Good evening, and welcome to Sunnova's Second Quarter 2019 Earnings Conference Call. Today's call is being recorded and we have allocated an hour for prepared remarks and question and answer. .

At this time, I would like to turn the call over to Robert Lane, Executive Vice President and Chief Financial Officer at Sunnova. Thank you. Please go ahead. .

Thank you, operator, and good evening, everyone. We released our earnings press release earlier today and posted a slide presentation to the Investor Relations portion of our website at investors.sunnova.com. We will reference the slides during this call.

Joining me on today's call are John Berger, Sunnova's Chairman and Chief Executive Officer; and Kris Hillstrand, Sunnova's Executive Vice President of Technology and Service Operations. .

Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, beliefs, estimates, plans and prospects.

Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our final prospectus dated July 26, 2019, and in our subsequent filings with the Securities and Exchange Commission.

We do not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release. .

I will now turn the call over to John. .

Good evening, and thank you for joining our first earnings call. Our public offering was a result of a lot of hard work over the last few years, and I'd like to thank everyone who helped make this happen. .

From a strategic standpoint, the initial public offering has provided us with a solid capital position and a great platform to drive growth in an extremely large and underpenetrated residential solar and storage market. I would like to start today's call by providing quick highlights about the second quarter.

For listeners new to this NOVA story, I will provide a brief overview of our business, our strategy and the market opportunity. I will follow that with additional thoughts on how our second quarter results reflect progress against our plan and ask Rob to walk you through our financial results and capital allocation strategy in more detail.

Finally, I will conclude with our forward guidance before opening the line for your questions. .

We delivered good second quarter results that were in line with our expectations for customer count growth, adjusted EBITDA, principal and interest from our customer loans and adjusted operating cash flow. We are growing faster than the overall market due to our dealer model, new products, new service territories and good execution.

Our growth rate is exceeding our expectations from only a few months ago, and we are clearly taking market share at a rapid pace. Thus far in Q3, we continue to see our growth rate accelerate. And in fact, as we look into 2020, we are confident we'll grow even faster than we have in 2019. We will provide full guidance on 2020 later this year. .

We are pleased that our dealer network, which is now more than 100 dealers strong, continues to develop and grow. This network helps us serve more customers while it strengthens our position in our existing footprint.

We are also experiencing healthy adoption of new products and attachment rates related to our Sunnova SunSafe solar plus storage products. Storage remains a robust opportunity within the markets we serve. We are confident in our future growth potential and ability to execute our plan.

In addition, as a direct result of our dealer model and management's focus on cost control, we continue to improve our operating leverage, delivering cost declines to our bottom line. Taken all together, we are creating value for our customers and our shareholders. .

For those of you who may have missed our roadshow, I'll take a step back to discuss Sunnova, our business model and our overarching business strategy. Starting with our mission, which is to power energy independence.

Sunnova is a leading residential solar and storage service provider, and our goal is to provide homeowners with clean, affordable and reliable energy.

We're able to do this through our unique business model that leverages our large independent dealer network who originate and install solar and storage equipment on our behalf, and who know their communities better than anyone. .

I started Sunnova to provide consumers a better energy service at a better price, and through our solar and storage service offerings, we are disrupting the traditional energy landscape. We offer our customers numerous options to finance their solar equipment, including loans, leases and power purchase agreements.

As a technology-enabled service provider, each new technological advancement allows us to meet our customers' energy needs with even more products and services. .

Outlined on Page 4, I believe the key to understanding the Sunnova strategic opportunity are centered on our above-market growth profile, the operating leverage our business model delivers and the financial results that drive our strong financial position.

Our dealer model, our great customer service and our strong financial performance, provide competitive advantages as we strive to continue to deliver above-market growth in the future. .

I will now go into each of these areas of focus in greater detail. As we turn to Slide 5, we partner with dealers throughout the country who are the best entrepreneurs in their communities. Our model leverages our dealer-specialized knowledge, managerial skills and experience in local markets to attract customers.

As a result, we can better manage labor costs, while providing our dealers high-quality products through our approved vendor list and technical oversight and expertise through our technology platform, allowing us to drive higher growth and higher operating leverage.

We are distinctly positioned in the market to achieve above-average growth while mitigating labor costs given the aforementioned operating leverage. To support the needs of the diverse dealers in our portfolio, we built a unique technology platform.

Some dealers are large, some are small, some only do installations and some only do origination, but each dealer is allowed to optimize their execution in the market by utilizing our unique technology platform. .

