Good morning and welcome to Sunnova’s First Quarter 2021 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 conference over to Rodney McMahan, Vice President, Investor Relations at Sunnova. Thank you. Please go ahead..

Thank you, operator and, good morning everyone. Yesterday we released our earnings press release and posted a slide presentation to the Investor Relations portion of our website 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..

Thank you, Rodney. Good morning and thank you for joining us. 2021 is off to an excellent start thanks to strong Q1 results, the quick closing of the SunStreet acquisition, and our continued ability to grow faster than the overall market.

Sunnova is well-positioned for an exciting year ahead, which includes delivering on its reaffirmed full-year 2021 guidance. On Slide 3, you will see the details of our strong operational results where we grew our customer base, increased both our battery penetration and attachment rates, and continued to expand our dealer network.

Our customer growth remains healthy, as we've added 8,900 customers in the first quarter of 2021. This is before any contributions from the SunStreet acquisition which closed on April 1.

On storage, we continue to see strong demand as frustrated homeowners seek out more reliable and resilient energy solutions to combat outdated and ineffective power grids.

As discussed during our last earnings call, this demand outpaced available inventory in the second half of 2020 resulting in an industry wide supply constraint in Energy Storage Systems. However, these constraints began to subside in Q1 resulting in an increase in our battery attachment rate on origination from 19% in Q4 2020 to 23% in Q1 2021.

With this strong customer focus on reliability and resiliency, we continue to see an increasing penetration rate of storage on our full customer base. Our penetration rate now sits at 10.5% as of March 31, 2021 more than double where it stood just one year ago.

We expect this rate to rise even further and could see it reach as high as the mid-to-upper teens by the end of the year on an expected customer base of roughly 200,000. This exceptional growth is fueled by our over 500 dedicated dealers and sub-dealers.

Driven by the attractiveness of the Sunnova Network, we anticipate our dealer count to grow even further in the coming quarters and be at or near 1,000 by the end of 2022..

Thank you, John. Turning to Slide 9, you will see the momentum we have gained in our first quarter results over the past few years. For instance, Q1 2021 revenues are up 55% from Q1 2019 while over the same period adjusted EBITDA and the principal and interest received on solar loans increased by 58% and 237%, respectively.

As John noted earlier, Q1 historically generates negative adjusted and recurring operating cash flows which you can see reflected on this slide. However, the year-over-year trend remains up and to the right as we gain operating leverage. Slide 10 summarizes our recent financing activity.

The 2021 financing transactions completed to date include our first solar loan securitization of the year in February that was sized at $189 million and achieved a weighted average blended yield of just over 2%. Other financing activity included a loan warehouse restructuring of $350 million and $75 million in new closed tax equity funds.

We have additional commitments of approximately $500 million of tax equity that we expect to close in the near future. We will continue to work with lenders to properly finance the company with the goal of increasing near-term cash flow to the corporate balance sheet.

To facilitate this we remain focused on the issuance of a green bond within the next few months which should help turn our strong adjusted EBITDA and P&I growth into strong recurring operating cash flow.

Our total cash balance as of March 31, 2021 was $263.5 million, up from $169.2 million at March 31, 2020 but below our all-time quarter-end high of $377.9 million at December 31, 2020.

This decline since the end of last year was primarily driven by over $30 million in securitized debt pay-downs, intentional under-borrowing on our warehouse facilities, the timing of tax equity contributions relative to fund-specific construction milestones, the overall seasonality of cash flows as previously discussed, and a high level of EPC spend fueled by our robust growth that made up approximately 84% of the company's total cash outflows for the quarter.

In summary, this change in cash primarily reflects our usage of working capital to facilitate our high rate of growth..

Thanks, Rob. Until recently our industry was dominated by a solar only sale that primarily focused on saving homeowners money as compared to the centralized monopoly power rates.

Storage and the increasing consumer demand for a more reliable and resilient power service has catalyzed our industry to move towards an integrated, multiple technology solution sale. This is the wireless power service that we have been building for a number of years and to which the industry as a whole is beginning to pivot towards.

To serve customers with a wireless power solution and make it as efficient and worry free as possible is a significant technological, logistical, and operational undertaking. Sunnova has been, and is continuing to, invest in software capabilities that enable services to be delivered to consumers.

In addition, platform companies, such as Sunnova, are providing an increasing amount of services and scalability to originators and installers and closely partnering with the best equipment innovators and providers in the world to create and deliver these integrated technology services to homeowners.

We have woven these software and service capabilities together to create an interconnected platform that we call the Sunnova Network.

As we obtain an increasing amount of scale, we can better utilize the Sunnova Network's combination of software and services to enable certain aggregation capabilities and to create additional value for not only our customers, but also our dealers and equipment partners.

It is this cohesion of these three key components - software, services, and aggregation that creates tremendous value for our dealers, equipment partners, and most importantly our customers. Sunnova, along with its dealer and equipment partners are increasingly building bigger moats against competitors, including the existing centralized utilities.

Our unique capitalization strategy has also reached a major tipping point that will produce greater cash flow to the shareholders of Sunnova.

Since our founding we have focused on doing what was right over the long-term, and now that patience and investment is paying off with significant competitive advantages and greater cash flows for years to come. With that, operator, please open the line for questions..

Thank you. . Your first question is from Sashi Sarason with Simmons Energy. .

Good morning, all. Great start to the year and thank you for taking my question. So I'll start with the big one. A few days ago, Enphase indicated that they're going to have issues meeting demand throughout 2021 due to chip shortages and this is weighed on the sector, just given the potential bottlenecks.

Can you help us just provide some context around your supply chain, what gives you the confidence that you can hit your numbers for the rest of the year, maybe anything surrounding the amount of inverters you have on your inventory backlog or storage systems and what you're hearing from all your major suppliers, any context at all would be great?.

Certainly, thank you for the question. First and foremost, I want to point out that we were the first one’s way back in July of last year to signal that there was supply chain problems, and specifically in the energy storage system area.

