Sunrun Inc. (NASDAQ:RUN) Q1 2024 Earnings Call Transcript

Sunrun Inc. (NASDAQ:RUN) Q1 2024 Earnings Call Transcript May 8, 2024

Sunrun Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to Sunrun’s First Quarter 2024 Earnings Conference Call. All participants have been placed on mute. Please note that this call is being recorded and that one hour has been allocated for the call, including the Q&A session. [Operator Instructions] I will now turn the call over to Patrick Jobin, Sunrun’s Senior Vice President, Investor Relations. Please go ahead.

Patrick Jobin: Thank you, Operator. Before we begin, please note that certain remarks we will make on this call constitute forward-looking statements. Although, we believe these statements reflect our best judgment based on factors currently known to us, actual results may differ materially and adversely. Please refer to the company’s filings with the SEC for a more inclusive discussion of risks and other factors that may cause our actual results to differ from projections made in any forward-looking statements. Please also note these statements are being made as of today, and we disclaim any obligation to update or revise them. During today’s call, we will also be discussing certain non-GAAP financial measures, which we believe can provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of current period performance on a comparable basis with prior periods.

These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, superior to, or in isolation from GAAP results. You will find additional disclosures regarding the non-GAAP financial measures discussed on today’s call in our press release issued this afternoon, and our filings with the SEC, each of which is posted on our website. On the call today are Mary Powell, Sunrun’s CEO; Danny Abajian, Sunrun’s CFO. Ed Fenster, Sunrun’s Co-Founder and Co-Executive Chair, along with Paul Dickson, Sunrun’s President and Chief Revenue Officer are also on the call for the Q&A session. A presentation is available on Sunrun’s Investor Relations website, along with supplemental materials. An audio replay of today’s call, along with a copy of today’s prepared remarks and transcript including Q&A will be posted to Sunrun’s investor relations website shortly after the call.

We have allocated 60 minutes for today’s call, including the question and answer session. And now let me turn the call over to Mary.

Mary Powell: Thank you, Patrick. And thank you all for joining us today. We are starting the year with solid momentum in the business as our storage-first, margin-focused strategy is delivering strong results. In the first quarter we beat the high-end of both our storage and solar installation guidance, set new records for storage attachment rates, and delivered another quarter of strong net subscriber values. Our installation productivity and success driving a storage-first strategy is delivering strong results. At the same time, sales activities in Q1 did grow slightly slower than initially expected, coming in at 13% sequential growth in our direct business. While less than initially anticipated, this level is still consistent with our historical seasonal norm.

We continue to prioritize margins over volumes, and we believe this approach will result in the highest long-term value for our shareholders. We are reiterating our full-year storage capacity installation guidance and we are reducing our full-year solar installation capacity outlook to down 15% to flat, from our prior guidance range of down 5% to up 5%. We expect 2024 will be a strong year in terms of total value generated, which will grow by over 10%. Most important, we are reiterating our cash generation guidance of a Q4 annualized level of $200 million to $500 million. We are confident in achieving strong growth in installation activities through the year, as the fundamental demand drivers of our business continue to be robust. Utility rates continue to rise, while solar and storage equipment costs are declining, and our operating efficiency continues to improve.

Customers remain eager for clean, affordable and resilient energy to power their lives. In the beginning of 2023, we oriented the business to be storage-first, which increases the customer value proposition and lays the foundation for future value creation from grid services. This strategy has also allowed us to capitalize on regulatory changes better than others in the industry. In Q1, we installed storage on 50% of our new customers, up from a 15% attachment rate in the prior year. We installed 207 megawatt hours of storage in Q1, almost triple the year-ago quarter. Storage systems provide increased customer value through enhanced resiliency and control, while providing higher margins for Sunrun. Our fleet of networked storage capacity has reached 1.5 gigawatt hours with 102,000 systems installed.

Based on industry data, we represent about half of new storage installations in the United States, and are gaining. In 2023, we were under 20% share of residential storage deployments across the U.S., and by Q4 we were approximately 45%. Our fleet is growing in significance, and is already at a scale that could replace multiple polluting peaker power plants. For instance, these resources could power a city like San Francisco for multiple hours, and do so daily as batteries are recharged from the sun. While still in the early stages of commercializing these resources, we just announced two new record-setting grid service programs. For the second year in a row, Sunrun will set a national record for the largest number of residential solar-plus-battery systems enrolled in a virtual power plant.

