SUNNOVA ENERGY INTERNATIONAL INC. The following discussion and analysis contain forward-looking statements that
are subject to risks, uncertainties and assumptions. Our actual results and
timing of selected events may differ materially from those anticipated in these
forward-looking statements as a result of many factors, including but not
limited to those discussed under "Special Note Regarding Forward-Looking
Statements" above and "Special Note Regarding Forward-Looking Statements", "Risk
Factors" and elsewhere in our Annual Report on Form 10-K filed with the
Company Overview
We are a leading residential solar and energy storage service provider, serving more than 85,000 customers in more than 20 United States ("U.S.") states and territories. Our goal is to be the leading provider of clean, affordable and reliable energy for consumers, and we operate with a simple mission: to power energy independence. We were founded to deliver customers a better energy service at a better price; and, through our solar and solar plus energy storage service offerings, we are disrupting the traditional energy landscape and the way the 21st century customer generates and consumes electricity.
We have a differentiated residential solar dealer model in which we partner with local dealers who originate, design and install our customers' solar energy systems and energy storage systems on our behalf. Our focus on our dealer model enables us to leverage our dealers' specialized knowledge, connections and experience in local markets to drive customer origination while providing our dealers with access to high quality products at competitive prices as well as technical oversight and expertise. We believe this structure provides operational flexibility, reduced exposure to labor shortages and lower fixed costs relative to our peers, furthering our competitive advantage.
We offer customers products to power their homes with affordable solar energy. We are able to offer savings and storage opportunities to most customers compared to utility-based retail rates with little to no up-front expense to the customer, and we are able to provide energy resiliency and reliability to our solar plus energy storage customers. Our solar service agreements take the form of a lease, power purchase agreement ("PPA") or loan. The initial term of our solar service agreements is typically either 10 or 25 years. Service is an integral part of our agreements and includes operations and maintenance, monitoring, repairs and replacements, equipment upgrades, on-site power optimization for the customer (for both supply and demand), the ability to efficiently switch power sources among the solar panel, grid and energy storage system, as appropriate, and diagnostics. During the life of the contract we have the opportunity to integrate related and evolving home servicing and monitoring technologies to upgrade the flexibility and reduce the cost of our customers' energy supply.
In the case of leases and PPAs, we also currently receive tax benefits and other
incentives from federal, state and local governments, a portion of which we
finance through tax equity, non-recourse debt structures and hedging
arrangements in order to fund our upfront costs, overhead and growth
investments. We have an established track record of attracting capital from
diverse sources. From our inception through
In addition to providing ongoing service as a standard component of our solar service agreements, we also offer Sunnova Protect Services, which provide ongoing energy services to customers who purchased their solar energy system through unaffiliated third parties. Under these arrangements, we agree to provide such monitoring, maintenance and repair services to these customers for the life of the service contract they sign with us. We believe the quality and scope of our comprehensive energy service offerings, whether to customers that obtained their solar energy system through us or through another party, is a key differentiator between us and our competitors.
We commenced operations in
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Table of Contents Recent Developments
Coronavirus Disease ("COVID-19") Pandemic
The ongoing COVID-19 pandemic has resulted in widespread adverse impacts on the
global economy and on our employees, customers, dealers and other parties with
whom we have business relations. Our first priority in our response to this
pandemic has been the health and safety of our employees, customers and dealers.
To that end, we quickly implemented preventative measures to minimize
unnecessary risk of exposure and prevent infection. We have experienced some
resulting disruptions to our business operations as the COVID-19 pandemic has
continued to spread through most of the states and
Social distancing guidelines, stay-at-home orders and similar government
measures associated with the COVID-19 pandemic contributed to a decline in
origination. New contract origination, net of cancelations, in March and
The service and installation of solar energy systems continued during the COVID-19 pandemic. This reflects residential solar services' designation as an essential service in all of our service territories. In order to adhere to all applicable state and federal health and safety guidelines, we and our dealers have moved to a contact-free process for installers and service technicians. In addition, certain regulators and local utilities have begun accepting electronic submissions for permits and inspections are now being performed in many locations through video calls and other electronic means. We expect our dealers' ability to install and our ability to service solar energy systems will continue in this manner. However, if there are additional outbreaks of the COVID-19 virus or more stringent health and safety guidelines are adopted, our and our dealers' ability to continue performing installations and service calls may be adversely impacted.
