreed reserves of $20.1 million, (3) pay transaction costs and fees in connection with the 2017 Term Loan Facility of $5.5 million, (4) pay the ITC insurance premium of $2.0 million on behalf of one of the Company’s investment funds, and (5) distribute $35.9 million to the Company as reimbursement for capital costs associated with deployment of the 2017 Term Loan Portfolio.

Interest on borrowings accrues at an annual fixed rate equal to 6.0% and is payable in arrears. Certain principal payments are due on a quarterly basis, subject to the occurrence of certain events. The Company’s first principal and interest payment was made in April 2017. Principal and interest payable under the 2017 Term Loan Facility will be paid over the term of the loan until the final maturity date of January 5, 2035. Optional prepayments are permitted under the 2017 Term Loan Facility without premium or penalty.

The 2017 Term Loan Facility includes customary events of default, conditions to borrowing and covenants, including negative covenants that restrict, subject to certain exceptions, the borrower’s and the guarantors’ ability to incur indebtedness, incur liens, make fundamental changes to their respective businesses, make certain types of restricted payments and investments or enter into certain transactions with affiliates. The borrower is required to maintain an average debt service coverage ratio of 1.20 to 1. As of September 30, 2017, the Company was in compliance with such covenants.

The obligations of the borrower are secured by a pledge of the membership interests in the borrower, all of the borrower’s assets, and the assets of the borrower’s directly owned subsidiaries acting as managing members of the 2017 Term Loan Portfolio. In addition, the Company guarantees certain obligations of the borrower under the 2017 Term Loan Facility.

Interest expense for the 2017 Term Loan Facility was approximately $3.2 million and $9.4 million for the three and nine months ended September 30, 2017. No interest expense was incurred for the three and nine months ended September 30, 2016. As of September 30, 2017, the Company had $19.2 million in required reserves outstanding in collateral accounts with the administrative agent, which were included in restricted cash and cash equivalents.

2016 Term Loan Facility

In August 2016, the Company entered into a credit agreement (the “2016 Term Loan Facility”) pursuant to which it borrowed $300.0 million aggregate principal amount of term borrowings and $12.1 million for letters of credit from certain financial institutions for which Investec Bank PLC is acting as administrative agent. The borrower under the 2016 Term Loan Facility is Vivint Solar Financing II, LLC, a wholly owned indirect subsidiary of the Company.

For the initial four years of the term of the 2016 Term Loan Facility, interest on borrowings accrues at an annual rate equal to the London Interbank Offered Rate (“LIBOR”) plus 3.00%. Thereafter, interest accrues at an annual rate equal to LIBOR plus 3.25%. The Company has entered into an interest rate swap hedging arrangement such that approximately 90% of the aggregate principal amount of the outstanding term loan is subject to a fixed interest rate. See Note 11—Derivative Financial Instruments. Certain principal payments are due on a quarterly basis subject to the occurrence of certain events, including proceeds received by the borrower or subsidiary guarantors in respect of casualties, proceeds received for purchased systems, and failure to meet certain distribution conditions. Estimated principal payments due in the next 12 months are classified as the current portion of long-term debt, net of the related unamortized debt issuance costs. Optional prepayments, in whole or in part, are permitted under the 2016 Term Loan Facility, without premium or penalty apart from any customary LIBOR breakage provisions.

The 2016 Term Loan Facility includes customary events of default, conditions to borrowing and covenants, including negative covenants that restrict, subject to certain exceptions, the borrower’s and the guarantors’ ability to incur indebtedness, incur liens, make fundamental changes to their respective businesses, make certain types of restricted payments and investments or enter into certain transactions with affiliates. A debt service reserve account was funded with the outstanding letters of credit under the 2016 Term Loan Facility. As such, the debt service reserve is not classified as restricted cash and cash equivalents on the condensed consolidated balance sheets. The borrower is required to maintain an average debt service coverage ratio of 1.55 to 1. As of September 30, 2017, the Company was in compliance with such covenants.

