Sunnova Energy International Inc.

Good morning and welcome to Sunova's third quarter 2024 earnings conference call. Today's call is being recorded and we have allocated an hour for prepared remarks and Q&A. At this time, I would like to turn the conference over to Rodney McMahon, Vice President, Investor Relations at Sunova. Thank you. Please go ahead.

Thank you, Operator. Before we begin, please note that 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. On the call today are John Berger, Synovus Chairman and Chief Executive Officer, and Eric Williams, Executive Vice President and Chief Financial Officer. I will now turn the call over to John.

Good morning, everyone, and thanks for joining us for today's call. I'll begin on slide four, speaking to a format that should by now look familiar. As we committed previously, increasing cash generation remains a top priority. underpinned by our commitment to work with our exceptional dealer and supplier network to serve our customers. And I am proud of the results our team is delivering related to these commitments. While the slide is familiar, you'll see that we added a commitment to serve our dealers and suppliers who often act as the face of Sunova to our customers, touching on each commitment. We provide a best-in-class platform to support our partners. The software and services we offer our dealers and the level of service we provide our customers makes Sanova the most attractive platform for both dealers and equipment manufacturers. We remain keenly focused on growing our core adaptive energy customer base as we prioritize profitable growth through higher margins and credit quality over maximizing customer count. Importantly, we've demonstrated that you can achieve both As through the first nine months of 2024, we added 76,600 customers, of which nearly 80% or approximately 60,000 were solar customers. We are maximizing the asset level capital we generate, demonstrated by our success closing securitizations and tax capital commitments at significantly higher levels compared to last year. Tax capital, which includes both traditional tax equity and credit transfer funds, We're up 100% year over year. We are successfully increasing our investment tax credit, or ITC adder utilization, up significantly as we exited the third quarter and focused on a strong close to the year. Our industry-leading decision to work with our dealers to originate all leases and PPAs after September 1st with domestic content is translating into meaningful cash flow, which I will explain in more detail later. And finally, we continue to drive cost efficiencies by right-sizing the organization with an emphasis on using technology and process redesign. As you'll see in our results, since the end of 2023, we've made significant progress reducing our operations and maintenance expenses while turning attention to G&A, which is now on a path to significant reductions as we enter the fourth quarter and position the business for 2025. Having recapped our priorities, the next few slides highlight our progress in more detail. Turning to slide five, we're mindful that integral to our goal of powering energy independence is a large network of dealers dedicated to the same. This network of entrepreneurs is the backbone of who we are and allows us to leverage industry leader expertise, managerial skills, and knowledge of local markets to attract new customers. To ensure our dealers have the right tools to succeed, we strive to provide them with the best-in-class platform with a heavy focus on software and customer service. Giving our dealers the right tools and support helps us win together and allows us to focus on driving faster installations and service activations, which benefits our customers, our dealers, and Sunova. Importantly, accelerating the time from origination to placing a system in service is better for our customer and better for our working capital. Additionally, in the immediate term, we've been working with our dealer network to flip the work in progress or flip the whip to further capture the domestic content adder on systems originated prior to our September 1st requirement for new originations and that are still pending install. I will discuss Flip the Whip in greater detail shortly. Turning to slide six, many of you have been following our industry for some time now and understand its seasonality and how we see the greatest demands on working capital during the third quarter as heavy summer customer originations increase dealer payments ahead of the funding we receive from our warehouse facilities and tax capital funding. This working capital seasonality is the primary driver for the reduction in unrestricted cash in the third quarter, and even with record originations this summer, I'm pleased that we maintained an unrestricted cash balance of over $200 million. We enter the fourth quarter well positioned to return to positive cash generation during the period as we close within the first full week of October a tax capital fund that provided an additional $35 million at closing. We expect to generate at least an additional $69 million of unrestricted cash this year, which will put us at or above our $100 million cash generation target for 2024. Our expanded capital markets team is hard at work progressing additional securitizations and tax capital funds. Mindful of the importance of transitioning in-service systems from our warehouse