Spruce Power Holding Corporation

Thank you, Bronson, and thanks to everyone for joining us on the call today as we discuss our strong second quarter results and progress on 2023's initiatives that extend our core business of distributed generation solar power. For those new to SPRUS, we have three primary businesses. First, we create and sell clean electricity through our growing solar power portfolio. Second, we deliver power services to our customers with servicing creating strong margins and business development opportunities. Third, we profit through participating in the related environmental commodities markets. This year, we've kept our differentiated customer strategy. Rather than carry a high-cost sales force, we add customers through the acquisition of existing power portfolios with long-term purchase contracts and leases. It's simpler, it's flexible, and it's allowed us to have arguably the lowest customer acquisition costs in the industry. We demonstrated the strength of that growth strategy by expanding our portfolio of home solar assets and contracts by over 40% with the acquisition of the Spruce Power 4 portfolio. With the transitional tasks associated with our merger with XL Fleet mostly complete and the first full quarter of Spruce Power 4 in the books, What we're showing today are the results of a clean quarter. I want to break my comments into three focus areas. The first will be operations and then growth initiatives and then capital markets. Okay, operations. Of course, Spruce is not a financing company. We actually make and sell a product and provide services to our customers. We are an operating company, and so our goal is operational excellence. Our company facilitates the solar electricity consumed by about 80,000 households across 18 states. For these families to enjoy zero-emission electricity that's reliable and cost-advantaged, our Spruce servicing team delivers best-in-class excellence in its execution of customer billing, collections and support, asset management, system repairs, and the complex technology that links all of that together for a smooth customer experience. The ultimate measure of operating excellence then is customer satisfaction. Our second quarter customer satisfaction score was 70% right in line with our 70% target and up substantially year on year from 53% in the second quarter of 2022. This is our third consecutive quarter of meeting our target, helped by several million dollars of technology and personnel investments we made in customer operations. In Q2, we rolled out customized changes to our billing system, service by SMS text, and a completely retooled customer home transfer process to bring that to a five-star level. We continue to strive for an even better experience for our customers. Our customer focus groups have given us valuable feedback this year. They aren't asking for the latest and greatest technology. No AI-driven computer systems or a flashy mobile app with streaming data. On one hand, we're going to keep building a solid IT backbone, developing technology and asset management tools at the pace of about $2 million per year. Yet, on the other hand, AI technology is incapable of empathy. Our customers place the highest value on direct interaction with our well-trained U.S.-based service team, real people and real interactions. So we are also pleased to announce a new pilot program to place our own field services teams in our highest asset density areas, starting in the Northeast. Field services will lock in our own labor force, which will both get faster O&M to our customers and create more human interactions. That person-to-person service is key to building Spruce as a trusted brand to deliver additional products, such as home batteries. Spruce is a clean energy producer, so let's hit the production numbers. Our Q2 performance ratio, which is the production compared to the theoretical maximum of the installed solar panels, was 95%. We achieved this despite impact from the Canadian wildfire smoke through the quarter as well as negative weather in California in June. Our weather-adjusted performance ratio was a strong 103%. At 103%, Spruce's asset management team is strongly outperforming the projections we get from top independent engineering firms who review our portfolios at the time of their acquisition. The strong physical performance of our portfolio interest in that we expect an annual range of $35 to $45 million, ultimately leading to between $5 and $15 million of net cash flow after principal payments. That's the exact same level as we discussed last quarter. That is, we are affirming that financial framework. Long term, our primary operations driver is our professional team. Last quarter, we announced Sarah Wells as CFO. Also, SPRUCE's longtime chief legal officer, John Norling, assumed the responsibilities of board secretary and sole leadership of the legal department. More importantly, we are deepening our management team with strong hires of experienced directors and team leads. New leadership and bench strength in FP&A, M&A, collections, treasury, and litigation gives us our best cross-team collaboration ever. Related to team growth this fall, the executive team will move into our new Denver headquarters and our Houston servicing group will expand its office footprint by about a third. It's