Prior to the maturity of the 2016 Term Loan Facility, a fund investor could exercise a put option in two of the Company’s investment funds and require the Company to purchase the fund investor’s interest in those investment funds. As such, the Company was required to establish a $2.9 million reserve at the inception of the 2016 Term Loan Facility in order to pay the fund investor if either of the put options is exercised prior to the maturity of the 2016 Term Loan Facility. This reserve is classified as restricted cash and cash equivalents. Previously, the Company was required to establish a $2.4 million escrow account with respect to those systems in the 2016 Term Loan Portfolio that had not been placed in service as of the closing date. During the nine months ended September 30, 2017, these conditions were met and the escrow was released.

The obligations of the borrower are secured by a pledge of the membership interests in the borrower, all of the borrower’s assets, and the assets of the borrower’s directly owned subsidiaries acting as managing members of the underlying investment funds. In addition, the Company guarantees certain obligations of the borrower under the 2016 Term Loan Facility.

Interest expense for the 2016 Term Loan Facility was approximately $3.7 million and $2.2 million for the three months ended September 30, 2017 and 2016. Interest expense was approximately $10.8 million and $2.2 million for the nine months ended September 30, 2017 and 2016.

Subordinated HoldCo Facility

In March 2016, the Company entered into a financing agreement (the “Subordinated HoldCo Facility”) pursuant to which it borrowed an aggregate principal amount of $200.0 million of term loans from investment funds and accounts advised by HPS Investment Partners. The borrower under the Subordinated HoldCo Facility is Vivint Solar Financing Holdings, LLC, one of the Company’s wholly owned subsidiaries. Borrowings under the Subordinated Holdco Facility mature in March 2020. The Company may not prepay any borrowings outside of required prepayments until March 2018, and any subsequent prepayments of principal are subject to a 3.0% fee. Borrowings under the Subordinated HoldCo Facility were used for the construction and acquisition of solar energy systems.

Interest accrues at a floating rate of LIBOR plus 8.0%. Certain principal payments are due on a quarterly basis. Estimated principal payments due in the next 12 months are classified as the current portion of long-term debt, net of the related unamortized debt issuance costs.

The Subordinated HoldCo Facility includes customary events of default, conditions to borrowing and covenants, including covenants that restrict, subject to certain exceptions, the borrower’s and the guarantors’ ability to incur indebtedness, incur liens, make investments, make fundamental changes to their business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions. These restrictions do not impact the Company’s ability to enter into investment funds, including those that are similar to those entered into previously. Additionally, the parties to the Subordinated HoldCo Facility must maintain certain consolidated and project subsidiary loan-to-value ratios and a consolidated debt service coverage ratio, with such covenants to be tested as of the last day of each fiscal quarter and upon each incurrence of borrowings. As of September 30, 2017, the Company was in compliance with such covenants. Each of the parties to the Subordinated HoldCo Facility has pledged assets not otherwise pledged under another existing debt facility as collateral to secure their obligations under the Subordinated HoldCo Facility. Vivint Solar Financing Holdings Parent, LLC, another of the Company’s wholly owned subsidiaries and the parent company of the borrower, and certain other of the Company’s subsidiaries guarantee the borrower’s obligations under the financing agreement.

Interest expense for the Subordinated HoldCo Facility was approximately $5.0 million and $2.6 million for the three months ended September 30, 2017 and 2016. Interest expense was approximately $14.4 million and $4.4 million for the nine months ended September 30, 2017 and 2016. A $10.4 million interest reserve amount was deposited in an interest reserve account with the administrative agent and is included in restricted cash and cash equivalents.

