Good morning and welcome to Sunnova's Second Quarter 2024 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. Before we begin, please note that during today's call, we will make forward-looking statements that are subject to various risks and uncertainties as described in our slide presentation, earnings press release, and our 2023 Form 10-K.

Please see those documents for additional information regarding those factors that may affect these forward-looking statements. Also we will reference certain non-GAAP measures during today's call.

Please refer to the appendix of our presentation as well as the earnings press release for the appropriate GAAP to non-GAAP reconciliation and cautionary disclosures. On the call today are John Berger, Sunnova's Chairman and Chief Executive Officer; and Eric Williams, Executive Vice President and Chief Financial Officer.

I will now turn the call over to John..

Good morning everyone. First, I want to extend a warm welcome to Eric Williams, our new Chief Financial Officer, who is with us today for his first earnings call with Sunnova.

Eric joined us in June from Diversified Energy where he accumulated significant expertise in leveraging the capital markets, specifically the asset-backed securitization market, which is particularly relevant for Sunnova and our long-term financing strategy.

I speak on behalf of the entire management team and our Board when I say we are looking forward to working with him and utilizing his strategic insights and wealth of experience. Before I jump into more detailed remarks, I want to provide a quick update on our cash balance and cash generation forecast which can be found on Slide 4.

We are continuing to make progress on the four key priorities we outlined last quarter of maximizing asset-level capital, driving cost efficiencies, increasing ITC adder utilization, and refocusing on our core adaptive energy customers.

Progress against these initiatives resulted in a $21.5 million increase in our unrestricted cash balance for this quarter. Total cash, inclusive of both restricted and unrestricted cash on our consolidated balance sheet, increased by $142.9 million, resulting in a balance of $630.4 million as of June 30, 2024.

As we continue to progress our strategy and shift our approach, we remain focused on cash generation. As a result of our efforts, I'm pleased to share that we are increasing our cash generation guidance from cash-neutral to an estimated $100 million in 2024.

Additionally, we are increasing our cash generation guidance for 2025 and 2026 to $350 million and $400 million respectively. In total, we now expect cash generation of $850 million over our three-year guidance period, an increase of 70% from where we guided on our last earnings call.

As I mentioned, the four strategic priorities we introduced last quarter are driving our results, which are summarized on Slide 5. First, given the current inflated cost of corporate capital, we said we wanted to maximize asset-level capital.

We have made strides in this area as we were able to issue four securitizations in the first half of 2024 compared to only two in the first half of 2023. Our focus here goes beyond the securitization market to also include increasing our tax equity commitments and opportunistically generating cash through asset sales.

Second, we said we were going to continue to drive cost efficiencies by utilizing our technology platform and scale.

While there is more work ahead in this area in Q2 for the second quarter in a row we experienced a sequential decline in our adjusted operating expense per weighted average customer giving us confidence that the steps we were taking to right-size our cost structure are bearing fruit. Our third priority is to increase ITC adder utilization.

ITC adders continue to serve as a tailwind for cash generation even more than we expected just a few short months ago, thanks in large part to the domestic content adder guidance issued by the IRS in May of this year. Our final priority that we laid out last quarter was to put the focus back on our core adaptive energy customers.

While we are reducing guidance on the total number of customers we expect to add in 2024, those reductions were once again mostly accessory loan customers. We continue to expect strong additions in solar and solar plus storage customers, with a heavy weighting to lease and PPAs.

We also expect continued growth in our high-margin, capital-light service-only customers. On Slide 6, you can see the significant increase in the number and size of securitizations, we issued in the first half of 2024 compared to the same period last year.

The four securitizations issued through June 30 2024 totaled $853 million, a 40% increase in size from last year and twice the number of deals closed in the same period of 2023.

I would like to highlight Kroll's recent upgrade of our 2022 and prior TPO securitizations as evidence of the strong underlying asset performance, particularly since these cash flows underpin a portion of our corporate cash flows.

We expect these strong asset-level cash flows to improve our position in the ABS market, setting us up for a strong second half of 2024 and beyond. We estimate that in the second half of 2024, we will issue up to an additional $1 billion of securitizations.

Giving a bit more color to tax equity, during the first half of the year, we added $811 million in tax equity commitments versus $264 million over the same period last year. Additionally, during the second quarter, we completed two separate non-solar loan sales.

These sales included the sale of our entire home security loan portfolio as well as a portion of our home improvement loan portfolio. The home improvement loans sold included loans for items such as roofing, generators and EV chargers, which play a role in creating the Sunnova Adaptive Home.

We elected to sell a portion of these loans, not only to demonstrate to the market it could be done, but also to bring cash in the door ahead of the expected surge in cash from ITC adders.

After fees and debt repayments, the combination of these two loan sales generated cash proceeds of $52.4 million in the second quarter and will generate another $8.4 million in future periods. We continue to evaluate other potential asset sales in a variety of different areas of our business where we believe it makes sense.

Another key priority where we are making solid progress is in improving our cost structure and driving efficiency.

On Slide 7, you can see we have continued our trajectory of decreasing our adjusted operating expense per customer, reporting an additional sequential decline in this metric in Q2 bringing our total reduction between Q4 2023 and Q2 2024 to 15%. Also contributing to this increased efficiency, is a 10% decline in headcount since the end of 2023.

Moving forward, our efforts to continue scaling the most profitable areas of our business and reducing operating expenses through our technology platform will position us to drive cost per customer even lower. Next, Slide 8 covers the priority that we expect will have the greatest impact in the near term increasing our utilization of ITC adders.

Given the latest guidance, as I noted earlier, we now expect 2024 cash generation to be $100 million. Included in this estimate is cash generation from the retroactive capture, domestic content and energy community adders.