Throughout the COVID-19 pandemic, we have seen minimal impact to our supply chain as our technicians and dealers have largely been able to successfully procure the equipment needed to service and install solar energy systems. We have established a geographically diverse group of suppliers, which helps ensure our dealers and customers have access to affordable and effective solar energy and storage options despite potential trade, geopolitical or event-driven risks. Further, we implemented a strategy in 2019, as a result of which the equipment necessary to install and service a significant majority of solar energy systems for the duration of 2020 is already available to us. Currently, we do not anticipate an inability to source parts for our solar energy systems or energy storage systems. However, if supply chains become significantly disrupted due to additional outbreaks of the COVID-19 virus or more stringent health and safety guidelines are implemented, our ability to install and service solar energy systems could become adversely impacted.
As part of our preventative measures to minimize unnecessary risk of exposure
and prevent infection, in the early weeks after declaration of the COVID-19
pandemic we implemented a work-from-home policy for employees in our
There is considerable uncertainty regarding the extent to which the COVID-19 virus will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of the COVID-19 virus, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. Restrictions of this nature have caused, and may continue to cause, us and our dealers to experience operational delays and may
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cause milestones or deadlines relating to our exclusivity arrangements to be missed. To date, we have not received notices from our dealers regarding performance delays resulting from the COVID-19 pandemic. However, worsening economic conditions could result in such outcomes over time, which would impact our future financial performance. Further, the effects of the economic downturn associated with the COVID-19 pandemic, and other economic factors, may increase unemployment and reduce consumer credit ratings and credit availability, which may adversely affect new customer origination and our existing customers' ability to make payments on their solar service agreements. Periods of high unemployment and a lack of availability of credit may lead to increased delinquency and default rates. We have not experienced a significant increase in default or delinquency rates to date. However, if existing economic conditions continue for a prolonged period of time or worsen, delinquencies on solar service agreements could increase, which would also negatively impact our future financial performance.
As of the date of this report, our efforts to respond to the challenges presented by the conditions described above to minimize the impacts to our business have yielded encouraging results. However, our future success also depends on our ability to raise capital from third-party investors and commercial sources. In the initial weeks of the COVID-19 pandemic we saw access to capital markets reduced generally. Although the capital markets have not returned to full strength we have since been able to raise funding during this challenging time. We have recently closed one additional tax equity fund, expanded capacity under one of our existing credit facilities and continue to have access to capacity under certain of our existing tax equity funds and warehouse facilities. If we are unable to regain access to the capital markets or are unable to raise funds through our tax equity and warehouse financing transactions at competitive terms, it would adversely impact both our ability to finance the deployment of our solar energy systems and energy storage systems and our future financial performance.
We cannot predict the full impact the COVID-19 pandemic or the significant disruption and volatility currently being experienced in the capital markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time due to numerous uncertainties. The ultimate impact will depend on future developments, including, among other things, the ultimate geographic spread and duration of the COVID-19 virus, the depth and duration of the economic downturn and other economic effects of the COVID-19 pandemic, the consequences of governmental and other measures designed to prevent the spread of the COVID-19 virus, actions taken by governmental authorities, customers, suppliers, dealers and other third parties, our ability and the ability of our customers, potential customers and dealers to adapt to operating in a changed environment and the timing and extent to which normal economic and operating conditions resume. For additional discussion regarding risks associated with the COVID-19 pandemic, see "Risk Factors" elsewhere in this Quarterly Report on Form 10-Q.
Financing Transactions
In
In
In
Securitizations
As a source of long-term financing, we securitize qualifying solar energy
systems and related solar service agreements into special purpose entities who
issue solar asset-backed and solar loan-backed notes to institutional investors.
We also securitize the cash flows generated by the membership interests in
certain of our indirect, wholly-owned subsidiaries that are the managing member
of a tax equity fund that owns a pool of solar energy systems and related solar
service agreements that were originated by one of our wholly-owned subsidiaries.