Credit Agreement

In February 2016, a wholly owned subsidiary of the Company entered into a credit agreement (the “Credit Agreement”) pursuant to which Goldman Sachs, through GSUIG Real Estate Member LLC, committed to lend an aggregate principal amount of up to $3.0 million upon the satisfaction of certain conditions and the approval of the lenders. Proceeds from the Credit Agreement were used for the deployment of certain solar energy systems. Principal and interest payments under the Credit Agreement will be paid quarterly over the term of the loan until the final maturity date of February 2023. The Company did not draw upon the full borrowing capacity of the Credit Agreement, and no borrowing capacity remained as of September 30, 2017. Interest accrues on borrowings at a rate of 6.50%. Interest expense under the Credit Agreement was de minimis for the three months ended September 30, 2017 and 2016. Interest expense was approximately $0.1 million and de minimis for the nine months ended September 30, 2017 and 2016.

Aggregation Facility

In September 2014, the Company entered into an aggregation credit facility (as amended, the “Aggregation Facility”), pursuant to which the Company may borrow up to an aggregate of $375.0 million and, upon the satisfaction of certain conditions and the approval of the lenders, up to an additional aggregate of $175.0 million in borrowings with certain financial institutions for which Bank of America, N.A. is acting as administrative agent.

In March 2017, the Company amended the Aggregation Facility, and the parties agreed to (1) extend the date through which the Company may incur borrowings under the Aggregation Facility to March 31, 2020 (“Availability Period”), with an option to extend such period by an additional 12 months to the extent the lenders agree to such extension; (2) extend the maturity date for the initial loans under the Aggregation Facility from March 2018 to September 2020; and (3) increase the “Applicable Margin” used to determine the applicable interest rate on outstanding borrowings after the Availability Period from 3.50% to 3.75%. The “Applicable Margin” used to determine the applicable interest rate on outstanding borrowings during the Availability Period remains unchanged at 3.25%.

In addition, the amendments to the Aggregation Facility (1) allow the Company to satisfy concentration covenants by maintaining insurance policies with respect to certain tax equity funds for the benefit of the lenders to cover any indemnification payments the Company may be required to make to certain of its tax equity investors in connection with the loss of ITCs, and (2) modify the customer FICO score requirement thresholds to enable the Company to borrow more against certain solar energy systems. The amendments to the Aggregation Facility also provide the ability for the Company to enter into forward-starting interest rate hedges and require no less than 75% of outstanding loan balances to be hedged. The Company is required to meet this threshold within 15 business days after the end of each quarterly period. See Note 11—Derivative Financial Instruments.


Prepayments are permitted under the Aggregation Facility, and the principal and accrued interest on any outstanding loans mature in September 2020. Under the Aggregation Facility, interest on borrowings accrues at a floating rate equal to either (1)(a) LIBOR or (b) the greatest of (i) the Federal Funds Rate plus 0.5%, (ii) the administrative agent’s prime rate and (iii) LIBOR plus 1% and (2) a margin that varies between 3.25% during the period during which the Company may incur borrowings and 3.75% after such period. Interest is payable at the end of each interest period that the Company may elect as a term of either one, two or three months.

The borrower under the Aggregation Facility is Vivint Solar Financing I, LLC, one of the Company’s indirect wholly owned subsidiaries, which in turn holds the Company’s interests in the managing members in certain of the Company’s investment funds. These managing members guarantee the borrower’s obligations under the Aggregation Facility. In addition, Vivint Solar Financing I Parent, LLC, has pledged its interests in the borrower, and the borrower has pledged its interests in the guarantors as security for the borrower’s obligations under the Aggregation Facility. The related solar energy systems are not subject to any security interest of the lenders, and there is no recourse to the Company in the case of a default.

The Aggregation Facility includes customary covenants, including covenants that restrict, subject to certain exceptions, the borrower’s, and the guarantors’ ability to incur indebtedness, incur liens, make investments, make fundamental changes to their business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions. Among other restrictions, the Aggregation Facility provides that the borrower may not incur any indebtedness other than that related to the Aggregation Facility or in respect of permitted swap agreements, and that the guarantors may not incur any indebtedness other than that related to the Aggregation Facility or as permitted under existing investment fund transaction documents. These restrictions do not impact the Company’s ability to enter into investment funds, including those that are similar to those entered into previously. As of September 30, 2017, the Company was in compliance with such covenants.