As of September 1 of this year, we will mandate our dealers to only originate lease and PPA customers, who qualify for the domestic content adder. As a result, we see our weighted average ITC rate rising in the second half of this year moving up to 45% in 2025.

And while last quarter we believed that every 1% increase in our weighted average ITC rate would translate to over $30 million in cash proceeds per year, we now estimate that number to be approximately $50 million. Lastly, this year we have refocused on our core adaptive energy customers.

As you can see on Slide 9, we continue to expect strong growth in our solar customers. Additionally, we expect to add 59% more megawatt hours of energy storage in 2024 compared to last year as more homeowners look to include a battery, with their solar system.

What you will also notice is in 2024, our solar customer deployments will be dominated by leases and PPAs. This is beneficial for our business as it will allow us to generate more cash as only these type of customer contracts can capitalize on ITC adders, which again are incredibly valuable. Currently over 90% of our origination is lease or PPA.

Now that I've gone through the details of our progress against our short-term priorities, I would like to take a minute to remind you all of our core business strategy, the Sunnova Adaptive Home illustrated on Slide 10.

This innovative approach seamlessly integrates solar energy, battery storage and energy management solutions to optimize energy usage and enhance resilience across all applications in the home.

Sunnova Adaptive Home platform is designed first and foremost with our customers in mind, as it minimizes the increasingly complex nature of energy and utilities.

As a trusted energy partner, Sunnova can manage the upfront cost, maintenance and technical complexities of powering customers' home or business with affordable dependable and sustainable energy solutions.

Before I turn the call over to Eric, I would be remiss if I did not mention Hurricane Beryl, which left nearly three million people in the Houston area without power. To all those affected by the hurricane, our thoughts go out to you and your families.

The tremendous disruption caused by Beryl, reaffirms the value of the Sunnova Adaptive Home, specifically in the resiliency it provides when the grid fails.

During the hurricane and its associated outages, our customers produced 485.2 megawatt hours of energy through their Sunnova solar and storage systems, and 96% of our customers needed no repair to their service, demonstrating the sort of quality, control and reliability that Sunnova brings to its customers.

These types of events drive people to reevaluate the service they get from utilities at a persistently increasing price and deteriorating reliability. Ultimately, this leads to the adoption of our energy solutions.

We take considerable pride in the fact that Sunnova can be there for our customers when it matters the most and provide some level of comfort even in the most difficult times. With that, I will pass it to Eric..

to fund our business by securing asset-level capital at attractive terms and simplifying the way we articulate our business to current and potential stakeholders.

I am pleased with the progress we've made during the first half of 2024, closing ABS and tax equity transactions, which provides momentum to do more in the quarters ahead, including a focus on refining our investor communications. To walk through our financial results for the quarter, I'll begin on Slide 13.

In addition to meaningfully growing our cash balances and reducing our per-customer level adjusted operating expense, which John discussed earlier, during the quarter we delivered $216.7 million of adjusted EBITDA, $35.4 million of interest income, and $55.4 million of principal proceeds from customer notes receivable.

Our reported adjusted EBITDA excludes the non-cash $24 million loss from the sale of our home security loans, following our decision to eliminate this sales channel from our business.

Conversely, we included in adjusted EBITDA, the non-cash $18.9 million loss on the sale of certain home improvement loans since we expect to continue originating these types of loans, albeit at a lower volume in the near term.

If you also exclude the $186.1 million second quarter ITC sales, adjusted EBITDA for the period would be $30.6 million, or 9% higher than the similarly adjusted $28.1 million in the second quarter of 2023. We also continue to see steady year-over-year growth in our net contracted customer value or NCCV.

Assuming a 6% discount rate NCCV was $3 billion, or $23.68 per share at June 30. Before I discuss our updated unit economics on Slide 14, I've mentioned earlier that one of my priorities is working to develop materials for investors that clearly communicate our business including key drivers that provide insight into our financial performance.

Reflective of this commitment, it is worth mentioning that we refined our fully burdened unlevered return calculation this quarter to provide a more nuanced and accurate measure.

Specifically, we now include a higher service cost allocation, an estimate of renewal value and customer purchases and an estimate of our asset retirement obligations including the cost to remove all equipment and restore sites to their original condition.

While this is a minor revision, as a newcomer to the industry, I am in the process of evaluating each of the non-GAAP measures we use to provide additional insight into our financial performance and expect to make additional refinements to other measures in the coming quarters.

Turning back to slide 14, the implied spread we present as the difference between our fully burdened unlevered return, less our current weighted average cost of debt, illustrates the durability of our returns even in high interest rate environments.

Shortages of traditional power generation, continuously increasing demand, lack of competition, a growing backlog of grid maintenance needs, ageing infrastructure, higher interest rates and other variables continue to drive utility rates higher and serve as a catalyst for consumers to reconsider their energy sources.

Importantly, these factors enable Sunnova to continue improving its pricing power which we evaluate and implement on a market-by-market basis. Ultimately, these factors underpin our ability to maintain strong implied spreads, allowing us to offset higher debt costs with a higher fully burdened unlevered return.

You can see that both on a trailing 12-month and quarter-to-date basis, we generated an implied spread that exceeds our long-term target of 500 basis points.

With the ITC adders we discussed driving a higher realized ITC percentage compounded by potential interest rate cuts that would reduce our weighted average cost of debt, we would expect the CV spreads move even higher. Flipping to slide 16, I will discuss our guidance.

As we execute on our commitment to prioritize profitability and cash generation overgrowth, we are revising these values where appropriate. First, we are increasing our adjusted EBITDA guidance to a range of $650 million to $750 million.

