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 theSecurities and Exchange Commission ("SEC") onFebruary 23, 2023 and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Unless the context otherwise requires, the terms "Sunnova," "the Company," "we," "us" and "our" refer to SEI and its consolidated subsidiaries.
Company Overview
We are a leading Energy as a Service provider, serving over 309,000 customers in more than 45 United States ("U.S.") states and territories. Our goal is to be the source of clean, affordable and reliable energy with a simple mission: to power energy independence so home and business owners have the freedom to live life uninterrupted. We were founded to deliver customers a better energy service at a better price; and, through our energy service offerings, we are disrupting the traditional energy landscape and the way the 21st century customer generates and consumes electricity. We have a differentiated dealer model in which we partner with local dealers who originate, design and install our customers' solar energy systems, energy storage systems and related products and services 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, reduces exposure to labor shortages and lowers fixed costs relative to our peers, furthering our competitive advantage. We offer customers products to power their homes and businesses with affordable solar energy and related products and services. We are able to offer savings compared to utility-based retail rates with little to no up-front expense to the customer in conjunction with solar and solar plus energy storage, and, in the case of the latter, are able to also provide energy resiliency. Our solar service agreements typically take the form of a lease, power purchase agreement ("PPA"), loan or cash purchase; however, we also offer service plans for systems we did not originate. We make it possible in some states for a customer to obtain a new roof and/or other ancillary products. We also allow customers originated through our homebuilder channel the option of purchasing the system when the customer closes on the purchase of a new home. The initial term of our solar service agreements is typically between 10 and 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 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 throughMarch 31, 2023 , we have raised more than$12.5 billion in total capital commitments from equity, debt and tax equity investors. In addition to providing ongoing service as a standard component of our solar service agreements, we also offer ongoing energy services to customers who purchased their solar energy system through third parties. Under these arrangements, we agree to provide monitoring, maintenance and repair services to these customers for the life of the service contract they sign with us. In addition, we offer one-time repair services to customers who purchased their solar energy systems through third parties. We also offer complementary products as well as non-solar financing. Specifically, our offerings include a non-solar loan program enabling customers to finance the purchase of products independent of a solar energy system or energy storage system. 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. 32 -------------------------------------------------------------------------------- Table of Contents InApril 2021 , we acquired SunStreet, Lennar's residential solar platform that focuses primarily on solar energy systems and energy storage systems for homebuilders. In connection with that acquisition, we entered into an agreement pursuant to which we would be the exclusive solar and storage provider for Lennar's new home communities with solar across theU.S. for a period of four years. We believe the acquisition provides a new strategic path to further scale our solar business, reduces customer acquisition costs, provides a multi-year supply of sites through the development of new solar communities and allows us to pursue the development of clean and resilient microgrids across theU.S. We also enter into leases with third-party owners of pools of solar energy systems to receive such third party's interest in those systems. In connection therewith, we assume the related customer PPA and lease obligations, entitling us to future customer cash flows as well as certain credits, rebates and incentives (including SRECs) under those agreements, in exchange for a lease payment, whether upfront or over time, to the third-party owner, which may be made in the form of cash or shares of our common stock. We believe such arrangements enhance our long-term contracted cash flows and are complementary to our overall business model. We commenced operations inJanuary 2013 and began providing solar energy services under our first solar energy system inApril 2013 . Since then, our brand, innovation and focused execution have driven significant, rapid growth in our market share and in the number of customers on our platform. We operate one of the largest residential fleets of solar energy systems in theU.S. , comprising more than 1,763 megawatts of generation capacity and serving over 309,000 customers. Recent Developments Financing Transactions InFebruary 2023 , a tax equity investor increased its capital commitment from$30.0 million to$125.0 million . InMarch 2023 , a tax equity investor increased its capital commitment from$41.0 million to$51.3 million . InApril 2023 , two tax equity investors increased their capital commitment from$200.0 million to$207.8 million . See "-Liquidity and Capital Resources-Financing Arrangements-Tax Equity Fund Commitments" below. InFebruary 2023 , we amended the revolving credit facility by and amongSunnova EZ-Own Portfolio, LLC ("EZOP"), certain of our other subsidiaries party thereto,Atlas Securitized Products Holdings, L.P. (as successor to Credit Suisse AG,New York Branch), as agent, and the lenders and other financial institutions party thereto, to, among other things, (a) increase the aggregate commitment amount from$450.0 million to$675.0 million , (b) increase the uncommitted maximum facility amount from$575.0 million to$800.0 million , (c) amend certain provisions related to the allocation of certain payments made to the lenders, (d) amend certain provisions related to excess concentration limits and eligibility criteria to permit us and our affiliates to provide warranties of, and replacements for, load controllers and generators in connection with the related solar loan contracts and (e) add provisions to allow EZOP to request an increase in the aggregate commitment amount (subject to certain conditions) by adding additional lenders to the EZOP revolving credit facility. InFebruary 2023 , Credit Suisse AG ("Credit Suisse") sold a significant part of itsSecuritized Products Group (the "Credit Suisse Securitized Products Sale ") to Apollo Global Management ("Apollo"). Subsequently, Apollo publicly announced the majority of the assets and professionals associated with the sale are now part of or managed byATLAS SP Partners , a new stand-alone credit firm focused on asset-backed financing and capital markets solutions ("Atlas"). InMarch 2023 , in connection with theCredit Suisse Securitized Products Sale , certain of our subsidiaries consented to the assignment of the loans and commitments of the Credit Suisse lenders to the Atlas lenders (such assignment, the "EZOP Assignment") under the EZOP revolving credit facility. In connection with the EZOP Assignment, Credit Suisse AG,New York Branch ("CSNYB") resigned as the agent under the EZOP revolving credit facility,Atlas Securitized Products Holdings, L.P. (the "Successor Agent") was appointed as the successor agent thereunder and, in connection with such appointment, the Successor Agent assumed the agent roles under the EZOP revolving credit facility. In connection with the appointment of Atlas as Successor Agent, the borrowers and the lenders party to the applicable agency resignation and appointment agreements consented to, among other things, Atlas' ability to assign the agent role under the EZOP revolving credit facility to one of its affiliates subject to certain conditions set forth therein. InMarch 2023 , after the EZOP Assignment, we amended the EZOP revolving credit facility to, among other things, (a) increase the aggregate commitment amount from$675.0 million to$775.0 million , (b) increase the uncommitted maximum facility amount from$800.0 million to$900.0 million , (c) amend and supplement certain defaulting lender provisions and (d) update the references from CSNYB, the predecessor agent, to Atlas, the successor agent, and remove or modify certain provisions related to the borrowing, funding and allocation of payments among the previous lender syndicate (that previously included lenders affiliated with Credit Suisse that, prior to the date of the amendment to the EZOP revolving credit facility and pursuant to the EZOP Assignment, had assigned their loans and commitments to lenders affiliated with Atlas). See "-Liquidity and Capital Resources-Financing Arrangements-Warehouse and Other Debt Financings" below.
