Sunrun Inc.

Good afternoon, and welcome to Sunrun's second quarter 2024 earnings conference call. All participants have been placed on mute. Please note that this call is being recorded and that one hour has been allocated for the call, including question and answer session. To join the Q&A session after prepared remarks, please press star 1 at any time. We ask participants to limit themselves to one question and one follow-up. I will now turn the call over to Patrick Jobin, Sunrun's Investor Relations Officer. Please go ahead.

Before we begin, please note that certain remarks we will make on this call constitute forward-looking statements. Although 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 projections made in any forward-looking statements. Please also note these statements are being made as of today, and we disclaim any obligation to update or revise them. During today's call, we will also be discussing certain non-GAAP financial measures, which we believe can provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of current period performance on a comparable basis with prior periods. These non-GAAP financial measures should be considered as a supplement to and not a substitute for, superior to, or in isolation from GAAP results. You will find additional disclosures regarding the non-GAAP financial measures discussed in today's call and our press release issued this afternoon and our filings with the SEC, each of which is posted on our website. On the call today are Mary Powell, Sunrun CEO, and Damian Badgian, Sunrun CFO. Ed Fenster, Sunrun's co-founder and co-executive chair, along with Paul Dixon, Sunrun's president and chief revenue officer, are also on the call for the Q&A session. A presentation is available on Sunrun's investor relations website, along with supplemental materials. An audio replay of today's call, along with a copy of today's prepared remarks and transcript, including Q&A, will be posted to the investor relations website shortly after the call. We've allocated 60 minutes. for today's call, including the question and answer session. And now let me turn the call over to Mary.