This increase reflects our expectations in the second half of 2024 of higher lease and PPA revenues, lower per-customer operating expenses and higher ITC sales, which specifically represent between 65% and 70% of our total expected adjusted EBITDA.

As we prospectively prioritize adding high-margin solar and solar plus storage customers deploy more capital into leases and PPAs and less into loans including accessory loans, we expect customer additions to range between $110000 to $120000.

We are also adjusting our guidance related to interest income and principal proceeds from customer notes receivable which we now expect to range between $115 million to $125 million and $180 million to $190 million respectively.

Our update is driven by the recent monetization of accessory loans and the quicker-than-anticipated move to leases and PPAs. It's worth mentioning that we continue to see upside to our principal proceeds target as in the past eight weeks, loan prepayments have been strong.

Turning to slide 17, I will reiterate once more of the emphasis we've placed on cash generation throughout this call which I'm pleased to say is driving higher the associated guidance, not only for the second half of 2024, but significantly for the additional years we forecast for this metric.

Just last quarter, we expected to be cash-neutral this year.

However, thanks to the progress we have made to realize the ITC adders, coupled with our high-margin customer focus, price increases and more efficient cost structure, we now expect to generate approximately $100 million of unrestricted cash this year and $850 million through the end of 2026.

The result, a 70% increase in our expected unrestricted cash over this period. Thus, if you include the $213 million of unrestricted cash with which we began the year and add the approximately $850 million of unrestricted cash, we expect to add over the next three years, our unrestricted cash balance rises to over $1 billion by the end of 2026.

Wrapping up on that key highlight, I would like to now turn the call back to John for closing remarks..

Thanks, Eric. Clearly, our first half results have demonstrated that we have identified and executed on the correct priorities to properly position Sunnova in the current environment. For now and in the near future, we will prioritize cash generation of our growth and raise prices to protect margins.

The origination flow, our dealer network has experienced these past few weeks has been so great that we simply cannot absorb the growth this quickly. As a result, we recently paused adding new dealers to our network, as our planned growth optimizes cash generation.

In addition, we are working to better align payment terms with our dealers to the funding schedules of our warehouse and tax equity facilities. This better alignment will lower the working capital needed for our growth, which in turn will lead to even better cash generation.

The opportunity to turbocharge our growth is clearly there, increased by the recent exit of a large public competitor. However, we will remain disciplined and focused on increasing cash generation to pay down our corporate debt.

While we still have further to go, I remain incredibly encouraged by the significant progress we have made in such a short time and I continue to be a strong believer in the long-term value proposition of Sunnova, it's place in transforming the energy landscape and its role in meeting society's ever-increasing energy needs.

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

Apologies for the delay. Thank you so much Mr., Berger [Operator Instructions] The first question is from Philip Shen with ROTH Capital Partners. Your line is open..

Hey, John, Eric, congrats on a strong results. You've meaningfully increased your liquidity forecast for 2024, 2025 and 2026. What do you plan on doing with all this incremental cash? Thanks..

Hey, Phil, it’s John. Thank you. Pay debt stack the cash, pay the debt. And at the right time and levels will be dictated by the Board working with the management team and I but pay the debt.

Great.

Any color you can share in terms of timing this year versus next year, et cetera?.

No, I would prefer not to share that I think for obvious reasons but the job is pretty clear, earn the cash, pay down debt, support our dealers and service our customers..

Great. Thanks, John. In our preview note for you guys we wrote about how you may be slow paying some of your dealers. Some of this may be due to a delayed tax equity tranche.

Can you give us a little more color on the situation? And how might this be tied to your growth outlook? You mentioned in your prepared remarks about the exit of another publicly traded solar company that does leases. I'm guessing this is likely pushing a lot of dealers to you.

And so from a cash consumption standpoint and growth how do you balance all that? You're not taking on any new dealers? And then how does that ultimately impact your growth outlook for 2025 and 2026? Thanks..

Certainly a lot there. So let me start by saying that lining up the adders some are easier than others to get through all the legal and accounting hoops and so forth, but I think we're there.

Now we've got to execute more but going back as far as January of 2023, which of course we can really appreciate all of our partners both on the financial side and obviously, on the operations side working with us to collect that money. That cash going from January 1, 2023 to yesterday of July is roughly about $270 million of cash.

We've collected roughly about half of that. This is all the energy communities domestic content, no LMI as of yet but we do expect that. And then we expect to collect the other half in the next few days and weeks. In fact we have a tremendous amount of closings including the securitization we priced yesterday.

I would say it's a rather tidal wave of cash over the next few days, six to 10 days and then increasing from there as we close out these capital pieces.

So never very easy to close all these transactions but – and clearly, we had a very busy quarter but we've accomplished it and we continue to see near-term execution measured in days not even weeks at this point.

When we look at the market and we'll talk about the actions we took we --I mentioned in my prepared remarks, I've never seen anything like this. The growth in our business started in May.

There was still a lot of, I would say, a preponderance of noise about how negative the growth is going to be this year in our industry and we just weren't seeing it and then it kept going in terms of trucking higher.

We had our second either our first or second-best month in history in June in terms of cash like actual amount of CapEx with the August of last year being our best historically. So that June surpassed that. But that was nothing compared to the month that we finished just last night.

We were heading about 10 days ago -- two weeks ago we were heading towards a 30% increase in trucking higher as far as a percentage which is off a big base in terms of increasing CapEx year-over-year. Right now we've been able to take some steps and that's only 20% higher, but that's still well ahead of our plan.

With that we did the unprecedented pausing new dealer additions and we expect that to continue. We are changing payment terms and we're moving in a move to reflect our current contractual rights and then change the payment terms further than that.

