Sunnova Energy International Inc.

Good morning and welcome to Sanovo's third quarter 2021 earnings conference call. Today's call is being recorded and we have allocated an hour for prepared remarks and question and answer. At this time, if you would like, I would now like to turn the conference over to Rodney McMahon, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Before we begin, please note during today's call we will make forward-looking statements that are subject to various risks and uncertainties that are described in our slide presentation, earnings press release, and our 2020 Form 10-K. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. Also, we will reference certain non-GAAP measures during today's call. Please refer to the appendix of our presentation as well as the earnings press release for the appropriate GAAP to non-GAAP reconciliations and cautionary disclosures. On the call today are John Berger, Sanova's Chairman and Chief Executive Officer, and Robert Lane, Executive Vice President and Chief Financial Officer. I will now turn the call over to John. Good morning, and thank you for joining us.

Today I'm pleased to report another quarter of strong results to reaffirm our 2021 guidance and to officially initiate our 2022 guidance. Slide 3 summarizes the growth in Synovus customers, battery attachment, and dealer network. In the third quarter, we added over 14,000 customers, double the number added in the same quarter last year. This growth is notable not just for its magnitude, but for the optionality it creates. Each new customer Sunova adds presents the opportunity for additional revenues in the future as we continue to broaden our service offerings. Sunova's battery attachment rate and origination now stands at 30%, up from 19% in the fourth quarter of 2020. Improved equipment availability has contributed to this steady improvement in our battery attachment rate. We are encouraged by the progress our equipment partners have made in delivering energy storage systems over the past several weeks and months, which has helped alleviate supply chain constraints. This is great news for the ever-increasing number of homeowners seeking reliable power service. Our growth remains powered by over 700 dealers, sub-dealers, and new homes installers strategically located across the 33 U.S. states and territories. Our dealer growth is driven by the strength of Sanova's business model, our best-in-class technology platform, and our brand's growing ability to deliver strong lead generation to our dealers. Lastly, On this slide, we have updated our information on customer contract life and expected cash inflows. As of September 30th, 2021, the weighted average contract life remaining on our customers' contracts equaled 22.4 years, and expected cash inflows in the next 12 months has increased to $330 million. On slide four, we provide a summary of our Q3 2021 financial results. Adjusted EBITDA, the principal and interest we collect on solar loans, adjusted operating cash flow, and recurring operating cash flow. Our financial results have shown strong growth over the past three years, and as I will discuss later in the call, we expect that trend to continue. Slide five outlines our unique and unparalleled service commitment to customers. Launching first in select key markets, we have established a goal well beyond that of any other residential energy service provider. to provide service within 72 hours for our solar-only customers and within 24 hours for our solar plus storage customers. This responsiveness, when combined with the resilience of our storage product offering, amounts to a superior energy experience for customers who are frustrated with the increasing cost and decreasing reliability they experience with a monopoly power provider. We will accomplish this goal by accelerating the build-out of our software platform, continue to build up our highly experienced and professionally managed service team, and continuously improve our logistics capabilities. This unprecedented service commitment will allow us to provide our customers with the power to live life uninterrupted. In time, it is our goal for the Sonoba name to be synonymous with the best energy service in the world. Slide six illustrates our expansive, customer-centric vision for the future, the Sunova Adaptive Home. With the adaptive home, our customers will have the option when it comes to staying connected to the centralized grid or not, an option many are already seeking in the wake of increased power outages and the rising cost of centralized power. We are working to achieve a service offering above what a traditional utility can provide, a service offering that integrates solar power, battery storage, possible secondary generation, electric vehicle charging, and energy control and management technologies, which will give consumers unparalleled energy reliability and capabilities for their homes. What will further differentiate Sanova will be our ability to integrate multiple technologies from multiple manufacturers into a single software and service interface. Our vision for increased customer touchpoints and engagement impacts our forward-looking outlook, which is increasingly more constructive on growth. Slide 7 updates expected growth in both net contracted customer value, or NCCV, and services provided on a per-customer basis. Currently, we provide an average of 3.5 services per customer, which equates to approximately $10,000 of NCCV generated per customer. We anticipate both metrics to increase over time, as it is only natural the number of services per customer and the NCCV from those services increases as the technology and cost continue to improve. We estimate by 2025 we'll be providing an average of seven services per customer. This, in turn, should increase the amount of NCCV per customer into the range of $18,000 to $20,000 of NCCV per customer. Last quarter, we noted we are seeing significant opportunities in grid services. Today, we have 10 grid service programs in place with an estimated value of at least $67 million over the next 20 years and a pipeline with the potential for an additional $445 million in value. Turning to slide 8, we are unveiling our intermediate term major metric growth plan. We have dubbed this the triple-double-triple plan. This plan consists of the following. A doubling of our estimated year-end 2021 customer count by year-end 2023. A doubling of our estimated year-end 2021 NCCB per share by year-end 2023. a doubling of our estimated year-end 2021 services sold per customer by year-end 2025, and a tripling of our estimated 2021 full-year adjusted EBITDA together with our principal and interest we collect on solar loans for full-year 2023. Our expectation is that our plan will assist shareholders in understanding how management anticipates creating value for shareholders over the coming quarters. I will now hand the call over to Rob.

Thank you, John. Turning to slide 10, you will see the continued improvement in our third quarter results over the past few years. Q3 2021 revenues are up 88% from Q3 2019, while over the same period, adjusted EBITDA and the principal and interest received on solar loans increased by 58% and over 200%, respectively. Slide 11 contains both our gross contracted customer value, or GCCV, and NCCV, discounted at 4%. As the slide reflects, we are experiencing significant increases to these metrics. In just three years' time, NCCV went from $892 million as of September 30, 2018, to $1.8 billion as of September 30, 2021. Overall, we deem 4% a conservative cost of capital as we continue to incur an incremental fully burdened cost of capital of 2.8% or less for our growth. given our operations are generating flat to positive recurring cash flow, inclusive of our legacy securitizations and their heavy debt amortization profile. It is clear that our NCCV per share, as measured by a 4% discount, should naturally increase over time, even if our Treasury bill reference rates increase. Slide 12 summarizes our recent financing activity and liquidity position. Just this week, we closed our fourth securitization of the year. This loan securitization was our third loan securitization of 2021, and like the three issuances that preceded it, was structured to include only investment-grade tranches of debt. As a reminder, investment-grade-only securitizations are less punitive in their amortization than those that include high-yield tranches. This approach to generating long-lived recurring cash flows gives us strong visibility into our expected financial performance over the next several years. This capitalization strategy also gives Sanova an advantage in the cost of capital in our industry, which aids us in capturing the full spread, resulting in Sanova generating some of the highest margins in the industry. Our total liquidity as of September 30, 2021, was $951 million, up from $629 million on June 30, 2021, and up from $212 million on September 30, 2020. Included in these numbers are both our restricted and unrestricted cash, as well as the available collateralized liquidity we could draw upon from our tax equity and warehouse credit facilities. Given available unencumbered assets as of September 30, 2021, this available collateralized liquidity equaled $431 million on September 30, 2021. Beyond that, subject to available collateral, we have $578 million of additional capacity in our warehouses and open tax equity funds. That represents over $1.5 billion of liquidity available exclusive of any additional tax equity funds or securitization closures. Turning to slide 13, we have updated our forecasted sources and uses of cash for 2021 through 2023. In addition to the takeaways from last quarter, keen-eyed investors will note that while our capital commitments have increased somewhat, so has our expected debt utilization, which is reflective of the strong reception we have received in the ABS markets in our most recent transactions. This, in turn, has decreased our expected corporate capital requirements for 2023. Again, our options for capital in 2023 are numerous. These include issuing another bullet maturity bond, service-retained asset sales now that we have the critical mass of cash flows and assets have appreciated, refinancing of older securitizations, and incremental thickening of investment-grade tranches of our securitizations. On slide 14, you will see our fully burdened unlevered return on new origination remained at 9.4% as of September 30, 2021, based on a trailing 12 months, while our weighted average cost of debt was 2.8%. This resulted in a trailing 12 months implied spread of 6.6% as of September 30, 2021. On slide 16, you will see our guidance ranges remain unchanged for 2021. And then on slide 17, you will find our guidance ranges for 2022, which are customer additions of $83,000 to $87,000, adjusted EBITDA of $117 million to $137 million, principal payments received on solar loans, net of amounts recorded in revenue of $134 million to $154 million, Interest received from solar loans of $45 to $55 million. Adjusted operating cash flows of $143 to $153 million. Recurring operating cash flow of $39 to $59 million. Please note that the midpoints of adjusted EBITDA, together with the interest and principal we collect on solar loans and customer additions, are in line with how we've guided investors in previous earnings calls. This includes a forecasted year-over-year increase of 80% in full-year adjusted EBITDA, together with the interest and principal we collect on solar loans, and a year-over-year increase of approximately 50% in organic customer additions. I should also note that we expect to have at least 75% of the midpoint of our 2022 targeted revenue and principal and interest collected from solar loans locked in through existing customers as of December 31, 2021. I will now turn the call back over to John.