I think it took several months for others to recognize that on our last earnings call in late February, we said that that we saw those constraints freeing up a bit, specifically on energy storage system.

However, if you recall, at the end of the year last year, rather, and through the first quarter we did express that we thought there might be a little bit of tightness in the inverter supply marketplace, and maybe specifically one or two players, if you will, of providers.

I would say that, what we did there is that we have a fairly significant Safe Harbor inventory of inverters. We did stockpile a lot of those, quite a bit. And we have -- and we also stockpiled quite a bit of energy storage systems and we have those.

We also, again, anticipating this issue, further purchased more inverters and in anticipation of something going wrong. As recently as a few weeks ago, I didn't think anything would go wrong, it appears that there is at least a bit of difficulty with at least one supplier, and we're pretty covered in that regard.

So we also have a very large purchasing power, as I'm sure a couple of my other competitors do as well and anything else that we would need get -- but we have plenty.

And indeed, I look at this as an opportunity to drop some of our inventory down because we're quite confident, especially listening to President Biden's address to the nation yet last night, that the Ford ITC extension, around 30% will get extended at some point here in the coming months.

In addition to that, on the energy storage system, which has been our problem, we do see and this is very recent information that our anticipation of a loosening of that, again, if you recall back to the Q4 earnings call a couple of months ago, we thought that the energy storage system market would loosen up in terms of supply towards the end of this Q2, beginning of Q3.

I am pleased to report that we are seeing that possibly loosen earlier and in particular with one partner and we see that loosening happening in the next three to four weeks. There'll be a couple of weeks of delivery time to our various locations around the world, around the country.

But we're also seeing quite a bit of new very well managed, very competent firms, such -- and partners of ours, such as Generac is ramping up quite significantly, innovating their product quite aggressively. Enphase has done so as well and I would note that Badri made a comment that he doesn't see any problems there with the in charge system.

And indeed, we have a lot of those already in place and moving towards our previously sold storage customers. In addition to that we're anticipating SolarEdge to launch their product out here in the next few weeks as well, although it depends Zvi can certainly cover that in his earnings call.

So all in all, we actually see the supply chain situation improving. We have prepared for what 0we thought would be the bumps in the road quite more than adequately and we actually are quite optimistic. And we don't see this getting in the way of anything that we have planned to do in the coming quarters..

And cash, if I can just add real quick on the 10-Q that was filed this morning under the inventory note, on Page 11, we've actually broken out the ESS and modules and inverters that we have within our inventory. You can see that we still have quite a few of both.

And that modules -- I am sorry, modules and inverters is a lot more weighted towards inverters. So that's our Safe Harbor in addition to those other purchases that John had referenced. .

Thanks, guys. That was excellent color, appreciate it. And then my second set of question is around California.

Just curious if you're seeing any demand pull forward associated with the uncertainty surrounding energy metering, and then maybe not quite related to that but are you also seeing an interest from home builders in using SunStreet platform, that could help you further penetrate the new homes market? And I'll leave it there. Thanks. .

Thank you. On the California question. No, we're not saying pull forward yet and wouldn't have expected to. And again, we expect that, that process to maybe take a little bit longer time to work itself out probably, certainly at the very end of this year for the commission, California Public Utility Commission to make a decision.

Maybe even early next year. The other part of that, of course, is that we expect that the leaders of California will recognize that the amount of good paying jobs and so much progress has been made and really California has done an excellent job of leading the country.

Everybody knows this in a clean energy world, which obviously is now just dominating the entire country and as we move forward and really rapidly transform our energy industry, into a clean and more reliable energy system. And so we see that the California NIM process will end in the right way.

And so I don't anticipate that there'll be any part of demand pull forward. But that's certainly something we wouldn't expect to see till much later this year, if any. On the second, yes, we've had several wins of late. Didn't take long to close on that acquisition and we already had some several big wins.

Most of these homes I think would come later in this year. Yes, given the build cycle times and then into 2022 it's one of the key reasons why we're starting to get very, very constructive on 2022 growth.

And so yes, it's already directly paying off and we're making more wins, and we certainly expect to see a lot more wins as we fully integrate the SunStreet platform into the Sunnova platform. .

Thanks for the details. .

Thank you..

Your next question is from Philip Shen with ROTH Capital..

Hey guys, thanks for taking my questions. As it relates to the growth rates, you're targeting, just about 100% year-over-year in 2021. Q1 came in later.

So I was wondering if you might do a share, how you expect customer additions to trend in Q2 and Q3? And to what degree do you think we could see upside to the 2021 growth rates, given the rate at which you're adding dealers?.

Just to cover off real quick, the rate fell. I think that when we had done our first quarter, or year-end call, we guided that we expected about 30% of the customer adds to happen in the first and second quarter and about 70% of the customer adds to happen in the third and fourth quarter, I think we're still very much on track for that.

Given where we came in this quarter and given the trajectory. As far as, upside opportunities I'll probably let John cover that. But I think that we actually came in very much where folks were expecting and actually ahead of where most of the consensus was. .

Yeah, I would say that we're actually trending more towards a 35:65 maybe a little better waiting on that. So I'd say we're in decent, pretty good shape. I don't want to comment any more on 2021 growth, it's already pretty heady.

Quite candidly, I don't really see this reflected in our equity and I don't think there's any point in pushing it up further.

We're seeing a lot of strong growth, we're seeing a lot of growth in areas more specifically in services offered per customer, whether it's new additional technologies, generators, EV charging, load managers, a bunch of these technology that we laid out in our third quarter 2020 call.

And we simply are rushing as fast as we can to get those implemented, put into nice products, make sure we have the appropriate licensing, get those out to our dealers, train them up, how to sell and how to install. And that just takes a lot of time. It is a huge operational lift, and it takes some time.

And again, we're just seeing these opportunities pulled forward. And so again, as we looked at 2022 we're getting very, very constructive. So that's all I will say about growth and hopefully, as we continue to execute, and the investors will appreciate that growth rate. .