We are mandating domestic content by September 1 and then we're raising prices and have raised prices over the last few days further in some regions.

So I know this is not necessarily welcome to the dealers, but we simply cannot handle this level of growth and we will not sacrifice our core focus of earning cash to pay our debt to support our dealers and service our customers therefore bringing on more dealers is not fair to the current dealers who are working hard with us and I very much appreciate their patience in working with us as we make these changes.

But this is all to the benefit of elongating and using our working capital more wisely and therefore generating more cash than possibly even reflected in our guidance forecast on cash..

Great. Congrats again, John. I will pass it on..

Thank you..

Thank you so much. The next question is from Andrew Percoco with Morgan Stanley. Your line is open..

Great. Thanks so much for taking the questions this morning. First one is on the EBITDA guide. Obviously a strong update there and seems to be mostly driven by higher ITC sales.

I'm just curious is there any recapture of 2023 domestic content included in the 2024 EBITDA guidance? And if so, can you quantify how much? And then maybe looking out to 2025 is the percentage of EBITDA contribution from ITC sales in 2024 representative of what you should expect in 2025?.

Hi, Andrew. This is John. I'd say maybe a small amount just with regards to the ITC sales and that's why we show the adjusted EBITDA with and without the ITC sales so you don't have to do the math. But I don't think it's the -- I know it's not the vast majority of it.

And you move forward in time going from an ITC of mid-30s into high-30s up to the mid-40s as we've guided to. That is going to produce even greater amount of tax equity requirements and therefore ITC sales. So it actually should increase as we move forward in time. There's not this one-time pickup and that's it.

The amount of cash generation as clearly shown in the slides you don't have to do any math is clearly moving materially higher. And the returns are moving on the unit level economics are moving materially higher and did in this past month I would add. So we see a greater contribution to go along with a greater expectation of cash generation..

Understood. That’s helpful. And then maybe just sticking to that for a second how sticky would you expect this domestic content benefit to be? There's obviously another competitor out there that does leases that has the opportunity to benefit from this adder.

I'm just curious if you expect any of this benefit to ultimately get flowed through to the customer and there is going to be some competition on that pass-through?.

We've been very -- I think as noted by a few of your peers and I think yourself, Andrew, very conservative in 2025 and 2026 as a result of assuming that there would be some balance return to the capital markets, but right now, capital markets are, I think, demanding higher returns for the capital.

And as I clearly laid out and very directly, we're overrun with origination right now. So I'm not materially worried about us being able to capture the returns in cash generation that we've laid out in the short term and then I think we've been appropriately conservative in the back two years..

Great. Thank you so much. I'll leave it there..

The next question is from Julian [indiscernible] with Jefferies..

Hey, good morning. Thank you guys very much for the time. Nice chat again. And nicely done I got to add..

Thanks, Julian, welcome back..

Thank you. So just following up a little bit earlier on the health of the tax equity market a little bit further, right? You talked about changing the terms of the dealers to align with your sort of warehouse and tax equity funding.

How about just the health of the tax equity market, you can talk about that? What about changing the payment terms and the timing there? How do you think about adding additional tax equity partners here? It seems like from the Q that some of that played into the -- or plays into the outlook here a little bit.

Can you talk, as you think about handling growth, partnering more effectively perhaps with your funding partners here to enable more rapid funding?.

Yes.

I think -- look, overall, the tax equity market and really the tax credit market is probably a better way of saying it, at this point, has greatly expanded due to the transferability of the ITC, right? And so that's transformed the financing sources to the point where it is quite likely that maybe the entire market goes to an ITC transfer or sale marketplace.

And we're certainly -- we did the first transaction if you recall, back in September. We certainly have done quite a bit more and engaged in closing on more capital as we speak under that structure.

And that is almost, I would say, without practical limits, right? Because there are a number of companies that pay billions and hundreds of millions of dollars in tax. And so that really opened things up in terms of the IRA change and the transferability of the ITC.

And I think that it came at the exact right time and it's certainly helping to, I would say, take the complexity out somewhat of some of the financing and enlarge the funnel top of the available capital. And I think you can see that in the numbers for the entire industry, not just behind the meter, but in front of the meter as well.

So in terms of payment terms, those are always negotiable and so forth. We like our balance sheet. We like retaining the cash flows, as you know. And we're in a very strong position, nobody serves our customers better. We've got a very much of a focus on service, as you know.

So we like where we sit, and we feel that we're getting the best capital partners in the market..

Then related here, can you talk a little bit about the domestic content piece? I mean, you say all will be by September 1st. Seemingly, that has a fairly muted impact in terms of saying -- or impacting the total volumes you're anticipating -- of practically everything is moving swiftly in that direction.

What equipment packages are you looking at? I suspect I know, but I just want to verbalize this briefly on what that effectively requires of your dealer network to pivot to by September 1st.

What permutations of equipment?.

There's quite a few. I don't necessarily want to get into, Julian, naming OEM names and their valued partners, and they've been working with us since guidance dropped in late May.

I would say that, there is a growing number of permutations at that, almost by the week as more and more OEMs get certain lines of manufacturing up and running in the United States.

So what Congress intended to in the administration and seems very bipartisan focus, right, bringing the production of the gear, whether it's batteries or ESS or inverters or panels, EV chargers, et cetera, to the United States, seems to be working and in a very quick fashion. So we see a number of manufacturing permutations.

We don't see any of our major OEM partners being kicked off the AVL or anything else. They're all working diligently and quickly and communicating with us almost hourly about how to get to maximize their sales of course through to us.