In
33 -------------------------------------------------------------------------------- Table of Contents assignment of the loans and commitments of the Credit Suisse lenders to the Atlas lenders (such assignment, the "TEPH Assignment") under the revolving credit facility by and amongSunnova TEP Holdings, LLC ("TEPH"), certain of our other subsidiaries party thereto,Atlas Securitized Products Holdings, L.P. (as successor to CSNYB), as agent, and the lenders and other financial institutions party thereto. In connection with the TEPH Assignment, CSNYB resigned as the agent under the TEPH revolving credit facility, Atlas was appointed as the successor agent thereunder and, in connection with such appointment, the Successor Agent assumed the agent roles under the TEPH revolving credit facility. In connection with the appointment of Atlas as Successor Agent, the borrowers and the lenders party to the applicable agency resignation and appointment agreements consented to, among other things, Atlas' ability to assign the agent role under the TEPH revolving credit facility to one of its affiliates subject to certain conditions set forth therein. InMarch 2023 , after the TEPH Assignment, we amended the TEPH revolving credit facility to, among other things, (a) increase the aggregate commitment amount from$600.0 million to$700.0 million , (b) increase the uncommitted maximum facility amount from$689.7 million to$789.7 million , (c) add provisions to allow TEPH to request an increase in the aggregate commitment amount (subject to certain conditions) by adding additional lenders to the TEPH revolving credit facility, (d) amend and supplement certain defaulting lender provisions, (e) modify the hedging provisions to give all hedge counterparties the benefit of certain payment priorities and certain other terms previously limited to qualifying hedge counterparties (as defined by the TEPH revolving credit facility), to extend the time period for the event of default resulting from hedge counterparties ceasing to be qualifying hedge counterparties and to make other hedge-related amendments, (f) update the references from CSNYB, the predecessor administrative agent, to Atlas, the successor administrative agent, and remove or modify certain provisions related to the borrowing, funding and allocation of payments among the previous lender syndicate (that previously included lenders affiliated with Credit Suisse that, prior to the date of the amendment to the TEPH revolving credit facility and pursuant to the TEPH Assignment, had assigned their loans and commitments to lenders affiliated with Atlas), (g) addEuropean Union bail-in provisions and (h) add certain syndication-related provisions. See "-Liquidity and Capital Resources-Financing Arrangements-Warehouse and Other Debt Financings" below. InMarch 2023 , the revolving credit facility by and among Sunnova Asset Portfolio 8, LLC ("AP8"), certain of our other subsidiaries party thereto, Banco Popular dePuerto Rico , as agent, and the lenders and other financial institutions party thereto was amended to, among other things, increase the aggregate commitment amount from$75.0 million to$150.0 million . See "-Liquidity and Capital Resources-Financing Arrangements-Warehouse and Other Debt Financings" below. InMarch 2023 ,Sunnova Inventory Supply, LLC ("IS") entered into a secured revolving credit facility withTexas Capital Bank , as agent, and the lenders party thereto, for an aggregate commitment amount of$50.0 million with a maturity date of the earlier of (a)March 2026 and (b) six months from the latest maturity date of any material parent credit facility (defined as a parent credit facility with a commitment amount of$250.0 million or more that, if terminated could individually be expected to result in a liquidity event (as defined by theIS revolving credit facility)). The proceeds of the loans under theIS revolving credit facility are available to purchase or otherwise acquire certain accounts receivable and inventory directly fromSunnova Energy Corporation , fund certain reserve accounts that are required to be maintained byIS in accordance with the revolving credit agreement and pay fees and expenses incurred in connection with theIS revolving credit facility. Interest on the borrowings under theIS revolving credit facility is due monthly. Borrowings under theIS revolving credit facility bear interest at an annual rate based on Term SOFR (as defined by theIS revolving credit facility). See "-Liquidity and Capital Resources-Financing Arrangements-Warehouse and Other Debt Financings" below. InApril 2023 , theU.S. Department of Energy (the "DOE") announced a conditional commitment to guarantee 90% of up to approximately$3.3 billion of certain of our future financing arrangements under its Innovative Clean Energy Loan Guarantee Program. The commitment is subject to various customary conditions. There is no assurance theDOE's conditional commitment will be fulfilled on the terms announced or at all or that the related guarantees will provide the anticipated benefits to us. See "-Liquidity and Capital Resources-Financing Arrangements-Warehouse and Other Debt Financings" below. InApril 2023 , one of our subsidiaries issued$300.0 million in aggregate principal amount of Series 2023-1 Class A solar asset-backed notes and$23.5 million in aggregate principal amount of Series 2023-1 Class B solar asset-backed notes (collectively, the "SOLV Notes") with a maturity date ofApril 2058 . The SOLV Notes were issued at a discount of 5.01% and 11.63% for the Class A and Class B notes, respectively, and bear interest at an annual rate of 5.40% and 7.35% for the Class A and Class B notes, respectively. See "-Liquidity and Capital Resources-Financing Arrangements-Securitizations" below.
Securitizations
As a source of long-term financing, we securitize qualifying solar energy systems, energy storage 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, energy storage 34 -------------------------------------------------------------------------------- Table of Contents systems and related solar service agreements that were originated by one of our wholly-owned subsidiaries. The federal government currently 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 theU.S. Internal Revenue Code of 1986, as amended. For projects that begin construction afterDecember 31, 2024 , the Section 48(a) ITC will be replaced with investment tax credits under Section 48E(a) (the "Section 48E ITC"). We do not securitize the Section 48(a) ITC incentives, and currently do not plan to securitize any Section 48E ITC incentives, associated with the solar energy systems and energy storage systems as part of these arrangements. We use the cash flows these solar energy systems and energy storage systems generate to service the monthly, 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 and energy storage 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 equipment 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 under 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 throughMarch 31, 2023 , we have issued$3.6 billion in solar asset-backed and solar loan-backed notes.
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 and energy storage systems by co-investing with tax equity investors, such as large banks who value the resulting customer receivables and Section 48(a) ITCs or, in the future, Section 48E ITCs, accelerated tax depreciation and other incentives related to the solar energy systems and energy storage 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 and energy storage systems. In these tax equity funds, theU.S. federal tax attributes offset taxes that otherwise would have been payable on the investors' other operations. The terms and conditions of each tax equity fund vary significantly by investor and by fund. We continue to negotiate with potential investors to create additional tax equity funds. 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, solar energy systems and energy storage systems developed by us and sells energy from such solar energy systems and energy storage systems, as applicable, to customers or directly leases the solar energy systems and energy storage systems, as applicable, to customers. We assign these solar service agreements, solar energy systems, energy storage 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 or the Section 48E ITC, as applicable, 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. Certain tax equity investors agree 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 and energy storage systems, which includes accelerated depreciation and Section 48(a) ITCs or Section 48E ITCs, as applicable; however, we typically 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 a specified date, we receive substantially all of the cash and tax allocations. We have determined we are the primary beneficiary in these tax equity funds 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 and noncontrolling interests in our consolidated balance sheets. The 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 starting approximately five years after the last solar energy system in the applicable tax equity fund is operational. If we or our tax equity investors exercise this option, 35 -------------------------------------------------------------------------------- Table of Contents we are typically required to pay at least the fair market value of the tax equity investor's equity interest and, in certain cases, a contractual minimum amount. From our inception throughMarch 31, 2023 , we have received commitments of approximately$1.9 billion through the use of tax equity funds, of which an aggregate of$1.6 billion has been funded and$138.8 million remains available for use.