Great. Thanks, guys for the color. My second question here is around unit economics. Looks like you were able to expand those economics in the implied spread nicely to 5.8% from 5.1% in the year ago period, actually in the Q4 period on a trailing 12-month basis. But in your footnote there you highlight that I think the spread is even greater.

So I was wondering if you could talk about kind of the Q1 expansion and then also what you might see in terms of that implied spread ahead, and I think you talked about the fully burdened unlevered return expanding as well, so anything on a forward-looking basis would be great? Thanks. .

Sure. So if you look at our last year 2020 it was roughly about 510 basis points of spread. And, we certainly see that much higher. We are seeing our unlimited returns and a bit of a surprise that continue to be fairly strong. And we don't see any dissipation in that. We also achieved a record low and then a lot of our other competitors followed up.

So it wasn't a one hit wonder so to speak, just a couple of weeks later. In the midst I would add, the worst bond market performance I think, since the early 1980s. So the risk free certainly did not have the impact, negative impact.

And so if you took that spread that is increased towards 9% and higher, and you have a 2, call it low 2s, cost to capital all the way through 100% of the fully burdened cost, you start to get something that's closer with a seven handle on it, so to speak. I think that what the best way to do this is to look at a trailing 12-month.

Both Rob and I have looked at this and said there's some volatility with issuance of securitizations within timing of financings and so on. And so I think that's about a better way of looking at things.

And so that gives us also a more conservative standpoint to be able to look ahead and say, yeah, we think these returns either stay here or move higher. And we're quite confident that we can move higher in the coming quarters. So, we're doing very well on that and I would say that is a bit of a surprise to how strong those spreads continue to be..

Great, thanks. .

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

Hey guys, good morning. Thanks for taking the questions. Kudos on good execution here. John, maybe just to follow-up on that. I know you guys are focused on the spreads and rightfully so, that's the right way to represent increasing value of the business model. But you guys have historically talked about net contracted customer value per customer.

I didn't see that in the slides this time, I might have missed it but you usually disclose them way in the back.

Was that left out deliberately, do you -- you said, I think in the call that the numbers have moved up, could you give us some sense of where those are and how they've been trending here?.

I don't think we had actually listed out the net contracted customer value per customer. We certainly have the numbers in there, we have the number of customers and we have the NCCV. But I don't think we'd actually run that calculation in the back of the book. That being said, it still continues on trend to be very strong.

Now, if you take a look at what we expect to happen on a per customer basis going forward, there's going to be some stuff in there that changes that a little bit.

Recall that for SunStreet, we're going to pick up about 35,000 customers to 45,000 customers that we're going to actually bring into that denominator, that we're just providing the service for, at this point, and that we expect to have a lot more opportunities with.

And in addition to that, we're going to have the new home build customers, which typically have smaller systems, and typically have systems that don't have batteries attached to them. So that's going to change that NCCV per customer metric as well.

I think what we're really concentrated on is how we can continue to raise the NCCV per share at the same time, and then come back to the SunStreet customers and raise the NCCV per customer on them as we do on a go forward basis. But yeah, that isn't a number that was taken out.

The only number that we took out and we did in fact preview this last time and say, in fact that we were was the net system value per customer.

Again, for the same reasons that we had mentioned last time that it doesn't really make sense when you're trying to look across geographies, when you're trying to compare different system sizes, when you're trying to compare systems with storage systems without different types of tax equity and the like.

So we felt that was again, sort of an archaic metric for the industry. But if you still need the NCCV per customer, you definitely have the two numbers on Page 29, you can run that back. .

And I think, Brian, I think, roughly, I think it's roughly about just south of 16,000 per customer. And just to be clear, as we laid out previously, by 2025 we still see the number of services per customer getting towards in that range of seven. And that NCCV per customer being roughly in the 18,000 to 20,000 range is our target.

So that's still the same even with the acquisition. .

Okay, that's great. I apologize, on semantics, I was actually speaking to that metric rather than net system value per customer, but I appreciate the additional context there. Maybe as a follow-up and also on the unit economics, the creation cost leveled off a bit here, they were actually down a decent amount and leases on a quarter-on-quarter basis.

I know this jumps around a bit but is this mix or what kind of drove those dynamics, are you seeing some cost savings, and where are those coming from?.

Really the primary drivers is as we grow just getting more and more operating leverage scaling. We talked about this for a few years, right Brian is that we grow the business up, we just scale the cost, and as we continue to have this rapid growth, we're going to continue to scale the cost out and we've laid out what that cost reduction looks like.

I think in the four years once you start taking out one-time items like needle replacements and so forth, you'll see an even bigger pick up.

And probably a more simplistic way of looking at that is as I mentioned in our opening comments, the adjusted EBITDA plus our principal and interest from our solar loans are loans, that should continue to trend much higher. And over time you should expect to see that trend higher than the customer growth.

And you've seen that we've done that in a few quarters even over a year or so before we went public. And we were experiencing such a high rate of growth right now.

There's about a year lag in spending, as I've talked about previously, but as again as you move forward and we get bigger and bigger, law of numbers right, I am talking about the forward years, you would see that growth investment, etc. slow down, abate as I made in my comments.

And then these one-time items drop out and you'll see even higher operating leverage that's already embedded into the company right now. So we're quite big, and really certain of moving forward with increasing our operating leverage. .

Okay, that's great.

And maybe if I could just squeeze one last one in on the financing side, the refinancing, you guys have kind of been telegraphing this for Q2, we're there now in terms of timing, can you give us a bit of sense around maybe more specific timing, and then the magnitude of what you're thinking of doing there, and what sort of cost of capital you think you can achieve versus what you will be refinancing and taking off the books? Thanks, guys.

.

I think it was pretty clear that we've been targeting our earlier securitization, that there's definitely opportunity there. If you take a look at any of our first three securitizations, the cost of capital there is well, well, above two extra more above what we can achieve in the market today.

