Sunnova Energy International Inc.

Good morning, and welcome to the Sunova's first quarter 2024 earnings conference call. Today's call is being recorded, and we have allocated an hour for prepared remarks and the question and answer section portion of the call. At this time, I would like to turn the conference over to Rodney McMahon, Vice President, Investor Relations at Sunova. Please go ahead.

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 as described in our slide presentation, earnings press release, and our 2023 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, Synovus Chairman and Chief Executive Officer, and Rob Lane, Executive Vice President and Chief Financial Officer. I will now turn the call over to John.

Before we get started, I wanted to acknowledge Rob Lane, our Chief Financial Officer. As we stated in our 8K yesterday, Rob will be stepping down from his role as our Chief Financial Officer to pursue other opportunities. This is a decision we have arrived at together. recognizing this is a logical time for a transition. On behalf of the Sanova team and the Board of Directors, I want to recognize and thank Rob for his many contributions, including helping the company execute its initial public offering, our acquisition of Sun Street, and launching the industry's first corporate green bond. We want to express our sincere gratitude to Rob for all that he has done to support Sanova's success during his tenure. Rob will serve as CFO through June 30, 2024, or until his successor is named, and will remain focused on supporting the key financing activities we will discuss later in the call. This change presents an opportunity for new perspectives as we position Sanova for continued success. Working with the Board, we have retained an outside search firm to run a full search process, which is already well underway, and we expect to share further details on his successor in the weeks ahead. Thank you, Rob. We will miss you. Now, as we review our first quarter performance, I want to take a moment to remind everyone that our team at SNOVA remains focused on making clean energy more accessible, reliable, and affordable for both residential and commercial customers. As we will discuss shortly, we have an outstanding market opportunity in front of us. And Sanova is positioned to capitalize on this opportunity so that we can deliver long-term value to all of our stakeholders as power demand continues to grow. On slide five, we see a multi-year tailwind driven by a tremendous load growth on aging electricity infrastructure. By 2028, it is expected that the demand for power in the U.S. will increase dramatically due to the continued electrification of the economy, onshoring of manufacturing, electric vehicle adoption, and increased demand from AI, cryptocurrency, and data centers. But an aging power grid means less energy reliability. And with so much growth on the horizon, the energy services that Sinova provides will be needed for decades to come. At the same time, we're also seeing steady increases in utility rates. As the capital needed to support and replace this aging and frequently damaged infrastructure becomes more expensive in the current interest rate environment. Inflation has had a direct impact on the cost to maintain and upgrade grid infrastructure and public utility regulators continue to approve higher and higher utility rates. This scenario allows Sanova to maintain a highly competitive and compelling energy offering. As evidenced on slide seven, a consistent and direct correlation exists between utility rates and the adoption of solar energy. On slide eight, We see these dynamics create strong demand for our Sanova adaptive energy offerings. As a company, we view these macroeconomic trends as indicators of the many opportunities ahead. Through our innovative financing, servicing, and energy management offerings, we are proud to be helping our customers protect their homes, businesses, and families. To date, Sanova has provided energy services to over 438,000 customers. managing 2.6 gigawatts of power backed up by almost 1.2 gigawatt hours of energy storage solutions. We have partnered with over 2,100 dealers and new homes installers in over 50 U.S. states and territories. We are doing this with industry-leading technology, both in hardware and software, which is backed by our service offerings and our entire team of dedicated employees who support our customers day in, day out. We see the demand and recognize that as we continue to make improvements to the business, we remain committed to the core customer value proposition we centered our entire business around 12 years ago. As a leading adaptive energy services company, we are delivering a comprehensive, sustainable, and streamlined approach to energy services. With our platform, we are simplifying the increasingly nuanced landscape of energy so that our customers do not have to worry about the upfront costs, maintenance, or technical complexities of powering their homes and businesses. Instead, they rely on Sunova as their trusted energy partner, accessing affordable, reliable, and