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, identify trends affecting our business, formulate our financial projections and make strategic decisions. Number of Customers. We define number of customers to include every unique premises on which a Sunnova product is installed or on which Sunnova is obligated to perform services for a counterparty. 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, 2023 December 31, 2022 Change Number of customers 309,300 279,400 29,900 Weighted Average Number of Systems. We calculate the weighted average number of systems based on the number of months a customer and any additional service obligation related to a solar energy system is in-service during a given measurement period. The weighted average number of systems reflects the number of systems at the beginning of a period, plus the total number of new systems added in the period adjusted by a factor that accounts for the partial period nature of those new systems. For purposes of this calculation, we assume all new systems added during a month were added in the middle of that month. The number of systems for any end of period will exceed the number of customers, as defined above, for that same end of period as we are also including any additional services and/or contracts a customer or third party executed for the additional work for the same residence or business. We track the weighted average system count in order to accurately reflect the contribution of the appropriate number of systems to key financial metrics over the measurement period. Three Months Ended March 31, 2023 2022
Weighted average number of systems (excluding loan agreements and cash sales)
197,500 155,800 Weighted average number of systems with loan agreements 88,700 41,700 Weighted average number of systems with cash sales 7,300 2,400 Weighted average number of systems 293,500 199,900 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, losses on extinguishment of long-term debt, realized and unrealized gains and losses on fair value instruments and equity securities, 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"), acquisition costs, losses on unenforceable contracts, indemnification payments to tax equity investors and other non-cash items such as non-cash compensation expense, asset retirement obligation ("ARO") accretion expense, provision for current expected credit losses and non-cash inventory impairments. 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 inthe United States of America ("GAAP") and should not be viewed as an alternative to GAAP measures of performance. The GAAP measure most directly comparable to Adjusted EBITDA is net income (loss). The presentation of Adjusted EBITDA should not be construed to suggest our future results will be unaffected by non-cash or non-recurring items. In addition, our calculation of Adjusted EBITDA is not necessarily comparable to Adjusted EBITDA as calculated by other companies. 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. 36 -------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA is also used by our management for internal planning purposes, including our consolidated operating budget, and by our board of directors in setting performance-based compensation targets. Adjusted EBITDA should not be considered an 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. Three Months Ended March 31, 2023 2022 (in thousands) Reconciliation of Net Loss to Adjusted EBITDA: Net loss$ (110,346) $ (22,104) Interest expense, net 85,607 (1,015) Interest income (24,788) (10,932) Income tax expense 510 - Depreciation expense 32,671 24,740 Amortization expense 7,338 7,288 EBITDA (9,008) (2,023) Non-cash compensation expense 9,515 10,864 ARO accretion expense 1,081 840 Financing deal costs 173 384 Natural disaster losses and related charges, net 137 - Acquisition costs 743 1,259 Unrealized gain on fair value instruments and equity securities (487) (6,362)
Amortization of payments to dealers for exclusivity and other bonus arrangements
1,386 928 Legal settlements 750 - Provision for current expected credit losses 10,259 6,657 Indemnification payments to tax equity investors 4 - Adjusted EBITDA$ 14,553 $ 12,547 Interest Income from Customer Notes Receivable; Principal Proceeds from Customer Notes Receivable, Net of Related Revenue; and Proceeds from Investments in Solar Receivables. 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. We also enter into leases with third-party owners of pools of solar energy systems to receive such third party's interest in those systems. In connection therewith, we assume the related customer PPA and lease obligations, entitling us to future customer cash flows as well as certain credits, rebates and incentives (including SRECs) under those agreements. We recognize payments received from such third parties as proceeds from investments in solar receivables. 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 different types of solar service agreements, we consider interest income from customer notes receivable, principal proceeds from customer notes receivable, net of related revenue, and proceeds from investments in solar receivables as key performance metrics. We believe these 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 primary types of solar service agreements. 37
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Table of Contents Three Months EndedMarch 31, 2023 2022 (in thousands) Interest income from customer notes receivable $
20,088
$ 29,098 $ 20,413 Proceeds from investments in solar receivables $
2,132
Adjusted Operating Expense. We define Adjusted Operating Expense as total operating expense less depreciation and amortization expense, financing deal costs, natural disaster losses and related charges, net, amortization of payments to dealers for exclusivity and other bonus arrangements, legal settlements, direct sales costs, cost of revenue related to cash sales, cost of revenue related to inventory sales, unrealized gains and losses on fair value instruments 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 IPO, acquisition costs, losses on unenforceable contracts, indemnification payments to tax equity investors and other non-cash items such as non-cash compensation expense, ARO accretion expense, provision for current expected credit losses and non-cash inventory impairments. Adjusted Operating Expense is a non-GAAP financial measure we use as a performance measure. We believe investors and securities analysts will also use Adjusted Operating Expense in evaluating our performance. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. The GAAP measure most directly comparable to Adjusted Operating Expense is total operating expense. We believe Adjusted Operating Expense is a supplemental financial measure useful to management, analysts, investors, lenders and rating agencies as an indicator of the efficiency of our operations between reporting periods. Adjusted Operating Expense should not be considered an alternative to but viewed in conjunction with GAAP total operating expense, as we believe it provides a more complete understanding of our performance than GAAP measures alone. Adjusted Operating Expense 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, including total operating expense. We use per system metrics, including Adjusted Operating Expense per weighted average system, as an additional way to evaluate our performance. Specifically, we consider the change in this metric 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 system basis allows for further nuanced understanding by management, investors and analysts of the financial impact of each additional system. 38
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Table of Contents Three Months Ended March 31, 2023 2022 (in thousands, except per system data) Reconciliation of Total Operating Expense, Net to Adjusted Operating Expense: Total operating expense, net$ 210,477 $ 99,928 Depreciation expense (32,671) (24,740) Amortization expense (7,338) (7,288) Non-cash compensation expense (9,515) (10,864) ARO accretion expense (1,081) (840) Financing deal costs (173) (384) Natural disaster losses and related charges, net (137) - Acquisition costs (743) (1,259)
Amortization of payments to dealers for exclusivity and other bonus arrangements
(1,386) (928) Legal settlements (750) - Provision for current expected credit losses (10,259) (6,657) Direct sales costs (7,597) (380) Cost of revenue related to cash sales (9,345) (5,815) Cost of revenue related to inventory sales (51,779) - Unrealized gain on fair value instruments 723 6,207 Indemnification payments to tax equity investors (4) - Adjusted Operating Expense$ 78,422 $ 46,980 Adjusted Operating Expense per weighted average system $
267
Estimated Gross Contracted Customer Value. We calculate estimated gross contracted customer value as defined below. We believe estimated gross contracted customer value can serve as a useful tool for investors and analysts in comparing the remaining value of our customer contracts to that of our peers.