And then sort of regular cadence, you can see that we tend to do a securitization on the TPO side, it's been accelerating certainly over time. We get about one year moving up to two a year. I think that with -- if you're looking at that, you should still expect to see something here by the mid-summer, certainly not earlier than that.

The market still remains very strong and one thing that we're really happy with, and you saw this not only in our securitization, but in the ones that immediately followed is that there continues to be compression on the spread.

So even with interest rates having a little bit of revolve to them, the overall rate that we're able to achieve in the market is still fantastic.

And that's because of a) just this overall recognition that this asset class has more resilience than just about any other and b) that the service level that we're providing, especially, being really the only ones providing this high of a level of service on loans is keeping the customer happy and paying and those loads of false delinquency rates are really being recognized by the market..

Thanks guys, appreciate it. .

And Brian, I'll just add real quickly to that is that, wouldn't upset us in the least bit to see the risk free move up here 20 to 30 basis points or whatever. And why is that, that seems a curious comment.

Well, it's because as we've laid out in the previous call, we do have hedges in place and those hedges once we break them and turn out the debt, that means money that probably will collect because they're in the money.

And then on the other piece of this to build on what Rob was saying is that it's very difficult when the risk free was plummeting, like it was last year, to get that spread, that risk spread, premium spread to compress. It actually expands if you look at this time last year, right.

And so as the risk free moves up what you're seeing, and you saw this in February, and we expect that to continue, as you would see the risk premium compress, because again most investors in the ABS market are absolute yield investors. And so what that means is, that's how you make money is having that risk premium and compressing.

That's what Rob is saying and we continue to see that. So we actually are not upset in the least bit to see the risk free move up here even as much as is done over the last few months. And if it moves up a little bit more that's not a problem and it's actually the way, Rob and I've laid it out, a little bit of a benefit to us..

Your next question is from Dan callow with Ben Kallo with Baird. .

Hey guys, good morning. .

Good morning. .

So a few questions. Your dealer network, can you just remind us there was a big pickup there and just remind us kind of the percentage of exclusive relationships there? And then maybe, John, just what's driving first for you guys to keep dealers up? That's the first question. .

Yeah, certainly. I think we've honestly I have lost track of how many exclusive relationships we have. We continue to see them escalate in terms of requests for those and signing of those quite a lot. And they have -- each of them are slightly different transactions or documents depending upon the requirements of that dealer.

But it is a very large part of our network. And, I think the practical reality is this is where the industry is trending towards. I've talked about this for a number of years, it just makes sense. Look, if we're not the right home for you, go marry up with other service provider and platform.

But the idea about moving in between the service providers and platforms is just -- it’s not realistic. As the industry becomes more of an integrated technology solution sales we laid out and we've been more specific on Slides 15 and 16 and hopefully, it helps investors really understand what we're talking about.

And again, I don't see this as unique to us necessarily. Our competitors would probably set themselves up and see this as very much in the same way. But it's driving more of the requirements of software and services to these dealers.

So more and more as this becomes more complex and you want to offer a simple solution to the customer, it's becoming stickier and stickier with the dealers. Now, why did they come to us? Well, aside from charisma or anything else that my folks have not me but my folks, I think it's pretty clear, it's we're dedicated.

I mean, we're not going to compete with our dealers, we have everything invested in them to be successful and they know that. We have the widest equipment partnerships in terms of the best technology, the best partnerships. This firm partners well, we play well with others and very, very helpful.

And I see that continuing to be a big part of the value that we provide our dealers.

The software tools that we have, we're about to in the next few weeks and months, we are going to launch out a number of big huge steps in software capabilities to our dealers across whether it's starts in the origination side all the way into commissioning and making sure that the equipment is done and turned over properly.

And, when you look at the capitalization strategy of the company, it gives them a lot of peace of mind, they're going to get paid as we again, go towards and being very close in issuing the green bond, start flowing more and more cash to the equity that also gives them peace of mind that they're going to get paid and they have the ability to marry up if you will, over the long term.

So each of these, I don't think I'll take the time, obviously, to go through all this and aggregation services as we continue to provide a lot of value there, especially on the storage side of things, to our dealers. Each of these is a huge network and huge value set that goes to our dealers. And in many ways, this is very unique to us.

Now we got to continue to work hard, continue to push on this, and continue to innovate whether it's software and services and our aggregation capabilities. But I feel very, very good about where we're sitting competitive wise, and you're right, it is driving a lot of a very large amount of dealer growth.

And for the first time, we feel very, very comfortable of saying look, given our trend we see this doubling on a very large number of 500 by the end of next year. I think that it's astounding growth and goes to a point about pointing towards our growth rate. .

That's my third question.

My second question, though, just on that green bond can you just maybe talk a little bit about that then within your guidance if that's included at all in any of your metrics on the green bond?.

We haven't really talked too much about it. And I think that we don't want to get too far ahead of it. What I would say is that anything we would do in that area would be accretive to our primary metrics, especially to the recurring operating cash flow.

It still remains something that we want to be prepared for, deliver for that we do still very much intend to do. But I don't want to get out ahead of my skis here. But it is a big focus of mine. And part of the point is that it would be very accretive to RCF.

But the other part is that by retaining the cash flows, we're really the only ones in that position to be able to go out to the market and do something of that nature. So again, don't want to get out ahead, but it's still very much a focus of what we're trying to work on. .

So my third question was about getting ahead of your skis. So you guys, throw out your numbers for all of us that follow Sunnova for a long time, we can look at it as reckless. But, I guess it's also better visibility than anyone else got.

So, I guess why do you do that, you give those -- that kind of forward visibility there, just maybe just from a high level what gives you confidence to start throwing out 2022 numbers?.

Yeah, thank you. First of all, in our financial metrics where adjusted EBITDA plus the principal and interest from our customer loans and cash flow metrics, right now at the end of March 31st, I think we had 86% of our cash flows locked in for the year.