Last year we did about a 30-megawatt program with PG&E. This year we are launching a statewide Demand Side Grid Support program that is about twice the size with more than 16,000 Sunrun customers. We also have now enrolled nearly 1,800 customers in our Puerto Rico virtual power plant. Our resources have been dispatched nearly a dozen times, helping to prevent rolling blackouts and keeping the power on for all Puerto Ricans – not just our customers. The fact that we are running these two successful programs shows that VPPs can rapidly scale all across the country. Last month, a Brattle Group study concluded that virtual power plants could save California consumers $550 million per year. We also continue to innovate with AI, enhanced customer experiences, new products, adding batteries to existing systems, EV charging, and of course early renewal opportunities.

The team is busy innovating to extend Sunrun’s differentiation in the market even as we dial up our focus on efficiency and cash generation. We are making clean, affordable, and reliable energy accessible to families across America with the most pro-consumer offerings, and delivering the best customer experience and service in the industry. Being the chosen, trusted provider to deliver this clean energy future is critical. As a testament to our approach, our customer Net Promoter Scores at the time of installation continue to increase, exceeding 75 points this quarter. We are driving this great customer experience and investing in innovation while also dramatically increasing operating efficiencies. Our crew labor productivity has improved by 5% compared to the prior year, even as we more than tripled our mix of more complex battery jobs.

Our efficiency gains installing systems with batteries are particularly impressive, improving 30% year-over-year. Overall headcount in our installation organization is down five percentage points more than the change in volumes. In addition, general and administrative costs have declined slightly year-over-year and continue to be a fraction of that of peers, even as we accelerate the pace of innovation, highlighting the tremendous scale advantages we derive and sizable barriers to entry in the space. We are also driving increased efficiency and improved quality through the organization from leveraging artificial intelligence. We have already started using AI to improve the speed and accuracy of system design, pipeline management, and material handling.

We are increasingly encouraged by how AI can improve our operating efficiency and customer experience even further. Growth in AI and the voracious energy consumption that comes with it will drive even greater need for Sunrun’s fleet of solar and battery systems. The International Energy Agency forecasts power demand from datacenters in the U.S. will increase 60 terawatt hours by 2026 to account for nearly 6% of total U.S. electricity demand. Electric grids will need to procure more power to meet this need, especially at peak times, and distributed flexible renewable resources will be one of the solutions. Much of this growth is also coming from companies who are eager to use clean energy to meet their environmental objectives. Before handing over to Danny, I want to take a moment to celebrate some of our people who truly embrace the power of solar energy to make a real difference in our world.

Thank you to our leading teams in Houston, Texas. Our top-ranked installation crew, led by Jonathan, and direct-to-home sales team in the quarter based on safety, quality, battery attachment rates and customer experience were in Texas this quarter. Thank you all for your contributions and leadership at Sunrun. With that, let me turn the call over to Danny for our financial update.

Danny Abajian: Thank you, Mary. Today I will cover our operating and financial performance in the quarter along with an update on our capital markets activities and outlook. Turning first to the results for the quarter on slide nine, we have now installed over 102,000 solar and storage systems, with storage attachment rates reaching 50% of installations nationally during the first quarter of 2024. We expect storage attachment rates to remain around this level throughout the remainder of the year. This higher mix of storage has driven improvements to our net subscriber value as backup storage offerings carry higher margins. During the quarter, we installed 207 megawatt hours of storage capacity, well above the high-end of our guidance and almost triple the same quarter last year.

Our total networked storage capacity is now over 1.5 gigawatt hours. In the first quarter, Solar Energy Capacity Installed was approximately 177 megawatts, also above the high-end of our guidance range of 165 to 175 megawatts. Customer Additions were approximately 24,000, including approximately 22,000 subscriber additions. Our subscription mix reached 93% of deployments in the period, an increase from 92% last quarter and the highest level in many years. We ended Q1 with approximately 957,000 customers and 803,000 subscribers, representing 6.9 gigawatts of networked solar energy capacity, a 16% increase year-over-year. Our subscribers generate significant, recurring revenue, with most under 20- or 25-year contracts for the clean energy we provide.