We continue to innovate across our technology platform to support the needs of the diverse dealers in our portfolio.

Our goal is to leverage our technology to allow each dealer to optimize their execution in their respective market by utilizing our proprietary technology to automate their processes as well as the entire customer installation workflow. .

During the second quarter, we deployed significant enhancements including improved quoting, visual design, quick estimate tools and proper tracking solutions. In addition, we expanded our dealer offering to include rooftop solar design as a service.

Our goal is to utilize technology to create a frictionless experience for both our customers and our dealers. .

Most importantly, turning to Slide 6. Customer service is at the heart of everything that we do. Once our dealers have fulfilled their installation workflow, we serve as the primary point of contact for our customers throughout the life of their solar service agreements. And we retain all of our contracts rather than sell them off.

We believe that focusing on excellent customer experience from the outset will keep us well positioned to meet the evolving needs of our consumers. This includes selling our customers additional energy services as technology advances and changes. .

And finally, as you can see highlighted on Page 7, we have a proven record of robust financial results measured in adjusted EBITDA and interest in principal payments from customer loans, adjusted operating cash flows and our customer growth rate. These are the key financial metrics we track.

Our financial position is strong, particularly following our IPO, and is supported by recurring cash flows we generate through our long-term contracts with our customers. We have also provided our gross contracted customer value metric in order that our shareholders can observe our increasing long-term contracted cash flows.

A great business model, great dealers and partners and great customers with long-term relationships have led us to financial success. .

At the end of the day, we are generating superior customer and superior corporate economics. I want to discuss how our model fits into this significantly underpenetrated residential solar and storage market in the United States. Growth in the solar industry is being driven by a great value proposition and societal benefit.

Against the backdrop of an underpenetrated addressable market, our platform and strategy helps us enjoy tremendous growth and puts us in a very good position to continue growing our market share. .

In the second quarter, we grew our dealer base in excess of 20% and locked in multiple years of exclusivity with large dealers in various geographic areas who have provided 72% of our origination in 2019. We're achieving stronger growth than the overall market.

And in 2019, we expect to deliver over 33% growth in new dealers and over 165% growth in new products. Products are defined as a sales-ready contracted service offerings for a geographic region that encompasses technologies and are financed by one of our various financing options. .

One example that I'm very excited about is Sunnova SunSafe, which we now have available in 12 states with retrofit offerings available in 10 states. We are seeing strong growth in our storage product, with year-to-date origination attachment rates of 11% and a customer base penetration rate of 2%, leaving us a great deal of room for future growth.

We are proud to be a leader in this industry, not only driving the adoption of solar energy, but using our business strategy to help solve the world's environmental challenges.

We believe that the best way to explain the value we are creating for our shareholders is by focusing on customer count, adjusted EBITDA and the interest and principal collected from our loan contracts and adjusted operating cash flow. .

I will now turn the call over to Rob to walk you through our financial results in greater detail. .

Thank you, John. Starting on Slide 9. We are pleased with our financial performance through the 3 months ended June 30, 2019. In the second quarter, we delivered strong customer growth of nearly 30% period-over-period.

As a result of additional customers and more cash generated per customer, revenue was $34.6 million, a year-over-year increase of $5.6 million. Adjusted operating expense, which represents the full recurring cash expenses to operate our current book of business, was $21 million for the second quarter.

The year-over-year increase of $5.3 million includes new ongoing costs we incurred as we prepared to become a public company and $1.3 million of costs associated with our IPO itself. .

Excluding the IPO costs, the adjusted operating expense grew at a slower pace than the customer cash inflows from our service contracts, once again demonstrating the operating leverage that comes from our focus on controlling costs.

As John mentioned earlier, we believe our dealer model provides operating leverage as these local entrepreneurs manage costs very effectively and efficiently.

While we do expect to have some additional costs going forward related to life as a public company, we have incorporated these costs into our forecasts and still expect to see per customer cost declines in the coming quarters, helping us to deliver further operating leverage.

Adjusted EBITDA in the quarter was $13.6 million, up from $13.2 million during the same period last year. While this represents only a modest increase year-over-year, we had anticipated some increase in our operating cost as a result of preparing to go public and fully expect that our year-end adjusted EBITDA will significantly exceed that of 2018. .

As most investors are aware, adjusted EBITDA has the same full operating impact of our leases and PPAs, but only the costs and none of the customer cash inflows from our solar loans.