And so look, I wouldn't say that we can just mail it in and be done with it, we certainly with this high rate of growth, we've got to manage the expense side of the equation quite carefully. But we do have a huge amount of visibility in the financial metrics across the board, because of our very conservative capitalization strategy.

And so, when you do gain on sale, nothing wrong with that, but it does have a lot more volatility to it. So, our belief is that investors over time will appreciate the stability of the financial metrics, the conservatism that the company has been set up with.

And I would point out that if you go back and you're to go look at late 2018, early 2019 before IPO, and you were to look forward in time, and look at all these metrics, we've exceeded them. And that, again, goes to the stability and conservative nature of the way that the company is set up. And again, I hope investors start to appreciate that.

As far as that, that can vary, it does vary more, but again, we're counting our customer when they go in service. And the rest of the industry, I think, is doing very early stage or equipment install, which is fine. But it will lead to more volatility in the quarters ahead, and not as much certainty.

And so a lot of what we have right now, and we're looking forward, certainly for this quarter, and even next quarter is we already have it in hand. And so that has been giving us a lot more stability, and predictability.

And then having a lot of our dealers and having good plans as far as software building and other capabilities and new technologies, new products, we have the ability to integrate not only lease in PPA, but loans and do -- create some very innovative products out there.

And again, it's creating a stickiness factor with dealers and it's something that we continue to be able to look at, to have that kind of stability with those exclusivity arrangements with our dealers and more and more, like I said earlier, want those exclusive relationships with us.

So it's just setting ourselves up and its taking the pain in the short-term, focusing on the long-term, and making sure we're set up in a way that we can give more predictability to investors. .

Hey, just for the record, I wasn't calling you guys reckless, I was saying that we would think that was reckless?.

Yeah, no, I appreciate that. And I appreciate that and look I want to make sure Ben that do I make sure that it's something of focus of me and the rest of the management team and the Board that we are constantly looking at this and pushing, this is not easy. This is not easy.

But we have a great strategy, we've been conservative on how we set the company up. And that's been painful on the front end. I can tell you but over the long-term, I just absolutely believe doing what's right on long term and being conservative is going to pay off..

Thanks John and Rob. .

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

Hey, good morning team.

Maybe if I can pick up off of that last dealer conversation here, given the expectations are double by year-end 2022 what does that mean about implications continued customer addition growth into 2023, I know you said you were cautious to give too much incremental on customer growth but clearly the implication of just annualizing the 1000 dealer target by year-end 2022 should have pretty sizable implications on 2023 compounding growth, right?.

Well, yeah, now forecasting in 2023, Ben’s comment probably is reckless for me to do that at this point. But look, I understand running evaluation analysis of the company you look at, yes, it obviously is going to have a positive knock on impact to growth.

And I don't want to get into what that is but you should definitely look at that as a positive impact on growth.

And I would also add, in becoming just as important is the launching of new service products, upsell opportunities to our existing customer base, and we just simply cannot get all of that out the door fast enough and really up and running, gives a huge operational lift. And we just see enormous amount of opportunities.

Grid services were running flat out, micro grids, that's something that I thought would take a while. We're getting inbounds like crazy from folks, like, we want to do this, we want to do this project, right.

And then you got generators, you've got EV chargers, you have got load managers, all this stuff is coming so fast and that's going to have knock on implications, particularly into 2022 and beyond upselling more services, making more margin, more revenue per customer on both existing customers and new customers.

So we're again -- we laid it out in the Q3 call last year, but we're growing and seeing a lot more opportunities to grow both on the per customer basis, old and new and then on the overall customer growth. .

Got it.

If I can pivot back to that inventory and supply question here, can you elaborate a little bit more, especially on the supply side and storage, considering Kaso’s commentary about shifting away from providing powerwalls to third parties, just talk about the overall mix and ability and then more importantly perhaps, how does this reconcile against your overall attach rates and year-end penetration targets to the mid upper teens if you will?.

Yeah, to our knowledge and it's very recent, I think that the relationship there with Tesla is very good, something that we value and I think they value it as well. I would say that we're not aware that they will not sell to good partners like ourselves. And so we continue to take delivery of units and expect delivery of units.

And again value the relationship there. I think that was mostly a commentary that Mr. Musk made on not selling in his service part of the business without batteries. And I applaud him on that and I think that's exactly that's where we think everything's going to go, I think faster than people think.

I do think we're going to need to see some price declines in the ESS in the coming couple of years or so to really get that penetration rate up there. But I think we're going to get it.

And the point is, I laid it out on answering the first question, which is, we have a lot more partners on the ESS side, SolarEdge has come into market and we know that they're going to have a good product, very well run company, good partner.

And, Generac is continuing to do a lot of great things and innovate their product roadmap and what they're doing is just, it's unbelievable, and they're going to have a lot of new products out there in phases doing a phenomenal job. So there's going to be a lot more availability, just period out there. But I think that's great.

And I think, Elon would agree, having a lot -- there's a lot to do, there's a lot of business out there. And we want to do what's right and make the energy system convert over because we have a climate emergency.

We have a major humanitarian crisis that may resolve and there's plenty to do and so we see a lot of different partnerships and they are bringing new products and they're innovating those products fairly quickly.

So overall, there's no way that we're not in a better situation in terms of this company, speak to that, in the coming three to six months on ESS then we've ever been. .

With no firm year-end commitments?.

No firm year commitments in what Julien?.

Total penetration by year?.

Well, I talked about it in commentary about accretion rate moving from 10.5% to kind of mid to upper teens.

Well that is something about as close as what we'll get at this point to move in and consider the new home market, which is going to have a little bit of a slower uptake, possibly, maybe I'm wrong on that on storage, penetration, we're certainly going to push it. But we don't know how exactly all that math will work out.

I will tell you that including yesterday and the last few weeks our storage penetration rate is moving right back up very smartly from the 23% pushing into the 30%. So no, I think we're in good shape and I think that the guidance I gave out there is probably better than anybody else was willing to give.