At the end of Q1, our Annual Recurring Revenue, or ARR, stood at over $1.4 billion, up 30% over the same period last year. We had an average contract life remaining of nearly 18 years. Turning to slide 10, in Q1, subscriber value was approximately $50,800 and creation cost was approximately $38,900, delivering a net subscriber value of $11,891. This strong result was from increased efficiency and a beat on volumes. Our Q1 subscriber value and net subscriber value now reflect a blended investment tax credit of over 35%, benefiting from expanded eligibility for the energy communities ITC adder and the portion of our deployed systems eligible for the low-income adder. Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period, was $262 million in the first quarter.

Our present value-based metrics are presented using a 6% discount rate, but our financial underwriting already accounts for our current cost of capital, which was in the 7.6% area in Q1. As a reminder, to enable ease of comparison across periods, we generally do not update the discount rate frequently. Instead, we provide advance rate ranges that reflect current interest rates, enabling investors to calculate the obtainable net cash unit margins on our deployments. In addition, we provide a pro forma net subscriber value using the capital cost observed for the quarter. At a 7.6% discount rate, net subscriber value was $6,593 and total value generated was $145 million. We expect additional tailwinds to net subscriber value in future periods from the following variety of factors: more favorable business mix, increased realization of ITC adders, and lower costs from hardware price reductions, labor efficiency and operating leverage from strong sequential volume growth.

On slide 11, we detail the tailwinds from ITC adders and hardware costs. In Q1, we recognized a weighted average ITC of approximately 35%, the equivalent of approximately half of our systems qualifying for the energy communities or low-income adder. During the quarter, the government expanded the qualification criteria for the energy communities adder. Approximately 35% of our current installations now qualify, compared to 13% before the expansion. While the energy community adder expansion was favorable, our expectation for the portion of our systems that qualify for the low-income adder going forward has been lowered from 26% to 18%, given the current inefficiencies in the program design and implementation. While we continue to receive proceeds from the energy communities adders, proceeds from the awarded low-income adders are delayed given the slow government process.

Proceeds from domestic content adders are expected to be realized in the coming quarters. Guidance on what will qualify for the domestic content adder has been issued, but we are still awaiting further clarity from additional rulemaking processes some time this year. Combined, these three adders could represent up to $450 million or more in additional annual run-rate cash proceeds. We continue to see decreasing prices for key hardware components, which are gradually flowing through our reported costs as we finish consuming our higher-cost inventory. On a like-for-like basis for a 7.5 kilowatt solar with backup battery system, by the end of this year, hardware costs are expected to decline by over 18%, or nearly $2,500 per system, from their peak in the second quarter of 2023.

These beneficial trends may be obscured by an increasing mix of storage, which carries higher net margins, but will increase hardware and install costs and therefore increase creation costs. Additionally, we are monitoring recent developments with certain U.S. manufacturers petitioning for new tariffs. Modules, however, represent less than 10% of our total creation costs and the history of various trade disputes has demonstrated the impact has been manageable as the global supply chain is dynamic over time. Turning now to gross and net earning assets and our balance sheet on slide 13, gross earning assets were $15.0 billion at the end of the first quarter. Gross earning assets is the measure of cash flows we expect to receive from subscribers over time, net of operating and maintenance costs, distributions to tax equity partners in partnership flip structures, and distributions to project equity financing partners, all discounted at a 6% unlevered capital cost.

Net earnings assets were $5.2 billion at the end of the first quarter, up approximately $200 million from the prior quarter. Net earning assets is gross earning assets, plus cash, less all debt. Net earning assets does not include inventory, or other construction in progress assets or net derivative assets related to our interest rate swaps, all of which represent additional value. The value creation upside we expect from future grid service opportunities and selling additional electrification products and services to our customer base, including our storage retrofit offering, are not reflected in these metrics. We programmatically enter into interest rate hedges to insulate our capital costs from adverse near-term fluctuations. The vast majority of our debt is either fixed-coupon long-dated securities, or floating-rate loans that have been hedged with interest rate swaps.