Thanks, Rob. This could not be a more opportune time for our industry, especially for service providers like Sunova. What was once often seen as an install-and-forget product sale, dealing only in solar panels and a single inverter, has now become an evolving energy service offering that contains an increasing number of pieces of equipment made by a growing number of manufacturers. Over time, this increasingly complex energy system will demand a level of service that is well beyond what our nascent industry currently provides, especially when juxtaposed with an ever-increasing consumer demand for higher energy reliability. Financing and software are enablers for this new energy service, and we now have enough financial and operational scale in these areas to drive forward our long-term vision for service Our service response goals are ambitious, but we see what the future of service must be for our industry to truly flourish, and we are well on our way to delivering on these goals. At Sunova, we are here to provide our customers with an energy service unlike anything they've experienced with traditional or new energy providers. And with the climate crisis on our front doorsteps, we are proud to be able to provide our customers with an energy solution that not only provides them with the ability to live life uninterrupted, but to also be a part of solving the biggest crisis facing our world today, climate change. With that, operator, please open the line for questions.

If you would like to ask a question, please press star 1 on your telephone keypad. Again, that's star 1 to ask an audio question. Your first question comes from the line of Philip Sheen with Roth Capital Partners.

Hi, everyone. Thank you for taking my questions. You know, on your unit economics slide, I was wondering what you thought and how you thought the unit economics might trend ahead. You know, we're hearing about resi module pricing already reaching mid-50 cents a watt for January delivery, for example, and contracts are now being structured based on an index to input costs like glass, aluminum, poly, and freight. And so as just the friction and everything continues to increase, how do you expect that 6.6 implied spread to trend through 2022?

Hey, Phil, this is John. Thank you. You know, we've – Rob and I have constantly said that the unlevered returns were very, very strong, and the spread of nearing 700 basis points is a bit high, and we expect that to compress over time. To date and currently as we sit here today, that has not happened, and obviously that's good news. I do think it has a lot. I know it has a lot to do with the fact that Because we have a balance sheet, because we've taken a capitalization strategy that's much different than anybody else out there that we compete with, our cost of capital is very low. I mean, that's pretty clear when you look at all the numbers and comparative. So right now we're seeing that spread maintained. You'll notice that the Q3 unlevered return is about 9.3, obviously a 0.1 or even something, you know, double that or triple that. It doesn't really matter in the grand scheme of things. But we continue to see quite strong spreads. The cost of capital, we do expect to drift downwards. And we've got some pretty good visibility in that, just recently closing that securitization. We think the investment grade attachment point is going to continue to rise. We think that our cost of corporate debt, it's definitely traded up right after our issuance. It's only been a couple of months. We continue to see that that's going to come down quite substantially. And then we see our costs scaling in terms of dropping our overall cost stack because, remember, these are fully burdened. numbers. So I think that we're quite likely to see this spread relatively maintained as you move forward into 2022. And indeed, as we sell more services, a lot of these services, you know, such as service only and so forth, have, you know, 50% gross margins in it. So they're quite profitable for us. Some are more profitable than others. But, you know, we expect the, you know, the spread to hang in here, if you will, as we move into 2022.

That's great, John. Thank you. You talked about your cost of capital going down and the potential for that to go down some more. And on the previous slide, the liquidity forecast slide, we see and saw some changes in 23 that went in your favor. Notably, the amount of borrowings have gone up to $2.5 billion. And then I think the cost in the new systems also went up a touch from $3.5 to $3.6 billion. And so you see this net change in cash go down. Is there a scenario where we could see that go from negative to positive in 2023 as your cost of capital goes down? And can you talk us through why some of those lines, especially at $3.5 to $3.6 billion and new systems went up? Thanks.

Yeah, this is Rob. So a lot of why that is going up is, one, we're seeing customers opt in for more and more services. As you know, we just released yesterday our partnership with ChargePoint, and we've seen a lot more, a big increase in battery attachment. I think the new home market, which was a market that we were probably expecting not to adopt batteries as fast, there's been a great deal of interest there as well. So I think what you're really seeing there, Phil, is the average ticket rise. It's not that the cost, the unitary costs themselves are rising. But then on the funding side, we've been able to go a little deeper into the investment grade part of the securitization stack, picking up anywhere from about 2% to 5% more. In some cases, actually even maybe a little bit more. We haven't really tried this. We haven't seen what's going to happen on the TPO side yet. But on the loan side, we've been able to pick up more advance, even as we have been going with lower APRs on our loans. So it's been moving actually in the opposite direction that we had initially anticipated. But as we mentioned in the prepared remarks, there are also a number of other things, tools that we have at our disposal to be able to postpone the use of any corporate capital. And again, as we continue to drive those efforts, we're actually seeing a lot of potential daylight on the CFADS number, which would mean that we would first turn towards new corporate debt when we're looking at that financing aspect. But I think that it's probably going to be prudent to continue to look at new corporate debt. It's just that our need and the timing of our need continues to be pushed out.

Great. Thanks for that detail. And then one last thing. As it relates to your 2022 guide, you mentioned in your prepared remarks that you might hit 75% of your 2022 guide as of December.

uh when do you think you hit 100 of your guy i mean we probably see it in q1 or maybe q2 at the latest next year historically uh you know the the trend has been very consistent uh and you know the higher the growth that you project in the next year it's just a lot of of numbers or math right phil but uh you know we might get as high as 80 going into the year of our projected uh cash inflows so I would say that you're right. Probably by early Q3, we should be nearing 100%. I mean, it'll be something like 98%, 99% would be my guess based on past history. But things are very, very predictable. The only thing that we manage is the rate of growth, which right now is pretty heady. In fact, I would say that as we look into 2022, there are a number of partnerships that We, you know, Rob made mention of the partnership, which we're very excited about with ChargePoint. There's a lot that can go on there. We could talk about that later. But, you know, there's more coming on the partnership side, and they're imminent and they're big. And I would say that we're very, very constructive on growth. But, you know, we're also the only ones that give guidance this early, as you know. Most give it in March. of next year. So we'll have that opportunity to have a few more months here and get those partnerships underneath us and execute and look to see where our growth, you know, comes out after that. But I do expect to beat this growth profile that we laid out, and it's already very, very aggressive. So I would expect, as you move forward in 23, we'll see even, you know, bigger increases in cash flow and just DBL plus P&I.

Great. We'll look forward to that. Thanks very much. I'll pass it on.

Your next question comes from the line of Ben Callow with Baird.

Hey, good morning. Congrats. Maybe, John, you started talking about partnerships. You did the Home Depot deal and the charge point. We talked about Home Depot and we used to think about that as one of the highest cost customer acquisition. How has that changed? And then charge point, and I have two follow-ups.