And again, to do anything more than that, I think would be a bit reckless on my part. .

Impressive, alright, good luck. Thank you..

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

So a lot of my questions had been answered but maybe you could talk a little bit about the -- if you look at the fully burdened return, IRR of 8.9% trailing 12 months, if you look at the first quarter alone, it's with 9.1%, I think that's a decline from fourth quarter of 9.7%, is there something you could talk about there about what's driving the reduction?.

Yeah, it really is. There's a lot to influence that on a quarter-to-quarter basis, it could be the structure in the terms of certain tax equity funds over others, it could be that the geographic mix, it could be the difference in mix of different products and so forth.

So, again I think what Rob and I are looking towards is just say, look at the trailing 12 months and that gives you the general trend of the focus on that. But, look I'm proud of the 9.1, I'll tell you that.

I mean, I didn't see that one coming and again, who knows at this point in time because that moves back up possibly, but 9.1 is pretty darn good and again in point to trailing 12 months I think would give investors the best visibility to the overall spread. .

Yeah, I'm going to go ahead and add to that. We want to -- what we don't want to do is to have the deployment into a particular tax equity fund or if we're doing more loans releases or if we have big boon in one state or territory to make that go up or down and then point to it and say, aha, that's the number right there.

We really want to look at it on an overall company basis and over a broad enough period of time that we can actually get some insights out of that number. .

Makes sense. And I think you said something earlier about with green bonds, that your advantages that you have retaining the cash flows, right, the green bonds.

Does that mean that -- what does that mean in terms of ABS tax equity usage going forward, is that going to be less?.

I'm thinking if we could go look to the ABS market, we would still look to the tax equity market. I think that where there's some advantage is really how we do some of that structuring within the ABS market. And again, your firm as you know, we do a lot with them.

So we're really looking forward to continuing to working with them on optimizing those structures. .

Got you, and in terms of dealer landscape, we are predicting about 1000 next year, what is the total addressable dealer market out there, how many dealers are there, how many sub dealers are there, at what point does Sunnova University really have to kick up the gear?.

Well we still have ways to go we think and I would say that there's 1000s out there, and certainly if you do the math and several 1000 and so -- and they're growing in number and I am seeing continuously seeing new names and some folks leave others and start around and so on.

And that's just normal, not just this industry but whether it's cellular, telephony, satellite cable television, Home Security, etc. So, we see ample opportunity, really do, and at the same time we're going to -- we're getting very serious about and diligent with Sunnova U.

So we want to create more, we need to -- we knew lot more risk will get to even more growth in the outer years. .

One last question. On Slide 23, looking at cash assets, there's a dip there in the latest quarter, and it steadily grows over time.

Just wondering I mean, if you look at total cash, including construction in progress and inventory, that sell basically 100 million in the quarter, what's driving that?.

There's a couple of different things that are going on there. One, we did a restructuring of one of our credit facilities that released a lot of cash that had been held in reserve. So we had some significant reserves in one of our credit facilities, we were able to get released.

We lowered some of the debt ball, we didn't borrow 100%, close to 100% of our facilities, which we tend to do up at month end so that was there. The first quarter is usually going to be a quarter where you're going to see some fall anyway from the prior quarter.

And in fact, if you look back, historically, the first quarter is always a little lower than prior quarters. But when we have more and more securitizations, ROCF impact is going to be greater and that we paid off $30 million worth of debt in that first quarter in that securitization debt.

And then the final thing is that we really started ramping up on our EPC. So I say the final thing that that really is the biggest one, that we were ramping up a lot and we expect to continue to be able to put those into facilities which should help us catch up a little bit on cash.

And really, we keep talking about this but it's probably a really good point worth reiterating, is that if we take a look at what moves that cash number, we are originating assets at -- on a fully burdened basis at or above breakeven, and we are moving to ROCF positive.

And that's really all the movements of cash with the exception of just working capital and that's really the only thing it's going to be moving around a little bit from quarter-to-quarter. This is just one of those quarters where it ended up being down a little bit just because of the big uptick in new opportunities..

Got you, thank you.

So it sounds like a lot of just lumpiness in timing more than anything else?.

Well, welcome to the solar business, a lot of lumpiness in time. .

And thanks. Sorry, that was my two-year-old in the background there screaming, very excited about solar these days. .

We're going to take his questions. .

Alright, thanks a lot guys. .

Thank you..

Your next question is from Mark Strouse with J.P. Morgan..

Good morning. Thank you very much for taking our questions. Just wanted to go back to your comment about EV chargers being available later this year.

Can you just kind of clarify for us what your expectations are for the cadence of new hardware offerings, whether it be EV chargers or generators, over the foreseeable future and how we should think about -- how we should think about the value per customer ramping over time without, is there kind of a learning period that you're expecting where people are fine tuning the sales and the installation process, and then the value really kicks in one, two, three, four quarters later, what are you expecting there?.

That's a good question. What I've said in the past is that I thought most of these would be in the 2022 and beyond timeframe. What we're seeing now from customers is that they want it now.

I mean, I can't tell you how many times I've even had friends come in and say, I want solar storage and a generator and what they don't know to ask for is a load manager as well. And then they come back and say, oh, by the way, I've just bought an EV so throw a charger in there.

And then they say well then I want you to run it off, the service and all that I don't want to worry about it. I want the uptime. And I want to pay this bill and that's it. And, that's complex.

I mean to put all those different pieces together and productize that offering and those integration of technologies across multiple manufacturers I think is the most realistic way of looking at this.

And so that can take -- that will definitely take a long time, whether you're developing your software platform to launch those products out, you got to think about you're doing across multiple states, you got to adhere to their individual licensing requirements, and so forth, and the legal language on the contracts, then you got a PPA, you got a lease, you got a loan, you got all the different tenures of the loans and so forth.