As such, we do not adjust the discount rate used in Net earning assets to match current capital costs for new installations. We ended the quarter with $783 million in total cash, a decrease of $205 million compared to the prior quarter. Q1, which is typically the weakest quarter for cash generation due to volume seasonality, was further impacted by one-time costs from financing activities we completed in the quarter, as we discussed on last quarter’s call, as well as delayed timing of incentive monetization. Cash generation was negative $311 million in Q1, which included approximately $317 million of one-time costs and timing-related items, as we have outlined on slide 14. Excluding these items, adjusted cash generation was positive $6 million in the quarter.

The financing activities we opted to pursue in Q1 resulted in $107 million of one-time cash impacts. These included fees paid for the 2030 convertible debt issuance and purchase of the capped calls to mitigate dilution, fees paid on the extension of our recourse working capital facility, and fees paid on the extension of our non-recourse warehouse facility and an associated reduction to the facility’s advance rate. In Q1, we made a significant transition from traditional tax equity, where all cash is typically provided at or just before installation, to tax credit transfer, where funds for tax credits often come quarterly in arrears. This transition was primarily responsible for a reduction in Q1 tax equity proceeds of approximately $181 million.

We are working to close new funding that will resolve the working capital headwind, all of which we expect to close before the end of the quarter. With these closings, we will fully recover the working capital investment that we made in Q1. In Q1 we deployed systems that are expected to contribute $30 million in cash generation from the low-income ITC adder. While many systems have met all conditions, monetization remains delayed given the timing of government processes. Later this quarter, we are expecting to monetize the receipt of delayed ITC adders through a combination of additional tax equity funding and debt proceeds. Turning to our capital market activities, as we discussed last call, we were very active in Q1 arranging capital to support our growth and further optimizing our balance sheet by extending maturities.

It is prudent to extend facilities early to navigate potential and unexpected macroeconomic conditions and volatility. In February, we successfully extended and upsized our non-recourse revolving senior warehouse facility to support our scale. This facility funds assets temporarily before we raise long-term financing, principally in the asset-backed securitization market. We increased the size by $550 million, from $1.8 billion to $2.35 billion, and extended the maturity by approximately 3 years from April 2025 to February 2028. The effective credit spread increase of 50 basis points was commensurate with recent movement in the securitization market for term out transactions with similar advance rates. The facility continues to have a diversified set of nine relationship lenders.

We also achieved certain other improved terms that afford more flexibility to fund our anticipated future product and geographic mix. Our team also continues to execute tax equity transactions, including structures that facilitate ITC transfers to a deepening pool of large buyers. As we discussed on the last few calls, the traditional tax equity market has been tighter recently, which we believe is resolving now that tax equity investors have adapted their approaches to structuring deals in this new environment. In addition, we continue to build an active pipeline to sell tax credits to corporate buyers for ITCs that are generated when systems are placed into service. As of today, closed transactions and executed term sheets provide us with expected tax equity capacity to fund over 331 megawatts of projects for subscribers beyond what was deployed through the first quarter.

We expect to expand this runway during Q2. Sunrun also had $593 million in unused commitments available in its non-recourse senior revolving warehouse loan at the end of the quarter. This unused amount would fund approximately 214 megawatts of projects for subscribers. Our strong debt capital runway allows us to be selective in timing transactions. Since the start of the year we have closed two ABS transactions. Sunrun’s industry-leading performance as an originator and servicer of residential solar assets continues to provide deep access to attractively priced capital. In February, we closed an ABS transaction with a private credit investor and arranged subordinated debt financing on the portfolio. The $361 million non-recourse senior debt was rated A- by Kroll and was priced with a 232.5 basis points spread.

This demonstrated yet another improvement in capital costs, with spreads declining from our last securitization in September that was priced with a 240 basis points spread. We placed a $109 million subordinated loan on the portfolio as well. The all-in full-stack weighted average cost of capital on this portfolio was approximately 7.5% and resulted in a cumulative advance rate, as measured against our contracted subscriber value metric, of over 80%. The use of private credit investors shows the strong interest in our assets from a growing and broad set of investors. In April, we closed a $230 million securitization to refinance existing debt on a portfolio of seasoned assets. The non-recourse senior debt was rated A by Kroll and was priced at a credit spread of 195 basis points, a 37.5 basis point improvement from our private securitization in February and 45 basis points lower than our securitization in September 2023.