Estimated gross contracted customer value as of a specific measurement date represents the sum of the present value of the remaining estimated future net cash flows we expect to receive from existing customers during the initial contract term of our leases and PPAs, which are typically 25 years in length, plus the present value of future net cash flows we expect to receive from the sale of related solar renewable energy certificates ("SRECs"), either under existing contracts or in future sales, plus the cash flows we expect to receive from energy services programs such as grid services, plus the carrying value of outstanding customer loans on our balance sheet. From these aggregate estimated initial cash flows, we subtract the present value of estimated net cash distributions to redeemable noncontrolling interests and noncontrolling interests and estimated operating, maintenance and administrative expenses associated with the solar service agreements. These estimated future cash flows reflect the projected monthly customer payments over the life of our solar service agreements and depend on various factors including but not limited to solar service agreement type, contracted rates, expected sun hours and the projected production capacity of the solar equipment installed. For the purpose of calculating this metric, we discount all future cash flows at 6%. The anticipated operating, maintenance and administrative expenses included in the calculation of estimated gross contracted customer value include, among other things, expenses related to accounting, reporting, audit, insurance, maintenance and repairs. In the aggregate, we estimate these expenses are$20 per kilowatt per year initially, with 2% annual increases for inflation, and an additional$81 per year non-escalating expense included for energy storage systems. We do not include maintenance and repair costs for inverters and similar equipment as those are largely covered by the applicable product and dealer warranties for the life of the product, but we do include additional cost for energy storage systems, which are only covered by a 10-year warranty. Expected distributions to tax equity investors vary among the different tax equity funds and are based on individual tax equity fund contract provisions. Estimated gross contracted customer value is forecasted as of a specific date. It is forward-looking and we use judgment in developing the assumptions used to calculate it. Factors that could impact estimated gross contracted customer value include, but are not limited to, customer payment defaults, or declines in utility rates or early termination of a contract in certain 39 -------------------------------------------------------------------------------- Table of Contents circumstances, including prior to installation. The following table presents the calculation of estimated gross contracted customer value as ofMarch 31, 2023 andDecember 31, 2022 , calculated using a 6% discount rate. As of As ofMarch 31, 2023 December 31, 2022 (in millions)
Estimated gross contracted customer value $ 6,751 $
5,875
Sensitivity Analysis. The calculation of estimated gross contracted customer value and associated operational metrics requires us to make a number of assumptions regarding future revenues and costs that may not prove accurate. Accordingly, we present below a sensitivity analysis with a range of assumptions. We consider a discount rate of 6% to be appropriate based on recent transactions that demonstrate a portfolio of solar service agreements is an asset class that can be securitized successfully on a long-term basis with a weighted-average coupon of less than 6%. We also present these metrics with a discount rate of 6% based on industry practice. The appropriate discount rate for these estimates may change in the future due to the level of inflation, rising interest rates, our cost of capital and consumer demand for solar energy systems. In addition, the table below provides a range of estimated gross contracted customer value amounts if different cumulative customer loss rate assumptions were used. We are presenting this information for illustrative purposes only and as a comparison to information published by our peers. Estimated Gross Contracted Customer Value As of March 31, 2023 Discount rate Cumulative customer loss rate 4% 5% 6% 7% 8% (in millions) 5%$ 7,179 $ 6,849 $ 6,560 $ 6,307 $ 6,083 0%$ 7,431 $ 7,068 $ 6,751 $ 6,473 $ 6,229
Significant Factors and Trends Affecting Our Business
Our results of operations and our ability to grow our business over time could be impacted by a number of factors and trends that affect our industry generally, as well as new offerings of services and products we may acquire or seek to acquire in the future. Additionally, our business is concentrated in certain markets, putting us at risk of region-specific disruptions such as adverse economic, regulatory, political, weather and other conditions. See "Risk Factors" in our Annual Report on Form 10-K filed with theSEC onFebruary 23, 2023 and in this Quarterly Report on Form 10-Q for further discussion of risks affecting our business. Financing Availability. Our future growth depends, in significant part, on our ability to raise capital from third-party investors on competitive terms to help finance the origination of our solar energy systems under our solar service agreements. We have historically used debt, such as convertible senior notes, asset-backed and loan-backed securitizations and warehouse facilities, tax equity, preferred equity and other financing strategies to help fund our operations. From our inception throughMarch 31, 2023 , we have raised more than$12.5 billion in total capital commitments from equity, debt and tax equity investors. With respect to tax equity, there are a limited number of potential tax equity investors, and the competition for this investment capital is intense. The principal tax credit on which tax equity investors in our industry rely is the Section 48(a) ITC. The amount for the Section 48(a) ITC was equal to 30% of the basis of eligible solar property that began construction before 2020 if placed in service before 2022. The Section 48(a) ITC percentage decreased to 26% for eligible solar property that began construction during 2020 or 2021 if the property was placed into service before 2022. Under the Inflation Reduction Act of 2022 ("IRA"), which was enacted inAugust 2022 , for eligible solar property that begins construction before 2025 and for eligible energy storage property that begins construction after 2022 and before 2025, the Section 48(a) ITC percentage will be no less than 30% provided (a) the project satisfies certain labor and apprenticeship requirements, (b) the project has a maximum net output of less than one megawatt (as measured in alternating current) or (c) the project began construction prior toJanuary 29, 2023 . If no criterion is satisfied, the base amount of the Section 48(a) ITC will be equal to 6%. In addition, the Section 48(a) ITC will be replaced by the Section 48E ITC for eligible solar energy property or eligible energy storage property that begins construction after 2024, and the Section 48E ITC percentage will be the same as the percentage for the Section 48(a) ITC and subject to the same requirements in order to receive the full benefit. The Section 48E ITC percentage will begin to phase down for projects that begin construction after (a) 2033 or (b) if later, the first year after the year in which theU.S. Department of Treasury determines greenhouse gas emissions from the production of electricity inthe United States are no more than 25% of 2022 levels. We believe our solar energy systems and energy storage systems generally will not be subject to the labor and 40 -------------------------------------------------------------------------------- Table of Contents apprenticeship requirements of the IRA due to the maximum net output of most of our solar energy systems and energy storage systems. In addition, the IRA added a new provision that allows taxpayers to transfer certain federal income tax credits that arise after 2022, such as the Section 48(a) ITC, to third parties for cash. It is unclear what effect the ability to transfer Section 48(a) ITCs will have on tax equity structures, although we expect the market for tax equity structures to continue for investors who will continue to value benefits that are not transferable, such as accelerated depreciation. We are continuing to evaluate the overall impact and applicability of the IRA to our ability to raise capital from third-party investors. Our ability to raise capital from third-party investors is also affected by general economic conditions, the state of the capital markets, inflation levels and concerns about our industry or business. Specifically, interest rates have risen and remain subject to volatility that may result from action taken by theFederal Reserve . Recent data have suggested inflationary pressures may be more durable than anticipated, which could result in interest rate increases or continued higher interest rates and/or further tapering of quantitative easing policies enacted towards the outset of the COVID-19 pandemic sooner than previously expected. Cost of Solar Energy Systems and Energy Storage Systems. Upward pressure on prices of solar energy systems and energy storage systems may occur due to growth in the solar industry, regulatory policy changes, tariffs and duties, inflationary cost pressures and an increase in demand. As a result of these developments, we may pay higher prices on solar modules, which may make it less economical for us to serve certain markets. Attachment rates for energy storage systems have trended higher while the price to acquire has remained steady and increased slightly for some suppliers due to several market variables, including COVID-19, raw material shortages and freight prices, but this still remains a potential area of growth for us. Energy Storage Systems. Our energy storage systems increase our customers' independence from the centralized utility and provide on-site backup power when there is a grid outage due to storms, wildfires, other natural disasters and general power failures caused by supply or transmission issues. In addition, at times it can be more economic to consume less energy from the grid or, alternatively, to export solar energy back to the grid. Recent technological advancements for energy storage systems allow the energy storage system to adapt to pricing and utility rate shifts by controlling the inflows and outflows of power, allowing customers to increase the value of their solar energy system plus energy storage system. The energy storage system charges during the day, making the energy it stores available to the home or business when needed. It also features software that can customize power usage for the individual customer, providing backup power, optimizing solar energy consumption versus grid consumption or preventing export to the grid as appropriate. The software is tailored based on utility regulation, economic indicators and grid conditions. The combination of energy control, increased energy resilience and independence from the grid is strong incentive for customers to adopt solar and energy storage. As energy storage systems and their related software features become more advanced, we expect to see increased adoption of energy storage systems. Climate Change Action. As a result of increasing global awareness of and aversion to climate change impacts, we believe the renewable energy market in which we operate, and investment in climate solutions more broadly, will continue to grow as the impact of climate change increases. This trend, along with increasing commitments to reduce carbon emissions, is expected to result in increased demand for our products and services. Under the current presidential administration, the focus on cleaner energy sources and technology to decarbonize theU.S. economy continues to accelerate. The federal government's administration under PresidentJoe Biden ("Biden administration") has taken immediate steps that we believe signify support for cleaner energy sources, including, but not limited to, rejoining the Paris Climate Accord, re-establishing a social price on carbon used in cost/benefit analysis for policy making and announcing a commitment to transition theU.S. economy to a net-zero carbon economy by 2050. We expect the Biden administration, combined with a closely dividedCongress , to continue to take actions that are supportive of the renewable energy industry, such as incentivizing clean energy sources and supporting new investment in areas like renewables. Government Regulations, Policies and Incentives. Our growth strategy depends in significant part on government policies and incentives that promote and support solar energy and enhance the economic viability of distributed solar. These policies and incentives come in various forms, including net metering, eligibility for accelerated depreciation such as the modified accelerated cost recovery system, SRECs, tax abatements, rebates, renewable targets, incentive programs and tax credits, particularly the Section 48(a) ITC and the Section 25D Credit. The recently enacted IRA expanded and extended the tax credits available to solar energy projects in an effort to achieve the Biden administration's non-binding target of net-zero emissions by 2050, which we expect will increase demand for our services. The IRA allows qualifying homeowners to deduct up to 30% of the cost of installing residential solar energy systems from theirU.S. federal income taxes, thereby returning a significant portion of the purchase price of the residential solar energy system to homeowners that may participate in our solar loan programs. Under the terms of the current extension, the residential tax credit will remain at 30% through the end of 2032, reduce to 26% for 2033, reduce to 22% for 2034, and further reduce to 0% after the end of 2034 for residential solar energy systems, unless it is extended before that time. The IRA also extended the investment tax credit for solar energy projects through at least 2033 and, depending on the location of a particular project, its size, its ability to satisfy certain labor and 41 -------------------------------------------------------------------------------- Table of Contents domestic content requirements and the category of consumers it serves, the investment tax credit percentage can range between 6% and 70%. Policies requiring solar on new roofs, such as those enacted inCalifornia andNew York City , also support the growth of distributed solar. The sale of SRECs has constituted a significant portion of our revenue historically. A change in the value of net metering credits or SRECs or changes in other policies or a loss or reduction in such incentives could decrease the attractiveness of distributed solar to us, our dealers and our customers in applicable markets, which could reduce our customer acquisition opportunities. Such a loss or reduction could also reduce our willingness to pursue certain customer acquisitions due to decreased revenue or income under our solar service agreements. Additionally, such a loss or reduction may also impact the terms of and availability of third-party financing. If any of these government regulations, policies or incentives are adversely amended, delayed, eliminated, reduced, retroactively changed or not extended beyond their current expiration dates or there is a negative impact from the recent federal law changes or proposals, our operating results and the demand for, and the economics of, distributed solar energy may decline, which could harm our business.