The Aggregation Facility also contains certain customary events of default. If an event of default occurs, lenders under the Aggregation Facility will be entitled to take various actions, including the acceleration of amounts due under the Aggregation Facility and foreclosure on the interests of the borrower and the guarantors that have been pledged to the lenders.

Interest expense was approximately $2.5 million and $3.0 million for the three months ended September 30, 2017 and 2016. Interest expense was approximately $7.6 million and $11.2 million for the nine months ended September 30, 2017 and 2016. As of September 30, 2017, the current portion of debt issuance costs of $3.1 million was recorded in prepaid expenses and other current assets, and the long-term portion of debt issuance costs of $6.1 million was recorded in other non-current assets, net. As of September 30, 2017, the Company had $3.0 million in required reserves outstanding in collateral accounts with the administrative agent, which were included in restricted cash and cash equivalents. The interest reserve increases as borrowings increase under the Aggregation Facility.

Working Capital Facility

In March 2015, the Company entered into a revolving credit agreement (the “Working Capital Facility”) pursuant to which the Company may borrow up to an aggregate principal amount of $150.0 million from certain financial institutions for which Goldman Sachs Lending Partners LLC is acting as administrative agent and collateral agent. Available borrowings under the Working Capital Facility are subject to a borrowing base tied to the (1) level of PPA and Solar Lease systems under development and (2) combined future available tax equity fund commitments and available borrowing capacity under the Company’s back-leverage facilities. To the extent that outstanding borrowings exceed the borrowing base, the Company would be required to repay borrowings under the Working Capital Facility. Loans under the Working Capital Facility will be used to pay for the costs incurred in connection with the design and construction of solar energy systems, and letters of credit may be issued for working capital and general corporate purposes. In addition to the outstanding borrowings as of September 30, 2017, the Company had established letters of credit under the Working Capital Facility for up to $13.5 million related to insurance contracts.

The Company has pledged the interests in the assets of the Company and its subsidiaries, excluding the Company’s existing investment funds, their managing members, the 2017 Term Loan Facility, the 2016 Term Loan Facility, the Subordinated HoldCo Facility, the Aggregation Facility and Solmetric Corporation, as security for its obligations under the Working Capital Facility. Prepayments are permitted under the Working Capital Facility, and the principal and accrued interest on any outstanding loans mature in March 2020. Interest accrues on borrowings at a floating rate equal to, dependent on the type of borrowing, (1) a rate equal to the Eurodollar Rate for the interest period divided by one minus the Eurodollar Reserve Percentage, plus a margin of 3.25%; or (2) the highest of (a) the Federal Funds Rate plus 0.50%, (b) the Citibank prime rate and (c) the one-month interest period Eurodollar rate plus 1.00%, plus a margin of 2.25%. Interest is payable dependent on the type of borrowing at the end of (1) the interest period that the Company may elect as a term and not to exceed three months, (2) quarterly or (3) at maturity of the Working Capital Facility.


The Working Capital Facility includes customary covenants, including covenants that restrict, subject to certain exceptions, the Company’s ability to incur indebtedness, incur liens, make investments, make fundamental changes to its business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions. Among other restrictions, the Working Capital Facility provides that the Company may not incur any indebtedness other than that related to the Working Capital Facility or permitted swap agreements. These restrictions do not impact the Company’s ability to enter into investment funds, including those that are similar to those entered into previously. The Company is also required to maintain $25.0 million in cash and cash equivalents and certain investments as of the last day of each quarter. As of September 30, 2017, the Company was in compliance with such covenants.

The Working Capital Facility also contains certain customary events of default. If an event of default occurs, lenders under the Working Capital Facility will be entitled to take various actions, including the acceleration of amounts then outstanding.

Interest expense for this facility was approximately $1.6 million and $1.4 million for the three months ended September 30, 2017 and 2016. Interest expense was approximately $4.9 million and $4.4 million for the nine months ended September 30, 2017 and 2016. As of September 30, 2017, the current portion of debt issuance costs of $0.5 million was recorded in prepaid expenses and other current assets, and the long-term portion of debt issuance costs of $0.8 million was recorded in other non-current assets, net.