The latest execution represents the lowest spread achieved for similarly rated transactions across the sector since 2021. The portfolio is jointly owned by National Grid and Sunrun following their project equity investment in 2017, with National Grid receiving the majority of cash flows through 2042, including the significant net cash proceeds from this refinancing. Importantly, however, this transaction highlights our continued deep access to capital, at improving terms, and demonstrates the favorable market for refinancing seasoned assets we have originated and serviced. This bodes well for the significantly sized portfolios of seasoned assets that we will refinance in the coming years. Moving to the parent capital side, during Q1 we took actions to extend maturities and optimize our parent balance sheet.

In February, we closed an extension of our recourse working capital facility. We reduced the size from $600 million to $447.5 million, with an option to upsize the facility to $477.5 million prior to September 30, 2024. We amended the facility to extend the maturity from January 2025 to November 2025. We also included a feature that will further extend the maturity to March 2027, should we meet the requirements for this provision, which include addressing the maturity of the convertible notes due in February 2026. Also in February, we issued $483 million in convertible notes due in 2030. Since the issuance of the 2030 convertible notes, we have repurchased another $82 million of our 2026 convertible notes. To date, we have now spent $175 million to repurchase over $205 million of these notes.

Less than half of the 2026 notes now remain outstanding. We will continue to be disciplined and selective with repurchases, given alternative high-yielding capital uses. Our intent is to maintain a strong and healthy balance sheet. The recourse financings and bond repurchase activity in Q1, including all related fees, increased our cash by $102 million and increased our debt by $125 million. With continued repurchases of the 2026 convertible notes, or retirement at par at maturity, we expect net recourse debt to be little changed. We have also prudently extended maturities while mitigating dilution with the capped call. When we think about our balance sheet, we prioritize a strong cash position and use of asset-level non-recourse debt financing.

This strategy provides the lowest cost capital to finance cash-flow producing assets backed by high-credit consumers, and to use parent recourse debt that is appropriately sized and balances maturity dates, cash interest costs and flexibility. Turning now to our outlook on slide 17, the underpenetrated nature of our market gives us confidence we can sustain robust growth throughout this decade. In this strong long-term demand backdrop, our priority is to generate cash by continuing to increase customer values through growing storage adoption and other higher value products and services, and by reducing costs by driving further efficiencies across the business. While sales activities in Q1 were slightly less than we previously anticipated, we are seeing strong demand signals and expect a material pickup to occur in Q2, leading to an inflection point with meaningfully higher installations in the second-half.

Storage capacity installed is expected to be in a range of 215 to 225 megawatt hours in Q2. This represents 105 to 115% growth year-over-year. For the full-year, we are reiterating our guidance for Storage Capacity Installed to be in a range of 800 megawatt hours to one gigawatt hour, reflecting 40% to 75% growth year-over-year. Solar Energy Capacity Installed is expected to be in a range between 190 and 200 megawatts in Q2. At the midpoint, this represents 10% growth from Q1. Because of the pull-in of demand in California in early 2023, year-over-year comparisons are less relevant in Q2. We are confident that Q1 volumes will mark the low point in the year and we expect robust sequential growth into the rest of the year. For the full-year, we expect solar energy capacity installed year-over-year growth to be in the range of down 15% at the low-end to flat at the high-end.

This updated range reflects recent sales activities and outlook. We believe this guidance still represents market share gains underpinned by the strength of our subscription offering and our disciplined go-to-market approach. Our growth in the value we create with this volume will be much larger. We continue to forecast subscriber values will increase by greater than 10% in 2024 as we increase our mix of higher-value offerings, and input costs decline, resulting in growth of total value generated of greater than 10% in 2024. Turning to slide 18, we remain committed to driving meaningful cash generation as we execute our margin-focused and disciplined-growth strategy. We are reiterating our cash generation outlook. We are guiding cash generation to be positive on a quarterly basis for the remainder of the year, with cash generation in Q4 at an annualized run-rate of $200 million to $500 million.