Through that, we have to look to our customer principal, net of amounts recorded in revenue and interest or P&I payments from solar loans, which were $5.2 million and $2.7 million, respectively, an aggregate increase of 134% year-over-year. .

Management and the board look at adjusted EBITDA and P&I together to get a more complete picture of our performance.

In addition, we keep our loans on our balance sheet, which we believe provides us with a long-term advantage and a clear runway to recurring positive free cash flow, especially as the securitizations we have put in place to finance these loans are paid down over time. Adjusted operating cash flow is another key metric for us.

We start with GAAP operating cash flow and first subtract the cash distributions from our tax equity. Doing that basically puts it on par with our debt from a financing perspective.

To that, we add the principal payments from our customer loans as those represent ongoing cash flows from existing assets and then back out inventory purchases and other costs that we expect to convert to cash flows from investing over the next 12 months.

Adjusted operating cash flow was a negative $20 million for the 6 months ended June 30, 2019, compared to a negative $12.2 million for the same period in 2018.

While our adjusted EBITDA and P&I together were higher year-over-year, we did have higher interest expense, in large part driven by negative interest rate hedges we realized as a result of refinancing our debt in a lower interest rate environment.

We believe this short-term hedging expense will be more than offset by the longer-term cash benefits from our refinancing. .

On a cash-on-cash basis, the additional loan-to-value we received from the financing of our loans more than covered these hedge realizations. Estimated gross contracted customer value as of June 30, 2019, was approximately $1.7 billion, up from $1.5 billion as of year-end.

While our focus as a company is on producing sustainable, predictable and growing cash flows to the corporate equity, we're also ensuring that we continue to create real value from each additional customer that is not solely dependent on assumptions of renewals 20 to 25 years in the future.

Although we acknowledge that it has been the industry standard, internally, we do not benchmark our unit economics in terms of kilowatts or megawatts as such math can be artificially inflated by adding items such as batteries, service-only contracts and other services that are not measured in kilowatts. .

We believe that our metrics of customer growth, adjusted EBITDA and P&I and adjusted operating cash flow, give investors a more complete and fair look into an industry that continues to grow and evolve.

We intend to safe harbor some equipment in order to preserve our ability to use the 30% investment tax credit after it decreases at the end of this year. We are putting a number of strategies into place, including a facility that we are working on closing this quarter that should allow us to take full advantage of the higher ITC beyond 2019.

Further, we have closed or are in the process of closing on sufficient commitments of tax equity to meet our needs well into 2021. .

As our growth continues to accelerate, this will increase our use of working capital to fund both our dealers' work in progress as well as in-service contracts that are in our short-term warehouse facilities. This may result in some fluctuations in our financing cash flows over time as we continue to rapidly build backlog prior to securitizations.

That being said, as with our strategy for safe harbor, we continue to pursue a number of alternatives to minimize the amount of corporate cash needed to fuel this growth. We have been active on the financing front in 2019, as illustrated on Slide 10.

We completed our $178 million IPO; closed a private placement program for up to $364 million of asset-backed notes, of which we've used approximately $140 million to date; refinanced and expanded warehouses with commitments of $350 million; refinanced $45 million of senior notes; closed a $168 million loan securitization; and just last week, closed on a $75 million tax equity commitment.

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Through our debt and tax equity financings, we have generated more than $60 million of additional cash at the corporate level, further bolstering our equity position. By combining these realized refinancing cash flows with our adjusted operating cash flows, we expect to use very little corporate equity outside of working capital.

We are focused on upcoming financing opportunities, including the safe harbor facility, new tax equity facilities and additional debt securitizations in the coming months. .

Post-IPO, we have no debt at our operating company or the public parent. All of this gives us greater flexibility as we look at our future financing options. We are very confident in our financial profile and the flexibility we have at our disposal in order to efficiently operate the business and continue to drive growth. .

I will now turn the call back over to John to go over our outlook and to provide closing remarks. .

Thanks, Rob. Turning to Slide 11. I want to discuss our 2019 outlook. Going forward, we remain extremely confident in our ability to continue to drive outsized market growth and achieve superior customer and corporate financial results. .

Today, we are introducing our 2019 guidance.

We expect to deliver customer growth rate of 30% or approximately 79,000 customers at year-end; adjusted EBITDA of $47 million to $49 million; customer principal payments from solar loans, net of amounts recorded in revenue between $17 million and $18 million; customer interest payments from solar loans between $12 million and $13 million; adjusted operating cash flow of negative $2 million to a positive $1 million.