Interest Expense and Amortization of Debt Issuance Costs

For the three months ended September 30, 2017 and 2016, total interest expense incurred under all debt obligations was approximately $16.0 million and $9.2 million, of which $1.9 million and $1.8 million was amortization of debt issuance costs. For the nine months ended September 30, 2017 and 2016, total interest expense incurred under all debt obligations was approximately $47.2 million and $22.2 million, of which $6.9 million and $4.5 million was amortization of debt issuance costs.

Derivative Financial Instruments
Derivative Financial Instruments

11.

Derivative Financial Instruments

Derivative financial instruments consisted of the following at fair value (in thousands):

 

 

September 30, 2017

 

 

Fair Value

 

 

Balance Sheet Location

Derivatives designated as hedging instruments:

 

 

 

 

 

 

Interest rate swaps

 

$

12,283

 

 

Other non-current assets

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

Interest rate swaps

 

$

1,834

 

 

Other non-current liabilities

 

 

 

December 31, 2016

 

 

Fair Value

 

 

Balance Sheet Location

Derivatives designated as hedging instruments:

 

 

 

 

 

 

Interest rate swaps

 

$

14,317

 

 

Other non-current assets

The Company is exposed to interest rate risk relating to its outstanding debt facilities that have variable interest rates. In connection with the 2016 Term Loan Facility, the Company entered into interest rate swaps to offset changes in the variable interest rate for a portion of the Company’s LIBOR-indexed floating-rate loans. As of September 30, 2017, the notional amount of these interest rate swaps was $263.9 million. The notional amount of the interest rate swaps decreases through July 31, 2028 similar to the Company’s estimated monthly and quarterly principal payments on its loans through that date. The interest rate swaps are designated as cash flow hedges, and unrealized gains or losses on the effective portion are recorded in other comprehensive income (“OCI”). The amount of accumulated other comprehensive income (“AOCI”) expected to be reclassified to interest expense within the next 12 months is approximately $1.2 million. The Company will discontinue the hedge accounting designation of these derivatives if interest payments on LIBOR-indexed floating rate loans compared to the payments under the derivatives are no longer highly effective.

In connection with the March 2017 amendment of the Aggregation Facility, the Company is required to maintain interest rate swaps such that at least 75% of the outstanding loan balance of the Aggregation Facility is hedged. The Company is required to meet this threshold within 15 business days after the end of each quarterly period. As of September 30, 2017, the Company had entered into interest rate swaps with an aggregate notional amount of $77.0 million. The interest rate swaps terminate when the Aggregation Facility matures in September 2020. The Company did not designate these interest rate swaps as hedge instruments and accounts for any changes in fair value in other expense, net.

The Company records derivatives at fair value. The effect of derivative financial instruments on the condensed consolidated statements of comprehensive income and the condensed consolidated statements of operations, before tax effect, consisted of the following (in thousands):

 

 

Three Months Ended September 30,

 

 

 

 

 

2017

 

 

2016

 

 

Location of Gain (Loss)

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

 

 

 

(Losses) gains recognized in OCI - effective portion:

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

(828

)

 

$

715

 

 

OCI

 

 

 

 

 

 

 

 

 

 

 

Gains reclassified from AOCI into income - effective portion:

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

156

 

 

$

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

Gains recognized in income - ineffective portion:

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

120

 

 

$

258

 

 

Other expense, net

 

 

 

Three Months Ended September 30,

 

 

 

 

 

2017

 

 

2016

 

 

Location of Loss

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

(320

)

 

$

 

 

Other expense, net

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2017

 

 

2016

 

 

Location of Gain (Loss)

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

 

 

 

(Losses) gains recognized in OCI - effective portion:

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

(2,688

)

 

$

715

 

 

OCI

 

 

 

 

 

 

 

 

 

 

 

Gains reclassified from AOCI into income - effective portion:

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

13

 

 

$

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

Gains recognized in income - ineffective portion:

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

641

 

 

$

258

 

 

Other expense, net

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2017

 

 

2016

 

 

Location of Loss

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

(1,834

)

 

$

 

 

Other expense, net

 

Investment Funds
Investment Funds

12.