This run-rate will be expanded upon on an annual basis into 2025. We have outlined our current set of assumptions underpinning this outlook on the bottom of slide 18. The most notable variable is the realization of the domestic content adder: the low-end of the guidance range assumes no domestic content adders while the high-end assumes these adders are obtained. We currently expect a large portion of our storage systems to qualify for the domestic content adder. With that, let me turn it back to Mary.

Mary Powell: Thanks, Danny. I want to again express my appreciation to the entire Sunrun team. Your continued commitment to providing our customers and communities with clean, affordable energy to power their lives and to create value for all of our stakeholders is what drives us forward. Our rapid transition to a storage-first company is extending our differentiation, driving enhanced margins, and delivering the best value to customers. Operator, with that, let’s open for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Brian Lee: Hi, everyone. Good afternoon. Thanks for taking the questions. The first one was just on the reduction in solar volume outlook for the year here. It appears, I guess, strategic. You said earlier in the slides you’re just kind of focusing on profitable growth and storage, but then you also alluded to some market-related weakness, I guess, sale activity being a little bit slower. Can you maybe parse those two pieces out? How much of it is market-related, how much of it is strategic on your own part? And then, were there specific areas that you kind of pinpointed had the weakness or the non-strategic sort of focus that you wanted to pull back from? And then, I had a follow-up.

Mary Powell: Sure. Thanks, Brian, great to hear from you. Yes. So, to be clear, we really see Q1 marking the bottom, and we feel confident in the uptick and our outlook for the year. And you are absolutely right, as we have said, we continue to focus on our goals around profitability and cash generation, and really being very strategic on volume. And with that, I would turn it, Paul, why don’t you give a little bit more detailed response to some of Brian’s questions?

Paul Dickson: Yes, great question. So, we underwent kind of a final evaluation of our market economics and the various routes that we have generating volume, and did a final cut of volume that did not meet our target return threshold. And so, we underwent that exercise, which is a component of the volume adjustment. The other thing that we’re seeing in the market is kind of this like, new entrance kind of this ankle-biter finance provider that comes in with aggressive pricing, and has been somewhat distracting to various channel partners or affiliate partners that we work with. And while we don’t see any sustainable approach in their business model, and we’ve made a business practice in the past of purchasing their portfolios when they’re unable to operate them because of the uneconomical approach that they take, there has been some distraction for our affiliate business.

Brian Lee: Understood. Yes, that’s super helpful.

Mary Powell: And just Brian, just one last point on that, just again, I’m sure you did notice it, but storage volume was retained. And we’re really thrilled with the storage attachment rates and with our ability to retain that volume, which is very positive from a bottom line perspective.

Brian Lee: Yes, absolutely. It seems like the reallocation of any resources or capital should further de-risk the storage number. That’s awesome. Maybe one for you, Danny, and then I’ll pass it on. Slide 18, this is super helpful, just kind of giving us some context, low to high-end. I know there’s been a lot of questions between how do you get to 200 versus how do you get to 500. If I look at this slide and a lot of the data you provided during the quarter on where you are tracking, it seems like you are already tracking at or ahead of the low end, the $200 million annualized based on these three bullets. Can you help us understand the frame of going from 36% to 40%, capital costs 8% to 7.5%, how much is each of those buckets worth?

I wouldn’t presume it’s 100, 100, 100, but is it that simple where if you get capital costs down to 7.5%, you get storage attached up 10%, each one of those is worth 100, maybe just kind of helping to quantify what each of those buckets is worth to the cash flow generation? Thank you.

Danny Abajian: Yes, great question. And we absolutely did want to break this out as to what assumptions are associated with opposite ends of the range as we’ve been getting a lot of questions around that. So, I wanted to be responsive to that. As far as the magnitude of each of those primary drivers in the middle of slide 18, capital costs, there was capital costs, so not in order, but capital costs, quarter point is between $40 million to $50 million, depending more on the volume in the period. And that will range through the years we grow volume. And this is most relevant to the Q4 exit rate. I would say, it’s probably closer to $50 million. And then, the point of ICC adders is probably south of $50 million, maybe somewhere in a plus or minus $40 million range per point.

And then storage attachment rate, I don’t have the exact translation, but I would say the first two are more meaningful at this point, given we’re in a smaller range on storage attachment rates relative to where we started.

