Spruce Power Holding Corporation

Thank you for standing by. My name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the Spruce Power third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Bronson Flagg, Head of Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to Spruce Power's conference call to discuss results for the third quarter of 2023. With me today are Christian Fong, our Chief Executive Officer, and Sarah Wells, our Chief Financial Officer. Our call this afternoon will include statements that speak to the company's expectations outlook, and predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risk and uncertainties, many of which are beyond our control, which may cause actual results to differ materially from those expressed in or implied by these statements. We are not obliged to revise or update any forward-looking statements, except as may be required by law. Please refer to our disclosures regarding risk factors and forward-looking statements in today's earnings release and other SEC filings. The copy of our press release has been posted up to the investor relations page of our website for reference. The non-GAAP financial measures discussed in this call are reconciled to the US GAAP equivalent and can be found in the press release that we issued this afternoon. With that, I will turn the call over to our CEO, Christian. Go ahead.

Thank you, Bronson, and thanks everyone for joining us today. I'm going to start with the discussion of our strategy and then turn to the third quarter. Spruce's core strategy is to be the dominant long-term owner and operator of distributed energy assets. Our business model is straightforward. First, we create and sell clean electricity through our growing portfolio of home solar assets. Our underlying value proposition for our customers is that we provide consistent energy savings month after month compared to the inflation of utility retail rates. Over time, as customer savings grow, especially in the expensive coastal markets, their appreciation for solar grows too. Second, we deliver power services to our customers at high margin economics through our integrated servicing platform. Having regular repeated touchpoints with customers has enabled Spruce to achieve industry-leading customer satisfaction scores. Third, we capitalize on revenue opportunities in rich environmental commodities markets across our footprint. As policies in most of our 18 state markets have shifted to be even more pro-solar, the sale of renewable energy credits has been Spruce's fastest-growing segment. This owner-operator model, combined with our low-cost customer acquisition strategy, positions us both for long-term recurring revenue and for highly profitable growth across most interest rate and economic scenarios. Let's turn to the third quarter. I want to anchor my discussion with two metrics. The first is cash. This quarter we generated positive cash. Combined with just shy of 500,000 shares repurchased in our share repurchase program, our net cash per share increased by 4%. Excluding cash settlements that are expected to reserve on a few legal matters that Sarah will discuss, our net cash per share is $9.14 at the end of the third quarter. Over the next few quarters, we'll focus on growing both our adjusted EBITDA and free cash flow, as well as either preserving our cash position or using it to buy multi-year cash flow streams at attractive prices. The second metric is customer satisfaction. Our trailing year customer satisfaction score rose to a record 76%. That measures repeated interactions to establish the customer trust necessary to sell the next product or service. Three years ago, that level sat at about 50%. Our analysis showed that at 70%, we'd be the industry's leading operator, and at 80%, we'd be ready to ramp up follow-on sales. So here we go. In 2024, we're aiming for 80% customer satisfaction and expanding the sale of power products and services. Let's go to general updates in operations, current growth initiatives, and capital markets. In operations, Spruce facilitates solar electricity consumed by about 80,000 households across 18 states. Our servicing team delivers outstanding execution of Texas-based customer support, customer billing, collections, asset management, and the technology infrastructure that links these functions together. Done well, this provides a great experience for our customers and supports growth in adjusted EBITDA to pay down project debt and add to our cash. As I mentioned, our customer satisfaction score hit 76%, up strongly from last year's 61%. Our Google review rating was 3.7 last quarter, lifting our cumulative score to a high watermark level today of 2.3, and on-time customer payment rates which usually track customer satisfaction, increased a strong 60 basis points in one quarter. These improvements in customer satisfaction are coming with investments in technology and customer-facing personnel across customer operations. In the third quarter, we rolled out our enterprise data warehouse, which links all our IT systems of record and gives us unprecedented internal collaboration tools. And we continue to execute on the rollout of our first field services teams that we announced last quarter. The field services program is initially focused on New Jersey and California. Why have teams in the field? Three reasons come together. First, to provide a better customer experience in some of our most dense markets when there is a service call. Second, to optimize the efficiency of creating and monetizing SRECs in these valuable markets. And third, to have teams in place to install retrofit batteries as we ramp up customer power sales later in 2024. Next, let me address the performance of our assets. Our Q3 performance ratio, which is the production compared to the theoretical maximum of the installed solar panels, was 89%. Lower