Sunnova Energy International Inc. (NOVA) on Q1 2022 Results - Earnings Call Transcript

Operator: Good morning and welcome to Sunnova's First Quarter and Full Year 2022 Earnings Conference Call. Today’s call is being recorded. And we have allocated an hour for prepared remarks and questions and answers At this time, I would now like to turn the conference over to Rodney McMahan, Vice President of Investor Relations at Sunnova. Thank you. Please go ahead, sir. Rodney McMahan: 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, Sunnova'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. John Berger: Despite persistent macro-economic headwinds, we made excellent progress against our financial goals for the year by posting strong first quarter results, a summary of which can be found on Slide 3. On our previous earnings call, we noted that we expected to capture approximately 12% of our full-year 2022 Adjusted EBITDA, combined with the principal and interest we collect from solar loans in the first quarter. I am happy to report we exceeded that target, as actual financial results were ahead of that goal. While our expenses have increased intotal, they have been in line with our expectations, and are necessary at this stage in our evolution to take full advantage of the incredible array of profitable growth opportunities that we increasingly find in front of us. Many of these growth opportunities are not baked into the Triple-Double Triple plan. Slide 4 summarizes the growth in Sunnova's customers, battery penetration, and dealer network. In the first quarter of 2022, we added approximately 15,300 customers, an increase of 74% compared to the first quarter of last year. As in prior years, we expect our customer additions to escalate throughout the calendar year and we still expect to meet our full-year 2022 customer additions guidance of 85,000 to 89,000. In addition to the strong demand for our solar services, we are also experiencing accelerating demand for energy services beyond solar. This includes increased demand for energy services such as, batteries, electric vehicle charging, generators, and load managers, and includes sales to both new and existing customers. We are also seeing a surprising surge in demand from our customers to "up-power" or increase their solar generation capacity with us. It is the rise in these types of ancillary services that is positioning Sunnova to realize the full option value of its customers. While this activity will not increase our unique customer count, it will increase our services per customer, and in turn our Net Contracted Customer Value or NCCV on a per customer basis, moving us closer to our target of $18,000 to $20,000 in NCCV per customer by the end of 2025. As of March 31, 2022, our NCCV per customer was nearly $10,800. To properly account for this change in customer appetite, and to ensure we have an accurate and honest customer count, we recently deployed new software to analyze our customer data. This analysis resulted in a reduction in our total customer count of fewer than 3,000 customers from what we reported as of December 31, 2021. This adjustment was driven by a tightening of our customer definition to ensure only homeowners with whom we have an ongoing economic relationship are counted as customers and are counted only once, regardless of the number of services we provide to them. This reduction was not specific to any one period but rather was blended across the decade Sunnova has been in business, and most importantly did not result in any loss in NCCV or require any modifications to previously issued guidance for 2022 or 2023. Additionally, installing these new stringent customer definitions will allow us to more accurately track, on a per customer basis, the value being created through "up-powerings" that typically coincide with the addition of one or more new energy services. It was these previously "up-powered" customers that drove this customer count adjustment. Management is focused on increasing cash flow per share by driving up value on a per customer basis as well as growing its overall customer base. We understand that there is unfortunately little consistency in non-GAAP metrics in the residential solar industry. Since Sunnova has gone public, we continue to try to increase transparency and disclosure across the industry. As a result, we know that our definition of a customer is more conservative than that of some of our peers, but our customer definition gives management and stockholders an accurate way of determining value creation. We strongly encourage investors to make sure all residential energy service providers use the same or a similar customer definition. Our battery attachment rate on origination for the first quarter of 2022 was 19%. This drop in our battery attachment rate was unexpected but was a timing issue as over the last 30 days our battery attachment rate on origination has been 29%. The first quarter timing issue was driven by a surge in sales from Sunnova New Homes and the northeast region and a delay in our under-writing processing caused by the huge sales volumes in March. Much more importantly, as our battery supply improved as planned, our battery penetration rate continued to grow and reached 12.5% as of March 31, 2022, this is inclusive of over 1,900 battery retrofits we have installed life to date. Our growth continues to be driven by our rapidly expanding dealer network which as of March 31, 2022 stood at 915 dealers, sub-dealers, and new homes installers. We expect to eclipse our year-end 2022 target of 1,000 dealers in the coming months. Finally, on Slide 4 we have updated our information on customer contract life and expected cash inflows. As of March 31, 2022, the weighted average contract life remaining on our customer contracts equaled 22.3 years and expected cash inflows over the next twelve months has increased to $403 million. Earlier in the month, we published our second annual ESG report, detailing the steps we have taken over the last twelve months to enhance our ESG strategy and reporting. Our new report, titled "Charging Ahead", describes the impact of the growth we have seen this year and how we are integrating ESG best practices into our core business to drive positive outcomes for our business and society. Building off our first report last year, our next step was to establish a more formal forward-looking strategy. To start this process, we conducted a materiality assessment to identify the ESG topics that were most important to our business and to our stakeholders. We engaged our employees, investors, community partners, vendors, and other groups to assess ESG-related topics. From this assessment, we identified nine priority ESG topics for our business, as well as others that we consider material. The results of this assessment can be found in our new report. With our priority topics defined, we engaged leaders from across our organization to ensure strong oversight of these topics and to develop multi-year goals to drive progress. These goals also complement our Triple-Double Triple growth strategy whereby our planned growth in our customer base will allow us to offset 52 million metric tons of CO2 by year-end 2023. Finally, we also made progress in enhancing our ESG data and aligning it with leading reporting frameworks. In 2021, we aligned our reporting with the Task Force on Climate-Related Financial Disclosures, or TCFD, reporting guidelines. This was an important step in demonstrating our commitment to climate action as a leading energy company. To continue our alignment with TCFD recommendations, our goal is to complete a Scope 3 inventory for all material categories and to set formal climate targets by year-end 2023. We will also be working to conduct climate scenario analysis to better assess climate risks and opportunities for our business. We look forward to sharing these results in future reports. Our team is pleased with the progress we have made to date and look forward to continuing to integrate ESG into everything we do. I encourage you to read our new report, which can be found on the ESG section of our investor relations website, and we welcome any questions or engagement on our current strategy. I will now hand the call over to Rob. Robert Lane: Thank you, John. Slide 8 summarizes our recent financing activity and liquidity position. The 2022 financing transactions completed to date include $150 million in tax equity funds as well as a well-timed $298 million securitization closed in late February with a blended coupon of 3.1%. Our total liquidity as of March 31, 2022 was $703 million, down from $831 million as of December 31, 2021, but up from $276 million as of March 31, 2021. This planned utilization of liquidity was driven primarily by the seasonality of cash flows and the expected increased requirement for working capital due to growth. 