sustainable energy solutions. We are more excited than ever to see what the future brings, and we will continue to innovate on our customer experience and work hard to support the growing energy needs of the country. Moving to our Q1 financial results on slide 11. Most notably, during the quarter, we generated $18.9 million in unrestricted cash, and our total cash balance remained relatively flat compared to the prior quarter, sitting at $487.5 million as of March 31, 2024. Additionally, we experienced an 11.6% decrease in adjusted operating expense per customer compared to the fourth quarter of last year, proof that the initial steps we have taken over the last few months to reduce costs are starting to bear fruit. This quarter, we delivered 46.4 million in adjusted EBITDA, 35.7 million in interest income, and 41.9 million in principal proceeds from customer notes receivable, which were all in line with the quarterly guidance we provided on our prior earnings call. We also continue to see steady year-over-year growth in our net contracted customer value, or NCCB. Assuming a 6% discount rate, NCCB was $3 billion, an increase of 15% compared to March 31st, 2023. Our March 31st, 2024 NCCB per share was $24.34, assuming the same discount rate. Over the last few months, we have also made several exciting strategic announcements. In January, we announced the opening of our Adaptive Technology Center in Houston. Equipped with cutting-edge energy testing and integration technologies, this center allows our engineering teams to innovate and integrate various technologies seamlessly. It also empowers our service technicians to troubleshoot field issues in a controlled environment, enhancing our service response times when visiting our customers' homes. In late March, after years of working with the Home Depot to empower customers with cost-effective energy solutions and ensuring dependable and resilient power, We were thrilled to announce our strategic partnership, whereby we will now be the sole provider of solar and battery storage services in the Home Depot stores across the United States and its territories. This agreement provides consumers with access to the Sunova Adaptive Home energy offerings in over 2,000 Home Depot stores. Lastly, in early April, we announced the growth of our virtual power plant network. Powered by our Synovus Sentient technology platform, our customer systems and the clean power produced continues to help offset the need for utilities to use heavily polluting fossil fuel power plants during peak demand periods. In return for their demand, battery response, and contribution, our customers are compensated for the power supplied by their batteries in most programs, creating a win-win for the customer and the community. As our customer base continues to expand, we are at a pivotal moment in enrolling customers into these programs, and we look forward to sharing more details in future earnings calls. Recognizing the current state of the industry, our immediate focus remains on increasing cash generation and maintaining our margins. This has only sharpened our focus on maximizing asset-level capital, driving cost efficiencies, further leveraging ITC adders, and refocusing on our core adaptive energy customers, all of which we will discuss in greater detail in the subsequent slides. Turning to slide 14, you will see our total unrestricted cash balance was up compared to the end of last year. We have remained active in the asset-backed securitization market with two issuances in February totaling $453 million, and our securitizations are trading well in the secondary market which gives us confidence in a strong ABS environment for solar. We expect to continue to access the securitization market this quarter and throughout the year as investor appetite remains strong. We also continue to be active in the tax equity market with the closure of a new $195 million fund in February and increased funded commitments of $58 million throughout the quarter to previously established funds. Additionally, where our large TEP 8B fund closed in December. It was not funded until March of this year, providing us with significant liquidity in the first quarter. As the shift from loans to leases and PPAs continues, driven by macroeconomic conditions and ITC adders, we expect that tax equity will make up a larger component of our total financings. We are generating more proceeds from asset level financing than we have in recent years. We believe there are three main dynamics at play that will support this. The first is more asset-backed securitizations per year and monetizing those securitizations beyond the investment-grade credit attachment points. The second, increased utilization of tax equity driven by the shift from loan financing to lease and PPAs. And third, accelerating the overall pace of asset-level financing. First are more securitizations. We have done four securitizations per year for the last three years. and we expect to complete at least six securitizations in 2024. Also, since Q4 2023, we resumed the practice of issuing beyond the