Ladies and gentlemen, thank you for standing by, and welcome to the Sunnova Energy International, Inc. Fourth Quarter 2019 Earnings Call.

[Operator Instructions] Please be advised that today’s conference is being recorded.[Operator Instructions] I would now like to turn the conference over to the Vice President of Investor Relations, Rodney McMahan, please go ahead..

Thank you, operator, and good morning, everyone. Yesterday, we released our earnings press release and earlier today, posted a slide presentation to the Investor Relations portion of our website at investors.sunnova.com, which will be referenced during this call.

Joining me today are John Berger, Sunnova’s Chairman and Chief Executive Officer; and Robert Lane, Executive Vice President and Chief Financial Officer.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 as set forth in our press releases and 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 morning, and thank you for joining us for our 2019 year-end earnings call. Starting on Slide 3. We closed out the year with another quarter of strong operational and financial results. 2019 was the year Sunnova became the industry leader in growth rate.

Throughout the year, we increased our customer base, expanded our dealer network, lowered our cost of capital and boosted our storage attachment rates.

As a result, we were able to meet, and in most cases, exceed our 2019 guidance targets.In Q4 2019 alone, we added 6,000 new customers, which is a 20% increase from what was added just last quarter and an 84% increase over the fourth quarter in 2018. For all of 2019, we grew our customer base at a rate of 30%.

We are excited about the year ahead as we continue to acquire customers at a pace that is only continuing to quicken.

Due to this increasing growth rate later in the call, we will update the 2020 guidance ranges we discussed in our third quarter 2019 earnings call.A driving force that has supported our growth has been our ability to provide dealers with the broadest portfolio of solar and solar plus storage service offerings.

In 2019, we experienced a surge in storage attachment rates.

In fact, we grew our origination storage attachment rate from 15% in Q3 2019 to 24% in Q4 2019, and we are seeing a similar quarter-over-quarter growth rate continue into Q1.Batteries, which are included in our stated unit economics continue to add to Sunnova’s profitability and recurring cash flow from operations.

Storage is helping to fuel our rapid growth and is allowing us to power energy independence for our customers.

It is now clear that we are witnessing an acceleration in the new energy industry as technologies, such as storage continue to come down faster in price and improving operational capabilities faster than previously expected.With disasters, such as storms and wildfires and mandatory power outages continuing to take their toll on the fragility of the traditional centralized power infrastructure, the instability of regional power grids is becoming increasingly intolerable for consumers.

As a result, demand for our product offerings continue to increase as consumers look for energy options that provide higher energy resiliency and reliability.

Most recently, the earthquakes in Puerto Rico and the resulting loss of power across the island, once again proved the economic and societal value of solar plus storage as we were able to keep the lights on for nearly 2,500 customers.The world is continuing to evolve, and the energy industry must evolve with it.

Yet the majority of Americans are relying upon an outdated 19th century technology to power their homes. Throughout history, technology and consumer choice have always won and as more power outages plagues cities and towns across America, we believe the switch to reliable energy sources, such as solar plus storage will become inevitable.

Finally, we would be remiss in discussing our growth without mentioning our valued dealers.Our dealer network is the backbone of who we are and allows us to leverage our dealers expertise, managerial skills, and knowledge of local markets to attract new customers at a rate above the industry average.

At year-end, the total number of dealer and subdealers who partnered with Sunnova reached 155, a 14% increase from the end of September 2019.

We currently have a growing backlog of high-quality contractors who are looking to become Sunnova dealers and an increasing number of them desire exclusivity.Turning to Slide 4, we provide a summary of our 2019 results, which are further expanded on Slide 5.

Our total customers, adjusted EBITDA, the principal and interests we collect on solar loans and our adjusted operating cash flow were all within or above our guidance ranges for the full year. On Slide 6, we reflect on both our estimated net and gross contracted customer value over the previous three years, using a discount rate of 4%.

As of December 31, 2019, net contracted customer value is approximately $1.2 billion or $14.15 per share.

This represents only our existing contracted cash flow base and excludes any upside potential from renewal value, ability to upsell existing customers or any of our growth prospects.To be clear, we subtract all debt and liabilities, both corporate and asset level from our present value cash flows to calculate our net contracted customer value.

As reflected on this slide, our net contracted customer value is experiencing significant increases year-over-year, which translates directly into shareholder value creation. We operate Sunnova as a technology-enabled service company.

We believe that our steadfast dedication and focus on customer service will continue to lead to increased growth, additional upsell opportunities and a cost of capital that is below the industry average.

A happy customer is a paying customer.Recently, we saw the capital markets recognize the unique differentiators of our model as evidenced by our $412.5 million securitization. We saw a significant demand from investors noting our focus on service, and as a result, achieved an all-time low cost of capital for the industry.

Service is at the heart of our organization and core to our customer experience. I would like to remind everyone that the momentum, the solar industry has experienced over the last few years has opened up a new world of energy options for increasingly engaged and demanding consumers.

We continue to see evidence that changes it coming, it’s already here today, and at Sunnova, we’re helping our customers power a cleaner and more sustainable energy reality.I will now turn the call over to Rob to walk you through our financial results in greater detail..

Thanks, John. Starting on Slide 8. We recorded revenue of $131.6 million for the 12 months ended December 31, 2019, a year-over-year increase of $27.2 million or 26%, thanks to our strong customer growth.

Adjusted operating expense, which represents the full recurring cash expenses to grow and operate our service operations also increased in response to the increase in the number of customers served to $83.3 million for the 12 months ended December 31, 2019.