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Although we are not prepared to provide full 2020 guidance at this time, we expect our customer growth rate to exceed 30% in 2020.

Once again, I'm pleased with our solid results and excited about Sunnova's opportunity for continued growth as we create more operating leverage through our dealer model, and ultimately, generate more cash and value for our shareholders. .

This focus on letting our dealers do what they do best allows us to focus on what we do best and has spurred our growth as a company in a cost-controlled manner. We are proud of our accomplishments and momentum. We are even more excited about the future.

With a local focus and a global vision, Sunnova aims to create a reliable energy future that will transform the world for the better. We strongly believe that we can do well and do good. And we look forward to continuing this remarkable journey with you as we power energy independence. .

With that, operator, please open the line for questions. .

[Operator Instructions] Your first question comes from Paul Coster with JPMorgan. .

Yes. Well, first of all, welcome to the public markets, Sunnova. And John, it's good to have you here. I have 2 questions. The first one really is, obviously, John, you have a great deal of confidence in the growth trajectory this year and into next year, at least from a customer perspective, accelerating.

Can you give us some sense of what informs that view, please? And then I have a quick follow-up. .

Yes. Thank you, Paul. We've been experiencing a pretty large growth rate all the way through the year. And what we've been focusing on, of course, in our metrics are focused on our in-service customers or customers that are in-service and paying, whether it's loan lease or PPA.

We've continued to gain share mainly because we've been signing up a lot more dealers, as our dealer growth suggested. We've opened up new geographies and then we signed up and created a lot of new products for our dealers. So when you've got a lot of dealer growth, you've got product growth.

And we've got growth in our existing dealer base has been quite strong, frankly stronger than we thought even a few weeks ago.

It's given us a great deal of confidence that we'll be able to -- as we continue to see -- and you heard in my remarks, Paul, that, that trajectory is continuing to accelerate, that we continue to see that there's more and more growth ahead of us.

We've got more products that we'll launch and we've got more dealers sign up and we're getting a lot more success out of the existing dealers. .

So we're seeing very good signs of management's become very comfortable in the last few weeks and couple of months that, that trend is very solid and we can look towards 2020 and be able to do that with confidence for you. .

Can you also, John, as a follow-up, talk to us a little bit about the mix moving forward between loans, leases and PPAs? But also the type of solar business that you don't see many outright sales in the market and perhaps even some no contracts, solo service agreements. .

Yes, certainly. So we've been roughly about 30% loans, it's a little bit less, let's call it, maybe 29%, 28%, and then the balance will be a breakout lease in PPA, mostly PPA. And we don't see that trend really changing anytime in the near future.

I don't think it really matter if it did, plus or minus, as far as loan versus lease and PPA, but it's been fairly stable all year and I don't expect that to change. It's possible though. In terms of what we continue to see in the forward growth is that there are different services we've been able to launch with service-only contracts.

We have those out in growing number of areas in our footprint. We have a lot of folks that sign up for a loan, and they may choose to pay a lease partially down after 12 months or so, or pay it all off. And then we just be able to service the contract. We have all the cash upfront. .

So there's a combination of ways that if you wanted to just pay cash, you can come to us.

And even if you have signed up with somebody else and paid cash or a loan and paid that loan off previously, we do have a service and that is unique to us that we can sell you and take care of you, make sure that you're getting what you signed up for as far as energy. .

Your next question is from Julien Dumoulin-Smith Bank with Bank of America Merrill Lynch. .

Congratulations to the whole team here on finally getting over the finish line. Perhaps just to follow up on the last question, if I can, and starting off with a more detailed one. Just with respect to the gross contracted value, GCV.

You provided a brief snapshot of the absolute value, but could you provide us percentage breakdown between loans, leases, abstracts, et cetera? Just a little bit more granularity on the GCV value as it stands today just to follow-up on the last question first. And then I got a follow-up. .

Sure. So on the GCCV, what it mainly incorporates are the lease and PPAs, that's just the PV6. It's a fairly standard industry calculation. On the SREC side, the SREC values make up roughly about 16% or so of that. A portion of that is hedged out. It's a very -- as you know, Julien, very conservative curve.

I would say that one thing that has been pointed out is that our loans are not valued in that GCCV calculation. That's true. So we are not doing ourselves justice, if you will, and that's a decent number there that could be added back into and increase that GCCV level from $1.7 billion. So in essence, the loans are really largely not in that value.

And we wanted to point out that they should be, you’d be correct. .