Thank you, Patrick, and thank you all for joining us today. Sunrun's strategy to become the beloved, trusted provider of clean energy and storage for households across America is delivering strong results. In the second quarter, the Sunrun team set records for storage installation and attachment rates, beating the high end of our installation guidance while delivering solid quarter-over-quarter solar installation and net subscriber value growth. We also delivered strong cash generation of $217 million in Q2, recouping the tax credit transfer-related working capital investment noted in Q1. Our primary focus is accelerating our differentiation, launching additional products and services to expand customer lifetime values, and remaining the disciplined margin and customer focus leader, growing cash generation in the business for years to come. We are on track to achieve our cash generation objectives as we exit 2024 and our increasing cash generation guidance for 2025. We are also on track to exceed the high end of our full year storage installation guidance this year as our focus on storage products pays dividends faster than we even expected. Driven by our margin focus strategy and slightly lower sales pacing than we initially expected, We now expect our solar volumes for 2024 to be at the lower end of our guidance range. Nevertheless, we are seeing strong sequential growth in order activity as consumer interest continues to build over this hot summer with soaring electricity rates. We continue to focus on the most margin-accretive customers. The hot summer and high utility bills are driving consumers to focus on their home energy use and related costs. Our strategy is to focus on products and geographies where Sunrun shareholders can earn a strong return while Sunrun customers experience an excellent value proposition. Driven by these dynamics, we are increasing our storage capacity installation guidance from approximately 58% to approximately 86% growth in the year. And we are narrowing our solar installation guidance to reflect the low end of our prior range. down approximately 15% for the year. We expect to see solid high-teens sequential growth in solar installations into Q3 and Q4, and to resume double-digit year-over-year growth in Q4. We are reiterating our cash generation guidance of 50 million to 125 million in Q4. In addition, we are initiating even higher cash generation guidance for 2025 of $350 million to $600 million. The fundamental drivers of our business continue to accelerate. Utility rates continue to rise, while solar and storage equipment costs are declining. Our operating efficiency and customer experience continues to improve. Customers remain eager to take control of their energy needs with affordable and resilient solutions to power their lives, the ultimate in independence. A Pew study issued in June affirmed what polls have said for years. The majority of Americans, Republicans, Democrats, and Independents favor expanding solar power in the United States. Over a year ago, we oriented the business to be storage-first, which increases the customer value proposition and lays the foundation for future value creation from grid services. This strategy has also allowed us to capitalize on regulatory changes faster and better than others in the industry. In Q2, we installed storage on 54% of our new customers, up from an 18% attachment rate in the prior year, and a four-point increase from levels achieved in Q1. We installed 265 megawatt hours of storage in Q2, up 152% from a year ago, and the most we have installed in any quarter. Someone's experience selling Installing and monetizing storage for the grid is a clear differentiator. Storage systems provide increased customer value to enhance resiliency and control while providing higher margins for sunruns. Our fleet of network storage capacity has reached 1.8 gigawatt hours with 116,000 systems installed. While still in the early stages of commercializing these valuable dispatchable energy resources, we continue to advance programs which prove their value potential. We now have more than a dozen operating virtual power plants across the country. Just this afternoon, we announced a program with Tesla in Texas. The program has already enrolled customers and will scale up while dispatching stored solar energy from at-home batteries to rapidly increase capacity on the grid during periods of high consumption. Customers will be compensated for their participation while retaining a portion of their stored energy to provide backup power to their homes in the event of a power outage. Sunrun will also earn incremental recurring revenue for the program. These same resources are providing tremendous value for our customers. During prolonged power outages in the aftermath of Hurricane Beryl, More than 1,600 Sunrun customers in the greater Houston area were able to keep their homes energized, with more than 70,000 hours of backup energy provided by their solar and storage systems. With over 3 million homes and businesses without power, we are seeing strong demand in Texas, as many are seeing the obvious value our service can provide. Just last week, we announced the operation of the nation's first vehicle-to-home power plant. using a small group of customer-owned bi-directional electric vehicles. Initiated by forward-thinking regulation and in partnership with Maryland's largest utility, Baltimore Gas and Electric, this program utilizes all-electric Ford F-150 Lightning trucks to deliver power this summer during peak demand times. These programs build on many others we are operating. including the Demand Side Grid Support Program initiated by regulators in California. This virtual power plant is being actively used to support California's power grid. Just last month, during a heat wave, over 16,000 Sunrun customers' solar plus storage systems dispatched power during peak hours, supplying the grid with an average of 48 megawatts each night, exceeding the capacity of several costly and polluting gas-fired peaker plants in California. Home solar and battery systems are modernizing and strengthening the electric grid. With forward-thinking regulation, these resources could lower the cost of the overall grid for all users. As a reminder, California has 14,000 megawatts of power plants that are used less than 5% of the time. We are quickly becoming a multi-product company that offers a suite of clean energy products to our consumers in a bundled, easy to finance way. By continuing to invest heavily in service and providing a leading customer experience, we are able to monetize opportunities to provide additional services to our large base of customers for decades into the future. We are proud of our customer first approach. evidenced by a continued increase in customer net promoter scores at the time of installation, which this quarter reached 76 points, up over five points in the past year. We have invested time and resources to develop products and learn from pilots to best inform our strategy to harness these opportunities. On slide seven, we highlight our focus, including renewals, repowering customers with new equipment that meet increased energy demands, installing batteries for existing solar-only customers to provide energy resilience, networking systems to form virtual power plants, and providing electric vehicle charging or even bi-directional solutions. We are seeing strong traction. For instance, we have over 1,000 orders by existing customers to add batteries. While we just recently launched this, orders are growing at a rapid rate. I want to spend a minute discussing developments with a public peer who recently announced their market exit and restructuring. This presents an opportunity for Sunrun to continue our industry leadership and gain share in a financially disciplined and measured way. We are engaged in conversations with many of their former dealers and are selectively onboarding partners that share our vision and commitment to provide the best customer experience. We have been an established leader in the new homes business for many years and are engaging with many large national home builders about joining the Sunrun platform. In July, we announced the addition of two strong leaders and industry veterans who most recently led the new homes business at SunPower. We expect strategic growth in the new home segment in the coming quarters, given by our leading platform, expanded leadership team, and a long track record of being a reliable, trusted partner for homeowners. This dislocation will provide opportunities for competitors as well, especially new entrants in the financing segment eager for volume. We continue to see irrational pricing and immature controls from some of the new entrants, but have also seen some indication that as they have gained more experience, they are adjusting pricing and controls accordingly. We continue to hear from our partners that they value Sunrun most for being a sustainable, reliable partner, and that has led to strong long-term relationships. We deeply value these partners and our shared vision of success, particularly some of our longest standing and largest partners. Before handing over to Danny, as always, I want to take a moment to celebrate some of our people who truly embrace the power of clean energy, and the desire to connect customers to the cleanest energy on earth. Thank you to our leading direct-to-home sales team in Los Angeles. Thanks so much to our team members, Adler, Rich, and John, for delivering on safety, quality, battery attachment rates, and customer experience, delivering some incredible results this quarter. I also want to celebrate the team at Snap and Rack, our independently run business, which is proudly manufacturing premium solar racking in the United States, creating jobs and helping improve the efficiency of Sunrun's installation activities and those across the industry. The team is busy innovating and ramping production of U.S.-made equipment to help the entire industry, including Sunrun, meet domestic content standards. Thanks so much, Troy, Charles, Arun, and the entire team. 