Investment Funds

As of September 30, 2017 and December 31, 2016, the Company had 21 and 20 investment funds for the purpose of funding the purchase of solar energy systems. The aggregate carrying value of these funds’ assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s condensed consolidated balance sheets were as follows (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

27,983

 

 

$

23,190

 

Accounts receivable, net

 

9,575

 

 

 

3,958

 

Prepaid expenses and other current assets

 

1,179

 

 

 

761

 

Total current assets

 

38,737

 

 

 

27,909

 

Solar energy systems, net

 

1,434,679

 

 

 

1,273,813

 

Other non-current assets, net

 

5,814

 

 

 

1,781

 

Total assets

$

1,479,230

 

 

$

1,303,503

 

Liabilities

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Distributions payable to non-controlling interests and redeemable

   non-controlling interests

$

11,664

 

 

$

16,176

 

Current portion of deferred revenue

 

8,198

 

 

 

8,148

 

Accrued and other current liabilities

 

4,456

 

 

 

4,458

 

Total current liabilities

 

24,318

 

 

 

28,782

 

Deferred revenue, net of current portion

 

29,513

 

 

 

33,536

 

Other non-current liabilities

 

1,455

 

 

 

1,875

 

Total liabilities

$

55,286

 

 

$

64,193

 

Under the fund agreements, cash distributions of income and other receipts by the funds, net of agreed-upon expenses and estimated expenses, tax benefits and detriments of income and loss, and tax benefits of tax credits, are assigned to the fund investors and the Company’s subsidiaries as specified in contractual arrangements. As such, the cash held in investment funds is not readily available to the Company due to the timing of distributions. Certain of these fund arrangements have call and put options to acquire the investor’s equity interest as specified in the contractual agreements. Once the investor’s equity interest is acquired by the Company, the assets, liabilities and operations of the investment fund become wholly owned and no longer require an assessment of non-controlling interests.

Fund investors for three of the funds are managed indirectly by The Blackstone Group L.P. (the “Sponsor”) and are considered related parties. As of September 30, 2017 and December 31, 2016, the cumulative total of contributions into the VIEs by all investors was $1,213.2 million and $1,050.9 million. Of these contributions, a cumulative total of $110.0 million was contributed by related parties in prior periods. A third-party provider has agreed to perform backup maintenance services for all funds, if necessary.

Lease Pass-Through Financing Obligation

During 2015, a wholly owned subsidiary of the Company entered into a lease pass-through fund arrangement under which the Company contributed solar energy systems and the investor contributed cash. The net carrying value of the related solar energy systems was $58.9 million and $60.5 million as of September 30, 2017 and December 31, 2016.

Under the arrangement, the fund investor made large upfront payments to one of the Company’s wholly owned subsidiaries and is obligated to make subsequent periodic payments. The Company allocated a portion of the aggregate payments received from the fund investor to the estimated fair value of the assigned ITCs, and the balance to the future customer lease payments that were also assigned to the investor. The fair value of the ITCs was estimated by multiplying the ITC rate of 30% by the fair value of the systems that were sold to the lease pass-through fund. The fair value of the systems was determined by independent appraisals. The Company’s subsidiary has an obligation to ensure the solar energy systems are in service and operational for a term of five years to avoid any recapture of the ITCs. Accordingly, the Company recognizes revenue as the recapture provisions lapse assuming all other revenue recognition criteria have been met. The amounts allocated to the ITCs were initially recorded as deferred revenue, and subsequently, one-fifth of the amounts allocated to the ITCs is recognized as revenue from operating leases and solar energy systems incentives based on the anniversary of each solar energy system’s placed in service date.