Okay. All right, fair enough. And then perhaps just as a follow-up, perhaps more holistically.

I know you guys haven't, let's say, talked about like sort of an NPV per watt-type approach per se, but how do you think about other metrics around free cash flow in excess of cost per megawatt to think about modeling out the company on a go-forward basis? And how do you think about providing metrics on that front? Maybe that's just probably a little bit more of a holistic take on development efforts.

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Yes. The way I think about this, Julien, is when you look at the, call it, the unit economics on a per customer basis, right? And what I would say is the way -- that the proper way of looking at it is to take the cash that we get in from our customers. So it would be the revenues plus the principal and interests in the case of loans.

And divide that by our cost on the unit basis, which would be a combination of PP&E plus our loan balances. Now we buy the loans at a discount, and so that's not reflected on our balance sheet. That's -- their loans are at par, so it's a little bit understanding our cash yield.

But if you look at it, roughly this year, that will be roughly about a 10% cash on cash. So that's a pretty rich cash-on-cash yield that we then can appropriately finance, whether it's debt or tax equity or a combination thereof, depending on the product, whether it's a loan or a lease or a PPA.

And I think that gives you a pretty good picture about what the economics, unit economics are of the business. .

The GCCV is another picture of that. You can net the debt out if you want. Netting the debt out, as you're probably familiar with, some of even our competitors and so forth can. As you do financings and refinancings, which have been very active this year, can add some volatility to that calculation. So you have to think about that.

But as you can see, we've strongly created much more value and continue to do so, but then our PP&E expenditure. .

Got it. And sorry, quick one, if we can, on the adjusted operating cash flow numbers.

Can you talk about how the inventory arrangement that you're thinking about here, if that becomes final, how that operating cash flow should evolve through the course of this year, rather than talking about '20?.

You want to answer that one?.

Yes. So if -- to the extent that we do decide to safe harbor inventory on the balance sheet, we would expect that the operating cash flow would go up, and then we would make an appropriate adjustment on the adjusted operating cash flow to back that out.

The idea being that within a short period of time, within 12 months or 18 months or so, all of that will eventually roll into the PP&E. So we'll -- to the extent that we do, we'll go ahead, making the adjustment there for what we invest in inventory. .

Your next question is from Brian Lee with Goldman Sachs. .

It's Rebecca Yuan on for Brian Lee.

So on the recent partnership announcement with PetersenDean and the new homes opportunity in California in general, how many homebuilders are you working with? And what kind of visibility are you seeing on volumes in this channel heading into the 2020 mandate?.

Well, thank you. That was a pretty important partnership that we've announced. There are certainly several other homebuilders, some of which we already have on board. And then some, many of which we're talking with.

What I would say is that our homebuilder business is something that we would look at as an addition to our growth rates going into next year. What we have been able to ascertain is that there's a lot of homebuilders that have good relationships with current subcontractors.

One of those would be -- example of PetersenDean, and those relationships can go back several years. And so again, this is where the partner model, I think, has a unique advantage and then partnering with people that already know what they're doing and have relationships with the homebuilders.

Doesn't mean we can't go directly, and we've done that as well, but it's a combination of the things where I feel like we've got a pretty good competitive advantage here, and looking forward to signing up more homes in the California area. And who knows, maybe that mandate, if you will, expands across the country. .

Yes.

And then as a follow-up, can you provide an update on financing milestones for the rest of 2019, aside from the safe harbor inventory?.

Well, in addition to the safe harbor, we're looking at closing other tax equity facilities. We are probably going to do 1 or 2 more securitizations here by the end of the year. We continue to fill up our bucket on the back leverage side of the business. And looking at other things as well, I'd say that we continue to be very active on that front.

And that you should expect us to continue to be very active. As far as each individual transaction, we'll let you know, certainly, as we give the quarterly updates, the progress that we've made along the way, because it is an important part of our business.

But we're fortunate to be with some great partners who really understand the business and are great with working with us in order to bring a lot of these financings across the finish line. .

Your next question is from Philip Shen with Roth Capital Partners. .

First one is on the Q3 outlook. I know you gave a full year. Should we take the first half customers, it implies that you guys want to add 12,000 customers in the back half.

Can you kind of give us just a mix between Q3 and Q4?.

We haven't issued guidance breaking that out, Phil, in terms of Q3 and Q4. I would say that it's most likely that Q4 will be a little higher than Q3. Typically, when you see growth, and so this might be a place where to talk about seasonality.