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 markets activities and outlook. Turning first to the results for the quarter on slide 11. We have now installed over 116,000 solar and storage systems, with storage attachment rates reaching 54% of installations nationally during the quarter. We expect storage attachment rates to remain at or above this level throughout the remainder of the year. This higher mix of storage continues to drive net subscriber values higher as backup storage offerings carry higher margins. During the quarter, we installed 265 megawatt hours of storage capacity, well above the high end of our guidance, and an increase of 152% compared to the same quarter last year. Our total network's storage capacity is now approximately 1.8 gigawatt hours. In the second quarter, solar energy capacity installed was approximately 192 megawatts within our guidance range of 190 to 200 megawatts. Customer additions were approximately 26,700, including approximately 25,000 subscriber additions. Our subscription mix reached 95% of deployment in the period. an increase from 93% last quarter, and again, the highest level in many years. We ended Q2 with 984,000 customers and approximately 828,000 subscribers, representing 7.1 gigawatts of network solar energy capacity, a 14% 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 Q2, our annual recurring revenue, or ARR, stood at almost $1.5 billion, up 27% over the same period last year. We had an average contract life remaining of nearly 18 years. Turning to slide 12, in Q2, subscriber value was approximately $49,600, and creation cost was approximately $37,200, delivering a net subscriber value of $12,394. This strong result was from higher battery data rates, efficiency, and sequential growth in volumes. Although subscriber value decreased slightly in Q2 due to a smaller average system size relative to Q1, we expect this trend to reverse in Q3 and Q4 with higher average system sizes. If measured on a per-watt basis to normalize the system size, subscriber value per watt increased slightly from Q1. Our Q2 subscriber value and net subscriber value reflect the blended investment tax credit of approximately 35%, again reflecting the portion of our deployed systems qualifying for the energy communities and low income ITC honors. Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period, was $310 million in the second quarter. Our present value-based metrics are presented using a 6% discount rate, but our financial underwriting already accounts for our current cost of capital, which was approximately 7.5% in 2002. As a reminder, to enable ease of comparison across periods, we generally do not update the discount rate frequently. Instead, we provide advanced rate ranges that reflect current interest rates, enabling investors to calculate the obtainable net cash unit margins on our deployments. In addition, we provide a pro forma net subscriber value using the capital cost observed for the quarter. At a 7.5% discount rate, net subscriber value was $7,075 and total value generated was $177 million. We expect additional tailwinds net subscriber value in future periods from the following variety of factors. More favorable business mix, increased realization of ITC outers, lower hardware prices, labor efficiency, and operating leverage from strong sequential volume growth. On slide 13, we detailed the tailwinds for IPC adders. In Q2, we recognized the weighted average IPC of approximately 35%, the equivalent of approximately half of our systems qualifying for the energy communities or low-income adder. Proceeds from domestic content adders are expected to be realized in the coming quarters. including a retroactive monetization of a portion of 2023 and year-to-date 2024 installations. We were encouraged to see the updated guidance in May, which should allow for a strong majority of our installations to qualify for this hour within a few quarters and increase our weighted average ITC level to around 45% in 2025. Turning now to gross and net earning assets and our balance sheet on slide 15. Gross earning assets were $15.7 billion at the end of the second quarter. Gross earning assets is the measure of cash flow we expect to receive from subscribers over time. Net of operating and maintenance costs, distribution to tax equity partners, and distribution to project equity financing partners, all discounted at a 6% unlevered capital cost. Net earning assets were $5.7 billion at the end of the second quarter, of approximately $430 billion from the prior quarter. Net earning assets is gross earning assets plus cash plus old debt. Net earning assets does not include inventory or other construction in progress assets or net derivative assets related to our interest rate swaps. All of which represent additional value. The value creation upside we expect from future grid services opportunities and selling additional products and services to our customer base are now reflected in these metrics. We programmatically enter 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 rates loss. As such, we do not adjust the discount rate used in net earning assets to match current capital costs for new installations. We ended the quarter with over a billion dollars in total cash. an increase of $259 million compared to the prior quarter. Cash generation was $217 million in Q2, which included the recovery of timing-related items, most notably the $181 million reduction in Q1 proceeds as a result of the transition from traditional tax equity to tax credit transfers. Turning to our capital markets activities. As we discussed last call, we were very active in Q1 arranging capital to support our growth and further optimizing our balance sheet by extending maturities. To navigate potential and economic conditions and volatility, we have been prudent to extend facilities early and proactively. As of today, closed transactions and executed term sheets provide us with expected tax equity capacity to fund over 313 megawatts of projects for subscribers beyond what was deployed through the second quarter. We also have over a billion dollars in unused commitments available in our non-recourse, senior revolving warehouse loan. This unused amount would fund approximately 373 megawatts of projects for subscribers. Our strong debt capital runway allows us to be selective in timing turnout transactions. Since the start of the year, we have closed three ADS transactions. Sunrun's industry leading performance as an originator and servicer of residential solar assets continues to provide deep access to attractively priced capital. In June, we closed an $886 million ABS transaction, representing the largest ever securitization for Sunrun and the residential solar industry. We also arranged a subordinated financing on the portfolio. The Class A non-recourse debt, comprising both publicly and privately placed tranches, was rated A-plus by Kroll. The Class A notes at a higher rating than precedent ABS transactions with comparable advance rates, evidencing the higher quality of our portfolios. The spread of 205 basis points on the public tranche represented a 35 basis point improvement from our previous comparable ABS transaction in September 2023. The advance rates on the portfolio were 73% for the Class A notes and 83% cumulatively when including the additional subordinated financing. As previously noted, in February, we issued $483 million in convertible notes due in 2030 and can currently commit repurchases of our 2026 convertible notes. To date, we have repurchased over $266 million, or two-thirds of our 2026 convertible notes. This amount includes repurchases of $50 million in July. We will continue to be disciplined and selective with our repurchases. When we think about our balance sheet, we prioritize a strong cash position and use of asset level non-recourse debt financing. This strategy provides the lowest cost capital to finance cash flow producing assets backed by highly credit worthy consumers and to use parent recourse debt that is appropriately sized and balances maturity dates, cash interest costs, and flexibility. Turning now to our outlook on slide 18. The under-penetrated nature of our market 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 storage adoption and other higher-value products and services, and by reducing our costs. Storage capacity installed is expected to be in a range of 275 to 300 megawatt hours in Q3. This represents approximately 64% growth year over year at the midpoint. For the full year, we are increasing our storage guidance to a range of 1,030 to 1,100 megawatt hours, representing 86% growth at the midpoint, an increase from our prior guidance range of 800 to 1,000 megawatt hours. Solar energy capacity installed is expected to be in a range between 220 and 230 megawatts in Q3. At the midpoint, this represents 17% growth from Q2. For the full year, we expect solar energy capacity installs to decline approximately 15%, in line with the low end of our prior guidance range. We believe this guidance still represents market share gains underpinned by the strength of our subscription offering and our disciplined go-to-market approach. We also expect year-over-year growth to be positive starting in Q4. Given our focus on increasing net subscriber values through product mix, additional ICC adders, and cost efficiencies, we expect our net subscriber values will be materially higher in the second half of the year relative to Q2 levels. Because we have been increasing unit economics, total value generated growth will be at least 15 percentage points higher than solar installation growth. We remain committed to driving meaningful cash generation as we execute our margin focus and discipline growth strategy. We are reiterating our cash generation outlook for Q4. We expect cash generation will be positive in Q3, 50 to 125 million in Q4, and now 350 to 600 billion in 2025. On slide 19, we have outlined sensitivities related to key variables that would affect our achievement. We now expect a large portion of our solar-only systems in addition to our storage systems to qualify for the domestic content adder starting later this year and into 2025. We will provide more concrete expectations for amount and timing of initial receipt of domestic content adders during the coming quarters. Our 2025 cash generation guidance reflects an approximately 45% average ITC. With that, let me turn it back to Mary.