So there's a lot there. And we're launching our products, we've been doing it for at least three years. But we continue to see more and more opportunity to launch even newer products out the door even faster. And we continue to build up our quite extensive IT capabilities in terms of personnel and people.

We're hiring like crazy for those positions, and have been doing so for the last couple of years. And so all that leads to is that we're trying to get these out instead of 2022 towards the end of the year, as we talked about.

But will it take some time to “knock the rust off” and get the appreciable amount of the dealer network really moving, I am sure it will.

And so right now, we haven't really been able to factor that into our growth plans but we know it's going to hit sometime later this year in 2022 versus in my previous expectations are really starting to hit kind of late 2022 and 2023 and beyond. .

Okay, that's very helpful John, thank you..

Your next question is from Harold Mosenoff with Raymond James. .

Thanks for taking the question. You've touched several times already on the landscape of rising interest rates.

Maybe I'll just ask this kind of a very high level, at what point would be a broader yield environment, get to a point where you would have to say it's getting tough for solar leasing, is that 3% 10-year treasury, 4%, 5%, what's the magic number?.

Yeah, I think at the end of the day, I think it'd be foolhardy to take a magic number, though at the end we can all and that's not just Sunnova, but we all adjust our pricing, whether the financing arrangement that the customer chooses is a lease or a PPA or a loan, we'll adjust our pricing accordingly to the risk free market, as you would expect us to do.

And then as we're going through and we're issuing the term securitizations, and then down the road here with a corporate bond, those are long-term debt issuance. And so we don't really worry too much about a movement and the risk free in that regard, because we locked in our cost of debt, and the term of debt that we for the most part need.

And I would say that your competitor or our competitor rather in the utilities, one of their biggest cost inputs is interest, right. And so their costs are going to go up.

And again, when I look at this, and I've been in the power business now hard to believe, for 25 years, a quarter of a century and I will tell you, I see no reason for power rates to drop zero. I see nothing but reasons for them to go up and that's included in there as interest rates.

And so the price to beat is just getting easier and easier to beat frankly, and as they pile on more and more costs, that's creating more and more of an upward pressure on rates.

And so again, that gets a wider and wider spread in this way if you want to look at it, especially as our equipment costs namely batteries, ESS has dropped in the coming years or continue to drop. All this goes to the point where they're actually widening.

So I think, a risk free move and certainly if you look at even the risk free move that we've had over the last few months really -- the refinancing demand in the mortgage market, right. And potentially even the ability to buy homes. I think anything north is like 3% on the 10 year is going to cause real broad economic damage.

And that would be the least of your concerns as far as what our cost of capital would be. But simply put we will adjust to it. There is no rate that you will pick that would be really a problem and we are terming out our debt obligations and we're doing so at record low rates, even despite the pretty significant move up here.

So we feel again, feel quite comfortable about it. .

But speaking of utilities, in the 90 days or so since last earnings call we have joint application by the California utilities to the regulator for new grid connection fees for solar households.

Any comment on those?.

I don't think that they're good for the people of California and it's pretty clear. And if they really cared about serving low moderate income customers and other customers that may have challenging credit rates, we certainly will take the same subsidy that they have as terms of credit backstop from the state. We will certainly take that.

We will certainly -- in the leadership at California, and in some ways we already are but happy to step that up significantly to address those folks, if that's truly what they care about. I think it's really more of an anti-competitive move and anti-consumer move.

And again, I don't think that it's going to stand, I don't think the leadership at California is going to want to really crush the very bright spot for their economy and for the consumers of California. .

Thank you very much..

Your next question is from Sophie Karp with KeyBanc. .

Hi, good morning. Thank you for taking my question. Most of the questions have been answered. I just also wanted to ask you a philosophical question, about the numbers that you guys put out.

So you adjust them out credit loss provisions out of your EBITDA figure, as the loans grow bigger, as a part of your mix as you hinted does that make sense to maybe adjust that loss provision that you have taken to match more closely the real numbers or if it is already pretty close to match does it make sense to have it taken out of your adjusted EBITDA and kind of present your numbers that way, just curious to hear your thoughts on that?.

Yeah Sophie, it's a great question. I mean, keep in mind that CECL is trying to take your full credit losses for the entire 25 years in one slot as soon as you originate the loan.

One of the things that we've been doing is realizing that -- and this is really a great credit to our credit and collections team is that we continue to do better than sort of where our expectations for our modeling has been. But if you want to say well, where are we taking it out, was being taken out in the actual solar loan P&I.

So every quarter we're actually realizing it on a cash basis and that's why we present adjusted EBITDA together with the solar loan P&I is to give you that full picture. So that is non-cash. CECL is non-cash, but where it comes and it gets realized, is in what we actually produce in solar loan P&I. This is default, we're not collecting.

If there's a delinquency, we're not collecting there. So it's already fully baked into the numbers that we show on a cash basis..

Got it, very helpful. Thank you. That's all I had..

Thanks Sophie. One comment to build on that is, we did see in this last quarter, really surprising amount of the very good delinquency and default numbers. So that continues to trend much better, loan payoffs continue to trend much higher than we expected.

So, things are very good on the credit front and if everybody recalls where we were this time last year, I mean amazing. How well, our credit team and collections team has done just a phenomenal job..

Your next question is from Richard Tullis with Capital One Securities..

Hey, thanks. Good morning everyone. Two quick questions, hopefully, so on I guess the large U.S. utility reported recently and it sounded like one from the call comments that they were looking to get a little bit more aggressive on the solar front, I guess it's mainly PPAs initially.

How do you view the current competitive landscape for the solar providers in relation to utilities, I know you talked a little bit in your opening comments about building moats but, how do you see the landscape at this point?.

Yeah, I would obviously think it's best for the consumers of the country to make sure that they have a choice.

And if they have a choice, then I think that if your focus is on this business, which is materially different, again, I've operated -- I've traded power across the entire country, I have operated utility system from the control room, I understand how the centralized power system works, I think better than anybody, in the end they are part of the industry and it is materially different.