Brian Lee: Great. I appreciate that additional color. Thank you.

Danny Abajian: Thank you.

Operator: Thank you. Our next question comes from the line of Moses Sutton with BNP Paribas. Please proceed with your question.

Moses Sutton: Hi. Thanks for taking my question. So the tax credit receivable of $181 million, is this transferability credit sold outside of a TE fund, or is it still going through the typical cash waterfall of such that essentially partially replaces the tax equity proceeds that you would have gotten from some of those banks? And what could delay the $181 million maybe further than Q2.

Danny Abajian: Yes. So, let me — I think the general expectation is to be caught up by the end of Q2. There’s a basket here of like reasons for the delay, but primarily it’s the timing of when you sell the credit out of the fund to the buyer. So, in traditional tax equity structures, the tax equity bank would be willing to both take the credit and give an advance ahead of the install or around the time of the install for that credit. Whereas today, the tax equity — the tax credit buyer, rather, is buying in arrears, and that can trail the time of install. And as we’re migrating structures, for structures that don’t involve a traditional tax equity bank, the fronting, if you will, of that tax credit monetization is not happening to the degree it used to.

Now, some of it also varies based on, you know, the timing of when the individual buyer is transferring over proceeds for the purchase. They might do it monthly. They might do it quarterly. They might do it annually. I think we’re seeing the market move to monthly and quarterly as opposed to annually, which is kind of where we started on one of the funds we’ve done recently. So I would say it’s really that the frequency of payment is the big driver. Obviously, the payment is for both the base tax credit of 30% plus the adders. So, I would say it’s predominantly timing driven, and that’s in the process of being resolved, as we said in the prepared remarks. As traditional tax equity banks are figuring it out and moving into these structures, the working capital dynamics are improving.

Moses Sutton: I see, I see. That’s very helpful. And I guess, on related to timing, are you seeing any reduction in the tax equity capacity that you normally use because NOVA is increasing its participation in the market? Maybe those banks want to limit their aggregate exposure to resi solar, just thinking through if that’s a possibility?

Danny Abajian: I think we’re seeing — generally, we’re seeing capacity in the process of expanding radically. I think that the biggest thing we see is just the value that we now provide to corporate buyers who basically are getting the 10 — up to 10% high single digits type of discounts. Immediately they can clip that coupon on their taxes. And I think we’re going to see a large swarm of repeat buyers come in once they figure out how to do this and get comfortable. And I think that’s driving the expansion. We’ve noted traditional tax equity now for a couple of quarters to be tight. I think that dynamic still persists to some degree, but I think as we’re moving the hybrid structures net-net, we’re seeing a big expansion in capacity.

Moses Sutton: Great. Thanks again.

Operator: Thank you. Our next question comes from the line of Kashy Harrison with Piper Sandler. Please proceed with your question.

Kashy Harrison: Good afternoon, everyone, and thanks for taking the questions. So maybe first one is for Danny. I think, please correct me if I’m wrong, but I think you just said $40 million for ITC Point for the domestic content adder. What — and so the question — my question is what specifically should we be looking for once the Department of Treasury releases guidance that would say, okay, this is fully due risk?

Danny Abajian: And you’re referencing the domestic content?

Kashy Harrison: Yes, for the domestic content, yes.

Danny Abajian: Yes, I think it’s eligibility. It’s the basis of calculation. I think we have as we’ve noted before, we already in the case of batteries, we buy batteries that are made domestically. Module supply, I think that’s in the work. So as we kind of get the domestic supply that we think based on past guidance is technically eligible, the rulemaking around how you specifically attribute things in a calculation will matter. And I don’t think we have yet full clarity there. So we’re in a bit of a range. And as soon as we see some additional guidance, we’ll be able to narrow that range is our hope. And that’s been a hope unfortunately too long, but we’re hopeful that is very soon.

Kashy Harrison: I guess maybe just asking in a little — a bit of a different way. If batteries alone qualify, would that be enough or do you need batteries and modules to qualify?

Danny Abajian: Yes, again, short of the guidance. We’ve taken a preliminary view that on most battery installs, the battery should qualify us. However, again, we have to punch through all the details and firm up that view. And on solar only, we’ll need module, and in some cases, we might also need inverter. There could be other combinations involving balance of system components like racking on a solar only to meet the tests, to meet the minimum threshold.