The Company accounts for the residual of the large upfront payments, net of amounts allocated to the ITCs, and subsequent periodic payments received from the fund investor as a borrowing by recording the proceeds received as a lease pass-through financing obligation, which will be repaid through customer payments that will be received by the investor. Under this approach, the Company continues to account for the arrangement with the customers in its condensed consolidated financial statements, whether the cash generated from the customer arrangements is received by the Company’s wholly owned subsidiary or paid directly to the fund investor. A portion of the amounts received by the fund investor from customer payments is applied to reduce the lease pass-through financing obligation, and the balance is allocated to interest expense. The customer payments are recognized into revenue based on cash receipts during the period as required by GAAP. Interest is calculated on the lease pass-through financing obligation using the effective interest rate method. The effective interest rate is the interest rate that equates the present value of the cash amounts to be received by a fund investor over the master lease term with the present value of the cash amounts paid by the investor to the Company, adjusted for any payments made by the Company. Any additional master lease prepayments by the investor would be recorded as an additional lease pass-through financing obligation, while any refunds of master lease prepayments would reduce the lease pass-through financing obligation.

The lease pass-through financing obligation is nonrecourse. As of September 30, 2017 and December 31, 2016, the Company had recorded financing liabilities of $35.1 million and $40.4 million related to this fund arrangement, of which $29.3 million and $34.2 million was deferred revenue and $5.8 million and $6.2 million was the lease pass-through financing obligation recorded in other liabilities.

Guarantees

With respect to the investment funds, the Company and the fund investors have entered into guaranty agreements under which the Company guarantees the performance of certain financial obligations of its subsidiaries to the investment funds. These guarantees do not result in the Company being required to make payments to the fund investors unless such payments are mandated by the investment fund governing documents and the investment fund fails to make such payment. Each of the Company’s investment funds and financing subsidiaries maintains separate books and records from each other and from the Company. The assets of each investment fund are not available to satisfy the debts or obligations of any other investment fund, subsidiary or the Company.

The Company is contractually obligated to make certain VIE investors whole for losses that the investors may suffer in certain limited circumstances resulting from the disallowance or recapture of investment tax credits. The Company has concluded that the likelihood of a significant recapture event is remote and consequently has not recorded any liability in the condensed consolidated financial statements for any potential recapture exposure. The maximum potential future payments that the Company could have to make under this obligation would depend on the IRS successfully asserting upon audit that the fair market values of the solar energy systems sold or transferred to the funds as determined by the Company exceeded the allowable basis for the systems for purposes of claiming ITCs. The fair market values of the solar energy systems and related ITCs are determined and the ITCs are allocated to the fund investors in accordance with the funds’ governing agreements. Due to uncertainties associated with estimating the timing and amounts of distributions, the likelihood of an event that may trigger repayment, forfeiture or recapture of ITCs to such investors, and the fact that the Company cannot determine how the IRS will evaluate system values used in claiming ITCs, the Company cannot determine the potential maximum future payments that are required under these guarantees.

From time to time, the Company incurs penalties for non-performance, which non-performance may include delays in the installation process and interconnection to the power grid of solar energy systems and other factors. Based on the terms of the investment fund agreements, the Company will either reimburse a portion of the fund investor’s capital or pay the fund investor a non-performance fee. No distributions were paid to reimburse fund investors during the three months ended September 30, 2017. Distributions paid to reimburse fund investors totaled $8.4 million during the nine months ended September 30, 2017. As of September 30, 2017, no accrual for additional distributions was required.

As a result of the guaranty arrangements in certain funds, the Company was required to hold a minimum cash balance of $10.0 million as of September 30, 2017 and December 31, 2016, which is classified as restricted cash and cash equivalents.

Redeemable Non-Controlling Interests and Equity
Redeemable Non-Controlling Interests and Equity

13.

Redeemable Non-Controlling Interests and Equity

Common Stock

The Company had reserved shares of common stock for issuance as follows (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

Shares available for grant under equity incentive plans

 

13,626

 

 

 

11,596

 

Restricted stock units issued and outstanding

 

6,534