And it doesn’t mean that they can't be successful, but we're totally focused on this as well the competitors. And so I think that we will certainly respect. I think I know who you're referring to and highly respect them as a company. But it needs to be in terms of the competition provided on the competitive side, not the monopoly side of the equation.

I think that's very, very damaging to the consumers in the country, people need choices, we need competition. The competitive landscape, increasingly, very quickly, we're moving to a service provider.

I mean, that's something we've been talking about for a number of years, we are there, simply just offering out one financial product or something of that nature is not competitive enough.

And you look at what Tesla was doing, obviously, with SunPower, some running ourselves, I think that's a very good competitive landscape that obviously continues to get smaller. It certainly got smaller last year, we made it even smaller with our acquisition of SunStreet.

And so I think that the scale and operating leverage that you need, and again I laid out the logistical and operational and financial complexity that goes into what our business is, it's a huge, huge lift. And I think that that's going to be -- I know, it is a very daunting task, no matter how big you are.

And it doesn't mean that it can't be pulled off, but it's a very daunting task. .

Thank you, John, that's helpful.

And just lastly, with Sunnova being based in Texas, following the winter storm Yuri in February, how much additional solar and storage business could be generated say over the next two years, just from the storm compared to your prior thoughts, and how many of the 250,000 homes are roughly are located in the Texas area that also could provide an uplift?.

I think most of the homes that built do focus in the California area and some other states, but they do have a good presence in Texas. And so I don't know what the breakout is, but it's certainly something that will be available to us and we're ramping that up right now, as far as creating the lead generation for dealers and such.

In terms of we've definitely seen a storage attachment rate move up on Texas. And, we continue to see a lot of demand. The other thing that's happened, well known is there's been a lot of outages, the increasing amount of power failures in the utilities, and certainly even my house.

Luckily, I've got the service, that frequency and the fear and keep in mind, what we just went through with Texas, that was the easy season, winter. Now it gets hard. You've got storm season, particularly sitting here in Houston on the coast, and you've got the cooling season or the hot summer that's coming. There's going to be some more problems.

I don't know if it will be this year or next year but there's more problems coming and people know that and they're going out looking for solutions. And we're here and they're coming to us.

So I see nothing but upward pressure on the growth rate in Texas that we -- consumers of Texas, people in Texas constantly get reminded, you know what I really should call Sunnova and get a better energy service. .

Thank you, John..

Your next question is from Sean Morgan with Evercore..

Hi, John.

So in terms of the in Q1, what's the thought process there, are you adding mostly an existing kind of strong geographies California, New Jersey or is there economies of scale that you kind of weigh versus maybe becoming a new incumbent and expanding into new states and territories and sort of how do you balance those kind of factors?.

So we made an announcement a few days ago on entering, Ohio and North Carolina. And we have others on deck here. So we are expanding geographies this year and that was a pull forward, just based on demand from some prospective dealers. And we're going to continue to do that. But the preponderance of our growth focus is on the existing areas.

However, as we continue to add new states, that kind of becomes a self-fulfilling prophecy, right. There's only 50 states in the union plus the territories. If you keep adding them, eventually it'll just all be about the existing tariffs. You have to look towards the international market.

So right now, most of our focus is on the existing areas, and continues to be. I think the Southern part of the United States and the middle part of the United States is an area of particular focus on us and we're seeing a lot of ability and interest there from the dealer. Some are new firms as well.

And I think that's where you'll see a lot more of our state additions, if you will in the coming months. .

Okay, thanks. And just a quick follow-up on, the G&A was up a little bit this quarter. And I think there may have been some acquisition costs that can be backed out of that.

But when you're integrating the SunStreet over the next couple of quarters, do you expect that Q1 is a sort of a run rate or do you -- is that kind of there's some anomalous first quarter items in that maybe going forward?.

Yes, a little bit of both in there. I mean, I think that there are going to be some acquisition and integration costs. Clearly, we're bringing on some additional G&A here with SunStreet as well that we had already had baked into the numbers that we had earned here in the quarter for the full year.

And there are a few other things that are in there, like the CECL provision that Sophie had talked about that are non-cash. But one of the bigger ones was just had to deal with a first quarter phenomenon having to do with divesting of stock options. So a lot of that really didn't even flow through the -- into being backed out of the P&L.

Anyway, it's more of a financing charge and it ends up being treated on the cash flow statement, as a financing -- as a cost of financing. So you'll see that I think, when we get to the first quarter, as many of you know, we receive as part of our compensation stock.

I think it is just about everyone here would rather receive more stock relative to other forms of compensation given the opportunity. But that's just going to flow through as a non-cash charge on the P&L in the first quarter when we reach the investing anniversaries. .

While we're on this topic of the stock, that 3.3 million at closing for SunStreet that's going to hit April 1st, so that'll be a second quarter item?.

Yes, Sean. .

Okay, thanks. That's all I had, great..

At this time there are no further questions. I would like to turn the call back over to John Berger for any closing remarks..

Thank you. I first want to pause briefly and say something, Tom Warner, at SunPower is going to retire in a few days and he has given 18 years the industry.

And I think too often, especially our part of the industry is too vicious in competition and certainly everybody knows that we're competitive, we're competitors together and I am just competitive as they come. But at the same time, I think we need to be respectful with each other.

And I have a high degree of respect for Tom and everything that he's done.

And just wanted to let him know and for everybody here at Sunnova, Houston and across the country, we're tipping our hat to him and very appreciative for everything that he's done for us and our industry over his 18 years of his life he's dedicated and wish him the best in the years to come.

We want to thank our dealers, our equipment partners, our employees, and most of all our customers for a great quarter and building to what is obviously an even better coming execution over the next few quarters and next few years.

The world of energy is changing at an accelerating pace and this company is focused on delivering and creating bigger moats and greater cash flows. I look forward to hearing and talking to everybody on the next second quarter call. Thank you..

This concludes today's conference call. Thank you for participating. You may now disconnect..