Our adjusted operating expense per customer was relatively flat quarter-over-quarter, but we expect to see that decline this year.Adjusted EBITDA for all of 2019 was $48.3 million, up from $41.1 million during the same period last year even with the increase in cost we experienced as a public company.

Principal and interest payments from our solar loans, which completes the customer cash inflow picture, were $20 million and $11.6 million, respectively, for the 12 months ended December 31, 2019, which was more than double the amounts from last year.Adjusted operating cash flow, where in we adjust our cash flow from operations to reflect how we operate the business was relatively unchanged year-over-year, but was significantly above our guidance range.

As we look forward to 2020, we are making a few changes to guidance, including our adjusted operating cash flow or AOCF metric.

As investors are aware, we use AOCF to adjust items that are more investing or financing in nature out of operating cash flow as well as move cash flows that are more operating in nature but classified per GAAP as investing or financing back into operating cash flow.

These changes would have resulted in a higher AOCF for 2019, but we did not want to move the goalpost we set during the IPO.For 2020, we are backing out realized interest rate swap breakage income and expense we incur out of securitization.

As we consider this a financing cost that would not occur, except for moving assets from a warehouse or term facility into a securitization. We consider these costs in our projections for net cash proceeds from investing and financing. We are also subtracting out cash received for inventory sales.

In the appendix of the investor deck released earlier today, we have shown both our current reconciliation to AOCF as well as our updated reconciliation, which we believe gives investors a clear picture of the operating cash flows.Estimated net contracted customer value as of December 31, 2019, was approximately $892 million using the industry standard 6% discount rate, up 26% from the $710 million as of December 31, 2018.

Due to the timing of deployment of some of our asset level capital from Q4 2019 into Q1 2020, net contracted customer value grew at a slightly lower pace compared to our customer growth. But we expect to make that up in the first half of 2020.Our focus as a company is on producing stable, predictable and growing long-term cash flows.

We believe that our metrics of customer additions, adjusted EBITDA, principal and interest from solar loans, adjusted operating cash flow and net contracted customer value, give investors a complete and straightforward view of the residential solar and storage service industry.We have been very active in the financing front in 2019 and early 2020, as illustrated on Slide 9.

In 2019, we completed a number of transactions, including our IPO, a lone and a TPO securitization, the refinancing of our credit facilities, new tax equity funds and ended the year with a $138 million equipment facility and a $55 million convertible debt facility.

The equipment facility allowed us to fund the purchase of inverters and batteries at the end of the year, which should allow most of our lease and PPA, solar energy systems over the next two years to qualify for the 30% federal investment tax credit by satisfying the 5% safe harbor outlined in IRS Notice 2018-59.The convertible debt facility was also used to fund a portion of safe harbor inventory purchases as well as provide working capital needed to fund our exceptional growth.

While both the equipment facility and the convertible debt facility increased our interest expense, the attractive prices we were able to secure on the safe harbor equipment purchases will more than offset the additional expense incurred this year.

In addition, we are reviewing multiple options to refinance the senior debt facility and have ample time to do so, well in advance of a possible conversion to common equity.We continued our financing efforts into the new year, closing on a $412.5 million TPO securitization.

On this securitization, we achieved a 93% advance rate, a weighted average spread of 2.22% and a blended weighted average interest rate of 3.63% on an order book that was four times subscribed.

As John mentioned, we see this as a testament to the value of being a solar service provider as well as reflecting our commitment to our debt investors by retaining our cash flows.

We strongly believe that retaining our cash flows provides necessary alignment between ourselves and our debt investors.I will now turn the call back over to John to go over our updated guidance and to provide closing remarks..

number one, produce cash; number two, produce long-term contracted cash flows. Therefore, we are focused on both for shareholders. As our shareholders can hopefully see, we’ve endeavored to disclose as much information as possible and get thoughtful structure and guidance on cash generation and usage.

Most importantly, we have focused on including all cash expenditures in our handful of commonly used major financial metrics and in our cash metric disclosures that we have provided.In closing, 2019 was a transformative year, and I expect Sunnova to make even larger strides in 2020.

We remain confident in our ability to continue to drive best in market growth, while achieving superior asset level and corporate financial results. The entire global residential solar and storage industry has entered its most exciting long-term phase. Every technology and industry transformation is marked by an S-curve.

We have clearly entered the lower balance in the middle part of the curve and the resulting change in the global energy industry will be profound.With that, operator, please open the line for questions..

[Operator Instruction] And our first question comes from the line of Eric Lee from Bank of America Merrill Lynch. Go ahead please, your line is open..

Congrats on the results.

First off, maybe could we discuss the drivers of your substantially higher growth rate, if I’m looking at it, at the midpoint, it’s about 60% year-over-year for full year 2020? And could you discuss your ability or how you perceive your ability to sustain that growth into 2021 and beyond?.

Certainly. I think, first of all, just to remind everybody that we’ve taken a more conservative way of classifying a customer. And so that customer is in-service and paying their monthly, either loan or lease or PPA.

And so that will create a lag of approximately about four months, relative to the way that the others in the industry classify a customer as an installation. Nothing wrong without a way. It’s just a reminder that ours is more conservative.

Second, the amount of dealer growth and just organically, has been pretty exceptional.But we’ve also added a number of dealers, as indicated in the previous comments that we made.