performance reflects high rainfall on both the east and west coasts at the beginning of the summer, Yet our weather-adjusted performance ratio is 101% year-to-date. So overall, the portfolio is doing great and generating strong cash flows. We expect run rate annual cash inflows of between $120 and $130 million. This is largely supported by recurring revenues and investment cash flows from our residential solar portfolio that has a 12-year remaining average contract life. Next is our growth initiatives. Our customer acquisition strategy is a compelling competitive advantage. Rather than carry a high fixed cost sales force, we add customers through the purchase of existing residential solar portfolios. This keeps customer acquisition costs low, and we never feel compelled to overpay for growth. In Q3, we closed on two deals. The first in August was for about 2,400 contracted customers in the Tredegar portfolio, a deal that exceeded our equity return target of 18% IRR. We also bought out one of our tax equity joint venture partners in a small token deal that we project is over 30% IRR. Over the last year, we've acquired the cash flows from about 25,000 rooftops for a 49% growth year on year. Our M&A team is still busy looking at deals. Renewable power markets, especially for installers, seem to have liquidity concerns with higher interest rates and the capital markets pulling back. In that environment, we adopt Warren Buffett-style logic. Since we have cash, higher IRRs, it's like having recurring cash flows on sale. Spruce is known as a strong buyer in secondary markets, and we stand ready for installers who need to recycle capital through portfolio sales. Apart from acquisitions, we also pursue organic growth opportunities to increase revenue per customer. First, Spruce's environmental commodities market business is firing on all cylinders. In Q3, cash inflows ticked up 25% sequentially as our ECM group found more opportunities to mint and sell renewable energy credits from our assets across the U.S. We like this business's ability to add cash returns on assets we already own. Second, we see increased demand for retrofit battery installation. This is largely in California due to that state's net metering rules. We aren't yet budgeting for large battery lease revenue, which was just a couple hundred thousand dollars in 2023. We anticipate, though, scaling this up by the end of 2024 to a more meaningful level. Third, in the next three months, we'll launch Spruce Pro, a new brand focused on selling services to the commercial and industrial segments. Next, I'll cover Spruce's capital and financing strategy in funding growth. Residential solar assets naturally support what can seem like high levels of project-level debt due to contracted cash flows coming from our customer base with a weighted average FICO score greater than 750. But it's really apples to oranges to compare it to installers. Fundamentally, installers are not our peers, and it doesn't work to use the same financial analysis. We lock in debt that is non-recourse. We don't use any convertible debt. And above all, we protect our cash position, which again, stood at a net $9.14 per share at the end of the quarter. We have historically used senior loans to pay for between 75% and 85% of the acquisition costs of our residential solar portfolios. Previously, we've used even higher advance rates through a mezzanine debt facility, but we haven't expanded that since becoming a public company. The debt markets for seasoned assets are still very robust. In fact, in the new deals we're looking at now, lenders have been offering us more money than we want to take because our portfolios have such strong performance history. I'm not saying we're going to raise our debt levels just because we can, yet we do like having untapped debt capacity as a backup liquidity source. Now, tying our liquidity profile to our growth. Spruce is fully funded to achieve our near-term goal of reaching a customer contract portfolio of $90,000 by the end of 2024. In fact, that's already baking in, reducing our growth rate from 49% over the past year to about 20% annual growth going forward. With a disciplined approach to acquisition, we aren't afraid to wait and preserve cash. Calling it T-Bill and Chill. we can make acquisitions still that exceed our 18% investment return hurdle. Finally, before handing over to Sarah to walk through financials, I want to preview the significant headway in moving past several transitional tasks associated with our merger with XL Fleet last year. First, in September, we reached an $11 million settlement with the SEC, and we hope to reach settlement soon in the previously disclosed shareholder lawsuits in New York and Delaware. We're glad to turn the page on those and get clarity on their financial impact. Second, we executed the one-for-eight reverse stock split in early October to get out of penny stock status and address the NYSE continued listening standard. Third, we finished most of the efficiency steps following a merger. There are just two people from Excel Fleet left at Spruce, and nearly all the duplicate systems are shut down. Plainly said, M&A is our core competency, and we're running a textbook post-merger integration, fast and focused on harvesting savings. As a final remark, since our entrance into public markets last fall, we've grown our base of solar assets and contracts, leading to meaningful growth in cash flows. Going forward, we have no equity capital needs through at least 2025, while still meeting our growth targets. still increasing EBITDA, and still increasing free cash flow. Yet the obvious point that I'll keep repeating, we're trading far below that net cash position of $9.14 per share, even as our operations and acquisition returns are hitting all-time levels. With that, I'll hand the call over to Sarah to walk through financials.