So we feel pretty comfortable including the racking companies have moved very quickly that we're going to have a number of permutations for our dealers. And this is going to get -- it's hard to put all the pieces together, but it's going to get set up and moving smoothly I think over the next couple of months or so..

Thank you. Good luck guys for future..

Thank you..

Thank you. The next question is from James West with Evercore ISI. Your line is open..

Hey good morning, John and Eric.

I wanted to touch on unit economics and how you're thinking about that going forward, as you're high-grading clearly the customer additions you've got costs coming down on the equipment side we have obviously the tax credits everything else a lot of moving parts but how are you thinking about unit economics for the business going forward? Or how would you guide us to think about it?.

Yeah. It’s a good question, James. It's John. One of the things that Eric has been able to do in a short period of time here is lead working with his teams and Board members to re-look at our fully burdened unlevered return a little more conservative brought it down did the back casting back for everybody so those are all apples-and-apples.

On a forward basis, the trailing month last month that we just finished last night was materially higher, in the fully burdened unlevered return. And we do expect to see a movement up of somewhere between 200 and 300 basis points on the fully burdened unlevered return that would match up with the cash generation that we forecasted.

That would be our best guidance at this point in time, given what we know and what we're seeing here as far as the uptake on the adders and the price increases and what's going on in the marketplace..

Perfect. Very clear. That makes sense.

And then, on the -- stopping the additions of new dealers how are you thinking about this from a timing standpoint? Is this a quarter, a couple of months, the rest of the year? When do you think you would be adding to your base of dealers and adding customers further than what you forecasted for this year?.

Well, we've got a gradually sloping CapEx increase going into next year and then flat lining from there. And I think we're going to keep that. That's what we need to do to optimize the cash. And I think we're just going to keep with that. So anything in terms of growth that goes above that we're going to take steps to mitigate that down.

We want to take care of our core dealers especially those that have been with us for years first and foremost. And so I just think that's fair. Now, are we going to lose some dealers potentially over some of these possibly? And we would just pay them out and wish them well and they can move on. The line to get in is very long.

And so at this point in time, I just want to make sure we take care of those who've been with us for a long time and really believed in working well with us and not try to take on and get aggressive to grow. And on the other side of that being aggressive in growth is not what we need to be doing for our shareholders.

We need to be earning the cash paying down the debt and that's exactly where we're going to stick to..

Perfect. Got it. Thanks John..

Thank you..

Thank you. The next question is from Brian Lee with Goldman Sachs. Your line is open..

Hey guys. Good morning. Kudos, on the cash generation and liquidity improvement here, John, if I look at slide 9 you have the megawatts added per year it's up 25%. So just looking at last year you're forecasting 830 megawatts of new growth in 2024. That's actually higher than what you showed us last quarter on the same slide.

Can you talk to kind of what's driving that improved growth outlook? Is it share gain? Is it other things? Just because there's a lot of talk about constraining growth, no new dealers, et cetera but it looks like you're actually getting momentum there.

And I'd be curious what's your -- you just alluded to it on the prior question you're raising your EPS cost forecast for 2025 and 2026. It seems like you're implying faster growth more investment in 2025 and 2026.

Is it 20%? Is it 25% that you're implying for megawatt growth for the next couple of years? Just trying to get a sense of what your growth outlook is here and what's driving the better view here for 2024 as well?.

Yeah, certainly. Part of this is the amount of kilowatts per system average has been continuously increasing. That's been a multiyear trend as you know Brian.

But we are also seeing some pretty large growth and have seen pretty large growth in some of the southern markets where the kilowatt per customer is pretty high relative to say our island markets in the Pacific and the Caribbean where it's pretty low. So I think that's a big piece of this.

Right now at the pace we're running at we're managing to by limiting dealers and taking some of these other steps. I would say it's basically kind of a run rate that we just state here we'd be looking out for 2025 and 2026. So I think we're basically there if not maybe a little bit higher but doubtful. I think we're about where we want to be.

And that's -- given show long it takes to go from origination to in-service basically 180 days or two quarters, half a year, however, you want to phrase it that's kind of how the math works out if you will looking ahead moving from 2024 to 2025..

Okay. Very good. That’s helpful. And then just a follow-up question to Phil's earlier one. I'm curious. You've got probably the most robust liquidity forecast you've had in a while, $1 billion plus of unrestricted cash by 2026 is the new target.

I mean, it sounds like there could even be upside to that based on how much leverage you're seeing to some of these adders and what have you. So I know you can't give us a singular answer per se, but as you think about the different permutations of how to address the debt, it sounds like you're planning to pay it down as the first priority.

I think up until now there's been lots of different discussions around restructuring and refinancing and doing different things like has that priority or strategic focus shifted to just simply paying down the debt as you generate cash? Or are there multiple, multiple options still on the table? We'll be curious if you can speak to that a bit?.

Yeah, certainly. I personally don't believe on taking on debt unless you can pay it all. And we did take upon this debt and underlevered our asset-level of cash flows. Those asset-level cash flows have come in stronger witnessed the upgrading on the rating agency a few days ago on our older lease ABS facilities.

The other thing we made mention of we're seeing a surge in prepayments. So those that think that the loan ABS are going to be negative in value or not going to produce the cash, we'll see about that. We're seeing a pretty tremendous pickup.

And I think that any sort of falling rates as the Fed was talking yesterday about cutting rates pretty soon and so forth and the bond market is clearly rallying that's just going to turbocharge those prepayments. So I'd put that out there.

And by the way the discount on those loan portfolios is now measured as you can see in the appendix of $1 billion. So just crossing and having customers pay us off would produce $1 billion of cash. When you look at ahead there's a number of options available to us as a company and we'll continue to evaluate those as you would expect us to do.