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 March 31, 2022, this available collateralized liquidity equaled $378 million. Beyond that, subject to available collateral, we had $423 million of additional capacity in our warehouses and open tax equity funds. That represents over $1.1 billion of liquidity available exclusive of any additional tax equity funds, securitization closures, or warehouse expansions later this year. On Slide 9, you will see our fully burden another return on new origination was 9.2% as of March 31, 2022, based on a trailing 12 months. While our returns increased from last quarter so too did our cost of debt, resulting in an anticipated reduction in our implied spread to 6.0%. As we have discussed before, we model a long-term average for our implied spread in the 500 basis point range to estimate our guidance targets. As we've mentioned on our last earning call, we and our dealers have been and will continue to increase pricing to offset the increased cost of capital. Taken together, these price increases, the youth of our industry are increasing operating leverage and our continued growth in additional energy services will keep margins wider in the near-term and position the company to push our implied spread back towards a 600 basis point range this year. As to the progress of these price increases, you can see our first quarter fully burden unlevered returns increased from the prior quarter and we expect further improvement in Q2. Slide 10 contains both our gross contracted customer value or GCCV and NCCV. In just three years time, NCCV went from $968 million as of March 31, 2019 to $2.2 billion or $19.67 per share as of March 31, 2022. As we discussed in the Q&A last quarter, regardless of what the proper discount rate maybe, NCCV is still a punitive way to view Sunnova's blow down value and gives us zero value for our platform, customer option value or growth. Remember NCCV only includes locked in contractual cash flows and thus excludes any value for growth renewals, upsells, uptimes, state or national incentive appreciation or other upside. Another way to view NCCV, and why we continue to believe a 4% discount rate is justified is to look at the undiscounted cash flows. That is against the nominal cash inflows generated by the contracted energy services we provide against all debt principle, interest expense, tax equity distributions, estimated service costs and even an estimate for defaults based on current actuals. This full residual cash flow view pencils out to approximately $2.8 billion as of March 31, 2022, which is approximately a 25% premium over our $2.2 billion NCCV estimate. While investors are understandably concerned about rising interest rates, we encourage you to keep three things in mind. First, the interest expense of our existing debt is locked in and we do not have any scheduled maturities on our corporate debt until 2026. Second, we have managed and will continue to manage our fully burdened unlevered returns with a view towards offsetting increased interest rates. Third, our ability to increase unlevered and levered returns is high, driven by the increase in utility rates, which is our primary competition, but no matter what discount rate one uses in their valuation, the fact will remain Sunnova has retained more value, originates assets more profitably, and is accelerating the acquisition of long-term cash flows more quickly than any other company in the industry. As such, we can profitably invest to further increase growth, overturn capital to shareholders. We maximize shareholder value through balancing customer growth with healthy margins, increasing services sold per customer, maximizing the amount of power sold to customers and minimizing losses of contractual cash flows from customer defaults. Sunnova is a technology enabled service business or a wireless power company focuses on providing customers a better energy service at a better price, giving them every reason to pay us for that essential service. Currently over 10% of our customer base is paying less than half than they would to their monopoly utility for the energy they use to power their homes by being a Sunnova customer due to significant increases in their utility rates. We expect that percentage could reach as high as 50% of our customer base as early as next year, as utilities continue to ask for massive rate increases. This together with our industry-leading customer service, as resulted in default and delinquency rates that are the lowest among our peers in an industry that is already the lowest of any major consumer asset class. Beginning on Slide 12 through Slide 14, you will find our guidance that includes our detailed 2022 guidance, liquidity forecast and our major metric growth plan, the Triple-Double Triple plan. There are no changes to these estimates as we are keeping our targets unchanged from where they were on our last earnings call. As of March 31, 2022, approximately 90% and 70% of the midpoints of our 2022 and 2023 targeted revenue and principle and interest we expect to collect on solar loans was locked into existing customers as of that same day, respectively. This visibility is what gives us comfort in reaffirming our guidance today. I'll now turn the call back over to John. John Berger: Thanks, Rob. Changing consumer energy demands, global security issues and climate change are creating an urgency to transform the global energy industry. To aid in this critical evolution, we are embracing an equitable, practical and balanced energy future by providing homeowners the affordable, reliable, and sustainable energy they need. To insure Sunnova is the energy service provider homeowners choose to power their energy independence. We will continue to distinguish ourselves by focusing on what differentiates us from the competition, a combination of service, software and aggregation. At Sunnova, we strive to provide our customers with a superior energy service. One that is more reliable and more affordable than the competition, including the centralized utilities. Enabling our ability to provide this best-in-class service is our substantial investment in software for dealers, customers, and for aggregation. Some of these software investments automate functions and displace the need for additional hires, increase the productivity of employees and dealers to serve our rapidly expanding customer base. Providing the level of service required for this industry is a significant technological, logistical and operational undertaking and one that can only be managed by utilizing a next-generation software platform. Our software platform together with our logistics capabilities, supply chain management, billing and collections team and efficient customer operations, all performed in-house by Sunnova employees, provides us with tremendous operating leverage and a huge advantage over our peers. It is this combination of software and service that enables aggregation. As we obtain an increasing amount of scale, we can better utilize this combination to enable certain aggregation capabilities which creates additional value for both our customers and Sunnova. Currently, we have multiple grid service programs in place with an estimated contracted revenue of $79 million over the next 20 years, with even more programs in the pipeline to expand that amount. Bringing these competitive modes together, fulfills our expansive customer-centric vision for the future. With the Sunnova Adaptive Home, we can provide an energy service offering that integrates solar power, battery storage, secondary generation, roofing, electric vehicle charging, energy and control management technologies, emission credit management, and more to give customers unparalleled energy capabilities and reliability for their homes. We see the Sunnova Adaptive Home as the core vision that fulfills the concept of no net metering needed and drives our growth in both absolute terms and on a per customer basis. After almost a decade of building out our service capabilities, we are well positioned to take advantage of the opportunities ahead of us as we help build the home of the future for our customers through continued execution and by making the Sunnova Adaptive Home a reality. With that, operator, please open the line for questions. Operator: Thank you. Our first question comes from Philip Shen from ROTH Capital. Philip, your line is open. Please ask your question. Philip Shen: Everyone, thanks for taking my questions. In terms of the anti-circumvention case was wondering if you might be able to talk us through the impacts that you guys might be seeing on the business. Our work suggests resi module pricing has increased 10% to 25% versus pre anti-circumvention levels. So just in a couple months or a month pricing's gone up a lot. What kind of impact are you guys seeing, what kind of module availability do you think you have for Q2, Q3 and Q4? It sounds like a number of players have exited or showing or holding off in terms of shipping in. And that includes, I think a large Korean company so just curious if you can share the impacts there. Thanks. John Berger: Phil, thanks. This is John. I'm not going to go through all of the – what was going through in the prior calls with the next earning phase call. I think both CEOs did a good job of explaining what our view is of the case. I would add to that there’s been some investigative reporting that’s been out in the media over the last week or so. I think it points to the fact that this is, let’s call it is something that’s somewhat fraudulent in terms of the case itself. And so I do think it’s going to get resolved in a way that makes sense for the country as well as the other CEOs did. So let’s get to us we had a view going into the year, first of all, that there would be some a war in Europe, there would be increased oil and gas prices globally and hydrocarbon coal in as well. And so we were very bullish on demand that turns out to be accurate. And we started stockpiling equipment along with our dealers. We now have over $1.1 billion in firm contracts that you don’t see in the balance sheet, we’re using our balance sheet and our cash flows with our partners, equipment partners to secure batteries, inverters, panels in large quantities. And we encouraged our dealer to do that months ago. And so they did so, so we feel very, very comfortable moving into 2023 on the equipment side of things. And we’ll continue to be aggressive in terms of securing that equipment. I would add that this is an insurance policy for our dealers. So these are equipments that we’ve secured to make sure that if anything falls apart on their contracts and their – what they have in inventory, we have some equipment inventory as well, as you can see in our balance sheet that we’d be there for them. And I don’t think anybody else in the industry does that. So first and foremost, we’re in great shape on the equipment side and feel very comfortable. I’ll add on the battery side of things. We ended exactly where we thought we were at a good pace right out with battery deliveries, some weeks are better than others, but we’re in a pretty good shape on the battery front just like we thought we would be. And so we look to be in great shape across on the equipment side now. As I think Badri mentioned, the Enphase CEO, some things can change, certainly we’re watching for that, but right now we feel very, very comfortable, particularly over the next few months. And certainly as I said, securing all the equipment looking into 2023, we feel like we’re in great shape. On the pricing side of things, we haven’t seen a big price increase. I’ve checked that. We have not seen at maybe do I anticipate some of the pricing as we move forward in the year, could it move up just based on demand? And we’ll talk about this with the utilities massively increasing retail rates across the country, demand in our sector is going to go and has gone way up. Yes, I think that absolutely could happen, but again, we haven’t seen that kind of percentage 10%, 25% yet but it’s possible to see it, but I also think I’m completely confident that we’ll be able to raise rates as an industry to because the utilities are raising rates so much to more than offset that. So I feel very comfortable with where we are as an industry, and I feel extremely comfortable where we are as a company. Philip Shen: Great. Thanks, John. That leads me to my next question around raising pricing for customers and the space you have there. You talked about that on the last call. Can you talk us through what you’ve done thus far? How much have you increased pricing to customers? What’s been the average increase? What percentage of markets that you serve? Have you increased pricing and how much more room do you think you can and based on your prepared remarks, seems like maybe half of your customer base could be paying half of the income and utility rate come 2023? So it seems like there’s a fair amount of space to not only raise pricing, but with that despite rising costs maintain a very healthy spread. John Berger: Yes, Phil. So I’ll address that last part first, in terms of the customer base and what portion is paying less than half of what they would pay the utility that is – that would go more towards our locked in customer base, right? So those customers that have signed up, it could have been a few months ago. It could have been a few years ago but we’ve locked that debt in as we’ve been very clear about. And so that’s a locked in spread if you will, that keeps increasing. Why does it keep increasing? Because customers are more and more inclined economically to pay us, right? So the fault delinquency rate was already so very low for our industry. It keeps going lower. For at least we can speak to ourselves. We think a couple of our peers on the service providing side are seeing some of that same phenomenon, but we’re really seeing a drop in the default rate. And that’s real cash. When you don’t lose entire contracts of value, not just cost of the contract that we paid, but value that’s cash to the equity, right? So we’re making a point there that says, hey, look, we’re – our customers are getting a better, better deal, which means that our shareholders will get paid and therefore get a better, better deal. On pricing on a forward basis, okay, so forward basis where I think your main question was, we have increased price across the Board. We have some other opportunities to increase price. We’ll continue to do that. As we move forward here in the next few weeks and months and I’ll give you a little bit of numbers here. We are aiming as the opening of Rob said in the opening remarks to that 600 basis points spread. We can obviously look at some of the previous ABS the recent one including Sunrun’s recently, and then good leads. And we can see that we got a little bit of increase in the number return to do. I can tell you that’s well on its way that 9.2% that we reported out was a snap as a March 31. We made a comment that Q2 is going to continue to increase it already has. And so you can see a trajectory there of increasing the unlevered return. So how much room do we have? If you look at it, there was about at forever 100 bps of unlevered return is equivalent to about $1.75 give or take per kilowatt hour. Now this