The federal government provides business investment tax credits under Section
48(a) (the "Section 48(a) ITC") and residential energy credits under Section 25D
(the "Section 25D Credit") of the
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energy systems as part of these arrangements. We use the cash flows these solar
energy systems generate to service the quarterly or semi-annual principal and
interest payments on the notes and satisfy the expenses and reserve requirements
of the special purpose entities, with any remaining cash distributed to their
sole members, who are typically our indirect wholly-owned subsidiaries. In
connection with these securitizations, certain of our affiliates receive a fee
for managing and servicing the solar energy systems pursuant to management,
servicing, facility administration and asset management agreements. The special
purpose entities are also typically required to maintain a liquidity reserve
account and a reserve account for inverter replacements and, in certain cases,
reserve accounts for financing fund purchase option/withdrawal right exercises
or storage system replacement for the benefit of the holders of the applicable
series of notes, each of which are funded from initial deposits or cash flows to
the levels specified therein. The creditors of these special purpose entities
have no recourse to our other assets except as expressly set forth in the terms
of the notes. From our inception through
Tax Equity Funds
Our ability to offer long-term solar service agreements depends in part on our
ability to finance the installation of the solar energy systems by co-investing
with tax equity investors such as large banks who value the resulting customer
receivables and Section 48(a) ITCs, accelerated tax depreciation and other
incentives related to the solar energy systems primarily through structured
investments known as "tax equity". Tax equity investments are generally
structured as non-recourse project financings known as "tax equity funds". In
the context of distributed generation solar energy, tax equity investors make
contributions upfront or in stages based on milestones in exchange for a share
of the tax attributes and cash flows emanating from an underlying portfolio of
solar energy systems. In these tax equity funds, the
In general, our tax equity funds are structured using the "partnership flip" structure. Under partnership flip structures, we and our tax equity investors contribute cash into a partnership. The partnership uses this cash to acquire long-term solar service agreements and solar energy systems developed by us and sells energy from such solar energy systems to customers or directly leases the solar energy systems to customers. We assign these solar service agreements, solar energy systems and related incentives to our tax equity funds in accordance with the criteria of the specific funds. Upon such assignment and the satisfaction of certain conditions precedent, we are able to draw down on the tax equity fund commitments. The conditions precedent to funding vary across our tax equity funds but generally require that we have entered into a solar service agreement with the customer, the customer meets certain credit criteria, the solar energy system is expected to be eligible for the Section 48(a) ITC, we have a recent appraisal from an independent appraiser establishing the fair market value of the solar energy system and the property is in an approved state or territory. All the capital contributed by our tax equity investors into the tax equity funds is, depending on the tax equity fund structure, either paid to us to acquire solar energy systems or distributed to us following our contribution of solar energy systems to the tax equity fund. Some tax equity investors have additional criteria that are specific to those tax equity funds. Once received by us, these proceeds are generally used for working capital or capital expenditures to develop and deliver solar energy systems. Each tax equity investor agrees to receive a minimum target rate of return, typically on an after-tax basis, which varies by tax equity fund. Prior to receiving a contractual rate of return or a date specified in the contractual arrangements, the tax equity investor receives substantially all of the non-cash value attributable to the solar energy systems, which includes accelerated depreciation and Section 48(a) ITCs, and a significant portion of the value attributable to customer payments; however, we receive a majority of the cash distributions, which are typically paid quarterly. After the tax equity investor receives its contractual rate of return or after the specified date, we receive substantially all of the cash. Under the partnership flip structure, in part owing to the allocation of depreciation benefits to the investor, the investor's pre-tax return is much lower than the investor's after-tax return.
We have determined we are the primary beneficiary in these partnership flip structures for accounting purposes. Accordingly, we consolidate the assets and liabilities and operating results of these partnerships in our consolidated financial statements. We recognize the tax equity investors' share of the net assets of the tax equity funds as redeemable noncontrolling interests in our consolidated balance sheets. These income or loss allocations, reflected in our consolidated statements of operations, may create significant volatility in our reported results of operations, including potentially changing net loss attributable to stockholders to net income attributable to stockholders, or vice versa, from quarter to quarter.