But my focus, Eric's focus, this management team's focus is to generate the cash, so that the management team and the Board can have the options to do what's best for the shareholders. And that cash is clearly piling up to the point to go back to my personal view, we should never take on debt that we can't pay off in cash flow.

And we've got a lot of things moving in the right direction here as far as generating more and more cash flow as we originally intended. So I would end with -- this was our original plan and we're going to stick to that plan. We're going to execute the plan..

Yeah. And this is Eric. I'd just add behind that. You heard in my comments that I'm committed to really maximizing that asset-level cash flow, at least we have tremendous opportunity to do that. And nothing puts you in a better position to create options than having cash in hand.

So, we'll absolutely be opportunistic, as John just said, and be thoughtful as we look at what we think will create the most value at that maturity comes closer but we've got a nice runway before that's the case..

All right. Sounds good. Thanks guys..

Thank you. The next question is from Dylan Nassano with Wolfe Research. Your line is open..

Hey. Good morning. Just on the updated cash generation, it looks like there are some offsets to the higher tax equity proceeds. Presumably, this relates to the shift to TBO sales.

But can you just offer any more color on kind of what gets netted against that $50 million per 1% increase?.

That is not offsetting. I mean that's basically a rule of thumb. It can be more or less but a rule of thumb when you look at cash generation per 1% of ITC..

Right.

But to the net number or just from gross ITC proceeds?.

I mean, it's going to waterfall down into the OpEx and so forth. And so that gets into where you could look at the adjusted EBITDA plus P&I, but it's largely going to end up towards the bottom line of cash generation. You've got working capital impact in there as well..

That's right. If you look at the way we present that graph we start with a restricted cash at the beginning of this year that net waterfall down coming largely through ITC as well as lower cost structure and the other things we mentioned result in the growth in unrestricted cash at the end of 2026..

Got it. Thanks. And then just as a follow-up. John you referenced the public competitors exit from the market. Just wondering how much appetite do you have to get bigger in California specifically since you flagged your relative exposure there? It's kind of been more of a tailwind in the past.

Like, is this the right time to try to grab more share in California? It seems like NEM 3.0 is kind of stabilizing at this point..

We have been increasing our market share in California and I think that trend is going to continue..

Great. Thank you..

Thanks..

Thank you. The next question is from Michael Blum with Wells Fargo. Your line is open..

Thanks. Good morning.

I wanted to ask in the cash generation guidance, how much of the domestic content tax credit are you assuming gets shared with customers and suppliers versus kept by Sunnova?.

I think the clearest way I'd answer that is that we expect all of our dealers to choose from a domestic content compliant whether it's under the cost method or the safe harbor method by September 1..

Okay. Got it. And then I just wanted to drill down on the strategy to refocus on the core adaptive energy customer. As you mentioned, you sold some non-solar loans tied to some of the ancillary businesses.

Would you say you're planning to completely exit these non-solar businesses and just focus exclusively on the lease PPAs at this point?.

Well, the business really is about serving power to customers and predominantly, residential customers, a little bit of business markets as you know. And so that's the business. The business is not focusing on one financing type or another.

What we're therefore to do after we serve our customers is to optimize the returns and the cash generation to shareholders. And so clearly because of the ITC adders, the lease and PPA is a superior cash generation. Outside that though there's still some needs that our customers have.

It could be EV chargers, additional load management, generators even some of those items that again our customers need roofing and we're going to continue to supply those services to our dealers that can in turn supply them to our customers.

Now, were we to enter forward flow agreements and sell those assets off those as loans on the accessory loan side and even the solar loan side? That's highly likely. We executed on this past quarter. We would look to obviously make money doing that. We feel very comfortable that we can.

So we'll have the option to either securitize those loans as we've done historically in the past or sell them off and we're leaning towards pretty strongly to go ahead and sell them off with valued partners that we've already picked up in this past quarter in terms of loan purchasers..

On the securitization front, we do have a private securitization right behind this one that's closing in the next couple of days or so. And then we have most likely another one or two. The first one in fall time frame would be another lease PPA and then behind it potentially would be a loan.

If we go ahead and sell the loans then we won't have that securitization. So, hopefully, it gives you a little bit of color of what we're thinking..

Thank you..

The next question is from Ben Kallo with Baird. Your line is open..

Hey, good morning, John, Eric. It's Davis on for Ben. Thank you guys for taking the time. Just super quick.

I actually was going to ask a question a follow-up maybe to the one that was just previously asked just about selling the non-solar the accessory loans on the portfolio and the benefit that you guys could see in this quarter the remainder of the year.

Just as we think about timing what is assumed for sales closing this year versus visibility into next year for what you can see so far? Thank you..

Yes, sure. I do expect us to sell some more loans and broaden that into the solar loan side. So, again, I expect to either work with some of the partners we've picked up this past quarter and sell loans on probably a forward flow or batch basis or pick up some additional financial partners that love our product.

We include service with our solar loans no one else does. That's become very, very important. Finally, everybody woke up in the capital markets how important services and making sure customers get what they were promised. So I think we've got a fantastic product. I'm confident in that.

And I'm looking forward to working out and turning these loan products if you will into a fee-based type of business for us..

Thanks. Congrats guys..

Thank you..

Thank you. The next question is from Pavel Molchanov with Raymond James. Your line is open..

Thanks for taking the questions. First kind of a macro one.

This surge in demand that you've observed since May what caused that?.

I have my view and I guess it's the collective view here at the company, if you look at the utility rates they continue to truck higher all the while natural gas is at $2 NM. I personally see that the probability of gas staying at $2 NM has to be very low probability.