Yeah, sure. You know, you're right. The retail stores are typically your highest customer acquisition channel. The way that we do our business, though, is that we're focused on our dealers, our partners, and we're working with them. And when you look at the way that we've constructed this, those returns are actually fairly even with our other origination. So this is mostly, I think, that the dealers decided that they want the additional growth, and candidly, they're paying a little bit more to acquire those leads that we generate for them with Home Depot. So it's pretty well down the fairway. This is the right way to do it, in my mind. It was early days in my first solar company with Home Depot, and now we're back, and really excited to and feel really fortunate to be with them. So we've got to execute on that, but the returns are quite nice. On ChargePoint, I think this really is very interesting. What we feel is an excellent partner. They've got, I think, a great business model in a space that has a lot of charging companies and solutions, as you know. Neither company has an exclusivity on one or the other. I think that's the right way to do things here, especially in the nascent industry. But it's not only equipment. I think a lot of folks focus on that. We're putting a charger in for homeowners who are increasingly demanding that. That's a given. We're going to do that, and they have really good equipment. But really what we're also looking for is selling more, you know, the service, solar service, storage, and so forth, so more equipment, and that generates bigger returns for us. But the really interesting thing is we're going to plug into our network into charge points, and we're going to be able to provide energy to our customers when they travel away from home. And so this is going to be, Sunova is going to be your power provider, energy provider, not only at your home but away from home. And I think it's going to be this really fascinating when we are able to put all the pieces together here and get this launched out next year. It's going to be really something special for our customer base, and we think it will actually drive more and more customers to Sunova as well. So we're very excited about this partnership.

You know, I think in your remarks at the deck, you know, the services comes up quite a bit, maybe more than a dozen times. And so I don't know if there's a way to help us understand, you know, what the different types of services are and how important this is, but it seems it's pretty important because you're highlighting it here.

Yeah, that's a good point.

Yeah, good eye on that. Yeah. I mean, we see ourselves as from the founding of the company as a service provider. And, you know, we see financing as an enabler. We see software as an enabler. We're big on both, obviously. Make great money on the financing side. But we're all about providing that service and having that customer for what effectively is life, but for the most part, 25-plus years. And, you know, as we add batteries, and we knew this because we're early days in places like Puerto Rico and other island markets in the Pacific, you can easily see where people start to go, this is very complex, this is a power that I need to have on no matter what happens, and you need to have a totally different experience. Not unlike what – and it has to be the same or better than what you experience with your monopoly power provider, right? So when the power goes down, you expect them to be out, you know, five minutes ago. And, you know, that's something that we've been working towards for a long time. We finally have – the ability to, given the scale of our operations and the density of our customer base, the software platform, and then the people and the logistics capability to be able to deliver this kind of service. And to give you an idea about how important this response time is and how different it is from the marketplace, We're aiming for 24 hours within 24 hours for battery and solar customers and 72 hours with solar only. Right now, we're roughly in about a couple of weeks, sometimes less than that time frame. We've got a little ways to go, but we're confident we can get there. The rest of the industry is like 60 days or 180 days to never. and so there's a wide gulf in response time out there we think that needs to be closed tremendously obviously and get something more commensurate with what you would see out of home security satellite cable television cellular etc so we're on the forefront of this and we're driving towards that point in the meantime The number of services you've heard on some of the equipment manufacturers' calls, and you will hear on the ones coming up, that there is a tremendous amount of new pieces of equipment, more energy storage systems, more load managers, the EV charger, the case in point, the charge point relationship. generators, et cetera, there's a lot to be added here with services and upselling customers. And so we've laid that out quite clearly. Roughly about $10,000, which is inclusive of all of our Sun Street customers that didn't come with cash flows, of NCCB, which is a PV4. We're borrowing capital fully loaded at 2.8%. And we feel very strongly there's a lot of value to be added there, and we've shot it down the fairway and said if we doubled from 3.5 services to seven services by 2025, which we see doable, that we should pick up about another $9,000 per customer on a midpoint, so somewhere between $18,000 and $20,000 by that time frame. And so, you know, it's another way to value in the company's equity, if you will, and looking at the, quote, breakup value of NCCV per share, but then adding the option value times the number of customers we have. And then expect to hold us accountable for executing against that option value. Are we upselling batteries? Are we upselling EV chargers? Are we upselling generators, load managers, et cetera? And I think I'm confident what you'll see as we go into 2022, we're going to be doing all that and then some. So a lot of value out there in the services and a lot of value in being responsive to the customer with service.

Thank you for that. My last one, just NCCB total going up. I think per customer, it's ticked down just maybe the last two quarters. But when should we see it tick back up with all the stuff you have good going on?

Yeah, it's coming at cash flows, you know, mainly in the tax equity, but also in some of the other fund flows. And I'll let Rob comment on that in just a second. We're, you know, I think the right way to look at it is NCCB per share, because obviously investors are buying shares. But, you know, we do expect to see the NCCB, you know, per customer tick up over the next few quarters, particularly as we get into 2022. If it does not, then that means the customer additions, you know, are you know smoking the the uh projections for us and they're you know more on the uh single services uh and uh some of the other you know services that we're launching out that we have yet to announce uh but i we do expect that nccd customer to you know per customer to be ticking up for what i just laid out particularly as we upsell batteries so one thing i want to make it very clear is we have not upsold our existing customers very many batteries and this year and That is simply because of a lack of battery availability. That is materially changing now. I mean materially. So we're already starting to engage and upsell our existing customers' batteries, and we'll be accelerating that tremendously as we go into 2022, expanding that into the new home business where we have not upsold a single battery yet. So it's definitely going to move up on a per-customer basis as we upsell batteries, all other things being equal. Rob, do you want to talk about it?

Yeah, and I think John sort of really hit on a number of points there, and I won't rehash too much of it. But remember that the last two quarters were the first two quarters that we added the Sun Street customers. And so those customers did bring down the average ticket size on an NCCD per customer basis. mostly because they're just smaller systems and, as John said, fewer services because just everything there is just the solar. But to John's point, we're making the turn right there as well to get those systems larger to add more services to those systems. So that's one big catalyst. But the second one, and without getting too much into the sausage making, is just really the timing of our whip pile. So the way that we're showing the NCCV is that as we put our assets in the construction to progress, we're carrying those at cost. As soon as we put them into service, we get the uplift of the actual value of the system itself. And given our trajectory, we would expect that to be a significant uplift in the fourth quarter. And it mainly has to do with the fact of the supply chain on the batteries unlocking, so we're putting in those really high-value systems into service in the fourth quarter, and at the same time releasing the remaining tax equity on those systems, which really all just sort of is a creative to cash because we've been carrying it this entire time.

Thanks, guys. Thanks, Ben.

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

Hey, guys. Good morning. Thanks for taking the questions. Appreciate all the NCCV color here. Maybe thinking longer term, the triple-double framework, which is new, I think you're going to end the year at 200,000 customers. So to double that, you're implying about 35% to 40%. more growth in customers in 23 off the 22 guide you just gave, so quite robust growth even in the out here. But then you're talking about tripling the EBITDA plus P&I, so that's implying the metric grows close to 80% in 22 based on the guidance, and then another 70 in 23. I think this has to do with NCCV, but can you kind of bridge the gap a little bit as to where some of that additional leverage is coming in, even in the out year? You know, you're talking about $10,000 today. Where does that number get to in the interim, and what are kind of the pieces in the next 12 to 24 months? I know you're talking about 19K midpoint by 25, but what are you sort of embedding in the 23 numbers?

Yeah, Brian. Yeah, we're... What we're seeing is an increased amount of operating leverage, despite the fact that we're obviously investing, spending money to launch out new grid services, new lines of business, bring on new partnerships. And overall, not only increase our growth rate in terms of the number of customers, but the number of services sold per customer, right? So these are all heavy lifts. And at the same time, delivering a better service experience, which is been baked into our cost structure. So, you know, what that shows you, quite simply, as I've always said, is what you want to see is you want to see adjusted EBITDA plus P&I grow faster than your growth rate of your customer base eventually. So our challenge has been in the near term is that growing off a small base and not having as much operating leverage by definition, but having a high growth rate, we've been challenged in that a little bit. We've been close to basically break even or a little south of that. As we get bigger and move forward, then, again, the law of math starts to help us, and the law of numbers, rather, and so we can gain a tremendous amount of operating leverage, and that's what we're highlighting for you all is that we're seeing it, we know we're going to experience it, And this is exactly what you should have expected out of us. So if we, you know, grow at a less of a rate on adjusted EBITDA plus P&I, then you should expect to see a heck of a lot more, you know, and profitable growth in number of customers and services sold per customer. But right now it's pretty heady growth. Again, if there's any bias, it's definitely to the upside on that growth rate. But we feel very good about the adjusted EBITDA plus P&I growing faster in the customer base. And, you know, quite frankly, we're seeing, you know, the growth that we have, going back to unit economics and so forth, is extremely profitable, you know, growth. And that's, again, reflected in the adjusted EBITDA plus P&I.