varies on region. It varies about what the kilowatt rate from the utility is. And that particular region, whether it’s really high like $0.28, or it could be a rather low one, like $0.12 moving up, but that’s a rough roll of thumb. And we have seen across just so far, and there’s going to be a lot more, we know it’s baked in to in terms of the utilities asking their respective POCs or rate increases, but we’ve seen an estimated across our base about $3.5 to $0.04 kilowatt hour increase already. So you look at that we have more than enough room to increase to 200 basis points if we needed to do that. I would say obviously the starting point was the Q4 number, kind of call it the high eights unlevered returns. And so we have more than ample room to continue to increase to get that spread back where we need it. So the cost of capital continues to increase, which it does look like the spreads kind of P tier a little bit with that good lead deal. I think the next transaction did a little bit inside that and was better. We expect the market to heal as the Solar ABS market and the commercial banking market really threw a lot of the solar paper out the – with the in terms of the baby with the bath water with the other consumer asset classes, mortgages, autos, unsecured, et cetera. And so as the performance of the paper, the data comes to investors. They’re realizing that this is very high quality paper, even as the country moves into a recessionary stands. People are paying us, and I’m going to go back to the point where as utility rates go up, you got to pay the power bill right at the house. And so this is a much better deal, and it’s actually economically accretive to folks. So as times get tougher, they have a willingness to pay us in that spread in the ABS market will come down accordingly. So we feel very comfortable. There’s ample room to raise, continue to raise rates we’ve been doing so. I think we’re probably leading the industry on doing that. But we’re very focused on maintaining our profitability. Philip Shen: Great. Appreciate the color. Thanks, John. John Berger: Thank you. Operator: Our next question comes from Brian Lee from Goldman Sachs. Brian, your line is open. You may ask your question. Brian Lee: Hey guys, good morning. Thanks for taking the questions. John, just maybe staying on the pricing topic for just a second. Could you sort of remind us what the pricing strategy is, I guess in terms of timing, is it dynamic where you’re basically going into each market on a real time basis and letting your sort of dealers work within a ever evolving slash increasing pricing paradigm? Or is it more systematic where you’re going in every few months and just raising the bar just kind of level set us as to how dynamic the pricing strategy and how it works is? And then how quickly does it flow through if you’re raising prices by penny, penny and a half across the Board in April. Does that show up within a quarter or kind of how quickly does it flow through? John Berger: Yes. We have so many different contract types that we’re always launching out in new regions and in new services. And indeed, one of the main points for this call is just how many new services we’ve launched out, how many new services we’re launching out in the next few weeks and months, it’s quite substantial. So the answer to your question, Brian is going to be that we’re constantly looking at pricing every single day. We have a entire pricing team just to make sure that, that what we’re offering out there makes sense for the customer, makes sense for our dealer, makes sense for us. So it – where I think you really wanted to go is like, okay, so these types of main increases in price in response to utility rates moving up and then response to cost of capital moving up, what does that effort look like and across the Board, and that is a big lift and we don’t do it lightly. And we don’t do it very often, but I think that we can all agree that the cost of capital’s moved up pretty significantly over the last three or four months. That’s a fact. And we’re responding to that fact. And we said, we could, and you look at the utility rates and they’ve gone way up as I just gave them my answer to Phil’s question. And by the way, your $0.01, $0.015, I would double that. And we spend time first going into if not more, we spend time going into our dealers and saying, look, the consumer can pay more and still have a great deal. So we need to push this up. It’s nobody’s fault. The fed is pushing up rates as we all know in response to pretty significant inflation. And so it is what it is, this money is not necessarily going to Sunnova, it’s offsetting increase cost to capital plus other increased costs of equipment, et cetera. And they – we work together. It’s obviously nothing that we all want to really do, but at the end of the day, we work together. And it’s the same as the equipment manufacturing companies that are out having to raise price for freight costs and costs of different materials going up and different product and assembly of labor and so forth. So it’s the same dynamic, but we do – and across the board and we do it by dealer and we work together with that dealer saying, hey, there’s an ability to raise price on the consumer. And we need to do so, because the cost have gone up across for us and for the dealer and for the equipment manufacturer. Brian Lee: Yes, fair enough. Makes a lot of sense. And then early in the call, I think Rob mentioned the 3% plus blended rate you saw on the ABS, the securitization that you did in February. I think as you guys had mentioned a couple times already, Sunrun did one recently, I think the yield was close to five and spread was over 200 bps versus kind of the lower 100 bps we’ve seen over the past six to nine months. So I guess, a couple questions in here, is that attractive to you as you think about, what you just did in February and then moving into your next securitization over the course of the year, just kind of where the latest ones have been pricing. Or are you looking at other forms of paper where you think you might be able to get better terms? Just kind of maybe a bigger picture view on how you’re thinking about financing and then maybe the timing of what you’re planning next. Thanks guys. John Berger: I’ll answer briefly and turn over to Rob to answer in more detail. So we have locked in our debt on our existing customers. We’ve been very clear about that. So it’s really on a forward basis. I will remind everybody that we do have hedges on our warehouses. And so we – obviously, those hedges have appreciated significantly. So we’re hedge on any interest rate increase before we do the term securitization or do a commercial bank deal or whatever. I would say that we’re constantly scouring the market and making sure that there’s nobody willing to lend money out to firms like us for less amount. And Rob does a very good job in that. So we’re very, very confident that we have a full view of whatever’s going on the marketplace. We also want to make sure we lock in a terms. So we’re not really interested in locking in very short term debt. We want to go ahead and lock that in. Because we’re not here to trade the bond market or try to figure out where interest rates are going to go over the next few months and years. I mean, I don’t think anybody can really figure out where they’re going to go today. So when you look at that, we’ve done. I think a very good job of hedging any sort of near-term weeks, months risk on the interest rate side of things. And so doing a deal as long as you can continue to push those unlevered returns to the question I answered before, you should be fine and it’s a spread at the end of the day is the way to think about it. Rob, I’ll turn it over to you for any additional comments. Robert Lane: Yes, I’d say that, it’s a good point to that John makes about looking out at the market. And I think that you are implying there as well, that there are all sorts of other options. I think that what we have found is that the ABS market still remains very