And then I would lastly say that our widest product portfolio in the industry and having all the products on a single platform, that really cuts a lot of cost for dealers when they don’t have to flip between two like a loan platform or a lease PPA platform.

And a lot more dealers are getting a lot more smart about the business and looking to see how do I just get into one single service provider platform.And then really just a focused business model. I mean focus, focus, focus. We’re not trying to do multiple different channels in operations and so forth. We’re focused on our dealers.

We’re focused on our customers. And we’re making sure that we’re – making sure that we can come in and provide what they need, both the dealers and the customers. And that’s obviously leading to a pretty exceptional growth..

Certainly. Could you discuss, actually a bit more on the increase in exclusivity for dealers? It sounds like there’s an increase in demand for that. So it would be great to hear your thoughts on what’s….

Yes. That – what did come as a surprise that we recently had our dealers summit, and this was something that was a pretty strong feedback. I think, look, we’re adding a lot of operational capabilities to the company. And then, again, looking at our widest product portfolio, there really isn’t a need.

And certainly, there is a desire to cut costs by the dealers to just plug in again to one service platform. A strong financial position, relationships, we’ve proven that we’re focused on the dealer and the customer and service.So all that comes together is that dealers are looking to find a home.

They want to be able to pick up the phone, talk to senior management if need be because things do happen on both sides of the relationship. And so that is giving a lot more comfort to folks, and you’re seeing a lot of dealers talks amongst each other that are not yet Sunnova dealers and saying, you know what, you need to come over here. This is home.

This is the place you want to be. This is where you can build your business over the long term..

Got it. And maybe one last question before I pass it along here. Shifting gears a little bit. Could you discuss since – with related to ABS, and clearly, 92% advance rate, weighted average go to $3.75 million. How do you think about the appropriate unlevered discount rate relative to industry standard, 6%? Thank you..

Yes. I think you guys put out a piece with – a couple of days ago about looking at the 4.5%. Clearly, here, all in through the cost of the stack, which included any of our overhead expenses, as I mentioned earlier, that was about 3.6 – just a little north of 3.6%, all in.

Clearly, the interest rate, the risk- free rate has dropped in the market even since that securitization, which is hard to believe, roughly by about 25 basis points.

The risk premium, by the way, the record lows both belong to Sunnova as far as leasing PPA, 175 over in November of 2018, and that securitization, this was 180 over on the ACE.So it looks very clearly to me that you guys are being very conservative on the 4.5 which is absolutely the right thing to do.

But it looks increasingly that the 4% is even conservative.

I would also add this, that a lot of investors I’ve spoken with, particularly over the last couple of weeks, are starting to see a lot of data, not only from us, but the – when you really provide service, both to loans and leases and PPAs.And then the cash flows and the embedded assumptions in the value that the industry, the securitization industry uses, such as the 6%, such as the degradation and the default percentage that’s given out there are really very – proving to be very, very conservative to the point that they’re leaving a lot of value on the table, so to speak.

And so if you look at the long term, selling assets off of these cash flows has not been a good idea. You’ve achieved a lot more cash flow by holding on to the assets, refinancing them, achieving the lower default rate that was baked in. And overall, I think, the lower – the cost of capital will actually continue to trend lower.

So I think you guys are on the right trend there..

Thank you..

Our next question comes from the line of Paul Coster with JPMorgan. Go ahead please. Your line is open..

John, the – 2020 growth, much of it will be fueled, I imagine, by further expansion of the dealer network and by expansion of the existing dealers.

Can you sort of quantify for us how much of the growth is through expansion of the network? And – versus growth of the dealers themselves and organic growth in demand? There’s a lot of stuff to unpack there, but your thoughts would be welcome..

Yes, certainly. Thanks, Paul. I would say about 90%, 95% of our current guidance is our existing dealers. We are, again, seeing a large number of dealer growth, again, as we previously commented, so that would be in addition to.

I’ve also stated that homebuilder activity is not baked in very much at all, if any, into our current forecast, and that stands. And so we’re really making sure that we’re being fairly deliberate and conservative as far as forecasting growth. And so if there is a bias to the growth, it’s certainly to the upside..

And following on from that, how much of the dealer acquisition is expanding territory versus improving your penetration of an existing territory? And with respect to territory, can you comment on the battery attach rate? Where is it happening? And how is the dealer network supporting that particular program?.

Yes. So most of our growth is in our existing territories. We have expanded to some new states, and those have been early winners. But I wouldn’t say they had moved the needle, so to speak, and certainly are not baked into our 2020 forecast.So right now, most of our growth is really in our existing footprint.

The battery has been a very pleasant surprise and continues to, especially at the start of this year, rip higher. I think more and more consumers are clearly seeing the benefits of the battery.

Clearly, in our Island markets, Puerto Rico, Guam, Saipan, Hawaii are either at 100% attachment rates or nearing it rapidly.California, obviously, had a big boost in Q4 from the wildfires. We continue to see that move up in this quarter. A few that surprised me, Texas. We’ve actually sold some storage in Texas.

And you wouldn’t think that the economics would really pencil out, but more and more people, particularly along the coastline. We’ve had a lot of issues with storms and increasing frequency and intensity. And so anywhere you see that, you’re going to see some storage pick up. Florida is another one.

And then we’re also seeing some in Massachusetts, New Jersey and New York a little bit. So we expect to see a broadening of the storage pickup, especially as storage prices continue to fall..

Okay. Thank you very much..

Our next question comes from the line of Philip Shen with Roth Capital Partners. Go ahead please. Your line is open..