Thanks, Danny. I want to again express my appreciation to the entire Sunrun team. Your continued commitment to providing our customers and communities with clean, affordable energy to power their lives and to create value for all of our stakeholders is what drives us forward. Our rapid transition to a storage-first company is extending our differentiation, driving enhanced margins and delivering the best value to customers. Operator, let's open the line for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Hey, everyone. Good afternoon. Thanks for taking the questions and kudos on the solid cash generation here. I guess first question on that front, just given it's such a focus for you now and for the overall market as well. How are you thinking about capital allocation priorities, especially in the 2025, as you think about, you know, now the significantly higher and absolute levels of cash gen you're talking about? And then just given the wide range, what are some of the biggest win factors for the 2025 outlook for cash gen? You know, is it rates? Is it mix, et cetera? Just, you know, what's sort of in your control versus what's not in your control? if we're trying to kind of handicap your potential to reach the higher end of some of those cash generation targets, and then I have a follow-up.

Hey, Brian. It's Danny. I'll take the second part of the question first, and I'll just generally refer to slide 19 of the presentation where we do kind of zero in on the three primary factors if we're trying to think through sensitivities. They are the ITC realization rate, the cost of capital, and the battery attachment rate. Those are the principle three we've highlighted in the past as well. And per point or quarter point of change in each of those, we've indicated the degree of sensitivity. So I'd refer you there for those big three. There are a bunch of other items noted around mostly timing. I would say in the bucket of not entirely within our control, always, at all times, so that, you know, that could have some, you know, intra-quarter variability around incentive monetization, capital markets timing, just as a general reminder. We do about three to four turnout transactions a year, so the timing for those will matter. And generally, other working capital, you know, mentioned incentives, rebates, you know, the ITC monetization, you know, the timing of cash receipt by transaction. I would put those all in the timing buckets in addition to the three primary factors. On the capital allocation question, we'll continue to evaluate the best options and remain disciplined around that and say parent fee leveraging to better position the balance sheet will become a focus that will drive higher available liquidity Clean up the balance sheet, which we think will drive shareholder value meaningfully as we do that. And then the remainder, you know, the balance will be put to best use with best use being determined at the time. You know, buybacks and other uses would be in consideration. Of course, you know, some of which would be board level decisions, considering the best use of the time.

Okay, that's awesome. Great call. Maybe one for Mary, since you brought it up in your prepared remarks, just obviously real-time developments around some of your peers, not doing very well in the marketplace, potential for share gain for you. Given the better cash flow prospects, you talked about gaining some share. How would you factor in kind of adding incremental growth and spending money on that um as a priority for capital allocation in in 25 you know just on the solar side obviously you're doing very well on on the storage side already but you know given you know you're also talking about being back to double digit year-on-year solar growth exiting this year uh seems like you might have a tailwind into 25 like what are sort of the spending priorities slash needs you might um be looking at there thank you

Yeah, Brian, good to chat with you. Yeah, so just to reiterate again, we're going to continue our disciplined, margin-focused approach and strategy. So yes, you know, certainly what is happening is providing some opportunity for us, some market opportunity. As I said in my remarks, I mean, we were really thrilled to have, you know, really two industry veterans and leaders join our new homes team. And we are talking to some of, you know, really the most significant Builders in the market and so we're progressing those kinds of conversations and looking at ways we can continue to grow in our margin focused way measured way That delivers what we're after right which is volume and margin and cash generation So that's like you're not going to see any change That's what our focus is on while we also continue to really drive continue to drive efficiencies in the business so I'm really proud of what the team has done and both on the customer experience side from an NPS perspective, but also from an efficiency perspective, as we have also done in the operations of the company. We've been in the new homes business for some time. We've been in the business of working with really important partners. So we also see some opportunity. We've had a number of affiliate partners reach out to us. And so again, we're really pleased to be having those conversations and continuing to build out the momentum we have in the business towards, again, that, you know, margin to creative, profitable growth. So, Paul, I don't know if there's anything you want to add to that.