I guess to dig into that a little bit more granularly, though, if you're talking about the unit economics having leverage over the next couple of years, I know that the target model after 2025 is pretty well laid out. The $10,000 you're at today on NCCV, if I look at some of the bridges you've provided to get to the 19K over time, you know, let's say half of your customers are doing storage and energy management by the time you get to 23. That would imply 2K more per customer, so you're at 12K right off the bat. But any just sort of color as to where you think you'll be able to see the most amount of sort of – I guess, materialization of some of these bridges to get to the 19K by the time you're out in 23. Is the 10K going to 14 before we get to the 19? Just trying to get a sense for how quickly you think you'll start to see some of these move into the customer unit economics over the next one to two years.

Yeah, I think it's fairly linear, but there's a lot of variables to it. So if we can launch out some of these other services and have them be more successful, you know, in some of these technologies are rather early days, right, like load manager, then I think that we can have a little bit more of a higher slope on that. that escalation towards that upper number. But, you know, the storage side, I would say, you know, looking at, you know, internally, we think that, you know, by 2025, our storage attachment and penetration rate will, you know, move up by a factor of six. So, you know, 60% or so. You know, we see strong uptake on the storage side of things. I think, obviously, that's first and foremost is how do you, you know, execute on upselling customers' storage? I think another one that's pretty interesting is we're seeing a lot of demand for EV charging. That's not a big needle mover, but the service that we talked about in a way, I think that could be pretty interesting margin-wise and therefore NCCB, certainly recurring cash flow. And then some of these others like generators and so forth, we see a strong demand for the generators too. So And an additional upsell of more panels, more inverters, et cetera, particularly as people do get EVs, we're seeing that accelerate. And more fuel to fuel up the battery, if you will, for backup power. We're seeing that. So there's a lot in here, but I think that if you were to draw a gradual linear line from this period to the end of 2025, I think that's not a bad assumption. And remember, as you move forward in time, you're discounting out of 4%, but our cost of capital is really 2.8, and we're paying the debt off at a fairly rapid rate. So that's something else to remember is that we'll be naturally accretive as you move forward in time and recognize that delta between the discount rate and the actual cost of capital falls out in cash flow, right, and calls our cash to the equity. So that's another thing. And so in Rob's prepared remarks, he talked about that as naturally you should expect NCCB per share to, and therefore per customer, for the large part as well, to increase over time, even if we did nothing.

All right, fair enough. I appreciate all that additional color. Last one for me, and I'll pass it on. Yes, I'm kind of surprised I'm the third caller, and we're talking about supply chain this late into the call. Maybe because, John, you started off the call talking about the supply chain being better for you. Can you maybe get into a bit more detail? It sounded like batteries you're feeling better about. What's happening there that's giving you more confidence? And then maybe also just your status on inverters and separately on solar panels. How much of that 2022 growth from a supply perspective? I know from a demand perspective you see high visibility, but from a supply perspective, How much of that is de-risk? How far out do you have supply visibility? And then obviously a lot of focus around where you're getting panels these days, just given all the different geopolitics out there. So can you kind of level set us as to how much of your panel supply is not coming from Southeast Asia today and then how much higher you think that mix could go over time? Thanks, guys.

Yeah, sure. Yeah.

A new supply chain was going to be a big topic, so thanks, Brian. You know, look, I'll divide things up, you know, to panels, inverters, and ESSs. And when you look first and foremost at the panel, there's obviously a lot of shall we say, political intervention here or government intervention, however you want to phrase it, that's causing a lot of chaos and pushing up prices artificially in the United States. We've been moving as our storage attachment rate's been moved up. We're continuing to see more and more customers want the higher wattage panels. which typically don't come out of China or Southeast Asia. And so the dominant number or members of the family we buy panels from are non-Chinese, if we buy any from China at this point in time, which I don't think is bad, to be clear about it, but that is a fact just given the WRO, the countervailing duty issue, the 201, etc., So we're increasingly looking pretty good. Now it's starting to look in towards Q2 on that front. We feel pretty confident. We've got some, like I said, panels secured just in case our dealers foot fault on some of the deliveries that they were expecting or should have procured. We're on top of our dealers working with them and helping them to secure those panels. So we feel pretty good about the panel situation. It's clearly tight. We're meeting demand as an industry, but given the political intervention, but we feel pretty good about what we said. On the inverter side, we continue to see more and more real, strongly well-managed firms come in and compete. And we've got a number of providers that are going to be providing ESSs with their own inverters in it and And that's going to have a dynamic impact on the inverter market by definition. And so, you know, the last one you go into the energy storage systems, and we're seeing an increasing amount of availability. It's literally been every two weeks we're seeing more deliveries hit our warehouses and and hit our dealers' warehouses, and we continue to see a significant improvement in those delivery schedules as we move forward. I do think that we'll be normalized. Increasingly, it looks like it will happen in Q1. At the latest, I think Q2, barring any sort of significant unforeseen supply chain issues, which would have to be really significant given how messed up things are globally, but we see a rapidly improving supply deliverability on energy storage, particularly the big player and a couple of the biggest players. I would go as far to say that we are seeing those equipment providers who increase costs or try to raise price currently, they will start to lose market share. So there is not a huge amount of stickiness on price. There's more and more availability. There's more qualified competitors that we're looking for to buy their inverters, their ESSs. So there's a loosening up in the equipment side that I think is pretty significant, particularly as we get into Q1 and Q2 of next year. All right. Thanks a lot, guys.

Your next question comes from the line of Julian Dumoulin-Smith with Bank of America Merrill Lynch.

Hey, good morning, team. Thanks so much for the time. Congratulations on all the continued progress. Really, really nicely done on the follow-through here on forward-looking guidance. Perhaps just to kick things off real quickly here, can you elaborate a little bit on the pipeline, as you say, of opportunities and services? Can you elaborate a little bit more granularly on what those are that sort of comprise that $400 million-plus that you talked about a second ago?

Are you talking about the grid services, Julian?

Yeah, exactly. Okay.

Well, we can't break those programs out. That's competitive intelligence we are bidding on. I'm sure we're trying to give visibility to you and everyone else about, hey, what are we working on, right, so what can you expect? You know, I've got to say I'm pleasantly surprised in a big way of how much progress we've made on grid services and how many contracts we've locked up. I mean, $67 million I think is up there, especially the number of contracts at 10. I never thought we'd be in this spot. And I'm looking ahead, more and more programs. are coming our way, and we're seeing a lot more, you know, profitability as far as the dollars that are associated with these programs. So I can't break them out for competitive reasons, but I'm trying to do everything I can to give you a window into what we're working on and what kind of money is associated with that. And hopefully we'll have big wins.

Indeed. John, maybe an idea to ask it this way. What percent of your customers does that represent? I.e., is that fully monetizing your customers, or what portion do you think at this point does that represent? I.e., how much of a further upside is there to more fully maximize that opportunity?

I see. You know, I'd say that's probably representative of roughly about 50% or so, maybe 60% of our customer base. I would also point out that Most of these are capacity services, and so we have the ability to upsell ancillary services and, in some cases, energy as well. So I think that there's more grid services on top of this. And then we start looking into microgrids and getting that moving, which I don't expect to have material movement there. next year, but the following year I think that we'll have something more to add there on the microgrid front. But I think that's my best estimate I can give you right now, Julian. It's probably 50%, 60% is covered by what we've already done and then what we have in the backlog.

Got it. And just to clarify this a little bit, what you're implying for fourth quarter customer additions? Off this 14K, it almost seems like you're implying something like 20,000 customers in the fourth quarter. It's a nice step up. Any nuances to what's driving the big quarter-on-quarter dynamic? And then if you can just specify, you know, I know there's a few different small nuances. What is that specific baseline for the customer count here going into 23, if you will?