Congrats as well on the Q4 and guide. In terms of growth, it’s looking really strong. I wanted to see if you could provide us some of your thoughts on the balance between growth and quality? Some might say, hey, growth is good, but it’s not the whole picture.

To what degree can you talk to us about the quality of that growth? And also, can you help us understand the balance between maximizing that growth and then versus – and how does that compare to leverage? So if you can speak to growth vis- a-vis that quality and that leverage, that would be very helpful. Thanks..

Okay. All right. That’s a lot, Phil. Thank you. Let me try to go through that. First of all, let me say this, that our unit level economics despite the cost of capital been fairly stable. In fact, really very stable over the last year. We don’t see any change in that.

The – as the cost of capital that continues to plummet, given maybe some of the issues that’s going on with the virus and so forth, then maybe you might see a little bit of pressure on that, but we haven’t seen it yet. And so the quality has been high. We want to make sure that we are making money.

And I want to point out, all of our costs are included in our unit economics at – roughly at about a 10% approximate. Some are a little bit less than that, some are a little bit higher than that.Unlevered return across the product portfolio.

And the only cost that’s not in that is roughly about at what we call an indirect cost, it was a few million dollars, and that’s roughly about – only about 15 basis points to that. So maybe it’s 985 that you want to couch it to with all the costs fully in.

The other costs have been apportioned out as overhead and been allocated towards the growth, of roughly about 40% of those costs and 60% of those costs to the operations. And so we’ve accounted for every single cost.We have not pulled out $0.01 of cost related to the side or not included into our calculations.

And the way that, at least the way I look at it, Phil, in terms of our growth. And I look at the cash flow. And if you were to look at very simple rule of thumb, for every $100 million of cost, again, including all of our costs and they’re including our safe harbor costs and our working capital interest cost in that number.

Of 100 million of in-service customers we generate, approximately $1.5 million of cash to the equity, before operating expenses is generated in year one, and roughly about $40 million of net customer contracted value at a PV4 generated over the course of the contract of 25 years from most of our contracts.So that’s, hopefully, a rough rule of thumb that helps you give visibility into the cash generation.

So then you can tell that it is high-quality growth. And when I look at the further capital requirements and so forth as we move forward in time, we – at the end of the day, it’s all about profitable growth. We said before, we’re looking to increase our working capital due to growth, we laid out higher growth for 2020.

And if there’s a bias, as I’ve mentioned earlier, to the upside for further growth, then that bias is certainly to the upside.This bias does not include Generac or homebuilders or any of the partnerships we’re exploring to further our growth.

We’re cognizant of the overall leverage, as you mentioned, and we want to make sure that we don’t overlever the company. We know that, that’s been a problem in the past. We know that at some point in time, maybe the capital markets experienced something like we saw yesterday.And we’d like to remain conservative on that.

And as we look at increasing our working capital needs, particularly as we look to even further growth ahead than what we were guiding now, due to Generac and homebuilders and other partnerships that I mentioned earlier, we want to make sure that we are focused on recurring cash flow from operations and that we bring long-term value and stability to shareholders, means that we need to achieve a proper leverage and not overlever the company.On this working capital, and I’ve discussed this in the past, we have many options that we’re considering as we look at over the next 12 months or so, including a multitude of corporate debt options.

Again, I would mind that we only have about $50 million of a convertible corporate debt at the corporate level. So it’s pretty lightly levered.Our options in this corporate debt increased in number and decreased in costs over the last few weeks.

One small part of these options could be equity, but no decision has been made, and it would be small if we did anything at all.

And so right now, we’re contemplating and looking to see what the best way to properly capitalize the company as we move forward.As for any sort of long-term shareholders, I think, it’s – when you look out, I think everybody is interested in looking at the value of the company.

But also looking at the value that we would bring to the company to increase the shareholder liquidity. But I would add this to it as well, and you didn’t ask this, Phil, but I’ll add this to finish this question out.I’m personally a buyer of the stock at this price. As founder and CEO, no one knows the company better than I do.

We’re clearly humming as a company, but we can do much more and I believe that we’re on a near- term path or even the larger growth, as I’ve indicated several times. And so to be clear, I will not sell a single share here and I will only buy at any price near these levels. I think we’ve got the proper balance on leverage.

I know we’ve got focus on generating quality and profitable growth. And I’m really excited about where – the position we’re sitting in right now. It’s probably more than what you’re asking for, but I want to give you a complete answer..

That’s great color. As it relates to shifting gears to the financing side of the house. You guys did your ABS back – early this month.

Looking ahead, can you update us on what you see ahead? How many more ABSs, maybe some sense of timing asset type and so forth? I think on the last call, you guys talked about maybe doing three or four this year, would love to get your latest thoughts?.

Yes, Phil, this is Rob. And we’re really still on that trajectory. We said we were going to have 4% to 5% this year. We’ve clearly done one. So we’ve got one down. Our plan is to get into a regular cadence as we pull up our tax equity funds in our loan warehouses.

So you should expect to see us back out there in the market a few more times this year, at least..

Okay, great. And one last one, through some of our checks, it seems like electricians appear to be a bottleneck for storage installations, especially in California.

Are any of your dealers experiencing that? To what degree might you be getting the attach rates in terms of order, but perhaps there’s a delay or some lag in the installations? And how might that impact operations, if at all? Thanks..