We typically have an option to acquire, and our tax equity investors may have an
option to withdraw and require us to purchase, all the equity interests our tax
equity investor holds in the tax equity funds approximately six years after the
last solar energy system in each tax equity fund is operational. If we or our
tax equity investors exercise this option, we are typically required to pay at
least the fair market value of the tax equity investor's equity interest.
Following such exercise, we would receive 100% of the customer payments for the
remainder of the term of the solar service agreements. From our inception
through
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aggregate of
Key Financial and Operational Metrics
We regularly review a number of metrics, including the following key operational and financial metrics, to evaluate our business, measure our performance and liquidity, identify trends affecting our business, formulate our financial projections and make strategic decisions.
Number of Customers. We define number of customers to include each customer that is party to an in-service solar service agreement. For our leases, PPAs and loan agreements, in-service means the related solar energy system and, if applicable, energy storage system, must have met all the requirements to begin operation and be interconnected to the electrical grid. For our Sunnova Protect services, in-service means the customer's solar energy system must have met the requirements to have the service activated. We do not include in our number of customers any customer under a lease, PPA or loan agreement that has reached mechanical completion but has not received permission to operate from the local utility or for whom we have terminated the contract and removed the solar energy system. We also do not include in our number of customers any customer of our Sunnova Protect services that has been in default under his or her solar service agreement in excess of six months. We track the total number of customers as an indicator of our historical growth and our rate of growth from period to period.
As of As of
March 31, 2020 December 31, 2019 Change
Number of customers 85,400 78,600 6,800
Weighted Average Number of Customers. We calculate the weighted average number of customers based on the number of months a given customer is in-service during a given measurement period. The weighted average customer count reflects the number of customers at the beginning of a period, plus the total number of new customers added in the period adjusted by a factor that accounts for the partial period nature of those new customers. For purposes of this calculation, we assume all new customers added during a month were added in the middle of that month. We track the weighted average customer count in order to accurately reflect the contribution of the appropriate number of customers to key financial metrics over the measurement period.
Three Months Ended
March 31,
2020 2019
Weighted average number of customers (excluding loan agreements) 70,100 55,300
Weighted average number of customers with loan agreements 11,800 6,700
Weighted average number of customers 81,900 62,000
Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) plus net interest expense, depreciation and amortization expense, income tax expense, financing deal costs, natural disaster losses and related charges, net, amortization of payments to dealers for exclusivity and other bonus arrangements, legal settlements and excluding the effect of certain non-recurring items we do not consider to be indicative of our ongoing operating performance such as, but not limited to, costs of our initial public offering ("IPO"), losses on unenforceable contracts, losses on extinguishment of long-term debt, realized and unrealized gains and losses on fair value option instruments and other non-cash items such as non-cash compensation expense, asset retirement obligation ("ARO") accretion expense and provision for current expected credit losses.
Adjusted EBITDA is a non-GAAP financial measure we use as a performance measure.
We believe investors and securities analysts also use Adjusted EBITDA in
evaluating our operating performance. This measurement is not recognized in
accordance with accounting principles generally accepted in
We believe Adjusted EBITDA is useful to management, investors and analysts in providing a measure of core financial performance adjusted to allow for comparisons of results of operations across reporting periods on a consistent basis. These adjustments are intended to exclude items that are not indicative of the ongoing operating performance of the business. Adjusted EBITDA is also used by our management for internal planning purposes, including our consolidated operating budget, and by our Board in setting performance-based compensation targets. Adjusted EBITDA should not be considered an
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alternative to but viewed in conjunction with GAAP results, as we believe it provides a more complete understanding of ongoing business performance and trends than GAAP measures alone. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
We use per customer metrics, including Adjusted Operating Expense per weighted average customer (as described below), as an additional way to evaluate our performance. Specifically, we consider the change in these metrics from period to period as a way to evaluate our performance in the context of changes we experience in the overall customer base. While the Adjusted Operating Expense figure provides a valuable indicator of our overall performance, evaluating this metric on a per unit basis allows for further nuanced understanding by management, investors and analysts of the financial impact of each additional customer.