Yeah, it's about 20,500. And, you know, the last question I'll go ahead and answer that I think is just a little south of 200,000, I think 197,500, somewhere in there, 198,000. So that's what we expect. Look, first to say it, yeah, it's one heck of a climb, and we got our work cut out for us. Now, we're seeing good visibility in that. We have the customers. We have the backlog. We'll take in the next year. Right now we have just south of $1.1 billion of contracts in the backlog, you know, at cost. So we've got the contracts. What's held us up is a couple of things, mainly the batteries, which we're seeing accelerated delivery schedule already. We expect to see more of that delivery schedule accelerate in Novi and Dees. And so that's going to, you know, a source of customers that we didn't have in Q2 and Q3. The other is, is that the new homes business. I think people are underestimating, and it's because we talked about having roughly about $12,000 a year. That business continues to grow, so it's a little bit more than $1,000 a month, in some cases moving towards $1,500 a month expectations. And the new homes business has been challenged by all the supply chain issues that as far as closeouts of the new homes. And you can't book those customers until those homes are closed out and sold to the customer. So that's been a delay from Q3 into Q4 as well. So we got the reasons, and we feel like we were in pretty good shape on both of those in terms of improvement given the supply chain. improvements. But, you know, we'll be working all the way up to December 31st to hit that number. But, you know, we're working hard at it. We've got the contracts. We've got the supply chain where we want it. Now we've just got to get the work done and get it through the utility system to get the permission to operate and register the customer.

Awesome. Well, I wish you the best of luck. Speak to you guys soon.

Thanks, Julian.

Your next question comes from the line of Mahith Mandolo with Credit Suisse. Mahith Mandolo with Credit Suisse. Mahith Mandolo with Credit Suisse.

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And so, I think the implied growth rate is a little bit higher than that, than the heap for, you know, 23. Obviously, that's a little ways out there, but let me give you some more color. As you look at what we've been originating for the last couple of quarters and you look at my answer on this Q4 and this quarter to Julian's question just prior, you basically multiply that times four, you get it pretty close to our range, right, if not in the range exactly that we've laid out for growth for next year. So as we're looking forward and we're seeing a number of these partnerships, the Home Depot, ChargePoint, we've got more coming that's imminent, And just the general growth, our improvement in our technology platform, we're picking up more dealers, the number of services sold per customer and so forth. I think we've done a pretty good job of being fairly conservative at moving off of growth and number of customers from 22 to 23. So simply put, that's not in nominal terms a huge increase in number of customers there. from 22 to 23. So, again, if there's any bias, and there is, it would be to the upside of these growth projections on both the number of customers and the services sold per customer.

Got it. But fair to say it's more kind of in line with your expectations for the market at this time, or do you think the market's slower than that?

No, I think it's in line. I think we've telegraphed, you know, I think quite nicely. We've laid out even sources and uses of cash two years out, which I don't think anybody, I know nobody else does. And so we're trying to get more visibility out to everybody on what we're seeing out there. You know, look, again, I referenced this earlier, Mahith, is no one else gives guidance for 22 this early. And it really is early, you know, going across the year. So this is where we feel comfortable at this point in time. Candidly, you know, right now the stock is, in our opinion, If you look at, you know, if you double NCCV per share measured on a PV4 within two years, and I've already got the next two quarters, you know, we start by the end of the year, booked up in terms of contract backflow, or back, sorry, WIP, going into 22, that means that we're really just kind of looking about roughly 18 months or so, right, of growth. And so we've got a high degree of predictability, and what I would say is that Right now, we felt like, you know, hey, look, their share price needs to start reflecting that we can, you know, move something into the Kona low to mid-30s of essentially break-up value within the next 24 months. We think that's pretty cheap, but that's for the market to decide. But right now, this is where we sit, and this is where we have laid out for folks, and we'll update on the Q4 call. And, you know, the bias is definitely to the upside. On your loan question, we continue to see consumers to take more loans. We see that to be roughly volatile. It continues to move up, when I say volatile, on a week-by-week, day-by-day basis. And, you know, as you look forward to the policy, which we haven't had a question yet, there's a possibility, given the refundability we think is a high degree of chance of getting done in the reconciliation bill, there's a possibility that can move more leases and PPAs. I know there's a good argument on the other side of that, but that's something to pay attention and watch. And what I would also point out is that on page 33 of the deck, we've laid out for the first time, and no one else does this again, what our discount is on the loans that we get. So for those of you who don't want to just look at principal and say that's return of capital, no, we've been clear about it. It's return of capital and return on capital, and it's pretty sizable. So it's about $213 million of margin, not revenue margin, that's booked as of 9-30-21. and roughly about 21% of our standing face value of the note. So these loans are quite profitable. We've laid out, if you just want to take the OID and the interest on the loans instead of taking the principal and interest, you can now do that. And obviously, that's pure profit or margin. So hopefully, that gives you a little bit more comfort as far as getting your hands around modeling the loan versus lease mix.

Perfect. Appreciate it, Carla. Thanks.

Your next question comes from the line of Mark Strauss with JP Morgan.

Yeah, good morning. Thank you very much for taking our questions. Just wanted to ask, the 30% storage attach rate in 3Q, what would that have been? Supply constraints. Just trying to think about what the storm kind of clears here.

Yeah. So, hey, Mark.

This is John. You know, I think that, you know, first of all, that's on all customers. So, you know, we would have had, if it was just in the dealer channel, that would have been closer to 35, a little over 35% storage attachment rate, which would have been a new record for us. I don't want to play games. I don't play games on metrics. So we added all the customers in, even though we don't have the capability just yet. We're just getting into that by upselling batteries to new home customers. And we'll start to see that attachment rate, I would say, you know, probably Q2 or Q3 of next year start to materialize. So that suppresses that number. And that's the primary drivers, the new homes customers that have no battery upsells at this point in time. We've had some, you know, many weeks of 40-plus percent attachment rates on the dealer-only channel. So it's something that is clearly moving up, and you just get a modicum of selling batteries to new homes customers. That storage attachment rate is going to zip up. So, you know, we continue to see a lot of interest from consumers and growing amount of interest in batteries, so we're becoming even more constructive in on the storage attachment rates and move forward in the next few quarters.

Okay, thanks. And then, John, I know you're a football fan, so I want to ask you a question about your supply chain kind of as an analogy to college football, right? So we've got four teams that make the playoffs every year. But, you know, rank number five, rank number six are obviously good teams as well. Thinking about that as your supply chain, in the past, you've selected suppliers, but there's been a company on the cusp that's been left out. Just given everything that's happened over the past year, how do you change that approach? Do you potentially look to... diversify your supply chain by adding more, and how do you weigh that against a potentially kind of inferior product that you hadn't chosen in the past?

Okay. I'll try to answer that. I don't know if I can wrap it into the football analogy, but, you know, I would say, you know, we're seeing more really strong, and this is on a global basis, equipment providers show up with inverters with energy storage systems, and even some that haven't been in the panel manufacturing business get into that and start to ramp that up as well. I would say that our primary relationships on the ESS side with Tesla, with Generac, with SolarEdge, and then lastly Enphase are well intact. I would say that some are doing better than others on the supply chain side of things. I think it's pretty clear that Elon and Tesla are doing very well, as you can see by their numbers that they reported. And again, I'll let them talk to their own business, but with microchip deliveries, and therefore you would expect to see that flow into their ESS business. And indeed, that's been the case and continues to be the case of a rapidly improving supply chain. And then some others have struggled a bit of late and continue this quarter. But I do expect that to get ironed out. We're eagerly anticipating ramping up very strongly with SolarEdge in particular. They've got some really nice products out. We know that there are some dealers that want to start selling that immediately. But it will, you know, Generac's got a lot of new products coming out, very close with that company as well. And, you know, I think that they're doing a great job and will continue to increase our purchases quite substantially as we move into 22. They obviously have a microinverter coming out. We're very interested in that as well. And so all these companies are very well-managed companies. They're obviously very well-financed companies in terms of financial capability and balance sheet. So we don't see any problems with the equipment amongst these and even some others that are fairly large companies themselves in Asia and Europe. You know, we feel comfortable that we're getting, and they have to go through a rigorous process to get on our ABL, our Available Equipment List, but we feel very comfortable that we're seeing more and more highly qualified, good equipment manufacturers making great equipment that we can buy. And so that's definitely a change from the past few years, and it's obviously great news for increasingly lower prices to consumers and consumers And, frankly, those lower prices, again, juxtaposed against higher utility rates, which we expect to increase in the next few years quite substantially, given gas prices and other, you know, cost pressures. That will have this business and this industry overall in terms of solar and storage, et cetera, grow much more substantially than I think a lot of people are thinking at this point in time. So we need all that equipment is what I'm saying, and then some. But, you know, we think part of that will also be some decreases in equipment pricing to incent more and more consumer demand. Got it. Thank you very much. Thanks, Mark.