When you look ahead over the next year, I think, actually we could be exiting a 15-year bear market in natural gas even. And so the probability of that gas goes higher given the extreme demand LNG facilities, the power demand just general economic growth and the rollover of some of the basins Haynesville and so forth.

I think it's an interesting constructive backdrop to be long on natural gas, which is going to push the utility rates up much further, if nothing else is done. But wait there's more. The reliability problems as I sit here in Houston are obviously extreme in terms of the issues at hand.

That a lot of people have offered assistance and ideas to CenterPoint for instance about how to get better. All those come with multibillion-dollar price tag. Somebody's got to pay for all that. That's going to be the utilities and they're going to pass it on to the ratepayers. So I see retail rates trucking higher, well higher than inflation.

And I think everybody else now sees that too. Not having competition, not having consumer choice is going to be a real topic. We've got to have competition, so that we can have better technology, better services for consumers. And when you have a monopoly, you should expect to see continuously higher rates.

So I think people are getting that more and more. The other side of that the equipment whether it's a solar panel or an inverter or a battery, especially in the batteries are plummeting; batteries are becoming more and more dominant in our portfolio.

Just look at the megawatt hour growth, for instance, and we make good money and serve our customers better like the storm we just went through here in Houston. Our customers were well served as we laid out on the slide 11.

So when you look at everything, we see fundamentals utility rates trucking higher and we see equipment moving lower that produces a value proposition year-over-year, almost exactly I might add, if you looked at the 10-year, you have flat interest rates. So your cost of capital is basically flatlining to potentially declining.

So this is all a very constructive backdrop for overall macro growth in our industry..

Okay. Zooming in on your financials, you referenced the importance of service.

What is the current cost structure of your in-house service efforts? And how has that tracked maybe over the last 12 months?.

On a per-customer basis we've been able to drive it down and we continue to see the ability to drive the per-customer cost down. I don't know if we've been public about what that per customer service cost is but we'll take a look at that see if we can talk about that a little bit more in the Q3 call.

But our Chief Operating Officer, Paul Matthew has done a fantastic job on driving down the cost, while improving the service level to our customers. And we see that as our core moat if you will is that strong customer service and doing so at a declining cost curve that I don't think can be matched in the industry..

Appreciate it..

Thank you..

Thank you. The next question is from Sophie Karp with KeyBanc. Your line is open..

Hi, guys. Good morning. Congrats on a solid results and thank you for taking my question. I’d like ask you more of a high level question.

So with the improved liquidity forecast and once your goal of paying down debt and supposedly the one that's more immediate is accomplished, what is your long-term capital strategy? Is that to rely more on asset-level financing moving forward? Or would you still consider corporate-level debt may be of a different kind? So any color there would be appreciated..

Yes, Sophie, this is John. Our strategy has always been as you and I have spoken over the years is to – let's have the option of doing either corporate level capital or asset lower capital whatever we feel is more flexible and cheaper.

Clearly the corporate level capital was inexpensive relative to the asset level capital back when we put that – those – raise those debt pieces. That is clearly not the case anymore. The corporate capital I would say fairly is absently expensive.

And so we're going to focus more than ever on the asset level capital size we've laid out and we've executed on. I don't see that changing but I'm not the market. The market will dictate what we do. My personal opinion is that the converts are a lot higher cost of capital and I probably will not be voting to do converts again..

Got it. Got it. Thank you.

And then what are your thoughts on how safe the ITC adders are in terms of a potential change in administration maybe in November maybe to the extent you'd like to comment on that?.

I think President Harris will probably be very supportive of them and that's a bit of a joke. Who knows who's going to win the election? But I think when you look at – clearly this is a dead heat now. So I think the old Trump trade and so forth I'd be very cautious on that just personally just looking at the situation.

I think it's been a very active three weeks in the political landscape. And I think we'll continue to see some surprises. I – look, I don't think as – regardless of party. I think that you should be supportive of what the IRA is doing. And behind the scenes politicians of both stripes are exactly that.

So I don't listen to the noise and quite frankly I personally find it to be more unhelpful and not worth my time to listen to the political noise than ever. And I'd stay focused on what's working.

What's working is that as I mentioned earlier, the domestic content is driving domestic manufacturing growth in jobs in a very important space that is the power generation space, using new technologies like solar batteries, load management, EVs, et cetera.

So I think that as you move forward in time I think you'll find both parties to be very supportive of what we're doing and execute. And I think the idea that repeal this and that I think will end up being on the dustbin of history, much the same with like the Obama Health care plan is basically still intact after all these years..

Thank you. Thanks so much. That’s all for me..

Thank you..

Thank you. The next question is from Jordan Levy with Truist Securities. Your line is open..

Good morning all. Appreciate you squeezing me in and Eric welcome to the call. Certainly, it doesn't seem like you guys are having any problems with competition from a growth perspective, with deposit new dealers, but I just wanted to see with all the talk of new entries into the lease PPA space.

If there's any certain regions, you're seeing more of that competition come out or how the dynamics are evolving overall?.

Yes, certainly. Look, I believe firmly in competition and I think that the utilities ought to get some. And I believe the capitalism and competition makes us all better. It certainly pushes me to be better. So, I embrace the competition.

With that said, I think that people greatly underestimate how complex the operations, the financing and lining everything up, and how much capital under management, assets under management need to have become very cost-competitive. This is a big-scale game, probably needing more big scale than any other area of the energy business period.

And so, I think that there's going to be a lot of struggles, with the new entrants. You got a lot of painful lessons that I've learned over the last 12 years and more. And I'm certainly my prime competitor can share their painful lessons as well. And everybody has to go through them.