Three Months Ended
March 31,
2020 2019
(in thousands)
Reconciliation of Net Loss to Adjusted EBITDA:
Net loss $ (77,004 ) $ (35,496 )
Interest expense, net 67,318 31,661
Interest expense, net-affiliates - 1,822
Interest income (4,620 ) (2,494 )
Depreciation expense 14,946 11,012
Amortization expense 9 5
EBITDA 649 6,510
Non-cash compensation expense (1) 2,690 387
ARO accretion expense 489 313
Financing deal costs 116 119
Natural disaster losses and related charges, net 31 -
IPO costs - 739
Amortization of payments to dealers for exclusivity and other bonus arrangements
351 -
Provision for current expected credit losses 1,864 -
Adjusted EBITDA $ 6,190 $ 8,068
(1) Amount includes the non-cash effect of equity-based compensation plans of
$2.7 million and $0.3 million for the three months ended March 31, 2020
and 2019, respectively, and partial forgiveness of a loan to an executive
officer used to purchase our capital stock of $0.1 million for the three
months ended March 31, 2019 .
Interest Income and Principal Payments from Customer Notes Receivable. Under our loan agreements, the customer obtains financing for the purchase of a solar energy system from us and we agree to operate and maintain the solar energy system throughout the duration of the agreement. Pursuant to the terms of the loan agreement, the customer makes scheduled principal and interest payments to us and has the option to prepay principal at any time in part or in full. Whereas we typically recognize payments from customers under our leases and PPAs as revenue, we recognize payments received from customers under our loan agreements (a) as interest income, to the extent attributable to earned interest on the contract that financed the customer's purchase of the solar energy system; (b) as a reduction of a note receivable on the balance sheet, to the extent attributable to a return of principal (whether scheduled or prepaid) on the contract that financed the customer's purchase of the solar energy system; and (c) as revenue, to the extent attributable to payments for operations and maintenance services provided by us.
While Adjusted EBITDA effectively captures the operating performance of our leases and PPAs, it only reflects the service portion of the operating performance under our loan agreements. We do not consider our types of solar service agreements differently when evaluating our operating performance. In order to present a measure of operating performance that provides comparability without regard to the different accounting treatment among our three types of solar service agreements, we consider interest income from customer notes receivable and principal proceeds from customer notes receivable, net of related revenue, as key performance metrics. We believe these two metrics provide a more meaningful and uniform method of analyzing our operating performance when viewed in light of our other key performance metrics across the three primary types of solar service agreements.
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Three Months Ended
March 31,
2020 2019
(in thousands)
Interest income from customer notes receivable $ 4,372 $ 2,328 Principal proceeds from customer notes receivable, net of related revenue
$ 6,378 $ 3,429
Adjusted Operating Cash Flow. We define Adjusted Operating Cash Flow as net cash used in operating activities plus principal proceeds from customer notes receivable, financed insurance payments and distributions to redeemable noncontrolling interests less derivative breakage fees from financing structure changes, payments to dealers for exclusivity and other bonus arrangements, net inventory and prepaid inventory (sales) purchases and payments of non-capitalized costs related to our IPO. Adjusted Operating Cash Flow is a non-GAAP financial measure we use as a liquidity measure. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of liquidity. The GAAP measure most directly comparable to Adjusted Operating Cash Flow is net cash used in operating activities. We believe Adjusted Operating Cash Flow is a supplemental financial measure useful to management, analysts, investors, lenders and rating agencies as an indicator of our ability to internally fund origination activities, service or incur additional debt and service our contractual obligations. We believe investors and analysts will use Adjusted Operating Cash Flow to evaluate our liquidity and ability to service our contractual obligations. However, Adjusted Operating Cash Flow has limitations as an analytical tool because it does not account for all future expenditures and financial obligations of the business or reflect unforeseen circumstances that may impact our future cash flows, all of which could have a material effect on our financial condition and results from operations. In addition, our calculations of Adjusted Operating Cash Flow are not necessarily comparable to liquidity measures presented by other companies. Investors should not rely on these measures as a substitute for any GAAP measure, including net cash used in operating activities.
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