facilities to a long-term fixed-rate securitization, we closed a 4a2 private securitization this month, and I look forward to closing an additional securitization, perhaps even two, this quarter. Ultimately, several factors moving in tandem give us confidence in affirming our full-year unrestricted cash bill and a longer-term outlook for the same. Specifically, these factors include greater contribution from the domestic content matter which significantly increased our weighted average ipc rate beginning in september when we instituted our domestic content dealer requirement for all new tpo originations higher margin systems originated earlier in the year receiving permission to operate additional cost savings and efficiencies from our technology platform and scale and less working capital needed as we better align our growth spending with various tax capital and warehouse funding schedules. Affirming our full-year and multi-year cash guidance positions us well to address our upcoming debt maturities, which as Eric will discuss, we expect to include a combination of opportunistic paydowns and a regular way refinancing of any remaining, both of which we are currently discussing with our banking partners. We've included slide seven to underscore the basis of our confidence to achieve our cash generation targets, and we thought it important to highlight the multi-year trend that reflects the success of our stated priorities in action. Here we have focused on the seasonally relevant third quarter of each year and are showing the spread between customer agreements and incentives revenues and the change in unrestricted cash, excluding proceeds from the corporate capital we raised in each of the prior third quarters. You can see that the change in unrestricted cash relative to the aforementioned revenue has progressed from a negative 5.8 times in the third quarter just three years ago to nearly at 30 this quarter and based on our expectations inflecting to a positive net generation as we end the year with multiple levers available to achieve this outcome. Turning to slide eight. By now, you are well aware that a meaningful contributor to our cash generation forecast are the ITC adders, something we have prioritized throughout the year, even going back to close tax equity funds to monetize their value retroactively, which sets us apart from others in our space. I'm proud of how our teams work together to stack that cash. And as we look ahead to areas of focus this quarter, I'll highlight two key initiatives I mentioned earlier. First, we have led the industry by working with our dealers to ensure that all lease and PPA systems originated beginning September 1st meet the eligibility requirements to qualify for domestic content. Doing so has significantly increased our weighted ITC rate on origination by 17% to 42.2% in October versus the average for July and August and we expect further increases as we round out the year, targeting a weighted average of approximately 45% in 2025 and 2026. You'll recall that each 1% increase in our weighted average ITC rate on a full-year basis generates approximately $50 million of additional cash. Second is flipping the whip. whereby we add domestic content qualifying equipment to systems originated but not yet fully installed prior to our September 1st domestic content requirement. To date, we've flipped systems worth $3 million of additional cash to Sunova. Rounding out my highlights of the progress we've made towards our key commitments, slide 9 shows the progress we've made to reduce our O&M and G&A expenses. Reflecting the benefit of scale, amplified by our focus on process improvement and use of technology, we've reduced these expenses as a percent of revenue by 48% and 5% respectively. We have additional reductions in the fourth quarter, some significant related to G&A, made evident on the graphs as you see these reductions increase to 65% and 35% respectively. The team is demonstrating that they can do more with less and I applaud the drive they bring to work each day. Turning to slide 10, and before I turn the call over to Eric, I'd be remiss if I didn't take a moment to recognize that we're talking only days before an important election, one that has created some uncertainty around our industry, prompting many questions from our investors. You have asked me how a new administration on either side of the aisle would impact our current business and outlook. While we all see and feel the polarization, I focus on the reality more than the rhetoric. The reality is powering energy independence through the expansion of solar production enjoys bipartisan support on many levels. Investment in clean, efficient, and reliable energy infrastructure that insulates consumers from electricity cost inflation is just one of the many benefits and one of which we can all agree. we look specifically at the inflation reduction act as a proxy for evaluating both parties priorities we see many of its key provisions appeal to both sides whether it's the jobs it creates the gdp growth it stimulates the competition it provides to traditional utilities its contribution to ever increasing demands for energy and importantly clean energy including that needed to power AI and data centers, improving reliability and modernizing our energy grid for the digital age. We can all agree these dynamics position Sanova as part of a solution that both sides desire for our great country.