not a hiring binge, just Spruce's staff shifting back to in-office work for better productivity and career development. Now, let me shift gears to talk about our growth and capital strategy. As I mentioned before, Spruce has a growth strategy that gives us what is arguably the lowest customer acquisition cost in the industry. Not only do our costs continue to stay low, Spruce's M&A team finds deals that generate impressively high cash-on-cash returns for years into the future. So instead of talking about one-time sales margins, we think in terms of multiples on our investments, and our stability grows with a portfolio that has over 12 years average contract life remaining. Spruce's growth isn't the sugar rush of one-time sales. We think investors are better served by the muscle-building nutrition of recurring high-margin cash flows. In Q2, we focused on integrating the portfolio we bought at the end of Q1, the Spruce Power 4 portfolio, which increased our rooftop solar assets and contracts by about 44%. In this initial quarter under our ownership, we actually saw the portfolio's customer payments perform about 5% better than our initial expectations due to the underlying PPA contracts, many of which are indexed to the rapidly escalating retail electricity rates in California. We're now looking at our next growth acquisition. In July, we signed a letter of intent to acquire a portfolio of approximately 2,400 home solar systems. all with long-term customer contracts from a publicly traded counterparty. We hope to close in the next few weeks. Bill, of course, can't comment on specifics, and nothing is certain until the ink is dry. However, we can say that the transaction is underwritten to meet our mid-teen levered return target, and we're excited that it brings us past 75,000 home solar assets and contracts. We expect to fund the equity portion of the acquisition with cash on hand and non-recourse senior debt. It's worth noting that after the banking scare this spring, the debt markets have bounced back fast and we're seeing an abundance of debt offered to us at attractive terms. One last point on growth. We have two areas of organic growth that are picking up pace. The first involves actually increasing the cash flow from our home power systems we already own by more efficient participation in the environmental commodities markets, or by acronym ECM. Our ECM business is finding more efficient ways to mint and sell renewable energy credits from our assets around the nation. In Q2, we saw a strong uptake in the value and cash flows, leading to quarter-on-quarter growth of close to 10% on a GAAP basis. The second area of organic growth is increased natural demand for retrofit battery installation, really for the first time. Spruce has offered that product for a couple years, but the economics of a battery lease or sale was a tough sell. What we're seeing is that adjacent to California's new net metering rules, there is real demand for home battery storage from our California customers. We aren't internally budgeting material battery lease revenue for the rest of 2023 yet as we finish the business infrastructure to begin taking advantage of it. We're working on partnerships to more quickly address that demand and also see our new field services initiative as an important long-term way to meet the demand. So just to wrap up on organic growth, even as we execute on our strategy of acquiring portfolios of assets, we're excited to see a neat opportunity for increasing revenue per customer. On capital, We have plenty of cash, and even in the current debt markets with higher interest rates, we believe we are fully funded to achieve our near-term goal of reaching a customer contract portfolio of 90,000 by the end of 2024. One final point before handing the call to Sarah. Every quarter, we have any number of choices of how to deploy the capital to which you've entrusted us. Naturally, an acquisition is the top choice if the portfolio is solid and the price will yield attractive cash returns. With the board authorization of our share repurchase program in May, we began to purchase our own stock. In our view, that stock is priced far below its fair value and is a great buy for investors, including ourselves. We bought about 1.9 million shares in Q2 and just keep going. Through August 4th, we've repurchased about 3.6 million shares for about $3.2 million. I want to bring you to a conversation we have every day here. Why is our stock sitting at a buck? Based on institutional feedback from the buy side, conversations with research analysts and investment banks, they cite the overhang of having so many shares outstanding that even strong company value gets obscured by the math of a huge share count. It's not a function of operations, but of the unique way we became a public company. Maybe it's just math, but fortunately, it's within our control. So last week, our board authorized a plan to consider a one-for-eight reverse stock split. This week, we filed the preliminary proxy with the SEC, and in the next couple weeks, we plan to call a shareholder meeting in early October for approval. If shareholders approve, a reverse split is intended to get us well above the dollar level necessary to maintain our NYSE listing. With that, I'll hand the call over to Sarah to walk through the financials.