Yeah, I would maybe say just, you know, similar as we've talked about in the past on the viewer side of the business, we're seeing people migrate more to safe harbor, safer harbors, and we don't view this situation where, you know, one where the market's demanding people come in and overpay to attract the volume. Much of our conversations with these new homes partners and historically, they're coming to us looking for the foundation that Sunrun has, a reliable business that knows how to predictably price, service, and maintain and deliver for consumers and do so at a fair rate. So we've definitely seen that take place. We are, however, investing in product expansion and not chasing Boeing specifically. And we don't anticipate that exercise. It consumes a lot of capital.

All right, appreciate it. Best of luck.

Thank you. Our next question comes from the line of Julian Dumoulin-Smith with Jefferies. Please proceed with your question.

Hey, good afternoon, team. Thank you very much. Appreciate it, and nicely done indeed on the cash gen here. Maybe pick it up where Brian left off here if we can. Just on the full year, just rolling forward here, I mean, cash in looks very constructive. What does that reflect in terms of volumes looking at 25? You said as you look at the full year, you know, obviously expecting solar volume to decline, but seeing an inflection here at a positive beginning in Q4. How do you think about that volumetrically across the space as you look forward here? What's reflected and related here? Well, actually, I'll let you run, and I'll follow up with a clarification.

Yeah. Hey, Julian. I'll give the short answer on volume as it relates to cash jet, which is double-digit growth. I think we made the remark on the script. Getting to that level in Q4 and holding at that level beyond Q4 is the anticipation. That's in line with the longer-term view and objectives. of double-digit like mid-teens industry growth potential as well.

I always try to ask for more granularity, right? If I can, just pressing on this a little further, right? So despite the eligibility on solar-only systems for domestic content here, you're still raising storage guidance, right? I think that's an interesting dynamic here by 10% to 20%. Is that a statement on California and NEM market specifically, right? As you think about California being a big driver here nationally on volumes, is the fact that storage is doing relatively well a statement of what you guys specifically are seeing in California?

It's a statement on what we specifically see provides incredible value for customers all across America, as well as for our shareholders. So we've made the move, Julian, into a multi-product company, with our Storage First strategy. We sell other products as well, but storage has really been, you know, a key focus of ours, not just because of the, you know, value it provides for shareholders, the value it provides for customers in terms of resilience, but also what we really continue to see is going to be a future unlock, which is the grid services value that we continue to talk about. So it really allows Sunrun over time to be building a fleet of stored energy capacity that I think is going to become increasingly valuable in the United States as utilities face not just rising cost challenges but capacity challenges as well.

Got it. All right, guys. Thank you very much.

Thank you. Our next question comes from the line of Moses Sudden with BNP Paribas. Please proceed with your question.

Thanks for taking my questions. Congrats on a stellar update. How do you think of competing for tax equity and transferability hybrid funds in the context of rising demand for such capital, particularly from your top competitor who is successfully pushing deeper into these markets, but possibly also from former loan providers and others trying to flood into this market?

Hey, this is Dan. We feel pretty well positioned. I think, you know, In particular, given how many years we've been at it, the buyer universe that's been pretty stable for us over many years, the ability to implement hybrid structures where we're combining the traditional buyer universe with a very rapidly expanding set of transferability buyers, many of whom are in the nine-figure zip code for individual check size in the transactions. I think just given the momentum we've seen build over the year, we feel well positioned. We're well aware of the overall demand for tax equity, but I think it is being balanced for us with the radically expanding available supply that's coming in from the corporate buyer universe that is supplementing deal sizes in a very, very material way for us.

And Moses, I would say that the company, I think, has a fantastic reputation across all of our capital providers on the non-recourse side. But I think that is particularly acute with tax equity, who we've been working for for so long and have done dozens of funds with multiple counterparties, both the company's performance, the lack of need to amend the transactions, the quality of the team, all those things, I think, contribute to us being, you know, really on the top of the list of counterparties for those capital providers. And I think we feel very good about it.

And then one point just sums up, like the reliable flow nature of our business leads to predictive, you know, very high rate of predictability for the person on the other side seeking tax credits and a tax planning exercise as well. And I think that's understood by the market.

I think it's very helpful, and I sure remember you out competing as far as SolarCity's days, so you've proven that. I guess one more separately. I noticed $220 million early repayment of pass-through financing. How is that reflected in cash gen? Was that swapped out, new project? I know that was sort of a form of former kind of tax equity, but what's happening there with that $220?

Are you referring to the repayment of Sorry, I just missed part of the question. Is it the repayment of the tax equity financing obligation?

No, I noticed the early repayment of pass-through financing of 220 million. You had 20 last quarter also.

Yeah, that was an older style of tax equity fund that reached its buyout point. I think we've had a rolling amount of tax equity buyouts. I think this is no different. It's a tax equity fund buyout. The asset capital structure gets cleaned up eventually in connection with that. So I think that's just a kind of ordinary course type of activity for us. These funds just reached kind of end of life in terms of the, you know, getting to the buyout point.

Right, right. Sorry. How was that paid? Was that reducing cash generation, though?

It would have been paid with a concurrent debt financing of the assets in connection with the buyout.

I'll take the rest offline. Thank you. Thank you.

Thank you. Our next question comes from the line of Joseph Osa with Guggenheim Partners. Please proceed with your question.