attractive. I think that the bank term market does have its attractions as well. But at this point, we think that the ABS pricing is still better than what we would find in that market. There’s opportunities on the loan side as well. And we’ve talked about this that there’s going to be some math with some loans where it does make more sense to monetize those loans up front instead of to put those into the ABS market. So we really are looking at all options. I will say about that last Sunrun deal. That was, I think the biggest TPO ABS that had really come out into the market. That was a – it was a really big deal, but also it’s not really apples to apples with the loan transactions. The lease and PPA transactions tend to price at a slightly wider spread and also have longer duration. So it’s not necessarily apples to apples. We expected the price outside of say a loan deal with five-year duration. But still, I thought that was a good deal that they had done out there in the market. The other thing I’d say and this is really critical is that if you take a look at what we sort of go out there in the market, and I think this happens a lot more on the loan side with us versus our competition is that we really – we are really trading on our low default delinquency rates and they’re trading a lot more on their higher refinancing rates. So their ability to have in-house refinancing arms that go and take the solo loan and refinance it faster than ours. I think that’s something that helps them, but won’t necessarily help them in the rising interest rate environment. For our side, our default and delinquency rates keep going down. And we’ve talked about this, I think in the prepared remarks here in John’s comments as well, it really makes a difference. And if you take a look and say, what is the one thing that will take value away from an asset base, it’s default rates, the cumulative default rates. By us being able to crush that not only does that equate to the debt holders, but obviously it creates long-term to the equity holders as well. So that is sort of the hidden interest rate savings. It really isn’t made apparent right off the bat. And then finally, just going back to the point that John made, we locked in these interest rates, we locked in that high yield bond last year. Really the point that we’re making was that, hey, thank goodness we did the deal when we did the deal, but the market still remains very attractive today. Brian Lee: All right. Thanks guys. Operator: Our next question comes from Julien Dumoulin-Smith from Bank of America. Julien, your line is open. Julien Dumoulin-Smith: Hey, good morning team. Thanks for the time and the opportunity. Hey, so just going back to Phil’s earlier question and some of the responses there. Can you talk a little bit about the balancing the impact of this increase in price point ultimately against the increases in the panels, inverters as you alluded to at one point, as well as ABS. I think you specifically alluded to 2Q and seeing that sequential quarter-to-quarter improvement in returns. How do you think about that through the balances of the year, like, are we going to continue to be able to see that trend? As you think about your ability to continue feathering in that weighted average inventory price into your price points, as you think about it through the course of this year, again, how much latitude is their price effectively? John Berger: Yes. Julien, this is John. Yes, you will continue to see that the return move up as we move forward through the year. Obviously, like to have that sooner rather than later, and again, we’ve already made a lot of price moves. So I think that that would be a good assumption to make, as far as looking at Q2 versus Q1. But we’re going to continue to look for other opportunities. For instance, the natural gas price move from say roughly is not baked into any utility rate that I’m aware of at this point in time, but it will be right. Rough rule of thumb, as you know probably better than most is take a natural gas move a dollar per MMBtu multiply it times like a 7,000 heat rate, right. So you’re looking at a pretty good number of $0.02, $0.03, $0.04, depending on the utility move on top of that, just for the gas move, if not more than that. That we’ve had, that’s not baked into these rates. So we’ve already seen as I laid out, roughly call it a $0.04 rate increase across our base. Every 100 bps, like I said is, roughly about $0.0175 per kilowatt hour. And so we’ve been able to move up accordingly and we continue to see a lot more room to move up accordingly. And that’s on top of digesting some of the increases in equipment costs, which ultimately when you look at the relative cost increase have not been that high, right. When you look at the overall EPC and the resi side. In the utility scale, that’s not our business. I can’t speak to that. That’s obviously a bigger, much, much bigger impact as you know, but on the resi side of things, there’s more than ample room to increase price as utilities increase prices fairly dramatically and we have done so, and we will continue to do so. Julien Dumoulin-Smith: Got it. And you just to clarify around that. Just how are you thinking about your inventory position seems like that’s declining sequentially here. How do you think about rebuilding, what’s the right level considering the backdrop. And then also on the battery side, what’s your position today on that front and kind of a similar conversation around raising prices versus the cost impact. And obviously you have some attached rate implications here as well. John Berger: Yes, we’ve done a very good job of looking ahead. I can’t tell you that, I really, I think it’s most unfortunate that the commerce department is doing what it’s doing and taking up the anti-circumvention. I think it’s a total disaster for the country. And doesn’t mean any objections whatsoever for any part of the country, including labor. So again, I’m not going to go down this road. I think that’s been well treaded in the last couple of earnings calls from our peers. But what I would say is, is that we looked ahead, because we thought a lot of demand was coming. We were right. And I thought that was because the utility rates would move up strongly globally that they indeed happen. We know that the war is a big part of that, particularly over the last call it 60 days or so. And so we got some – we locked in some pretty nice deals on the pricing and the volume side of things. And so we haven’t really seen, and we’re not going to see too much inflation on the equipment side as we move forward in time. But as we maybe get into the 2023, we have more than enough ample room to be able to move that up and work with our users to do that if they need to do so. So I just want to go back on the inventory line. We have, as I mentioned in answering Phil’s question over $1.1 billion of firm contracts for equipment, for batteries, for inverters, for panels and that is not going to show up on our balance sheet. We’re not going to say who they are because there’s confidentiality. But there’s a lot that we are able to do out there in the marketplace to secure equipment for our dealers. And it is for our dealers and it is insurance policy for our dealers. So to make sure that we’re doing everything we can to address the risk as we see coming up. And I think we’ve done a pretty good job of looking around the curve and seeing some things that maybe some other didn’t see and making a big move to address that risk accordingly. Julien Dumoulin-Smith: All right, fair enough. I’ll leave it there. Operator: Our next question comes from Joseph Osha from Guggenheim Partners. Joseph, your line is open. Joseph Osha: Thanks. Good morning, everyone. John, I just wanted to return to this issue of cost of capital, again, in a slightly different way. You have said in the past that all of the things being equal, you would rather retain value as opposed to monetize it. Because I think that’s a little expensive and obviously it’s gotten a little bit more expensive. You’ve also