I would say that historically, been in the industry for years, your Q1 is going to be lower in the origination, the lowest quarter likely on the in-service as well. Your Q4 is going to typically be lower in origination but it can be fairly high in in-service.

And then your second quarter is ramping on both the origination and in-service and your third quarter is your best. With that said, an overlay on here is the overall growth rate of the company, which is quite strong. So what we've seen in our origination, typically takes 2 to 3 quarters to realize an in-service.

And what gives us so much confidence in the forward growth is we basically have the origination and we're starting to see that increase in in-service show up in the third quarter here. We do expect that to continue in terms of the trajectory into the fourth quarter and into 2020. .

Great.

And then as it relates to dealers, can you update us on the number of dealers you guys have locked down for exclusives now? And then what do you expect the annual exclusive payments to be now that you have a couple more for 2019 and 2020? And ultimately, how is this accounted for? I believe it's -- these costs are capitalized, but just if you can update everybody on, is it -- do you run these expenses through the income statement? Or my guess is on the balance sheet and the cash flow statement.

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Yes. In terms of the number of dealers, that's spread out amongst our geography, and we do have several different types of exclusivity. We have multiyear exclusivity with our big regional dealers. And then we have some that are just exclusive on a year-on-year basis. And then we have some that just to operate in an exclusive fashion with us.

And those are all increasing. I don't want to give out a number yet. I would say that it's obviously a very large percentage. As we disclosed on our origination, I would say that if you added those who work with us on exclusive basis, it would approach 80% at this point in time. And so it's a vast majority of our origination.

We -- in terms of looking ahead, we continue to see dealer growth to be quite strong and -- but at this time, we're depending more and more on our growth on the existing dealer base, and we feel very comfortable with that. And... .

Yes, for the accounting side of it, real quick. We amortize it over 23 years as a noncash to SG&A. But at the end of the day, it's always built into the return on the asset that we have.

So every time that we make those dealer payments, it's done both in terms of the total amount of volume that we expect to have from those dealers and then some sort of moving -- it's moving the payment forward for the dealer. So it's still within -- it's still guiding towards that total return John talked about earlier in the call.

And then on -- and then if there's -- if the dealers don't meet their targets, there are certain adjustments that we made to future payments. We don't want to get to the exact dollar amount only because we do have a number of different payments or specific arrangements out there.

But I would just say that from an economic basis, it's -- at the end of the day, going to be the same amount of money ultimately out the door that we would have been paying these dealers early.

We're just making sure to get the money to them early on the exclusivity and making sure that we have great terms with them that help them achieve their goals. .

Yes. And I'd just add to that, Phil, that just to be clear about it, anything that comes from this company goes to our dealers in terms of payment is incorporated in our unit economics and fits up against that cash-on-cash and our GCCV calculation. So nothing's excluded for a reason. .

Great. This is a bit of a housekeeping question, but I noticed in the Q that you guys just released in terms of GCCV, in the S-1, you guys had a renewal value, but in this Q, we don't see the renewal value.

Can you share with us what the renewal value is? And can you talk about why it might be excluded?.

Well, I think from our standpoint, it's something if you were to use some what others use, you'd say it's a little bit north of $200 million. But let's be candid, all of you guys have -- and ladies have a different view about what the renewal rate is and percentage and so forth.

So I guess you can attach whatever you feel like is you're comfortable with.

We look at the value that may or may not materialize 20 to 25 years from now as something that's nice to have, but it's certainly -- we're more focused on, again, operating cash flow and keeping those contracted cash flows that we can drive towards really a free cash flow before capital expenditure.

That's our goal, and we're certainly well far ahead of anybody to reach that goal. And so we're going to stay focused on the contracted piece and the cash flows, not [ sell those cash flows off ].

And any sort of renewal value or what I would look at as option value of selling additional services like batteries and so forth to customers is something that over time the market will set an implied valuation on. .

Your next question is from Michael Weinstein with Crédit Suisse. .

A couple of questions.

One, when you're acquiring customers from dealers, how do you choose between whether you're going to acquire a lease or a purchase option from that customer? And then also, is there an implied EV-to-EBITDA multiple that you're acquiring these customers at?.

Michael, well, the customer chooses. And really, that's what it's all about is how do you have a very broad product set that you're not going to choose what technologies you want to incorporate.

So for instance, you want to do solar only or you want to add the solar in storage or some other things coming down the pipe with new technologies out from the inverter manufacturers and others. But it's how do you want to basically finance the equipment that is involved in the service contracts. So it's really up to the customer.