Thank you, everybody. Following on Moses' question, insofar as the market for transferable credits is concerned, I'm wondering if you can give us some rough commentary on on where those transactions are clearing in terms of pricing. And then I'm also curious as to whether there's any difference in the market if you're looking at something that might be perceived as a little more aggressive, like stacking and energy communities, credit and domestic content on top of the 30%, or is everything kind of priced the same? And then I'll just give you my follow-up, which is super simple. I want to clarify on the cash generation for next year. Are you talking Q4 24 to Q4 25? For the 350 to 600, I just want to make sure I'm thinking about the right comps. Thank you.

So taking the first part, so really the primary pricing data point is the price per credit being paid. And I think that's been in a low 90s, expressing cents per dollar of credit in a low 90s range. I think that has moved Incrementally, I think over the course of a year, especially if we get late in the year, we could see pricing move up for those looking to fill out the year and they're just kind of in a moment of urgent demand. So we're seeing some of that activity now materialize in the back half of the year. Potentially, we'll see more of it. Generally, the long-term expectation is that we see the price per credit incrementally pick up over time. Both because the buyer universe expands, but then we mature to the point where we're seeing repeat buying activity, and it's that kind of reliability play where we could see the value differentiation or the ticking up in value come into play. There will be monetization of retroactive credits, so pricing can be a little bit different depending on how far back we're reaching. And there's no distinction. Because it's for dollar credit transferred, there isn't a distinction between the type of adder that's being paid for.

Yeah, that was my question. There's not any kind of perceived higher level of recapture if you're stacking multiple credits, people are just kind of paying what they're paying.

I think that's generally right. I mean, investors are doing their diligence. and they're paying in consideration of their diligence. I think the prices reflect that.

Okay.

Joe, can you remind me of the second part, the follow-up?

Yeah, it's just simple clarification. The 25 cash generation target, can I think of that as where you exit 24 and then where you exit 25? I just want to make sure I understand.

That's more simply the cash generation in the year, so through all fourth orders added up.

All right. So I want to make sure I'm clear. What does that imply for exiting 24 versus exiting 25? If I'm just comping like to like, what is that number then?

Right. So we have 50 to 125 for Q4 is the guidance. And if you – Yes. Simply annualize that by multiplying by four. That's 200 to 500 is the exit case. And then for the full year next year, it's 350 to 600. January 1, 2021. Yeah, I guess I'm sorry.

I want to clarify this.

Are you saying

that exiting 2025, the cash balance exiting the year should be between $350 and $600 million higher than the cash balance exiting 2024. That's correct.

Thank you. I'm restricted.

Got it. Thank you.

Thank you. Our next question comes from the mind of Andrew Pericoco with Morgan Stanley. Please proceed with your questions.

Great. Good evening, everyone, and thanks for taking the question. I do want to ask another question on this cash generation here, just related to some of the ITC adders. I mean, I guess I just would have expected a slightly more meaningful jump in 2025 as you fully realize some of that domestic content adder. I believe that the top end of the $250 to $500 million range that you provided for the fourth quarter this year contemplated like a 40%. ICC, so that goes to 45%. I guess I would have expected the top end of next year's to be slightly above where you're guiding. Is that just conservatism? Am I misreading some of your sensitivities? We just love some additional color around how you're thinking about benefiting from some of those credits and whether or not there's potentially additional upside if you don't have to pass that through to the customer.

Hey, Andrew. Yeah, so based on the implied volume growth we expect to see next year, the volume mix and the amount of adders, the 350 to 600 implies a high single digits to slightly north of 10% type of free cash flow margin, if you will. So just taking free cash flow against all the proceeds raised for financing in the business as the indexing. which we view as an appropriate level of target margin for the business next year, especially as we figure out how to market by market, go to market with the adders, especially the domestic content piece in areas where we have lower battery adoption. There might be some pricing benefits accruing to the consumer as opposed to us. All things considered, as we you know, watch that through that, you know, six to 10% level of net margin, even through like consideration for working capital as we resume growth, we feel like it's an appropriate target area to expect.

Understood. Okay. That's helpful. And then maybe just switching gears, coming back to the battery storage part of your business for a second, maybe you can just elaborate, obviously California, very, very strong, battery storage market under M3. Can you just give us any data points or anecdotes in terms of what you're seeing on attach rates outside of California? You mentioned Texas already, but maybe just compare and contrast where you are on battery attach rates in some of those markets today versus, you know, 2023 or 2022. That'd be helpful. Thank you.

Yeah, I think overall we see consumers in every market expressing interest in batteries, but we really have pockets that have far stronger battery attach rates. So inside Hawaii and Puerto Rico, obviously we have nearly 100% or 100% battery attached. California in the backup storage is well under the 80%. Texas has been trending up really steeply as we've talked about in the past. So for us, the heavy focus, as Mary kind of alluded to this being a core strategy for us, is opening up additional markets. And across the East Coast, you see a lot of markets that have relatively low penetration today, but have really attractive consumer value props. The grid deeply needs that we see a lot of future opportunity because of it. Our sell people are eager to sell us. So as we work with policy, the different cities, the utilities, and a good market strategy, that's kind of where additional growth would come. But nationwide, I would say strong demand for it and pockets that we've cracked the code on and other markets that are emerging.