investment grade credit attachment point by monetizing the Class C notes in our asset-backed securitizations in addition to the Class A and Class B notes. This change in our securitization approach allows us to increase our net proceeds. Second, on our customer mix shift towards more solar leases and PPAs. This is an advantage for us as leases and PPAs benefit from higher total advance rates than loans due to their ability to utilize tax equity recently enhanced by the ITC adders. Lastly, we are focused on accelerating the pace of our asset level financings by working with our dealers and internal resources to bring assets into service quickly. Closing securitizations at a faster pace allows us to take advantage of higher advance rates, net of hedge breakage, when we securitize. Moving to slide 16, we detail that trend in our unit economics spanning across multiple different interest rate environments in only three years. Taking a step back, our value proposition is comprised of many things, including cleaner, safer, and more reliable energy. But one of the biggest advantages to our customers is savings. Given the increase in utility rates, we've been able to continue delivering savings to customers while at the same time increasing our pricing. This has allowed us to achieve a healthy spread in a rising interest rate environment. This dynamic is illustrated by the trend of our implied spread over the last three years. We have always said that we target a 500 basis point spread long term. In 2021, in a lower rate environment, we delivered an implied spread of 6.4%. As interest rates rose into 2022 and 2023, so too did our cost of debt, doubling from 2021 to 2022. Though we dipped below our spread target in 2022, our pricing changes in 2023 allowed us to increase our fully burdened unlevered return and generate an implied spread of 5.6%, 60 basis points higher than our target. Over the last three years, in a host of different rate environments, we've been able to average a 5.5% implied spread while still delivering savings for our customers. We believe that this is indicative of the sustainability of our business model. Additionally, in the first quarter of this year, even as our cost of debt increased, it was more than offset by an increase in our fully burdened unlevered return, and we saw an increase in our spread back up above the 6% mark. However, we recognize that strong unit economics can only be part of the story. Therefore, we are continuing to drive further cost efficiencies in the business. In the first quarter of 2024, our adjusted operating expenses declined roughly 6% quarter of a quarter, or $6.6 million. This decrease in total adjusted operating expense was the first decrease in this metric since 2020 and was driven by our initial efforts to reduce costs and to further drive efficiencies in our business. Moving forward, we will utilize our technology platform and scale to continue driving cost per customer down as evidenced by the 11.6% reduction in the first quarter. Another dynamic we are monitoring is the monetization in the investment tax credit adders introduced in the Inflation Reduction Act. In addition to the base 30% tax credit, increasingly we are seeing the ability to access the adders allocated to building and energy communities providing service to low-income individuals, and the push for more domestic content and equipment. For 2023, we saw little uplift from these adders as the year's weighted average ITC with adders was only 31.5%. This was due to limited implementation guidance on the adders from the U.S. Treasury last year. With the guidance we have received this year, and with more to come shortly, we expect we'll be able to increase our weighted average ITC to somewhere between 36 and 40% by the end of 2024. As you can see here on slide 18, we estimate that a 1% increase in the weighted average ITC rate would generate at least an additional 30 million in cash proceeds in 2024 based on the fair market value of the lease and PPA systems we expect to place into service this year. And lastly, we are refocusing on our core adaptive energy customers. The left side of slide 19 shows our customers deployed per year. While we expect flat growth in overall customer additions in 2024, we still expect the number of megawatts we deploy this year to increase. This is due to a shift in our expected customer mix in 2024 as we refocus our capital expenditure investment on core adaptive energy customers. Also, our solar additions in 2024 are expected to be much more heavily weighted towards lease and PPA customers, which, as I discussed, is advantageous for our cash generation as well as our margins. This renewed focus on our core adaptive energy customer will help us to make progress against the priorities I previously mentioned, while also providing us the adequate scale necessary to fund the business through asset-level financing. I also want to be clear. There is more than enough market demand despite economic challenges to continue to recognize the benefit that scale has for our business. With that, let me now turn the call over to Rob.