Yes, Phil, it’s John. I’ll take that one. Look, it differs on different part of the country. I think it’s well known that California has a relatively tight labor market. There’s some tightness in places like Massachusetts, New York, New Jersey.

Other places, geographies or not is anywhere near the tightness in that particular labor category.We have found, though, again, this pays off of the dealer model is that, that local entrepreneur that man or women in the field knows a lot of people, and people want to come work for him or – and so while it certainly has been a layup, we have found no real issues with our dealers, hiring the people that they need.And then on our side and the service technicians, what I would say is that, we picked up a lot of hiring that we needed to do, and we’re on plan for that, so far this year.

And a lot of that included the information technology heads that we needed or people that we needed. And we were able to pick those up in Houston at a fairly decent pace. And so as we look ahead, we’re going to be hiring less as far as the overhead here in Houston necessarily, but more folks in the service field.

And we don’t see any issues at all with the labor. Our model is geared for this to address this issue. And I think we’re – it’s very clear we’re doing this quite effectively..

Our next question comes from the line of Brian Lee with Goldman Sachs. Go ahead please. Your line is open..

Maybe just a follow-up here. I might have misconstrued this. But John, I think, you mentioned equity capital in response to Phil’s question. Can you quantify, comment a bit more? It seems like you’ve upped on the notion of not retaining all cash flows and that being akin to selling corporate equity.

So just trying to square the comment and how raising equity fits into your strategy here in 2020?.

Yes. Brian, it’s really about if we can continue to retain our cash flows as we have been and grow that NCCB calculation. We’re seeing more and more where as we naturally delever, including our amortization schedules get more beneficial to the corporate equity, our tax equity will start going into flip status here in the next couple of years.

And then also our solar renewable energy certificate hedges and the debt against that is getting paid off at a fairly rapid rate. That will flow more cash to the equity.So any time we can keep those cash flows, we should do that.

I think what we’re clearly pointing out is that, if it’s at a – it’s a substantial discount rate of four or something in that nature, and there’s an asset sale that we could do, we’ll be opportunistic about that and fully disclose that. So it’s not necessarily off the table.

But anytime we can retain those cash flows when they’re not – when they’re trading at elevated levels in terms of a discount rate, we should probably do that.

Now the other piece of that in terms of the proper leverage, and that’s what I was answering, Phil, on the balance sheet is the Board and the management team are very focused on making sure we don’t get the company overlevered and that we are achieving the recurring cash flow positive, the operational cash flow positive.And so what we’re looking at is, given the high rate of growth and the additional high rate of growth that we see coming, even on top of this guidance is that, that needs to be properly capitalized.

And so we don’t get the company into an overlevered situation. We have a number of options on the corporate debt side of things, with one of those options or a portion of – a small portion of those options be some equity.I don’t know.

Just merely saying that as the growth is considerably higher than I thought would be, and we continue to see more and more opportunity for that growth, that that’s something we’re contemplating over the next year as we look out to look at further working capital raises. But if we do anything, it will be very small.

And as I indicated very strongly, I continue to be a buyer of the equity. So I continue to see it undervalued..

Okay. Fair enough. That’s helpful. And then maybe just a couple of follow-ups on regulatory issues.

On the abstract program in New Jersey, there’s been some recent update/changes there in the process, if you could maybe comment on kind of how you’re seeing that develop?And if there’s a better visibility for you in terms of the SREC commission there because it’s a key market for you guys, obviously? And then secondly, on SMUD in the California New Homes Mandate, any views on the recent community solar decision by the California Energy Commission? And then the impact on the opportunity there? Maybe also what you think or are seeing from other utilities in the state, what they might be planning in relation to that? Thank you guys..

Sure. First, on New Jersey. We think that it’s going to come out to be pretty favorable. We like the current program. It’s generated quite a bit of value for our shareholders and our customers, most importantly. So I think the state of New Jersey has shown excellent national leadership. And I wouldn’t expect that to change.

We’ve got fairly close relationships there in New Jersey is that you’re aware of. And I think that whatever that program ends up being, they’re entering the final decision stages as at least we understand it.

I think it will be fairly even in – it will be not such a rough transition to a new type of program.May actually end up being a – looks like a fixed rate on the SRECs, if you will, so guaranteed by the state. So in some ways, it may even be a little bit more favorable actually to growth there. And given you’re right, our large presence there.

We think on the margin, that should be beneficial to ourselves, to our dealers and to our customers in the state of New Jersey. On California, look, what I would say is that we want consumers to have choices. I’ve been very clear about that.I think the market, in terms of the overall U.S.

power industry ought to be aligned more to consumers and giving consumers choices and not having monopolies and such. And what I would say, I find it interesting that every time we have a utility, there are for consumer choice when it’s for them, and they’re not for consumer choice when it’s against them.

And so I don’t have any problem with the way that this choice has been given to consumers and what SMUDs done necessarily.

I think it’s probable that maybe other utilities in the state follow it.But I want to point out another thing is our solution and our industry solution for residential, solar and storage, especially given the wildfire impacts in California and such that have been headline-grabbing and did contribute to our increase in storage attachment rate, as I pointed out earlier, that is, one, a far cheaper solution than what SMUD has offer and is a far more reliable and therefore, a better service.

So it’s a better service, better energy service at a better price.And that’s why I’ve founded this company. So I would hope that we and our dealers can go out there and make that pitch to consumers that they understand the value that what we’re offering versus what a competitor, in this case, a SMUDs offering.