Components of Results of Operations
Revenue. We recognize revenue from contracts with customers as we satisfy our performance obligations at a transaction price reflecting an amount of consideration based upon an estimated rate of return, net of cash incentives. We express this rate of return as the solar rate per kilowatt hour ("kWh") in the customer contract. The amount of revenue we recognize does not equal customer cash payments because we satisfy performance obligations ahead of cash receipt or evenly as we provide continuous access on a stand-ready basis to the solar energy system. We reflect the differences between revenue recognition and cash payments received in accounts receivable, other assets or deferred revenue, as appropriate. PPAs. We have determined solar service agreements under which customers purchase electricity from us should be accounted for as revenue from contracts with customers. We recognize revenue based upon the amount of electricity delivered as determined by remote monitoring equipment at solar rates specified under the contracts. The PPAs generally have a term of 20 or 25 years with an opportunity for customers to renew for up to an additional 10 years, via two five-year or one 10-year renewal options. Lease Agreements. We are the lessor under lease agreements for solar energy systems and energy storage systems, which we account for as revenue from contracts with customers. We recognize revenue on a straight-line basis over the contract term as we satisfy our obligation to provide continuous access to the solar energy system. The lease agreements generally have a term of 20 or 25 years with an opportunity for customers to renew for up to an additional 10 years, via two five-year or one 10-year renewal options. We provide customers under our lease agreements a performance guarantee that each solar energy system will achieve a certain specified minimum solar energy production output. The specified minimum solar energy production output may not be achieved due to natural fluctuations in the weather or equipment failures from exposure and wear and tear outside of our control, among other factors. We determine the amount of guaranteed output based on a number of different factors, including (a) the specific site information related to the tilt of the panels, azimuth (a horizontal angle measured clockwise in degrees from a reference direction) of the panels, size of the solar energy system and shading on site; (b) the calculated amount of available irradiance (amount of energy for a given flat surface facing a specific direction) based on historical average weather data and (c) the calculated amount of energy output of the solar energy system. If the solar energy system does not produce the guaranteed production amount, we are required to provide a bill credit or refund a portion of the previously remitted customer payments, where the bill credit or repayment is calculated as the product of (a) the shortfall production amount and (b) the dollar amount (guaranteed rate) per kWh that is fixed throughout the term of the contract. These bill credits or remittances of a customer's payments, if needed, are payable in January following the end of the first three years of the solar energy system's placed in service date and then every annual period thereafter. See Note 13, Commitments and Contingencies, to our interim unaudited condensed consolidated financial statements ("interim financial statements") included elsewhere in this Quarterly Report on Form 10-Q. Inventory Sales. Inventory sales revenue represents revenue from the direct sale of inventory to our dealers or other parties. We recognize the related revenue under ASC 606 upon shipment. SRECs. Each SREC represents the environmental benefit of one megawatt hour (1,000 kWh) generated by a solar energy system. We sell SRECs to utilities and other third parties who use the SRECs to meet renewable portfolio standards and can do so separate from the actual electricity generated by the renewable-based generation source. We account for SRECs generated from solar energy systems owned by us, as opposed to those owned by our customers, as governmental incentives with no costs incurred to obtain them and do not consider those SRECs output of the underlying solar energy systems. We classify SRECs as inventory held until sold and delivered to third parties. We enter into economic hedges with major financial institutions related 42 -------------------------------------------------------------------------------- Table of Contents to expected production of SRECs through forward contracts to partially mitigate the risk of decreases in SREC market rates. While these fixed price forward contracts serve as an economic hedge against spot price fluctuations for the SRECs, the contracts do not qualify for hedge accounting and are not designated as cash flow hedges or fair value hedges. The contracts require us to physically deliver the SRECs upon settlement. We recognize the related revenue upon the transfer of the SRECs to the counterparty. The costs related to the sales of SRECs are generally limited to fees for brokered transactions. Accordingly, the sale of SRECs in a period generally has a favorable impact on our operating results for that period. In certain circumstances we are required to purchase SRECs on the open market to fulfill minimum delivery requirements under our forward contracts. Cash Sales. Cash sales revenue represents revenue from a customer's purchase of a solar energy system from us typically when purchasing a new home. We recognize the related revenue upon verification of the home closing. Loan Agreements. We recognize payments received from customers under 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. Similar to our lease agreements, we provide customers under our loan agreements a performance guarantee that each solar energy system will achieve a certain specified minimum solar energy production output, which is a significant proportion of its expected output. Other Revenue. Other revenue includes certain state and utility incentives, revenue from the direct sale of solar energy systems and energy storage systems to customers with financing provided by us and sales of service plans and repair services. We recognize revenue from state and utility incentives in the periods in which they are earned. We recognize revenue from the direct sale of energy storage systems in the period in which the storage components are placed in service. Service plans are available to customers whose solar energy system was not originally sold by Sunnova. We recognize revenue from service plan contracts on a straight-line basis over the life of the contract, which is typically 10 years. We recognize revenue from repair services in the period in which the service was performed.
Cost of Revenue-Depreciation. Cost of revenue-depreciation represents depreciation on solar energy systems under lease agreements and PPAs that have been placed in service.
Cost of Revenue-Inventory Sales. Cost of revenue-inventory sales represents costs related to the procurement and direct sale of inventory to our dealers or other parties, including shipping and handling costs.