Yeah, and I would also just build on that by saying we see just, really significant potential in our retrofit program, going back to our existing customer base. So, again, we expect to see real growth there as well.

Thank you. Our next question comes from the line of Cassie Harrison with Piper Sandler. Please proceed with your question.

Good afternoon, and thanks for taking the question, and congrats on the cash gen. So my first question goes back to the commentary surrounding irrational pricing. If we take that comment and then we combine that with the fact that the OEMs will have domestic content available for pretty much everyone, what gives you guys the confidence that competition won't just end up eliminating the excess benefit of the higher ITC and that you guys can, in fact, retain the value? What makes you think that the cost of the lease across the board doesn't just come down and really benefits the customer, but you and your peers end up in a relatively similar cash position as this year?

Great question. So I think today we're proving that out in the reality that we're generating cash. We have differential price points and returns than our competition. And we see a large component of the market is out there selling and offering higher rates to sales dealers than we do. And we still have the volume and the growth and the kind of pricing power that we have. And as we see more competitors struggle and go out, we see consumers get more thoughtful around selecting who they go solar with on merits other than just the price they're paying. We also think that complication is our competitive advantage. And so as markets get more complicated, have different rate structures and require batteries and other considerations to deliver a complete consumer value prop, we view that as absolutely our advantage and anticipate more markets becoming more complicated and us being able to price differentially as a result.

And as Danny mentioned, you know, some pass-through to the customer is considered.

Yeah, I mean, for sure. And how we built our guidance we built in the assumption that some would flow through to benefit customers without a doubt. But yeah, for sure. And we are just building on what Paul said. You know, that is something we are definitely seeing that I think is more recent, which is, and probably the most recent disruption with SunPower will drive this home even further where customers are looking harder at servicing. They're looking harder at the long-term relationship where again, Sunrise just has a very, very strong story to tell.

Got it. I appreciate the call there from everyone. And then my follow-up question, maybe a little bit more theoretical, maybe a little bit tricky to answer, more difficult to answer, but let's say rates decline faster than the market currently anticipates, faster than what's implied in yield curves, just just due to a more significant deterioration in the economy. Do you have any historical reference for how project financing spreads could trend? I'm basically trying to understand if you get lower benchmarks, but they're offset entirely by higher credit spreads, or if you think that would potentially be a net benefit to you, or if it's just too difficult to answer until you go ahead and do a deal under that scenario. Thank you.

That's a great question. And prior to assuming the role, I like capital markets. And we've seen this play out through cycles and different points and cycles. You might, and I suspect what we're seeing right now in capital markets transactions, when there's an immediate and sudden change in base rates, you might see a little bit of credit spread impact. Those can be relatively short-lived. You know, we go through a period of, you know, price reset, price discovery. We've seen it happen over the last couple of years even where spreads have momentarily moved and in subsequent transactions they've come back down. So we've planned for all of that. I think we're, you know, taking both sides of the equation, you know, looking at base rates and planning appropriately and conservatively for credit spreads as we plan out the cash generation of the business. As far as the approach, when base rates fall monthly and even weekly, we hedge the base rate. We lock in the base rate environment we're in for that week or month, depending on the life cycle of where the asset is relative to install. And we effectively protect that rate until the asset is installed and turned out. So we've been quite, as you can imagine, we've been active at that very recently with the pullback in rates. And the seven-year treasury indexes our borrowing costs, and that's down quite a bit ahead of any decision by the Fed to start reducing short-term rates. So we're already benefiting from that. On the credit spread environment, we'll be very thoughtful about how we approach markets. So in the past where we've seen momentary short-lived rises in credit spreads, rather than doing non-callable transactions in the capital markets, it might turn out in the commercial bank market, which has refinancing flexibility for a future point when credit spreads come back down. So we've got a well-scripted playbook for, you know, out of, you know, experience in playing that through a different point in the cycle.

Appreciate all the color.

Thank you. Our next question comes from the line of James West with Evercore ISI. Please proceed with your question.

Hey, everyone. I wanted to just quickly ask about the current pricing environment. Mary, I know you mentioned your competition that had been a little sloppy was getting better. I'd love to get some more context on this. Are these larger competitors? Are these smaller competitors? Are these competitors that are slowly went out of business. I mean, what's changing in the overall pricing environment, and how is it helping to get better?

Yeah, so thanks for the question. I view it more as we were giving you an update versus a seismic shift. So there has been, I would say, since the Inflation Reduction Act, there has been, particularly in the financing-only space, With the rapid move to third-party-owned model versus loan, there's been a lot of entrance into the space. So I do it more as we were giving an update. We are definitely glad to see what we thought would happen, which is some maturation as entrants learn that this is a very, very different space than loan or cash. But Paul, do you want to add any specific color relative to his questions?

Yeah, I think the only thing I would add to that is when a new financial insurance comes in, and there's been a pretty big handful of them with small individual scale, but several of them, they come in with low controls, attractive pricing, trying to buy up and grow market share. And as them and their financiers learn more about owning 25-year assets, tax credits are the things that... to use Danny terminology, the well-structured playbook that we've built over nearly two decades. As they were in those things, they are repricing and implementing a lot of the controls that we already have in place, bringing it closer to a level playing field. And as that happens, volume migrates back to us. And so we have not seen and don't see these people, you know, these groups scaling, but it's more the quantity of them out in the marketplace with transferability tax credits making it more readily available.