And that's what I think really makes us unique is that we're indifferent to the financing type as long as it's a great customer that we're getting, hopefully, good service too. And they're good long-term cash flow streams, we'll go ahead and do that, sign that customer up. .

So we don't really focus on one type over another. And that roughly, again, our split right now, 70% PPA lease, vast majority of those PPAs, both levelized and normal PPAs and then 30% loans. That's a general trend that we see.

In terms of how we look at the economics when we buy from a dealer, we're going to again go back and look at the cash-on-cash returns. We're going to look at the unlevered returns with regards to influence of tax equity on the respective, whether it's a lease or PPA. Obviously, it's not applicable in the loan.

And then we're going to look at the levered returns. And so we look at the full cycle of the cost to capital and make sure that we find ourselves with an acceptable level of return and then blend that into an overall portfolio return.

That gives us a very good, clear, concise picture, again, going back into our cash from our customers or revenue plus our principal and interest from our customers, divided by our PP&E plus our loan balance, roughly being roughly about a 10% cash on cash. That blends out to giving us a very nice unit level economics that we continue to grow on. .

Great. And one more question, and this is kind of a more general one. Maybe you could address some concerns from investors right there about a possible recession coming up.

What do you think the impact of a recession will be on the home solar market, just in general on this business and this industry in general and then on you in particular?.

Yes, I think it's a great question. Obviously, given some of the news that we've had since even we've been public, which hasn't been that long, clearly. It's not good. And clearly, the bond market is signaling some at least slowdown, if not outright recession in the economy. Who knows what materializes.

I personally have had a decently cautious outlook overall on the economy. If nothing else, we've been doing this for 10 years. At some point in time, there will be another recession. And so one of the things that I made sure of is, is that on our credit underwriting, we have an outstanding team. That team is fully funded at all times.

And we've been bracing for a recession for well over a year, probably closer to 2 years. So we -- we're ready for it. That's another reason to have recurring cash flow. So that as the capital markets, if it were to experience a disruption, you would hate to have your cash flows as part of your "cash flow positive" only be dependent upon your growth.

And so what we want to get to is a spot where we can. And again, we're getting closer and closer to that, where we don't need to grow and to be able to cover and sustain ourselves, and that puts us in a very strong financial position going into a potential recession. .

Part of raising the capital that we've done, all the refinancings, the IPO, et cetera, is to prepare for the possibility of that being the case. And so we feel pretty good about where we're sitting today, we're feeling better as we move into next year.

What I would also say about the overall industry though is that we are typically saving what may amount, in some cases to some people, a relatively smaller amount of money on a per month basis, whether that's $20, $50, $100 a month. It could be said that in a good time that, that may not be something that catches people's attention as much.

But in bad times, it certainly does. And we've seen that throughout my career where people, you obviously can't cut the power that goes to your home, are more focused on saving money in a difficult economic environment. And so I would say that not only do I think that in a difficult economic environment, the industry, not just Sunnova, would do well.

I think it's possible that we actually could pick up a little bit of a growth rate in there as people become more focused on saving money on the necessities that they have to purchase for their family. .

Your next question is from Ben Kallo with Baird. .

Just to clarify, John, your contract value doesn't include renewals at all, you stripped them out completely. Just to clarify that. .

Yes. .

Okay. And then just on inventory, I saw in the Q that batteries and components was the highest. I think it was around $60 million. Could you just talk what's in that? And then maybe that could lead us into discussion on just attach rates on storage and how we should think about that overall. .

Rob?.

As far as what the inventory is, it's on the books right now. It's just a matter of what we're putting in, eventually going to put into the work in process and then ends up going to the PP&E. Certainly, as our origination increases, we'd expect that to increase a little bit.

Certainly, as we look to do more things on the safe harbor, we'll work for that to increase as well. .

And in terms of the storage attachment rates, they have been increasing all year. We're -- as we've said, we're roughly about 11% across all of our origination. We are seeing some pickup in California. We've had a lot of -- some markets have 100% attachment rates. We've done very well in those markets.

We've created some markets that have moved very strongly towards 100%. And then we're also starting to see some attachment rates in the Northeast and Mid-Atlantic. So the storage offering, if you will, as we've launched these products out, it takes some time to get them moving and get dealers trained up to both originate and to install.

But we see -- we like what we see in terms of the overall attachment rate and continue to grow that. .