And also, I would hope that the government there in the state of California, which I’m confident can make sure that there’s proper balance and consumers have proper choices to choose from. And so I think that, by and large, I think, giving consumers more choices is fine as long as it’s an even balance..

Okay, thanks guys..

Our next question comes from the line of Ben Kallo with Baird. Go ahead please. Your line is now open..

Thanks for the detail, John. I just want to maybe dig into Generac.

And just kind of if you could outline how that impacts this year’s guidance, I think you might say that’s not included, how we should think about that rolling out this year than going forward? And then outside of Generac, I think, so the feedback was, as you guys continue to expand different types of channels.

What else, I guess, the question is, what other type of channels should we look? We’ve seen things that didn’t work in the past, whether it’s Home Depot or things like that. But how should we be thinking about what you’re looking to do going forward? Thank you..

Thanks, Ben. Yes, that’s – in terms of a question, I think that’s an interesting point to bring up in the fact that well, I have this advice, the company’s business direction from day one to be is somebody that partners well with technology providers.

And I think that trying to – I think what’s very clear is, we’re basically in a very – getting more expensive arms race and the industry to develop more powerful, cheaper technologies.

In this case, it’s ESSs but there’s also control electronics, generate – quiet generators and so and other technologies that Generac and others are developing out there.And I would say that our long-term vision, by the way, of powering energy independence to the point of even potentially clipping the cord, so to speak, is well aligned with Generac.

And I think more and more people are seeing what seems like a crazy idea as a very real and near-term opportunity over the next few years.

And so when we’re looking out at the technology landscape, I don’t think that – we certainly were not going to pour capital into developing technologies ourselves, manufacturing those technologies used or contract manufacturer ourselves, that’s just not our focus. We want to partner with the best.We partner with Tesla.

We partnered with SolarEdge and Enphase and now Generac, and there’s other partnerships out there. And we’re going to continue to go out there and for our customers, especially and our dealers go out getting the best technology partners and then work with them as they develop their product lines.

And then on top of that, work to see how do we generate more customer leads for our dealers and, therefore, more customer sales. Generac is a marketing machine. It’s a company we’re very proud to be partnering up with, and that will lead to additional growth.

They also have a dealer model, which was one of the reasons the cultures fit so well.And so they’re going to give us access to their dealers as well, which is, again, further growth.

And again, yes, to stress that, that kind of growth expected from Generac or some of our other partnerships, both technology and otherwise that we’re working on, is not baked into this current guidance. And so I just don’t have enough information yet to be able to do that. I hope to be able to do that on the Q1, certainly, by the Q2 call.

But I want to be very conservative before we raise expectations on these new partnerships. But I would say we’re very proud of that and look for many more to come..

Great, thanks for your help..

[Operator Instructions] And our next question comes from the line of Michael Weinstein from Credit Suisse. Go ahead Please. Your line is now open..

Hi, guys. Thanks for taking my question. Maybe, could you talk a little bit more about the split between the different types of customers that you have? Like what – there’s an other category in there and it seems to be growing.

And I’m just wondering if that’s – do you have any guidance going forward, especially after 2020?.

Yes, sure. Well, that other category is typically our service-only customers. There are some other different types of contracts we have. I would say that, I guess, a new term that I’ve seen over the last few months. These are orphaned customers as they’re being termed.

These are typically originated by the loan-only companies and maybe some dealers that, for whatever reason, either they’re not in business anymore or they’re not answering the phone call because the service operation and origination installation, those are two very different types of businesses. Very different.

And so what we’re seeing is a pretty large opportunity to address those orphaned customers.And I think that more and more of the industry will start to recognize that this is a service provide industry. This is not a product sale. This is a service sale. Those customers need to be taken care of.

That’s what was recognized in the securitization by the cattle markets, that will get us a lower cost of capital. Those costs will be passed on to our consumers and our dealers. And so when you look at the further growth of that other category, I would expect it maybe not to take off, so to speak, this year.

But certainly, looking ahead to 2021, I think, that we’ve got a number of interesting – I know we do a number of interesting plans on how to facilitate those sales through our dealers.And then there’s other technologies coming. That will come down the path that may fit in that category as well. Demand side technologies are really starting to come out.

I know there’s a lot of our technology partners that are gearing up and will launch products later this year. So there’s a lot of different sales and services that those products provide that we can provide to our consumers, our customers that are starting to proliferate. And that’s going to go just to further growth.

And of course, the near-term example of that is batteries.One other thing that I want to point out is that we don’t count in the customer count when we upsell a customer a battery. And I think that, that may be unique to us in the industry, but that is just a further transaction count. We don’t count that because it’s not a unique customer.

And those are starting to be rather decent in number. So as we move forward in time, we’re going to – may start to break those out for you all a little bit more, but those would be battery upsells, if you will, to existing customers..

Interesting. So the 50 – the growth into 2020 is really just all your new unique customers. It’s not additional upsells to batteries..

Correct. That’s correct..

Okay.

And when you look at – when you look further out to 2021, I mean, I know there’s no guidance yet, but are we still going to be above the initial 30% level that you were originally forecasting for 2020? We’re still going to be well above that into 2021? Or is it going to be, is it moderating lower than the $58 million that we’re going to see next year or this year?.

Well, believe it or not, given – and this goes to the long term and just a different business model pertaining those cash flows and having visibility into the cash flow. So believe it or not, my team and I are already working on a 2021 budget and forecast.

And so we’re getting more and more visibility into 2021, which we’ll be able to share at some point over the next few months with you all more information to help you out, and then we’ll give guidance in Q3 call, as we did last year when it comes to time later this year for 2021.