Cost of Revenue-Other. Cost of revenue-other represents costs related to cash sales, costs to purchase SRECs on the open market, SREC broker fees and other items deemed to be a cost of providing the service of selling power to customers or potential customers, such as certain costs to service loan agreements, costs for filing under the Uniform Commercial Code to maintain title, title searches, credit checks on potential customers at the time of initial contract and other similar costs, typically directly related to the volume of customers and potential customers. Operations and Maintenance Expense. Operations and maintenance expense represents costs from third parties for maintaining and servicing the solar energy systems, property insurance, property taxes and warranties. When services for maintaining and servicing solar energy systems are provided by Sunnova personnel rather than third parties, those amounts are included in payroll costs classified within general and administrative expense. During the three months endedMarch 31, 2023 and 2022, we incurred$9.6 million and$3.8 million , respectively, of Sunnova personnel costs related to maintaining and servicing solar energy systems, which are classified in general and administrative expense. In addition, operations and maintenance expense includes write downs and write-offs related to inventory adjustments, gains and losses on disposals and other impairments and impairments and costs due to natural disaster losses net of insurance proceeds recovered under our business interruption and property damage insurance coverage for natural disasters. General and Administrative Expense. General and administrative expense represents costs for our employees, such as salaries, bonuses, benefits and all other employee-related costs, including stock-based compensation, professional fees related to legal, accounting, human resources, finance and training, information technology and software services, marketing and communications, IPO costs, acquisition costs, travel and rent and other office-related expenses. General and administrative expense also includes depreciation on assets not classified as solar energy systems, including information technology software and development projects, vehicles, furniture, fixtures, computer equipment and leasehold improvements and accretion expense on AROs. We capitalize a portion of general and administrative costs, such as payroll-related costs, that is related to employees who are directly involved in the design, construction, installation and testing of the solar energy systems but not directly associated with a particular asset. We also capitalize a portion of general and administrative costs, such as payroll-related costs, that is related to employees who are directly associated with and devote time to internal information technology software and 43
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Table of Contents development projects, to the extent of the time spent directly on the application and development stage of such software project.
Other Operating Income. Other operating income primarily represents changes in the fair values of certain financial instruments related to our investments in solar receivables and contingent consideration related to the installation and microgrid earnouts.
Interest Expense, Net. Interest expense, net represents interest on our borrowings under our various debt facilities, amortization of debt discounts and deferred financing costs and realized and unrealized gains and losses on derivative instruments.
Interest Income. Interest income represents interest income from the notes receivable under our loan program and income on short term investments with financial institutions.
Other (Income) Expense. Other (income) expense primarily represents changes in the fair value of certain financial instruments related to non-operating assets.
Income Tax Expense. We account for income taxes under Accounting Standards Codification 740, Income Taxes. As such, we determine deferred tax assets and liabilities based on temporary differences resulting from the different treatment of items for tax and financial reporting purposes. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Additionally, we must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. We have a full valuation allowance on our deferred tax assets because we believe it is more likely than not that our deferred tax assets will not be realized. We evaluate the recoverability of our deferred tax assets on a quarterly basis. The income tax expense includes the effects of taxes incurred inU.S. territories where the tax code for the respective territory may have separate tax reporting requirements, as applicable.
Net Income (Loss) Attributable to Redeemable Noncontrolling Interests and Noncontrolling Interests. Net income (loss) attributable to redeemable noncontrolling interests and noncontrolling interests represents tax equity interests in the net income or loss of certain consolidated subsidiaries based on hypothetical liquidation at book value.
44 -------------------------------------------------------------------------------- Table of Contents Results of Operations-Three Months EndedMarch 31, 2023 Compared to Three Months EndedMarch 31, 2022
The following table sets forth our unaudited condensed consolidated statements of operations data for the periods indicated.
Three Months Ended March 31, 2023 2022 Change (in thousands) Revenue$ 161,696 $ 65,722 $ 95,974 Operating expense: Cost of revenue-depreciation 28,197 21,958 6,239 Cost of revenue-inventory sales 51,779 - 51,779 Cost of revenue-other 19,224 7,569 11,655 Operations and maintenance 10,739 6,761 3,978 General and administrative 101,261 70,223 31,038 Other operating income (723) (6,583) 5,860 Total operating expense, net 210,477 99,928 110,549 Operating loss (48,781) (34,206) (14,575) Interest expense, net 85,607 (1,015) 86,622 Interest income (24,788) (10,932) (13,856) Other (income) expense 236 (155) 391 Loss before income tax (109,836) (22,104) (87,732) Income tax expense 510 - 510 Net loss (110,346) (22,104) (88,242)
Net income (loss) attributable to redeemable noncontrolling interests and noncontrolling interests
(29,263) 12,954 (42,217) Net loss attributable to stockholders$ (81,083) $ (35,058) $ (46,025) Revenue Three Months Ended March 31, 2023 2022 Change (in thousands) PPA revenue$ 21,746 $ 21,185 $ 561 Lease revenue 31,343 21,780 9,563 Inventory sales revenue 59,914 - 59,914 SREC revenue 7,791 6,244 1,547 Cash sales revenue 16,819 11,348 5,471 Loan revenue 7,143 3,376 3,767 Other revenue 16,940 1,789 15,151 Total$ 161,696 $ 65,722 $ 95,974 Revenue increased by$96.0 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to inventory sales and an increased number of solar energy systems in service. The weighted average number of systems (excluding systems with loan agreements, service-only agreements and cash sales) increased from 45 -------------------------------------------------------------------------------- Table of Contents approximately 116,400 for the three months endedMarch 31, 2022 to approximately 149,800 for the three months endedMarch 31, 2023 . Excluding SREC revenue, revenue under our loan agreements, inventory sales revenue, cash sales revenue and service revenue, on a weighted average number of systems basis, revenue remained relatively flat at$376 per system for the three months endedMarch 31, 2022 compared to$361 per system for the same period in 2023 (4% decrease). Inventory sales revenue increased by$59.9 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 due to the sale of inventory to our dealers or other parties, which began inApril 2022 . SREC revenue increased by$1.5 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to an increase in SREC prices inNew Jersey . The amount of SREC revenue recognized in each period is also affected by the total number of solar energy systems, weather seasonality and hedge and spot prices associated with the timing of the sale of SRECs. On a weighted average number of systems basis, revenues under our loan agreements remained flat at$81 per system for the three months endedMarch 31, 2022 compared to$81 per system for the same period in 2023. Cost of Revenue-Depreciation Three Months Ended March 31, 2023 2022 Change (in thousands) Cost of revenue-depreciation$ 28,197 $ 21,958 $ 6,239 Cost of revenue-depreciation increased by$6.2 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This increase was primarily due to an increase in the weighted average number of systems (excluding systems with loan agreements, service-only agreements and cash sales) from approximately 116,400 for the three months endedMarch 31, 2022 to approximately 149,800 for the three months endedMarch 31, 2023 . On a weighted average number of systems basis, cost of revenue-depreciation remained relatively flat at$189 per system for the three months endedMarch 31, 2022 compared to$188 per system for the same period in 2023.
Cost of Revenue-Inventory Sales
Three Months Ended March 31, 2023 2022 Change (in thousands) Cost of revenue-inventory sales$ 51,779 $ -$ 51,779 Cost of revenue-inventory sales increased by$51.8 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This increase was due to costs from the sale of inventory to our dealers or other parties, which began inApril 2022 . Cost of Revenue-Other Three Months Ended March 31, 2023 2022 Change (in thousands) Cost of revenue-other$ 19,224 $ 7,569 $ 11,655 Cost of revenue-other increased by$11.7 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This increase was primarily due to costs related to direct sales of$7.2 million and costs related to cash sales revenue of$3.5 million . 46 -------------------------------------------------------------------------------- Table of Contents Operations and Maintenance Expense Three Months Ended March 31, 2023 2022 Change (in thousands) Operations and maintenance$ 10,739 $ 6,761 $ 3,978 Operations and maintenance expense increased by$4.0 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to higher truck roll and monitoring costs. Operations and maintenance expense per weighted average system, excluding net natural disaster losses and non-cash inventory impairments, increased from$43 per system for the three months endedMarch 31, 2022 to$52 per system for the three months endedMarch 31, 2023 primarily due to higher truck roll costs.