And I would say that, there's a lot to be done to build up the kind of size and company and performance that Sunnova has. So I embrace the competition. I think it's important to have. And at the same time, I'm very confident in increasingly so in our moat and our competitive position..

Appreciate that.

And maybe just a quick follow-up any update on the status of the Puerto Rico market and how you're thinking about things there?.

Great market. Great. We have fantastic dealers down there some of our best at the top in terms of the dealer, was Puerto Rico and everything that we've been able to do down there for now over a decade. We're firmly committed to the market, and we obviously have a very large market share there still, after over a decade.

We're completely focused on making sure our customers are taken care of. And we still like the market potential as we move forward over the next few years. So it's fantastic, and wish all of our markets were like Puerto Rico..

Thank you..

Thanks..

Thank you. The next question is from Ameet Thakkar with BMO. Your line is open..

Good morning. And congrats on the progress. I just had a couple of quick questions on the cash generation guidance slide. John, I think you mentioned kind of the plan for now is to perhaps delever at the corporate level a little bit, but it looks like the cash for corporate interest expense is flatlined over the forecast horizon year.

And then presumably the cash balance that you're showing in 2026, is it assuming any kind of paydown like, can you just talk about that? Is this just kind of a placeholder for now?.

I think that's fair. Question.

Okay. And then you did highlight I think one of the rating agencies upgraded some of your older vintages of your ABS. You just price an ABS yesterday. It looked like the kind of the Series A notes were 300 basis points would look a little bit wider to us than some of the other kind of leaseback ABSs that have been issued recently.

I was just wondering, if some of the issues with one of your public competitors, is that kind of causing a little bit of a wider set of spreads in the ABS market right now?.

You nailed it. Quite helpful. And I think this too shall pass when investors focus on the numbers and what we're doing as a company versus just a bunch of noise in the market created by that situation. But most unfortunate, but I think what's really important is we executed through it..

Just to add -- this is Eric. Just to add, it's been nice to see some new investors coming in. We're working to grow the [indiscernible] class have a broader base of investors. So that yield while we don't like that is helpful in expanding the universe. The asset outperformance will allow us to price more tightly in future deals.

And you just look at what we've done, we talked about moving from two deals last year to 4. We just announced the fifth, John said the 6th is right behind possibly another one or two behind that. So that's why it's so important to make sure we get a broader base of investors in.

And that asset quality backstopping that will give us the chance to pull it in.

And having issued a significant amount, you'd expect single-name pressure there, but that having Kroll really highlight what we've done and then that's an underpinning to the quality of the cash flows under the corporate cash flows that support our broader corporate ambitions all works well together.

So, we'll continue to execute and I think you'll see those spreads continue to come in. Certainly as the interest rate environment looks to change as well..

Thank you. The next question is from William Griffin with UBS. Your line is open..

Thanks. Good morning. Just wanted to come back to some of the pricing and growth topic here. It seems evident that your pricing initiatives are taking a little bit of time to take hold and maybe moderate your growth down to a level that you're comfortable with.

I'm just curious, how you're thinking about the September 1 mandate that dealers only originate customers that qualify for domestic content? And maybe how that could drive further moderation in growth relative to just continued price increases?.

This is John. It could. I don't -- I suspect it won't. There's a number of OEMs that are high-quality partners. And if I start naming names and I get in trouble later about not naming the names, so I won't do that make that mistake.

But I think that there's a lot of options available and we're going to work with our dealers and be reasonable about things. But I think September 1 is a pretty reasonable date. So, we feel pretty good about it.

And look, we can always change strategy as far as allowing new dealers on if that makes sense, but right now what we're saying is just solidly doesn't. And we need to again take care of those who brought us to the dance. And so that's exactly what we're going to focus on and we're going to focus on maximizing the cash generation over growth..

Got it.

And just lastly any update on the Project Hestia initiative and to what extent you've been leveraging that on recent securitizations?.

We did one last quarter and it was a great program great success and we're happy with it and look forward to finding ways to use more of that program..

All right. Thanks for the time. Good luck in the second half..

Thank you..

Thank you. The next question is from Maheep Mandloi with Mizuho. Your line is open..

Hey, good morning. Thanks for squeezing me as well. Just a follow-up on Brian's question on the customers here. So, the number of customers seems down versus the -- for 2024 versus what you said in the last call 10% growth versus 20% growth last time.

Just wondering what's driving that? Is that just the mix of leases is increasing that's why your megawatts are increasing or something else there?.

Yes, I think it's really just again focusing on our core customers and whether we don't know as you know focus on megawatts or even now megawatt hours, which I think you could easily argue is even more important, right? It certainly gives you a lot more optionality with grid services or energy services we call the column.

At the end of the day, I guess I'll just be direct as always, I don't really care about the customer count I care about the cash generation..

Got you.

But I'm just trying to understand if there's any upside to that, just kind of seeing strong demand out there or either on the customers or the megawatts here?.

Potentially but it's got to come with additional cash gen..

Got it.

And in terms of just the domestic content September 1st is that timing just based on your checks with EPC or talks with them or waiting for any further clarification from the IRS for that as well?.

That's mainly driven by our OEM partners and the conversations with them..

Thanks. [Indiscernible]..

Thank you..

Thank you. We currently have no further questions. So, I hand back to Mr. Berger for closing remarks..

Thank you. Q2 was busy and we made tremendous progress. Execution on our plan of earning cash, paying down debt, supporting dealers, and serving customers is our sole focus. I expect Q3 will be even better and look forward to sharing the results of our execution with you in late October. Thank you..

Thank you very much Mr. Berger. This concludes today's call. Thank you all for joining. You may now disconnect your lines..