Your next question comes from the line of Sophie Carr with KeyBank. Hi. Good morning.

Can you guys hear me?

Yes, Sophie, we can. Good morning.

Thanks for taking my question. Just a couple of questions here that I have. Can you talk a little bit about whether you are experiencing loan interconnect times in any of your markets with the utility and how that might be impacting your outlook? Is it an issue for you at this point anywhere?

Sophie, that's a good question. A little bit here and there. There's a utility in the southeast that's been dragging their feet a little bit on some interconnections. There is one out in California and one or two up in the northeast. But some others have sped up the issuance of PTO. We're talking about days, two, three weeks. You know, that could matter. I grant you that. And so we're watching it closely, but we're putting a lot of pressure on those utilities as well as others in the industry, such as our dealers, et cetera, are doing to close those gaps. We can do a little better job on our end, too, of – of being more quick on the operational side to apply for those PTOs, and then also to convert a PTO into in-service and flip the system on. So we've got a number of initiatives to do an improvement on our side and drop that time, if you will. But we have seen a little bit, but not a huge amount of change. If anything, there's been quite a bit of improvement in the second and third quarter, over the first and fourth quarters, and certainly the last year that were, you know, heavily impacted by the pandemic.

Got it. Thank you. And then, John, you mentioned the, my other question was on the equipment landscape. You mentioned that there's a growing number of suppliers of various pieces of equipment that you use. Could you talk a little bit about your sort of barriers to switch, if you will? How hard is it to qualify a new supplier for you once they roll out their product? And is your bias to kind of stay with the existing ones or to price shop around if there's an offering that seems comparable and cheaper maybe than what you have currently? Can you talk a little bit about your thought process here?

Yeah. So we've had a strategy of basically being an open platform service provider. I know there is a strategy where if you want to be an equipment provider getting into the service business that basically you close your world off, right, and it's just your equipment and your service. Typically in other industries that are very similar to ours, that has led to, frankly, much lower growth. inability to scale, and a disaster ultimately. And so we think that the best way to go about this, particularly as more and more capital is flowing into this industry, is to keep an open mind. And there are new technology, new firms that crop up around the world, and it is a global business. With that said, some of those traditional partners that you've seen are acquire those new upstarts and firms and then integrate that technology into what they're doing. Obviously, the most recent example of that is what Generac is doing with the microinverter side of things. And so in some cases, we're certainly very well open to new technologies. And some of these are new technologies like electronic or digital JBOX for load management and so forth. Those are different companies out there. But the traditional ones are also coming out with their own load manager solutions as well. And so I think it's keeping an open mind and looking to see when we become comfortable. We go through rigorous testing. We have engineers on staff here. that do that for us. And so once we've become comfortable with both the equipment quality and their financial capability, then we'll start to look at how do we launch their product out. You know, ChargePoint's a good example of that. That's a new piece of equipment, right, Sophie, that we've in service and plugging into their software platform with our software platform that we're launching out. But I think it's primarily going to be that we're going to stick with our core group of partners on the equipment side of things. You know, that may narrow a bit, you know, depending upon what strategic decisions those equipment partners make. If it's not favorable, if it's to try to get into our business, then we'll stop buying equipment there. And that can be a fairly very rapid change in the dealer network with us. So the switching capability is actually decently quick if something goes awry, so to speak.

Thank you. This is very helpful. It's all I have.

Thank you.

Your next question comes from the line of Pavel Machinov with Raymond James.

Thanks for taking the question. So we are supposedly 24, maybe 48 hours away from learning what happens with the reconciliation package in Congress, and therefore, among other things, the ITC for solar. Depending on what that tax credit extension looks like and, you know, particularly the duration of the extension, would that have any impact on, let's say, the urgency of installation in 22 or 23 for you directly and across the industry? Hey, Pavel.

I think... I spent some time actually a few days in Washington last week, and my sense of this and our sense as a company is that there's definitely a deal that's going to get done here. I read some reports as recently as a few hours ago. There are some naysayers there. I just think the Democrats need to do something over the next 60 days, and clearly trying to do something between Christmas and New Year's is going to be, you know, really challenging as always. So I think it's less than 60 days. And I think it's very clear, by the way, that even on both sides of the aisle that the investment tax credit is strongly supported. And we see, you know, 10-year ITC at 30%. plus refundability, plus storage ITC, plus a few other things. We're also strong supporters of a domestic manufacturing initiative and suggestions of subsidies to locate these different parts, particularly the module manufacturing supply chain in the United States. And so we strongly support Senator Ossoff's proposals. as part of the reconciliation. And I think some of that is going to get, if not all of that gets into the bill, it's probably going to be some. So I think that there's going to be very little pressure for accelerating, pull forward, if you will, demand from the federal angle. I think what we're going to have is actually a fairly long runway, which is fantastic for the industry. We've never had that before. As you know, we need it to grow the business in the right way and to grow the industry in the right way and deal with climate change. And I think a I think we're on the cusp of finally getting that. Does that answer your question fully or no?

Right. So I guess your guidance for 22 assumes what scenario, the kind of the urgency scenario of the law as it currently stands or an extension scenario?

An extension scenario. Okay. So if we were surprised, you're right, the growth would be tremendously higher than what we've laid out for 22. But, again, I feel pretty comfortable we're going to get a very long runway on the ITC, you know, finally.

Okay, understood. One more question on the supply chain. You alluded to, you know, some of the geopolitical complications earlier. Have any – suppliers, modules, or otherwise that you directly work with, have they had any shipments into the United States blocked or confiscated at the border because of forced labor issues?

No, not to our knowledge. Okay.

Clear enough. Thank you, guys. Thank you.

Your next question comes from the line of Sean Morgan with Evercore ISI.

Hey, guys. Thanks for taking my question. So my first question is I think probably for Rob, but of the three tranches on that securitization you guys just did, you know, obviously great interest rates achieved, and I think there was three different credit ratings on the three sub tranches. But I guess my question is, is that mainly a function of the high FICO scores of the customers? With the portfolios as large as you guys have, it's going to have to obviously be some kind of workout or distressed customers in that portfolio. So is there like a support tranche that you guys are effectively retaining on your balance sheet to support those three investment grade tranches?

Yeah, absolutely. We're retaining a significant portion of the face value of those loans on our balance sheet. That's really what's driving the ROCF. One of the things that's allowed us to be competitive within that marketplace and securitization marketplace has been the incredible tracker we've had on collections, on collections. not only keeping customers from becoming delinquent, but when they do become delinquent or go and we default the customers, which we do earlier than anyone else in the industry, we do that 120 days, we actually get more than half those defaults recovered. which is also pretty unique. And that's information that they take into account as well when they look at those securitizations. So we've actually had a very good track record there. And while we do have very strong FICOs, we find that that's been probably a little bit less of an advantage in the industry. There are some that will hold out their lower FICOs to try to get a higher FICO score. What we've really just been doing is coming back with the receipts. of what our default delinquency data is, which is for an asset class that is already very strong, we are among the strongest, if not the strongest, within the industry. And that's really the feedback that we're getting with our loan product, and it all goes back to really what the theme is of this whole conference call on the prepared remarks, which is service. Just that focus on service and making sure that we have the systems up and we make sure they're producing power, we make sure the customer is happy, we make sure that the customer has the moral obligation to pay, all of that is very virtuous for our ability to continue to squeeze the margins. And, you know, I think that it – I think that actually helps our competitors as well to squeeze their margins because it's beneficial to the whole asset class. But that's great. We think that's a positive thing and continues to drive more interest and more investors into the asset class.