What I would say is that at this point in time, we’re not going to see, I think, that large of a growth, but I could be wrong on that. And what we’re looking for is something that certainly is minimum 30%.

And it may be something that is still around the level of that – of this year’s amount.And again, I haven’t baked into this thought process, any of additional partnerships, the homebuilding, the other partnerships that we’re working on.

So all of this is certainly plausible that we would continue to see this kind of growth rate as we move into next year. I see no signs at all in the first two months of this year that, that growth rate is slowing down any at all. So it’s definitely possible.

But that is a fairly high rate of growth, but we – and we want to make sure that we’re focused more and more on generating cash to the equity. And making sure that, that growth rate didn’t get too high and too much away from us.

But there’s just a lot of growth opportunities there, and we’re going to choose wisely and making sure that we’re running the company and growing in intelligent and conservative fashion..

Great. One more question.

When you think about retrofitting batteries, I mean, do you have kind of a guidance or kind of an idea of where that’s growing in 2020 and 2021 and beyond?.

It’s the same territories? Are you asking where in terms of geography or another question?.

How sales are growing? Where – how those revenues are going to be growing, I guess, we’re going to be thinking about that in terms of revenues to our customers, right?.

Yes. We haven’t broken that out, and we’ll try to do that for you here in the next quarter or two.

What I would say is that anywhere in our locals like the island markets, in particular, California and – but also, we’re starting to see, as I mentioned earlier, some of the Southwest and the Northeast, those would be existing customers that will want batteries. I think, as I mentioned before, this is the year of the battery.

There’s going to be a lot of product launches from a lot of very well-run, well-capitalized companies. Enphase has got a product coming out. SolarEdge does. I know Tesla is always going to be out there, putting new products and innovating more and more.

We’ve got – we’ve talked about our Generac partnership, but there’s others out there as well.And all that, I think, will just lead to more and more customer awareness of the solution here and that you don’t need to be without power and still pay either at the same grid rates or a little bit below in some cases.

So – and the prices, I think our batteries are going to continue to drop in a rather precipitous fashion, particularly when you get all these different products and solutions available for consumers to choose from Sunnova. So I think that yes, we will certainly see an increased amount of attachment rate.

We’re looking to figure out and work with our dealers about how do we encourage more of those upsell opportunities, so that gives them more and more business.And takes care of our customers in a much better fashion. You’re talking – use that phrase.

One example of that is that we’ve been very earnest in looking, making sure that any customer in Puerto Rico that wanted a battery can get one. We’ve been doing everything we can.

We can’t make everybody happy all the time, and there is a payment for these new batteries, but we’re going out there with our dealers in earnest and upselling batteries to those customers. And a lot of those customers were extremely happy to say least when the unfortunate events of the earthquakes occurred around at the turn of this year.

They had power when, unfortunately, many of their friends and family and neighbors did not. So we’re going to continue to do, try to make sure that everybody that wants and sees the value in better energy services that better price with the battery has the opportunity to procure that from us..

Okay. Great, thank you very much..

Our next question comes from the line of Sophie Karp with KeyBanc Capital Markets. Go ahead Please. Your line is now open..

Couple of questions. First one, just a clarification [indiscernible].

Yes. So the question was sort of I can hear is that, are we talking about securitizations, when we talk about retaining cash flows for building cash – a recurring – long-term recurring cash flows in the business? No, that is debt. We are talking about a selling off of, say, many do on loans and then do asset equity sales and such.

We’re looking to retain those cash flows as much as we can.

And then look over a period of time, what we’d like to be able to do as we get closer and achieve recurring cash flow from operations is to be able to deliver the company.And again, that’s what I was talking about is the Board and the management team are very focused on making sure that we have a long-term proper leveraging of the overall company, including both the asset level and the corporate level debt facilities, so that we can build something for the long term and take care of our customers for the long term and our shareholders for the long term.

So – no, the securitization is simply the most economical way, the lowest cost capital to access the debt capital markets..

Perfect. Yes.

And so could you maybe speak a little bit to the vintage of the assets that are being securitized now? I mean does that make sense for us to you’re going to consider that when we think about the advance rate and the spreads that you may be getting further down the road as you work through your portfolio?.

Sure. This last securitization had – some assets are a little bit older in vintage. Roughly about half of it, and then some assets that are fairly newer in vintage. As we move forward in time, we’ll see, by definition, more and more of those be just the newer vintage assets.

We continue to see advance rate increase as the risk premium, as I mentioned earlier, Sophie, declines as we demonstrate the quality of the asset class and our competitors have done a good job in this area and demonstrating the quality of the asset class as well.And that, of course, overall interest rates have been falling.

That enters the – I made reference to it, refinancing some of our older vintages and maybe even some of our older securitizations. We’re taking a look at that. The cost of capital drop has been quite significant. Particularly over the past 12 months. And so that’s something that we’re looking at.

And we feel like that we can be able to refinance and either pull cash up to the balance sheet or more likely make sure that more cash flows, again, building up to that recurring cash flow from operations and providing more long-term stability for the company..

Terrific. And one last one, if I may. You’re not talking about bringing forward, I guess, the points in time when you’re free cash flow positive for this and you plan to achieve that at the lower asset level. I think I heard you say 3.8% to 4.8% or something like that.

Could you maybe repeat the point and give us some color on what’s driving this kind of lower asset level point where you’re able to achieve those positive cash flow utilization..