famously said, don’t name your cows, if something’s not working, try something else. So I’m wondering in the context of what the market seems to be thinking at the moment, especially with regard to the equity price? Could we see you shift your strategy in terms of how you pull in and monetize contracts versus retain them? John Berger: Yes, Joe, this is John and I’ll let Rob answer the question. But yes, I’ll answer directly given that you quoted me too. That still stands. We do what’s right for shareholders. Look, the retaining of assets and cash flows really goes and it’s been a huge win across the board, whatever it is when we retained all the emission credits, we retained all of our lease PPA. We built a balance sheet and we’re able to issue the industries in really first and only bond last year. And that was – that’s a big win. And that was a well time deal as Rob mentioned earlier. And that really enabled all that. Now we have a huge contracted cash flow base, and regardless of what discount rate, we’re not going to get into like whatever discount rate you want to use, your colleagues and anybody else use it. We give enough information out there you can be able to figure it out. Basically, every 100 basis point move you can take or add $250 million of NCCV value to it, or $2.20 a share. So that will help you move the discount rate, but we use whatever we want. Our point is that these are contracted cash flows. This cash is coming in. And the way I look at it is we either as this cash grows in a rapid rate we either take portion of the cash and we invest it, basically spend it and invest it and growing the business so that we get more – much more long-term contracted cash flows and generate more earnings. Or we give it back to shareholders. If it’s not returning the investment, like it should and we’re not being accretive on a per customer basis NCCV or on a per share basis or an earnings, but cash flow per share is the only thing that matters as you know. And then we’ll give the money back to shareholders in some fashion. With that said, there are times and places where it makes sense to sell some assets. And you’re right. I’ve always said, don’t name your cows. And I still firmly believe that. And I think you’re going to see a transaction out of us sometime this year. We’ll pick our time in choosing and we’ll probably sell some assets. They will probably be loans, but we’re open to anything that makes sense for shareholders and always have been. And certainly now that we have our balance sheet, we really have a lot of optionality. And we’re going to take advantage of that optionality. Rob, have you got any more comments? Robert Lane: No. I mean, I think there’s a lot of math that goes into it. But at the end of the day, it’s what John says, what is it that’s going to make sure that we are – that we build up asset value and cash being a part of that asset value. And then what are we going to be doing that’s going to flow the most cash back to investors is not just about short-term cash. It’s about cash for the long-term, but sometimes you make short-term – short-term cash is long-term cash. So we’re going to make sure to do what’s in the best interest of the shareholders. Joseph Osha: Excellent. Thanks. And then just one other question. One of the interesting things about that run APS is that the FICO was down a bit obviously, we’re all going to run out of rich people eventually. I’m wondering what you’re seeing in terms of the FICO profile for your assets and what you’ve got any philosophy there in terms of where you’re willing to go or not go. Thanks. John Berger: Yes. It was down a bit, but I don’t think it was down that much. And I want to remind everybody that a high – I don’t think that really makes a huge difference on payment performance from what we’ve seen. But I would say this that as a reminder there are plenty of rich folks that can’t seem to pay their bills and don’t have a good FICO score. I know some. And there are plenty of people that don’t make a lot of money that find a way to pay their bills every day. So the FICO is your ability to pay a bill. And so I just want to remind folks that, for instance, we estimate about 40% of our customer base as LMI customers. So these are people that increasingly obviously give them what’s going on in the energy – global energy crisis, right, Joe that we have that more and more people that really need to save money, i.e., they don’t make a lot of money are turning towards this offering. And I think that’s one of reasons. I know it is one of the key reasons that governor DeSantis yesterday vetoed a rate increase and a potential elimination of competition to the monopoly, so to give the people of Florida the ability to cut their bills in a time where they’re rapidly escalating. So I don’t think that that securitization means that we’re running out of high FICO customers or anything of that nature. There’s plenty out there. In fact, if anything again, going back into these natural gas, coal, oil, massive price increases and translating those into utility rate increases, we’re seeing demand spread across geographies, like crazy, and that’s bullish as far as pulling in more and more customers that have the ability and demonstrated that they can pay their bills on time. So I think overall the industry I can speak to it is extremely healthy from that regard. Rob? Robert Lane: I would also add though that we do tend to look at ways that we can help underserved communities. So it’s – we do not do a whole lot of press releases and stuff like that on these sort of things. But there are a lot of projects that we have that we’re doing. And we’ll start talking about those a little bit more that are targeting underserved communities and trying to bring solar to places where traditionally our industry has not made big headwinds. But at the same time, our FICOs have actually remained very consistent on a weighted average basis. And we – I would not look at a lowering of FICO as a negative sign. I would look at that as a way that we and others in the industry are finding a way to broaden the market. One of the things we use in our underwriting is FICO, but there are a whole lot of other things that we look at as well to try to determine whether or not a customer is going to be a good customer. And that really goes to that default and delinquency rate that I’m talking about. The best part – the easiest part to make sure you have a customer that is paying you is to make sure that that customer you originate will be a customer that will pay you. And that can’t just be done with FCO. There’s a lot of other analysis that goes in there and it can – it’s a lot, but we’ve got a great team and we’ve made the right investment here, and it’s one that’s really paying off for us. Joseph Osha: Thank you. John Berger: Thanks, Joe. Operator: Our next question comes from David Peters from Wolfe Research. David, please go ahead. Your line is open. David Peters: Good morning. Just on NEM 3.0, curious your guys’ expectation for the path forward and the proceeding when this might pop back up on the CPUC’s calendar. Assuming I think that would take the form of an alternate PD. Tell me if I’m wrong. And then just related to that comments on the governor’s detail of the net metering bill in Florida would be great? John Berger: Yes. This is John. I don’t know, and I don’t think anybody knows, but I assume the California public utility commission members know. But what I would say this is that I think as witnessed by what governor DeSantis did last night, the right thing to do is to look at how do you accommodate both the centralized or the monopoly needs for some additional revenues. And then how do you balance that for allowing competition for allowing consumer choice for consumers and what is an extremely challenging time for consumers with regards to energy. And I don’t think that that’s going to stop anytime soon and slow down. I think it gets worse as we move forward in time. I think that’s already baked into and goes to my prior comments. None of the natural gas