Okay. Thanks. And then next question, I guess, probably more for John. And it goes back to this solar adaptive homes on slide six. And I think in the prepared remarks, you said that the homeowners would have the option to either stay connected to the centralized grid or not. Is that something that customers are asking for, or do they look at grid connectivity even despite the additional charges that they would incur as sort of a almost like a second battery if they were to you know do solar and storage and they want uh i guess redundancy that the grid offers despite the the costs and also would that impact srex srex and uh and um uh and net metering charges like would they be foregoing all that and would you see that in states like florida where maybe net metering isn't quite as strong yeah sean it's a

It's a good question. And to be clear, we think that the best solution for everybody here is to integrate the centralized system with the decentralized resources. And, again, our vision of the power industry in the United States and in other countries, you know, we're all starting to look sort of the same in terms of the business models and so forth and where we think things are settling out as far as the transformation of the energy business model. is basically that there's going to be a hybrid approach between centralized and decentralized. Now, with that said, there are the demands to be able to run off the centralized system, and those demands are increasing and not in a linear fashion. Why is that? Because more and more of the centralized power service is failing more and more of the times. You know, I think that is primarily due to climate change, but it is also due to the fact is that consumer demand and behavior has materially changed where they're no longer tolerant of a few hours of outage, certainly, and become intolerant of even a few seconds of outages because everything is more digital. Basically, the work from home and the pandemic has has accelerated this change in consumer behavior and taste. And you've heard about that. I know Aaron over at Generac calls the home as his sanctuary, right? And we see the same thing. And it is a material change in consumer behavior and trend. And that consumer change in behavior has nothing to do with climate change and decarbonization, except for the fact that climate change is causing some of that consumer behavior change. So, Simply put, this home needs to be able to run off the grid because the grid is, more often than not, as we move forward in time, not there for whatever reason. And so the last piece of this is, could a home continuously run off the grid if the utilities got egregious and for some strange reason a public utility commission allowed them to just reap an ungodly number of profits there? and have really high fixed charges on folks and very punitive to consumers. I don't think that's going to happen. I'll hold out a very recent example of Arizona. Last night, the Arizona Corporation Commission reversed, reversed, a demand charge on solar-only customers. That's never been done before. So I hope everybody talks about, you know, we talk a lot about California NEM and some other issues, but gosh, look at that victory for our industry. That's tremendous, and we applaud the leadership of the ACC. and look forward to the lack of need for consumers to really cut the cord, so to speak. With that said, technology is improving. You heard a lot of good things from Enphase and Badri yesterday about how he's going to be able to have new technology coming out the gate that enables homes to run off-grid. You've got that with Generac. You've got that with Tesla. You've got that with SolarEdge and others out there. So don't underestimate technology. As strange as it may sound, to be able to have consumers cut the cord, and you're going to need a service provider like us, obviously. And so we're going to have some examples of that, of the homes being able to run off grid continuously in the not-too-distant future. We may even put an analyst day around that. But that's not what we see as a dominant, nor are we betting any sort of forecast or guidance or growth. initiatives on that type of customer, if you will. But we certainly see the technological capability, and we expect that that would keep the utilities in check and have us all play nice together and have a more integrated, centralized, and decentralized power service that serves all customers in the country the best.

Okay, great. So it's more of an offset to any risk that utilities, I guess, taking actions that are sort of anti-solar consumer at the residential level, but not really a trend right now at this point.

I think that's fair. That's very fair.

All right. Thanks, Sean. Thanks.

Your next question comes from the line of David Peters with Wolf Research.

Hey, good morning, guys. Just again on slide six, the Sunova Adaptive Home, you know, it sounds great to sort of be the brains of home energy management with grid services and the like, if you will, but I think some of your peers and even some of your suppliers are trying to do similar things. So can you maybe just kind of talk to what your edge is here and kind of confidence in being able to execute in this arena to effectively double the services that you're currently providing today by that 2025 target?

Yeah, certainly. So first and foremost, as you add more complexity here, and we've seen this with the battery additions, consumers naturally go, wait a minute, I need a service provider just like I have with my cellular service or satellite cable television or home security or even the current centralized power provider, which is typically a monopoly, if not always a monopoly, right? So what we're seeing is that consumers are coming to and wanting – You know, one throat to choke, so to speak, on service of all these different pieces of equipment. And the reality is that I know some, if not all, equipment manufacturers want every piece of equipment to be theirs, right? And if I was running one of those companies, that's exactly what I'd do. The reality is going to be quite a bit different than that from what we're seeing. So our job is to go in and assemble different manufacturer pieces of equipment into one seamless interface of software. It will be an app for consumers to enter and also to have a single software interface to deal with this on service. So if you have a service problem, a billing problem, question, you know, I've got a production problem, maybe look at your production estimates and so forth. It's going to be very highly interactive, and it's going to be something that consumers are going to be, you know, able to understand very easily. And so we've got, we think, an advantage over trying to have a single manufacturer have one single interface with the customers. The last one is that in terms of advantage is Again, just a reminder, and Rob made mention of it earlier, even in our loan contracts, and this is unique to us, but I don't think it will remain so, we have the service to the customer built in the loan contract. We also have the grid services built in the loan contract. So we've truly made ourselves agnostic to lease, PPA, and loan, and we truly see the financing as an enabler. of our relationship with the customer. So basically, we're the only one in the value chain that has a contract with a customer. That's it. And so that gives us a huge leg up as we are going back to the customer and asking them, hey, would you like to add on a battery? Would you like to add on EV charging plus the EV charging service and away from home? All these different things. we feel like we have an enormous leg up on anybody out there. But the way you've couched the question, I don't disagree with it. We just have a significant advantage over others, and it's our job to continue to execute and demonstrate that advantage to our customers.

Great. Thank you, guys.

Your next question comes from the line of Joseph O'Shea with Guggenheim Partners.

Hi there, John. Just to return to the policy issue a little bit, I would think that the fact we're going to have cash pay would tend to drive customers to trying to monetize that value on their own as opposed to third-party ownership. So I'm just wondering if you can amplify your comments a little bit on why you think cash pay might drive third-party ownership, and then I have a follow-up.

Yeah, Joe.

Well, there's two different types. I think that the most likely cash pay refundability, if you will, is going to come in the so-called commercial ownership, or this would be the lease PPA. And that would go to providers like ourselves. Obviously, this is more, maybe it's not obvious, but it's more geared towards the utility scale folks that don't have access to the tax equity or the tax equity simply just isn't enough. And so that's mainly what I was referring to. There is another ask out there to have consumers be able to get direct refundability. That is a different ask. That is a different part of the code. I think based on, again, this may have too many years on me, but there was a lot of problems with the grant period from the 2009 and 2010 and 2011 period of time including fraud. including very much slow payments from the Treasury. And the Treasury was, you know, and the service was much better staffed relative to the job back then than they are now. I think we've all experienced. I've certainly personally experienced that this year. And so there's a lot of problems with that. There's a tremendous amount of problems sending a checkout from the service from the Treasury to an individual and making sure that's above board and making sure that that's done on a timely basis so it doesn't create a working capital problem for that individual or a contractor. So I don't think it's a good idea for that reason. I think it's better done in the current construct of where we think things are going to go with refundability and leased PPA. But, you know, we'll see what happens. But regardless, you know, whether somebody is going to get 30% of a check directly or you're going to need to have that balance financed, and you're going to, more importantly, need that service. So we feel comfortable about no matter what happens, it's going to benefit us, but I think it's more likely to see that we'll have refundability on the lease BPA side, if anything, versus a full cash refund, if you will, on loans.

Okay, thank you. And then just also on the policy front, seems like we are going to get some stronger prevailing wage provisions. I think the IBEW seems to have done pretty well this time around. I'm curious as to how you think about that and the impact on your business.

There is an exclusion underneath one megawatt, which obviously covers everything we do by a large amount. So that's the answer.

And you think that one megawatt exclusion is going to survive?