General and Administrative Expense
Three Months Ended March 31, 2023 2022 Change (in thousands) General and administrative$ 101,261 $ 70,223 $ 31,038 General and administrative expense increased by$31.0 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to increases of (a)$15.9 million of payroll and employee related expenses primarily due to the hiring of personnel to support growth, (b)$3.6 million of provision for current expected credit losses due to the growth in loan customers, (c)$3.4 million of consultants, contractors, and professional fees, (d)$2.3 million of legal expense, (e)$1.7 million of depreciation expense and (f)$1.5 million of information technology expense. Other Operating Income Three Months Ended March 31, 2023 2022 Change (in thousands) Other operating income$ (723) $ (6,583) $ 5,860 Other operating income decreased by$5.9 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to changes in the fair value of certain financial instruments and contingent consideration. Interest Expense, Net Three Months Ended March 31, 2023 2022 Change (in thousands) Interest expense, net$ 85,607 $ (1,015) $ 86,622 Interest expense, net increased by$86.6 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This increase was primarily due to increases in unrealized losses on derivatives of$57.5 million and interest expense of$32.6 million due to higher levels of debt outstanding in 2023 compared to 2022. This was partially offset by an increase in realized gains on derivatives of$7.3 million . 47 -------------------------------------------------------------------------------- Table of Contents Interest Income Three Months Ended March 31, 2023 2022 Change (in thousands) Interest income$ 24,788 $ 10,932 $ 13,856 Interest income increased by$13.9 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This increase was primarily due to an increase in the weighted average number of systems with loan agreements from approximately 41,700 for the three months endedMarch 31, 2022 to approximately 88,700 for the three months endedMarch 31, 2023 . On a weighted average number of systems basis, loan interest income decreased from$260 per system for the three months endedMarch 31, 2022 to$226 per system for the three months endedMarch 31, 2023 primarily due to an increase in the volume of accessory loans. Income Tax Expense
Income tax expense increased by
Net Income (Loss) Attributable to Redeemable Noncontrolling Interests and Noncontrolling Interests
Net income (loss) attributable to redeemable noncontrolling interests and noncontrolling interests changed by$42.2 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to an increase in loss attributable to noncontrolling interests from tax equity funds added in 2021, 2022 and 2023.
Liquidity and Capital Resources
As ofMarch 31, 2023 , we had total cash of$420.8 million , of which$210.9 million was unrestricted, and$220.7 million of available borrowing capacity under our various financing arrangements. We seek to maintain diversified and cost-effective funding sources to finance and maintain our operations, fund capital expenditures, including customer acquisitions, and satisfy obligations arising from our indebtedness, which may include reducing debt prior to scheduled maturities through debt repurchases, either in the open market or in privately negotiated transactions, through debt redemptions or tender offers, or through repayments of bank borrowings. For a discussion of cash requirements from contractual and other obligations, see Note 13, Commitments and Contingencies, to our interim financial statements included elsewhere in this Quarterly Report on Form 10-Q. Historically, our primary sources of liquidity have included non-recourse and recourse debt, investor asset-backed and loan-backed securitizations and cash generated from operations. Our business model requires substantial outside financing arrangements to grow the business and facilitate the deployment of additional solar energy systems. We will seek to raise additional required capital, including from new and existing tax equity investors, additional borrowings, securitizations and other potential debt and equity financing sources. We believe our cash and financing arrangements, as further described below, will be sufficient to meet our anticipated cash needs for at least the next twelve months. As ofMarch 31, 2023 , we were in compliance with all debt covenants under our financing arrangements. As ofMarch 31, 2023 , our liquidity and financial condition had not been materially affected by the recent adverse developments affecting financial institutions and companies in the financial services industry, includingSilicon Valley Bank and Credit Suisse. For a discussion of the potential impact of these adverse developments, see Item 1A. Risk Factors included elsewhere in this Quarterly Report on Form 10-Q.
Financing Arrangements
The following is an update to the description of our various financing
arrangements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources-Financing
Arrangements" in our Annual Report on Form 10-K filed with the
48 -------------------------------------------------------------------------------- Table of Contents Tax Equity Fund Commitments As ofMarch 31, 2023 , we had undrawn committed capital of approximately$138.8 million under our tax equity funds, which may only be used to purchase and install solar energy systems. InFebruary 2023 , a tax equity investor increased its capital commitment from$30.0 million to$125.0 million . InMarch 2023 , a tax equity investor increased its capital commitment from$41.0 million to$51.3 million . InApril 2023 , two tax equity investors increased their capital commitment from$200.0 million to$207.8 million .
Warehouse and Other Debt Financings
InFebruary 2023 , we amended the EZOP revolving credit facility to, among other things, (a) increase the aggregate commitment amount from$450.0 million to$675.0 million , (b) increase the uncommitted maximum facility amount from$575.0 million to$800.0 million , (c) amend certain provisions related to the allocation of certain payments made to the lenders, (d) amend certain provisions related to excess concentration limits and eligibility criteria to permit us and our affiliates to provide warranties of, and replacements for, load controllers and generators in connection with the related solar loan contracts and (e) add provisions to allow EZOP to request an increase in the aggregate commitment amount (subject to certain conditions) by adding additional lenders to the EZOP revolving credit facility. InFebruary 2023 , Credit Suisse sold a significant part of itsSecuritized Products Group to an affiliate of Apollo. Subsequently, Apollo publicly announced the majority of the assets and professionals associated with the sale are now part of or managed by Atlas. InMarch 2023 , in connection with theCredit Suisse Securitized Products Sale , certain of our subsidiaries consented to the EZOP Assignment under the EZOP revolving credit facility. In connection with the EZOP Assignment, CSNYB resigned as the agent under the EZOP revolving credit facility, the Successor Agent was appointed and, in connection with such appointment, the Successor Agent assumed the agent roles under the EZOP revolving credit facility. In connection with the appointment of Atlas as Successor Agent, the borrowers and the lenders party to the applicable agency resignation and appointment agreements consented to, among other things, Atlas' ability to assign the agent role under the EZOP revolving credit facility to one of its affiliates subject to certain conditions set forth therein. InMarch 2023 , after the EZOP Assignment, we amended the EZOP revolving credit facility to, among other things, (a) increase the aggregate commitment amount from$675.0 million to$775.0 million , (b) increase the uncommitted maximum facility amount from$800.0 million to$900.0 million , (c) amend and supplement certain defaulting lender provisions and (d) update the references from CSNYB, the predecessor agent, to Atlas, the successor agent, and remove or modify certain provisions related to the borrowing, funding and allocation of payments among the previous lender syndicate (that previously included lenders affiliated with Credit Suisse that, prior to the date of the amendment to the EZOP revolving credit facility and pursuant to the EZOP Assignment, had assigned their loans and commitments to lenders affiliated with Atlas). InMarch 2023 , in connection with theCredit Suisse Securitized Products Sale , certain of our subsidiaries consented to the TEPH Assignment under the TEPH revolving credit facility. In connection with the TEPH Assignment, CSNYB resigned as the agent under the TEPH revolving credit facility, Atlas was appointed as the successor agent thereunder and, in connection with such appointment, the Successor Agent assumed the agent roles under the TEPH revolving credit facility. In connection with the appointment of Atlas as Successor Agent, the borrowers and the lenders party to the applicable agency resignation and appointment agreements consented to, among other things, Atlas' ability to assign the agent role under the TEPH revolving credit facility to one of its affiliates subject to certain conditions set forth therein. InMarch 2023 , after the TEPH Assignment, we amended the TEPH revolving credit facility to, among other things, (a) increase the aggregate commitment amount from$600.0 million to$700.0 million , (b) increase the uncommitted maximum facility amount from$689.7 million to$789.7 million , (c) add provisions to allow TEPH to request an increase in