price move we've seen recently for instance, is really baked into those utility rates yet, but it's coming. So, I think that if I'm running a state and I'm governor, I'm looking at this and I'm going to go do what's best for the people who are paying the bills. They're also called another name, especially come November, they're called voters. And I going against them versus trying to go, and please a constituency of a monopoly, a utility with its union. I'm sorry. I'm not going make that choice. I'm going choose the people. And I'm going choose the people that are working hard. They are trying to make ends meet, and I'm going make sure that they have the ability to have competition and choice and a better energy service at a better price. And so I think that, the California will make the right decision, the governor, so make the right decision. I hope he does. He's now got a really shiny example in Florida. And I think that, hopefully more and more folks on the Republican side we'll see that solar is actually something that's competitive. It's a market based, a government based business, and we'll get on board with it and stop some of the politics that we see sometimes on the news channels and so forth, and really move forward and do what's right for the people. So, I think that will happen, but, I'll tell you what, I'll answer the question you didn't ask, which is a little bit dangerous, always, but if California doesn't make the right decision, as it made a reference to earlier, given these utility price increases, natural gas, oil, coal, and so forth, we'll just pick up origination someplace else where it makes sense, but I actually think they're going come out with something that makes sense, and we'll still do business there and we'll sell a lot more battery service there as well as EV charging, generator and load management. So, I think it's going turn out well, but increasingly, they need to do what's right for their state and we'll be fine on our side. David Peters: Great. I appreciate that. One other question I had was just in the prepared remarks, you mentioned the purposefully hire OpEx to take advantage of growth opportunities. I was wondering if you could just give a sense of where you see that trending on a per customer basis over the coming year or so. And then specifically with respect to the growth opportunities, not included in NCCV or the triple double triple plan, just when do you think you see those start materializing? John Berger: Yes, I looked at that and I made that comment, because if I'm looking at this, I'm looking at the spending increase year-over-year, it does have SunStreet in there. So it's a bit, of you know, that's one of the big reasons we list that out in our disclosures. But I look at that as I try to put myself in the shoes of a shareholder, which obviously I am and say, okay, well, what's the spending increase? What's the trend here? And that's, that goes directly to your question. And I want to point out that on a per customer basis, we have been dropping. We continue to see that I drop, but I'm just looking at the aggregate or nominal amount of spending. And I wanted to point out that I can't say what a lot of these growth opportunities are right now. We haven't disclosed those, but there's – they're significant and they're not baked into triple, double, triple. And I think that once we get the hiring done the any sort of possible acquisition and so forth and any sort of implementation of software, implementation of our services that will make those different growth opportunities public, they'll probably be – they probably be service additional services. Again, it could be additional acquisitions. It could be additional markets that we open up. It could be additional verticals that we open up. It could be additional fulfilling Sunnova Energy International’s destiny, and moving in the international market. So there's a lot of things here that we have an availability to that we're investing in right now. And I just wanted to point that out that that's directionally where the spending is going and it will be spent intelligently and that spending will generate a return for shareholders, or I will cut it. David Peters: Great. Thank you. Operator: Our next question comes from Ben Kallo from Baird. Ben. your line is open. You may proceed. Ben Kallo: Hey, thank you. Hey, good morning, everyone. Thanks for taking my question, and thanks for all the information, John and Rob. Could you talk maybe just about customer visibility and where you stand versus where you thought you would enter into the year? John Berger: Yes. Ben, this John. Yes. The seasonality, I think we could have done maybe a little better job. I could have on saying seasonality in terms of the customer additions and so forth. Think we did a pretty good job on that on adjusted EBITDA plus P&I, and cash flows and such. But I wish we did exceed I want to point that out, but on the customer side of things there are always trials and tribulations in the field. As you go into Q1 from holiday hangover, more vacations and so forth, winter weather in certain areas of the country that are more difficult than others. And just different issues with Q1, it's obviously a seasonal low quarter of origination in service and even cash generation, right. So, I'd look back and I'd say in terms of the service, you notice the service line or the other line of customers really dropped from Q4 to Q1. I wouldn't make much of that other than the fact that we're retooling some of our service only offerings. You probably saw a release on Sunnova repair services, and we're going be doing some more selling through our dealers for the service, but more on our direct sales desk in terms of selling service only contracts out and facilitating the selling of those services through our service technicians, which again, they're doing a great job, and making customers happy and happy customers are paying customers. Right. So it's really more about that. So you should see that line move up here in the next quarter or two pretty considerably. I wish that line would've not dropped. And then that would be my expectations we would've gotten a few more customers there. The change in definition in eliminating the up powering customers, that probably dropped the customer account by about 600 or so in Q1. But again, I thought that was the right thing to do is that if we have some additional information that it's quite possibly the end customer signing up for us with two contracts, maybe one's the husband, one's the wife which is, was the case. And I personally saw one by the way in New Jersey just last week, then we shouldn't count that as two customers, there should be one customer. So some of that was in it was an impact as well, but went ahead and did, what I thought was the honest thing to do and right thing to do and say, that's one customer. Now, the cash flow is the same to the company, right? And the value is, and indeed the value per customer has gone up. As they look forward, we've had a huge amount of origination in Q1 was very pleased with it. I'm very pleased with what we've seen so far in April. April probably will end up being our biggest month in the company's history, as far as sales. So, we're seeing a huge amount of demand. And we talked about raising price quite a bit, right? So far in this call. And so that's with that. As I look forward, I say sometime in July, I'll have all the customers that need for this entire year, and then we'll start working on 2023. And so I like where our trajectory is on the growth rate. We're slightly ahead of where I would expect to be on the solar and solar storage customers through basically our dealer business. We're continuing to attract more dealers as you saw in the dealer account. And overall I think we're in really good shape as far as looking forward to the end of the – towards 2022 additions. And then even looking ahead into 2023, I feel pretty good about that. Come up, may out of the policy side of things, I think no matter what we'll be able to shift, and we've got