Thanks, Christian. Before getting to quarterly results, I'd like to quickly address a few housekeeping items that impacted our financial reporting. Consistent with the prior two quarters, legacy XL businesses, Drivetrain and XL Grid, are presented as discontinued operations within our financials. These legacy businesses were divested in the first quarter of 2023, and we do not expect any material expenses going forward related to discontinued operations. Our continuing operating results still reflect certain expenses related to XL Suite, notably legal expenses related to the previously disclosed SEC inquiry and related shareholder lawsuits. We are working to close these legal matters, but do expect to incur future associated costs. As we stated in our 10-Q, we believe the allegations in both the SEC inquiry and shareholder suits are without merit, and the company is vigorously defending itself. At this time, we cannot estimate the timing of resolution of these matters, nor the impact of any related liabilities. Also, as Kristen mentioned, the SPRUCE Power 4 portfolio acquisition closed in late March, and second quarter results fully reflect this investment. However, please recall that GAAP accounting treatment for the SPRUCE Power 4 portfolio acquisition places the majority of cash flow streams from the portfolio in the cash flow term investing section of our consolidated statement of cash flows. This item is denoted as proceeds from investment related to SEMTH master lease agreement. However, note that operating costs and interest expense tied to our senior debt supporting SPRUCE Power 4 are reflected in the statement of operations. Moving to Q2 financial results. Second quarter revenue, which consisted exclusively of spruce-related revenue, was $22.8 million compared to $18.1 million in the first quarter of 2023. Revenue was higher sequentially due to more sun hours across our fleet. That's just normal seasonality, as well as quarter-on-quarter improvement in our portfolio's weather-adjusted performance ratio and the resulting impact to our PPA contracts. Second quarter OpEx, which includes both SG&A and Portfolio O&M, and excludes depreciation with $19 million compared to $17.6 million in the first quarter. Portfolio O&M expense increased to $3 million in the second quarter from $1.9 million in the first quarter. The sequential increase is tied to accelerated activity in our meter upgrade campaign. as we replace legacy meters across our fleet to maintain the most efficient fleet possible. SG&A expense increased modestly to $16 million in the second quarter from $15.7 million in the first quarter. Integration costs tied to our public merger process tailed off and largely concluded in the quarter. However, SG&A continues to be impacted by certain legacy XL fleet corporate items, namely legal expenses associated with the previously disclosed SEC inquiry and shareholder lawsuits. Collectively, integration costs and legal expenses totaled close to $5 million for the quarter. Excluding these expenses, core SPRUCE OpEx will be closer to $11 million in the quarter, which we believe offers a clearer view of OpEx for a standalone SPRUCE power. On a GAAP basis, net income from continuing operations was $1.8 million. compared to a $15 million loss in the first quarter of 2023. Adjusted EBITDA totaled $9.5 million. Adding in the cash flow from the Spruce Power 4 portfolio, which is called in our financials, proceeds from investment in lease agreements, brings the total to $13.8 million. This compares favorably to $5.7 million in the first quarter. In measuring the value of our long-term solar assets and contracts, We've provided metrics on gross and net portfolio values, which represent the present value of the remaining net cash flows of our rooftop systems and contracts, discounted at 6%. As of June 30th, gross portfolio value was $929 million. After adjusting for non-recourse debt and cash balances, our net portfolio value was $477 million. Next, I'll speak to our capital and liquidity positions. As of June 30, 2023, we had cash, cash equivalents, and restricted cash of approximately $192 million. This compares to $205 million at the end of the first quarter of 2023. The sequential decrease is primarily attributable to the seasonal timing of semiannual mezzanine debt payment and portfolio expenses. The total principal balance of long-term debt was $644 million as of June 30, 2023. As a reminder, all of our debt is non-recourse, project-level debt that is supported by our long-term contracts. In the current rate backdrop, we think our debt is attractively priced with a weighted average cost of approximately 5.6%. And because our variable rate senior debt facilities are mostly hedged by interest rate swaps, our overall debt is 97% fixed rate, with the swap center extending well beyond the life of the loan. Bruce's earliest debt maturity is in August 2025. To date, we have primarily utilized non-recourse project-level debt to fund acquisitions. For context, these facilities have typically been structured with tenures of around seven years, though the underlying contracts and associated payment streams will extend well beyond the tenure of the debt facilities. This structure is typical in project finance debt markets. Given the nature of our long-lived cash flows, we are confident that we will be able to refinance our debt facilities upon maturity. We have strong relationships with current and prospective lenders in renewable power debt markets where we see the appetite for residential solar as robust. Moving next to capital allocation. As Christian mentioned, every quarter we have any number of choices of how to deploy the capital. In addition to debt repayment, during the second quarter we purchased approximately $1.6 million of our own stock through our share repurchase program. We believe this opportunistic investment represents tremendous value. Our repurchase program does not require us to purchase a specific amount of shares. However, we believe that the market value of our shares is well below the intrinsic value of the company. Every share purchase is accretive to our per share metrics. So we have stayed active. And from the start of the program through the end of last week, we have cumulatively repurchased approximately 3.6 million shares for $3.2 million. I will now hand the call over to the operator for Q&A. Operator, please open the line for questions.

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from Joseph Asha with Guggenheim. Your line is open. Hello.