Yes. I think it's, you know, very much impractical. You don't see a lot of unions in the residential market. There's a lot of reasons for that. I'll just point out that we pay very strong wages as an industry. We're very interested in making sure people have a living wage and then some. So our industry has been very good about that. And so I don't feel like any sort of demand or law to increase wages is needed. It's quite clear that we pay way above what most other industries pay. But I think that that will stand in terms of the one megawatt carve-out. Okay.

Thank you.

Thanks.

Your next question comes from the line of Elvira Scotto with RBC Capital Markets.

Hey, good morning, everyone. Thanks for taking the question this late. So just three quick ones for me. Thanks for providing the intermediate term, you know, major metric growth plan. Can you provide a little detail, like within that plan, thanks for all the detail, but Is that dependent on any certain outcome of net metering 3.0 in California? And then maybe if you can provide us any of your latest thinking around that. And then finally, my last question, I'm glad you brought up Arizona. I thought that was great news last night for the industry. Just your thoughts on how you see that driving rooftop solar growth in Arizona with that announcement yesterday.

Certainly. You know, we have a good portion, I'd say, you know, call it roughly 30%. Some months is a little bit higher of our origination in California, of all of our origination. Some months it's lower than that. Overall, it's mid to high 20s on a customer basis. I would say that, you know, that's quite a bit lower than anybody else that we compete with in the space. I would say it's probably less than half as far as awaiting than others have. So, you know, we have much less of exposure, if you will. However, let me be very clear. I think that California is going to do the right thing here. There's such a groundswell of support for solar. I think if you look at our average customer income, it's a moderate income customer because they do care about the savings, particularly in California with some of the highest utility monopoly rates in the country. and it would be a complete disenfranchisement of consumers to do anything that's anywhere close to what the utilities have asked for. So I think the commission is going to do the right thing, and I've been very clear about it. I think the offset rate will go down, and so more money will flow to the utilities. You can call it a win to the utilities. I think that's appropriate, but it's not going to be something that severely hurts us or even crimps the growth of the industry, in our opinion, as best as we can tell right now. With that said, we're continuing to diversify. I point out that You know, we will probably be in all 50 U.S. states, and on top of that, all the territories, you know, within the next 12 months or less. And so we've continued to diversify our geography quite substantially. So I think that we're in a great position, and even if something came down as a little worse than what we were expecting on NIM 3.0 in California, I think we'd still be able to be fine with the growth that we've laid out because, again, If anything, there is a definite bias to the upside in terms of the number of customers on a growth trajectory and the services sold per customer on the next couple of years. Arizona, I mean, at the bottom line, again, applaud the commission for what they did. This is pro-consumer, and it's going to have more growth. I mean, the bottom line is I don't know how much more growth, but it's either incremental or it could be quite a bit. But, yeah, that's retarded some of the growth in Arizona. There's no question about that. And now that burden's been lifted off the folks, you know, people of Arizona, and I think that we're going to see higher growth there. So it was great. It was very much a surprise and obviously a very good one. And I think a lot of other commissions need to look at very seriously, including California, about the experience when you put something punitive on people that basically disenfranchises them and gives them less choice. in their energy, particularly given the technology changes that we're seeing. I think what you're seeing is when those bad choices are made, they're rolled back. You had Nevada, now you have Arizona. There's other examples out there. So I think that folks ought to be looking more to the positive side of things as regards to policy rather than dwelling on some of the potential negatives that we don't see happening.

Great. Thanks very much.

Thank you. Your final question comes from the line of Tristan Richardson with Truist.

Hi. Good morning, guys. Really appreciate all the comments on 2025 and the services and NCCV implications. Just looking at that slide, I mean, assuming we get that double in services per customer, can you talk about maybe some of the biggest drivers between the 18 and 20K of potential NCCV outcomes? I mean, Seth, is that – in that mix of seven, is it simply, you know, a higher storage attach rate over the forecast period versus, say, a higher mix of some of the smaller ticket items would drive the range of potential outcomes there?

Yeah, so I said this a little bit earlier, but –

What I would see, the first one is that we'd say roughly a 60% penetration rate of storage on the base by the end of 2025. So that's a big driver. We see a lot in grid services, too. The question that Julian asked a few minutes ago, I think that's a big driver. I think anything on the generator side could be pretty interesting, load management. EV charging and service services. It may not be a huge NCCV per customer increase, but it certainly will provide a lot of high-margin recurring cash flow for us. And so it's certainly going to be helpful in that regard. And then, again, to reiterate the point that as we move forward in time and we rapidly pay off our debt, so the negative on that calculation is obviously debt, right? that's going to naturally improve on a per-share basis and a per-customer basis if we did none of those. So there's a natural rising floor, if you will, on the NCCB per share, which is really where it counts, right, but also on a per-customer basis that's going to come with as we just move forward in time and pay our debt off in a much more rapid fashion like we have been doing. I think debt paydown this year, Rob, roughly is going to be north of, you know, call it $110 million or so?

Yeah, it's strong, and it's really driven by the fact that we've been able to increase the principal payments and really increase the loan payments. And the irony here is that we're issuing less of the hyper-amortizing debt that we've had before, and yet we're still able to bring down and naturally delever the company faster regardless.

That's helpful. Thank you, guys. And then just maybe the quick follow-up there on your last comment about the 60% penetration. You know, presumably that does include sort of going back to the existing base and sort of tapping the retrofit opportunity. Can you frame that up in terms of maybe, you know, how much retrofit penetration do you need to get to that 60%? Yeah, I think...

Yeah, it's a combination of math on your forward attachment rate on origination, right? So the higher that goes up, then that means you need less of the existing base to buy, right, storage service. But, you know, we clearly see a lot of demand. Some of our markets are 100% attachment rate on a forward origination basis and have been for years. And so we're seeing a lot of demand from existing customers that, frankly, we just haven't even booked into contracts. We're now going back in there and upselling them now that we have, you know, a very good signaling and actual delivery of ESS systems. And so we see that next year could be a big uplift in terms of upselling storage per customer. One thing is I'll point out is that is not a part of our customer count. So this would be part of the NCCV per customer or per share increase, but it's not picked up in our customer account because we just count customers. And we list out services sold per customer to help track that. So that's something in terms of upsell opportunity we see a lot of pent-up demand for. So we're pretty excited and started to – go back and ramp that effort up, if you will. And I see a significant amount of growth in terms of upselling our existing customers as we move forward in next year. And a lot of that has not necessarily been baked into what we've laid out today. So as we get further into the year, say next earnings call, we'll be able to hopefully get a good update on that front. But I strongly suspect we're going to see a lot of uptake as far as upsells and storage of the existing customer base.

All very helpful. Thank you guys very much. Thank you.

I would now like to turn the call back to Mr. Berger for any additional or closing remarks.

Thank you, Operator. Thanks, everybody, for joining us on the call. I appreciate all the patience. The calls are getting longer as we have more and more interest in the industry, and obviously in particular in the Sonoma. Next time we'll be joining you all, it will be a new year. And I want to point out a couple of things that we're seeing as far as the overall industry attractiveness. We strongly believe that our industry, and in particular the service providers like Sunova is, it's a real opportune time. And why is that? We expect very strong monopoly retail power rate increases over the next few years. Sitting in Houston today, We have a front row seat to what's going on in the natural gas and oil side of things. And we see a very, very constructive pricing environment. Obviously, it's not good for consumers, but we see strong retail power rate increases. So consumers are going to be looking for more options against that. We see a low rate of cost of capital, even with the anticipated rise in risk-free markets. rates. We've laid that out. We've executed on that quite nicely this year. We see that continuing as far as the risk premium continuing to compress even a little bit. And we see supply and competition for key equipment increasing. So we're going to get past this issue with energy storage systems being not available. We're already seeing a tremendous insight and visibility into that. And we see a lot more equipment and therefore a lot more services per customer increasing. But overall, consumers are turning to service. They need to have one interface, one service provider that's going to be there in a timely fashion, and I'm proud to say that Sunova's laid out a very strong vision for what the future of the industry is going to be in the not-too-distant future, and we've laid out and well on our way of executing on that plan. So thank you for joining us, and look forward to seeing you again in the new year.

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