such a head esteem of growth that we'll be fine in terms of 2023. Ben Kallo: And on adding new dealers, how is it getting more competitive or how do you see that? And maybe just, on how sophisticated they are to selling the customers and how you're helping them and how that's changed going forward? John Berger: Yes, we've seen continued entry of contractors from various different businesses, home security general contracting, electricians, roofing, a number of industries, HVAC. And we don't see that trend slowing down. This is a great business to be in. And so we're seeing a lot more of the dealers pop-up in increasing fashion that don't have the level of sophistication and a back office. And frankly, the back office is something that is something you can scale. And a lot of dealers, a lot of contractors don't get that right. And really, they shouldn't have to worry about that as much. So, we're trying to take on more and more of that, where they want it, if they don't want it want to, and they want to keep doing, processing, permitting, all that stuff design, then that's fine, but we're building a platform out and have built a platform out. We launched a new quote tool, I think, as you're aware of catalyst out there that is adaptive to whatever type of dealer you are, if you want to be origination only, that's fine. We've got things set up for you. If you want to be install only, that's fine. You got things set up for you. If you want to be a smaller dealer that does both origination installed, that's fine. We got it for you. If you want to be a large scale multi-state dealer and you want to do everything, of course, that's fine too. And we are even seeing some large dealers say, well, I'm going do origination install in these states, but I want do origination in these other states or installation in these other states, whatever it may be. So there's a mix and matches my point. And then we're also seeing a lot of dealer growth out of the generator dealers some partnerships there and EB charging dealers installers as well. So, we're seeing a lot of different folks come into the industry and they all have different needs. And of course, our objective and challenge, and I think we're really making huge strides. I know we are on this is to build a platform software services, et cetera, that really go to the need and cater to the needs of each individual dealer, whatever they may want their business model to be. Ben Kallo: I guess just to finish it off, and thank you. Are you bumping up against other companies, some SunPower, Sunrun whomever out there with your dealers and our dealers gain to the point where they’re switching between companies or how is that all working and thank you very much. John Berger: Yes. I think it goes to that. So I probably could have done a better job of answering question directly. So I’ll do it now, is that we’re building out these services, we’re building out these software capabilities to meet all the dealer requirements so that we could be more competitive, not just on price. And we’re seeing that competitive moat, if you will widen against the competition. I think if you’re trying to do financing only and say, just one type of financing contract, I think that’s a challenging, really, really challenging business. And so again, we’re a service provider, a financing’s an enabler, we’re not a financing company. And it’s something that increasingly consumers are understanding about the service. So we’re winning over a lot more dealers. Do we see competition? Absolutely, of course, we do. And I respect the competition. Some are better than others. But we absolutely do, but we’re seeing a lot more influx of new dealers that will just directly sign up with us before they sign up with anybody else. And we’re seeing more and more dealers come in and say, look, we can get everything from Sunnova, everything. And every – and Sunnova’s entirely focused on us versus trying to have their own direct origination installs and so forth. And we’re not going to buy contractors. We don’t believe in that. We’re not – when it’s not something we will help facilitate investments. If some life event went to happen to a contractor owner, a dealer owner, we’ll facilitate that we’re here for them. We’re their friend, but we’re not going to come out there and start buying competing against our dealers. That’s just not something we’re going to do. We’ve been very clear about that since inception, we’ve maintained that, and we’re not going to do that. So that means that we’re very comfortable that we’re the right partner. We don’t need to spend shareholder cash in stock and dilute shareholders to go out and buy dealers. We’re not going to do that. I don’t think that’s a good use of shareholder money. And it’s something that would be very – taken very poorly by our current friends and dealers. And so we’re not going to do it, and we don’t feel like we need to do it. We’ve demonstrated that. Ben Kallo: Thank you very much. John Berger: Thank you, Ben. Operator: Our next question comes from Kasope Harrison from Piper Sandler. Kasope, your line is open. Kasope Harrison: Hi, good morning. Thanks for taking my questions and all the details thus far. So my first one John, in your prepared remarks, I think you said origination, storage attachment rates on originations have risen to 29% over the last 30 days or so. Can you talk about whether you’re finally starting to see improving some supply from your equipment providers or is supplies still pretty tight? John Berger: Yes, Kasope. We saw improving supplies. As said in the previous earnings call in Q4 as expected, we saw – we had a, I think the most battery delivered to us in Q1. It’s the last quarter for this – obviously this earnings call and we continued to see that ramp up as you move forward in time. And that’s across all suppliers. And so I think you’ve heard some comments for instance, Badri right, has made some comments where he’s managing the supply chain quite well, kudos to him. And we see others being fairly nimble about that as well and increasing capacity. So we’re cautiously optimistic. We’ve obviously done taken a lot of aggressive action and contracting equipment, not just batteries, but modules in particular and then inverters as well to make sure that our dealers are taken care of. And again, it’s an insurance and a backstop, but we continue to see more availability on the battery front and in a growth in manufacturing production globally. So we’re cautiously optimistic and I would tell you, at this point, we have caught up to with our backlog. We’d like it to be a little bit more of a cushion, right. But I would be remiss to not have added that, but at this point in time, we still see where we’re caught up and we’re in good shape. And we – like I said we’ve taken action accordingly, but we’re cautiously optimistic that things are off to the races as far as battery supply. Kasope Harrison: That’s very helpful. And then appreciate all the commentary on rising cost of capital. I know we spent more time talking about ABS, but I was wondering if you could maybe speak to any changes you guys might be seeing and t
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Sunnova Energy’s Upcoming Q1 Earnings Preview

RBC Capital provided its outlook on Sunnova Energy International Inc. (NYSE:NOVA) ahead of Q1 earnings, which are scheduled to be reported tomorrow after the market close.

The analysts lowered their Q1 estimates on seasonality but largely maintained their full-year 2023 estimates. They now forecast Q1 adjusted EBITDA of $12 million ($24 million prior), principal income of $28 million ($34 million prior) and interest income of $17 million ($25 million prior).

According to the analysts, Q1 is seasonally slower given lower solar production and SRECs as well as higher installations. For the full year 2023, they now forecast adjusted EBITDA + P&I of $519 million and for 2024 they forecast adjusted EBITDA + P&I of $782 million.

The analysts reiterated their Outperform rating and $31 price target on the company’s shares.