Kashy Harrison: I appreciate the color there. And then just my second question, just again, back to the discussion on the newer entrance with the uneconomic offerings, fully appreciate the focus of cash in lieu of volumes. That’s definitely the right call, but just wondering how you handicap the risk that some of these headwinds either continue or potentially accelerate in 3Q or 4Q. I’m just trying to make sure that we’re not having another call in August and there’s another guidance cut on the solar side?

Danny Abajian: Yes, great question. I think we feel really comfortable about the guidance that we are providing on the volume side and that we’re taking a conservative view with the guidance range adjustment. I think in the history of the business, we’ve seen kind of irrational behavior in different segments throughout time as different areas have gained attraction. So we’ve seen really low install prices. We’ve seen really attractive sales commissions. And now we’re seeing it in capital providers. And so, it’s something we have a lot of confidence in our ability to navigate. I think the key component for us is the affiliate partner business. We have deep and strong relationships with a few key partners and continue to see robust opportunities with them. The rest of our business is captive sales force that’s largely insulated from this competitive risk.

Kashy Harrison: Thank you.

Operator: Thank you. Our next question comes from the line of Andrew Percoco with Morgan Stanley. Please proceed with your question.

Andrew Percoco: Great. Thanks so much for taking the call and the question here. So, I guess just to start out, and apologies if this has been asked already, but I think it’s clear that some of your peers in the space are coming under some pressure here. And I’m just curious if you’ve seen any impact to your ability to find non-recourse project level capital. Have the conversations changed at all? Have the terms changed at all in those deals as a result of some of the disruptions you’re seeing across the space?

Danny Abajian: Yes, good question. We get underwritten; first, we get underwritten on asset quality, and I think asset quality has been great and our servicing level has been great. So, we also get underwritten on sponsor quality. And we’ve been meeting and passing those tests. So, to underscore that, we did talk about, and obviously it’s been news for some time, the extension of our non-recourse warehouse loan, which is now about $2 billion and almost 10 lenders, and lenders who, many of whom, well, all of whom kind of extended and several of whom also came up in size in the February timeframe. And of course that is a group of lenders that are seeing all the visibility on the turnouts that we do. And of course, in that regard, we have two good data points recently, one involving the public markets with a season pool of assets.

So, those have been running for about seven, eight years in duration. They’ve been maintained well, they’re performing. And we got the spread lower from the prior transaction we did in the private market that we closed in February. So we’re seeing a broadening of participation in the private credit market. We’re also seeing a continuation of good track records and performance in getting deals done in the public ABS market. So we’re not seeing any sort of issues in that regard.

Andrew Percoco: Okay. [Multiple Speakers]

Danny Abajian: This is Dan. I was going to say, over the company’s history, like a flight to quality mindset has generally benefited us.

Andrew Percoco: Yes, definitely. Okay, that all makes sense. Thank you. And maybe as a second follow-up question, maybe more a strategy question, but just kind of curious what you see in terms of battery retrofit opportunities now that battery supply is more readily available, costs have come down a lot, obviously growth in solar has slowed a little bit. Is there an opportunity to just go back to some of your customers and add batteries? And what would that look like from a cash perspective? Would that impact? Would that be positive or negative to near-term cash generation? Thank you.

Mary Powell: Yes, great question. And yes, we totally agree and, in fact, have already launched at the beginning of the year, we launched a storage retrofit program that’s doing very well. We also launched our first phase of our renewal pilot. We’ve also launched a repowering program and a renewal program combined with storage retrofit. So yes, we see tremendous opportunity to really focus in on and grow the storage side of the business. And as I also described, the other incredible tertiary benefit of that is that also really provides us with much more value from a grid services perspective longer term because every solar customer that we then attach storage to becomes a customer that can potentially participate in grid services programs. So yes, we are very bullish on it. We’ve rolled out programs. We’re seeing good numbers and uptakes, and we’re excited about the impact. And one of the reasons that, again, we feel really good about our storage guide.

Andrew Percoco: Great. Thank you so much.

Operator: Thank you. Our next question comes from the line of James West with Evercore ISI. Please proceed with your question.