Okay, got it. That makes sense. Thanks for the help, guys.

Thank you. Our next question comes from the line of Philip Shen with Roth Capital Partners. Please proceed with your question.

Hi, this is Robert on Phil's line. Thank you for taking my question. First question is just for the inverter battery procurement strategy for domestic content. second is how you're thinking about originations over the next 12 months and leveraging tax equity versus tax credit transferability philosophically how are you making the decision between tax credit transfers and tax equity to what degree does tax credit transfer improve the gap financials and then which is more expensive between tax equity and tax credit transfers. I know you kind of touched on that a bit earlier. If you could provide any additional color, that would be helpful.

Yeah, I think on the first part of the question, we think that we'll get implied in the 45% weighted average IPC level guided for next year is the vast majority of our systems qualifying, whether they are storage or solar only. In the case of solar only, you know, it's a combination of components, you know, including the inverter, the racking. You know, we called out and gave a shout out to Snap and Rack on the call. You know, there is domestic content qualification contribution from that business that will primarily benefit solar only. You know, on the battery side, we have been using batteries that have been manufactured in the U.S. I think there's good line of sight industry-wide on batteries as well. On the second part, on the mix of financing, I think we'll definitely see a mix of both and we'll even see participation of traditional tax equity players in a hybrid format where it does look like a tax equity fund and a large portion of the credits would be transferred out and the traditional participant will be also active in brokering the transfer out of the fund. We'll expect a good deal of that hybrid format and we'll probably see a mix of an arrangement of parties by us in structures where each participant takes a different part of the value stream and we're participating out the transfer credits. I think it'll be more often than not that there's a tax credit transfer involved in a transaction. What that does is it takes the size we would have had in a bilateral transaction with a traditional player and allows us to raise single tax equity funds of much greater size. I think that's a key benefit for us and to consider the number of deals we have to do throughout the course of the year.

Great, thanks so much. I'll pass it on.

Thank you. Our next question comes from the line of Mahit Mandeloy with Mizuho. Please proceed with your question.

Hey, good evening. Thanks for taking the questions here. Firstly, just on the storage growth here, could you just help us understand whether it's driven by attached rate growth or are you seeing larger system sizes, maybe more backup instead of shift batteries in California and then add a follow-up on cash generation? Thanks.

I mean, we're definitely seeing that it's driven by a higher attachment rate, as we've talked about, as well as the fact that many customers want now whole home backup. So we're seeing more and more customers with the desire for multiple batteries. So, you know, again, two, in some cases three. Sometimes that is tied to a larger solar system size as well, depending on the individual customer, but for sure that is a big part of what is driving the storage attachment rate and the growth. It's both the attachment rate and the number of products per customer.

Gotcha. And just on cash generation for next year, any just early thoughts on the cadence there versus the Q4 run rate? Is it more linear or some seasonality? I think in the past you said Q1 weaker, but any thoughts? Appreciate it. Thanks.

I think other than to expect normal seasonality, Q1s we get volume decline. We start to see that pick up in Q2, more materially in Q3. And that has a, historically, if you look at our cash generation, obviously adjusted for one-time extraordinary items, especially this year, you will see that sort of shape of cash generation. I think that'll continue. But, you know, we'll get more specific as we go.

Okay. Thank you.

Thank you. Our next question comes from the line of Dylan Nassano with Wolf Research. Please proceed with your question.

Hey, good afternoon, everyone. Thanks for fitting me in. Just going back to the questions on domestic content and the qualifying equipment, how much do you plan to shift the current equipment mix as it stands now to potentially realize more adders in the back half of this year and then Just to follow up is how permanent could those changes be? Would you kind of revert back to the prior mix at some point? Thank you.

Yeah, I think the current products that we have in inventory are set, established, and flowing out into installs currently are domestic content qualifying. So that is and has been underway.

Okay, thanks. That's it for me.

Thank you. Our next question comes from the line of Colin Roosh with Oppenheimer. Please proceed with your question.

Thanks so much, guys. Can you talk about how much market risk you're taking on pricing with these aggregated capacity portfolios? And secondly, are you seeing any uptick from potential utility partners to start new programs, especially given what's going on with interconnection queues?

Could you repeat the beginning of the question? I'm not sure I followed it. Are we talking about the virtual power plants?

Yeah, with the VPPs, how much market risk are you taking on the pricing, and how should we think about that following through the model as we go through the balance of this year and into next year?

We're not taking market risk with the pricing. So all of the virtual power plant projects that we're actively engaging in are positive for customers and positive for Sunrun. And again, like the value of what we're doing is not just the initial inherent value for customers and for Sunrun, but is really, again, as you mentioned, I think in the second part of your question, so much tied to the future potential value as, again, we're seeing it play out all over the country, more acutely in some parts of the country than others, but where utilities really don't have the capacity to meet the electrification demand combined with weather events that are happening combined with, of course, you know, the highly talked about publicized AI low growth demand. So we see that our resources are going to continue to have increased economic value in the coming, you know, three to five years.

Thanks so much.

Thank you. That concludes the time that has been allocated for Q&A. You may now disconnect. Everyone else has left the call.