Yes. So this is a follow-up to the call or to the question on the last call. I think it was Julien and Eric had asked about that at that point.

And to be clear about it, what we’re saying is that the larger growth, so that larger-than-expected growth, is basically enabling us as we’re financing and going into the term securitization market that we’re able to cover our costs that are allocated over to the origination side, faster than we expected.

So any sort of the financing cash flows that we’re getting, like, for instance, that we achieved from this – of the securitization is going towards filling any sort of cash need that we need so that they can be cash neutral.What we’d like to do is be able to get that from – in terms of the other side of the costs that are on the operations side to be fully covering all of those without needing to fully lever the assets as we did in that securitization.

Or not using that cash, if we so chose to fully assets, lever the assets in the securitization. So it gives us a lot more operational, financial durability.

And so what I was merely describing this is that our growth and profitable growth is driving more than expected cash generation, both this year and in the foreseeable future as this trend continues. And so simply recognizing and updating my comment to – in my answer to the question on the previous earnings call..

Thank you for clarifying, thank you. Congrats on the quarter..

Our next question comes from the line of Pavel Molchanov from Raymond James. Go ahead Please. Your line is now open..

Thanks for taking the question. Let me ask a slightly abstract one about the cost of capital. This year marks, I believe, 10 years since SolarCity first put out the 6% as kind of the benchmark, and it’s remained the talking point ever since for everybody in the space.

What do you think it would take for Sunnova or the industry, in general, to shift to a different cost of capital target, presumably something less than 6%, given the kind of rates that you’ve been achieving?.

Yes. Thanks, Pavel. Well, again, Eric asked the question earlier, I guess, to start off the Q&A session, right? And they had put out a piece on the 4.5% discount rate. I think it’s pretty clear we’re now sub 4%, particularly with this recent move.

It’s anybody’s guess whether this low rate environment just keeps getting lower or at some point, does it reverse. I think you need to be prepared for both.

But I think it’s also very clear as you dig into the discounts and the assumptions used to create the value side of the equation that’s used in the securitization market, for instance, it’s fairly conservative and not that, that’s bad in any way.

I don’t know if you want to change it necessarily.But it’s certainly – there’s more value in retaining these cash flows. It’s simply, if you look at the last, to your point, 10 years, I think, it’s actually maybe a little bit longer than that. It’s been – you’ve been better off retaining your assets, retaining your cash flows than selling them off.

And I think that, that trend is going to clearly continue, if you look through this. I see nothing but the risk premium and the asset class dropping.And again, if you’re a service provider, we properly service the customers, again, this goes to the happy customer is a paying customer.

And so I think that the overall discount rate will continue to drop further and further from 6%, barring the risk-free jumping up in some unforeseen macroeconomic event. When the industry should change off the 6% and go to a more standard, say, maybe a 4%, I don’t know if that’s really for me to answer.

I think that’s more for you all to answer about when do you feel comfortable doing that in the investor and the lenders to answer that.So I’m not going to answer that. I think that’s more for the market to tell us what – when the right time. I can tell you, and this is just the way I look at it. I’m looking at 4% being fairly conservative.

And that’s why I feel very good about looking ahead at $14.15, as I indicated, I think you need to look at a per share basis in terms of the value. And I see in the next 18 to 24 months, I can see that $14.15, growing quite significantly.

And so I look at that being kind of a base conservative value, which goes to my point about the shares being undervalued here. And I think we’ve got a lot of value to create. And I think we – hopefully, we’ll see the market respond and indicate that in an ever- increasing stock price as they’ve done over the last few weeks..

Yes. I appreciate the perspective on that.

And then secondly, in terms of geographic mix or geographic footprint, how many states are you currently in? And what do you expect that number to be by the end of the year?.

I think we are indicating we’re roughly in about over 20 U.S. states and territories. We are clearly looking at other geographies. I wouldn’t say that there’s going to be a huge amount of geography expansion. Again, I want densification of customers to drive down my overall service and my operating costs on a per customer basis.

And so we want to be fairly conservative on that. At the same time, storage is really opening up a lot of different markets, not just in the United States, but this is a global, as I indicated in my comments, transformation of the energy business.So there’s a lot of opportunity out there.

But again, I want to make sure that we’re very cautious, and we’re very conservative, both in estimating our forward growth, but also in what kind of expenditures we take on to enter these new geographies. I think we need to be very judicious with that. We’ve continued to do that. But we’ve also continued to open up new geographies.

And I think that methodical pace is what we’ll see continue over the next couple of years..

Thank you very much..

And there are no further questions in queue at this time. I’d like to turn the call back over to John for some closing remarks..

I want to thank everybody for joining us for our 2019 conference call. We had a fantastic year at Sunnova and really, it was a breakout year for the company. I’m very proud of everybody, all the men and women that make up Sunnova and our dealers did a fantastic job. I really appreciate all of your support.

We’ve got one heck of amount of momentum coming into this year, and it continues to increase.Got the right strategy, the right people, and it’s really at the right time. The industry is transforming. The battery is a significant catalyst. We have the right amount of strategy. Again, we have the right folks behind us.

And looking forward to having a fantastic 2020. And as I indicated earlier, already looking ahead to maybe even a bigger 2021. So I appreciate all of your support and look forward to our next conference call. Thank you..

Ladies and gentlemen, we would like to thank you for joining us today. A replay for the call will be available at 11:30. Thank you. You may now disconnect..