And I would also add that we've added a penetration rate. So that could further help you all in terms of understanding about how many batteries we have as a company relative to our customer base. And the reason why that's important for us is that we have experienced very strong retrofit sales.

So we're actually -- even though we're a bit cautious view on these 20-, 25-year renewals in the future, we are actually the ones out there upselling our existing customers and with increasing frequency. In this case, the first upgrade, and I believe, as an industry, we are in our first upgrade cycle driven by the battery.

We're upselling those customers batteries, and we like that trajectory in terms of growth as well. And so we wanted to make sure that you guys understood and kept track of that metric as well. .

[Operator Instructions] Your next question is from Pavel Molchanov with Raymond James. .

In the S-1, you talked about the geographic footprint of the company and you highlighted Puerto Rico as your third largest market.

And since we are in the early stages of hurricane season, I thought I'd give you the opportunity to talk about kind of what the resilience of the grid or lack thereof means for your business, particularly in these island territories where as we've seen, it's obviously been a problem historically. .

Yes. Well, thank you. What I would say is, is that being headquartered in Houston and certainly, we've seen a lot of challenges in California with wildfires and other natural disasters across the country, islands are not unique in this.

And unfortunately, if the science is to be believed on climate change, we are continuing to see these natural disasters, both increasing in intensity and frequency, which has been the trend as you know.

So I don't think that -- certainly, that's part, if you will, to provide people the reason to acquire storage especially if they've already had solar with us. And again, we've seen quite a bit strong uptake on that retrofit sales. I would tell you that our island markets have moved, almost all of them, to 100% attachment rates.

That's not been a recent phenomenon, that's something that's been going on, in the case of Puerto Rico, in the last 2 years since the Maria storm. So we stand, as far as an overall customer base in Puerto Rico, in a much better position than we did prior to Maria. And we continue to make progress in that with regards to storage. .

What I would also say is that our response as a company, and this is why being a service provider is so important, is that we know what to do. We know how to respond to these large-scale natural disasters very quickly.

And if I'm a lender in these assets, if you will, the solar systems, whether those are combined with batteries or not, I want to make sure that I'm tied up with a service provider and not just a pool of assets that may or may not get fixed.

That is what we've seen as we've been able to respond quickly to get those customers back online to get their power to them as they contracted with us, signed up with us. And more importantly, in some cases, make sure every investor was paid on time. And so the whole thing works, if you will. Customers are happy. They get power.

If you have a battery, and you have a storm, you're going to have power when nobody else has it in your neighborhood most likely. And then as an investor or lender, you're going to be taken care of as well. So we like -- we have insurance. Obviously, we had insurance backed in.

And again, I want to point out that the islands are no more likely to get hit on some natural disaster than, say, a coastal area like Florida or Texas, but our position certainly is much better both on the equipment side with storage and operations. .

Okay. Let me follow-up on your customer contracted value. The 6% discount rate has been a talking point in the industry, debating points going back to the SolarCity IPO almost 8 years ago.

So what's the -- what makes that the right number that you guys are using along with other residential solar providers?.

Yes. I think, really, the reality was, it was just a number that was picked, right, in those years ago by others.

I think the reality is that number fluctuates based on the overall macro interest rate environment and the overall market as far as securitizations and other lending facilities in terms of their cost to capital or the spread of the risk-free. And so 6% is probably, right now, if you look at our last securitization of the loans, we did south of 4%.

And I don't think we're alone in that in terms of our competitors. And so 6% looks extremely conservative, did outright wrong at this point in time, be blunt about it. Is that always going to be the case? Probably not, just given the overall environment changes.

But right now, I would say that we're, as an industry, undervaluing our assets clearly relative to the cost to capital with regards to using 6%. .

Ladies and gentlemen, this does conclude the Q&A session for the call. I'll now turn it back over to John for any closing remarks. .

I want to thank everybody for dialing in and spending the time with us this evening. Certainly look forward to many other quarters.

And I wanted to end with, we're extremely excited for the opportunity to serve more and more customers, to serve you, or either old shareholders that we love, and new shareholders that we love and like to invite more to join the industry. This is a really exciting place in terms of the industry, the most exciting I can think of in the entire economy.

And we've got a lot of work to do to change the energy industry for the better. We're very excited about the progress we're making this year, more excited about as we look towards -- into the latter half of this year, in 2020. And very much looking forward to our next quarterly call.

And thank you very much for joining us, and I look forward to seeing each of you again. .

This concludes today's conference call. You may now disconnect..