the aggregate commitment amount (subject to certain conditions) by adding additional lenders to the TEPH revolving credit facility, (d) amend and supplement certain defaulting lender provisions, (e) modify the hedging provisions to give all hedge counterparties the benefit of certain payment priorities and certain other terms previously limited to qualifying hedge counterparties (as defined by the TEPH revolving credit facility), to extend the time period for the event of default resulting from hedge counterparties ceasing to be qualifying hedge counterparties and to make other hedge-related amendments, (f) update the references from CSNYB, the predecessor administrative agent, to Atlas, the successor administrative agent, and remove or modify certain provisions related to the borrowing, funding and allocation of payments among the previous lender syndicate (that previously included lenders affiliated with Credit Suisse that, prior to the date of the amendment to the TEPH revolving credit facility and pursuant to the TEPH Assignment, had assigned their loans and commitments to lenders affiliated with Atlas), (g) addEuropean Union bail-in provisions and (h) add certain syndication-related provisions. InMarch 2023 , we amended the AP8 revolving credit facility to, among other things, increase the aggregate commitment amount from$75.0 million to$150.0 million . We believe we will be able to meet this obligation of$150.0 million due inSeptember 2024 through either repayment or refinancing of the facility. 49 -------------------------------------------------------------------------------- Table of Contents InMarch 2023 ,IS entered into a secured revolving credit facility withTexas Capital Bank , as agent, and the lenders party thereto, for an aggregate commitment amount of$50.0 million with a maturity date of the earlier of (a)March 2026 and (b) six months from the latest maturity date of any material parent credit facility (defined as a parent credit facility with a commitment of$250.0 million or more that, if terminated could individually be expected to result in a liquidity event (as defined by theIS revolving credit facility)). The proceeds of the loans under theIS revolving credit facility are available to purchase or otherwise acquire certain accounts receivable and inventory directly fromSunnova Energy Corporation , fund certain reserve accounts that are required to be maintained byIS in accordance with the revolving credit agreement and pay fees and expenses incurred in connection with theIS revolving credit facility. Interest on the borrowings under theIS revolving credit facility is due monthly. Borrowings under theIS revolving credit facility bear interest at an annual rate based on Term SOFR (as defined by theIS revolving credit facility). InApril 2023 , theDOE announced a conditional commitment to guarantee 90% of up to approximately$3.3 billion of certain of our future financing arrangements under its Innovative Clean Energy Loan Guarantee Program. The commitment is subject to various customary conditions. There is no assurance theDOE's conditional commitment will be fulfilled on the terms announced or at all or that the related guarantees will provide the anticipated benefits to us.
Securitizations
SOLV Debt. InApril 2023 , one of our subsidiaries issued$300.0 million in aggregate principal amount of Series 2023-1 Class A solar asset-backed notes and$23.5 million in aggregate principal amount of Series 2023-1 Class B solar asset-backed notes with a maturity date ofApril 2058 . The SOLV Notes were issued at a discount of 5.01% and 11.63% for the Class A and Class B notes, respectively, and bear interest at an annual rate of 5.40% and 7.35% for the Class A and Class B notes, respectively.
Historical Cash Flows-Three Months Ended
The following table summarizes our cash flows for the periods indicated:
Three Months Ended March 31, 2023 2022 Change (in thousands) Net cash used in operating activities$ (169,327) $ (92,129) $ (77,198) Net cash used in investing activities (524,295) (357,650) (166,645) Net cash provided by financing activities 568,871 382,813 186,058 Net decrease in cash, cash equivalents and restricted cash$ (124,751) $ (66,966) $ (57,785)
Operating Activities
Net cash used in operating activities increased by$77.2 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This increase is primarily a result of increases in payments to dealers for exclusivity and other bonus arrangements of$11.4 million . This increase is also due to an increase in net outflows of$25.6 million in 2023 compared to net outflows of$5.3 million in 2022 based on: (a) our net loss of$110.3 million in 2023 excluding non-cash operating items of$84.7 million , primarily from depreciation, impairments and losses on disposals, amortization of intangible assets, amortization of deferred financing costs and debt discounts, unrealized net losses on derivatives, unrealized net gains on fair value instruments and equity securities and equity-based compensation charges, which results in net outflows of$25.6 million and (b) our net loss of$22.1 million in 2022 excluding non-cash operating items of$16.8 million , primarily from depreciation, impairments and losses on disposals, amortization of intangible assets, amortization of deferred financing costs and debt discounts, unrealized net gains on derivatives, unrealized net gains on fair value instruments and equity-based compensation charges, which results in net outflows of$5.3 million . These net differences between the two periods resulted in a net change in operating cash flows of$20.3 million in 2023 compared to 2022.
Investing Activities
Net cash used in investing activities increased by$166.6 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This increase is primarily a result of increases in purchases of property and equipment, primarily solar energy systems, of$151.1 million and payments for investments and customer notes receivable of$28.1 million . 50 -------------------------------------------------------------------------------- Table of Contents This increase is partially offset by increases in proceeds from customer notes receivable of$12.4 million and proceeds from investments in solar receivables of$0.3 million . Financing Activities Net cash provided by financing activities increased by$186.1 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This increase is primarily a result of an increase in net contributions from our redeemable noncontrolling interests and noncontrolling interests of$120.4 million and net borrowings under our debt facilities of$63.3 million .
Seasonality
The amount of electricity our solar energy systems produce is dependent in part on the amount of sunlight, or irradiation, where the assets are located. Because shorter daylight hours in winter months and poor weather conditions due to cloud cover, rain or snow results in less irradiation, the output of solar energy systems will vary depending on the season or the year. While we expect seasonal variability to occur, the geographic diversity in our assets helps to mitigate our aggregate seasonal variability. Our Easy Plan PPAs with variable billing, Solar 20/20 Plan Agreements and Fixed Rate Power Purchase Agreements are subject to seasonality because we sell all the solar energy system's energy output to the customer at either a fixed price per kWh or indexed, variable rate per kWh. Our Easy Plan PPAs with balanced billing are not subject to seasonality (from a cash flow perspective or the customer's perspective) within a given year because the customer's payments are levelized on an annualized basis so we insulate the customer from monthly fluctuations in production. In addition, energy production true-ups and production estimate adjustments for Easy Plan PPAs with balanced billing are calculated over an entire year. However, our Easy Plan PPAs with balanced billing are subject to seasonality from a revenue recognition perspective because, similar to the Easy Plan PPAs with variable billing, we sell all the solar energy system's energy output to the customer. Our lease agreements are not subject to seasonality within a given year because we lease the solar energy system to the customer at a fixed monthly rate and the reference period for any production guarantee payments is a full year. Finally, our loan agreements are not subject to seasonality within a given year because the monthly installment payments for the financing of the customers' purchase of the solar energy system are fixed and the reference period for any production guarantee is a full year. In addition, weather may impact our dealers' ability to install solar energy systems and energy storage systems. For example, the ability to install solar energy systems and energy storage systems during the winter months in theNortheastern U.S. is limited. This can impact the timing of when solar energy systems and energy storage systems can be installed and when we can acquire and begin to generate revenue from solar energy systems and energy storage systems.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our interim financial statements, which have been prepared in accordance with GAAP, which requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, cash flows and related disclosures. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances, changes in the accounting estimates are reasonably likely to occur from period-to-period. Actual results may differ from these estimates. Our future financial statements will be affected to the extent our actual results materially differ from these estimates. For further information on our significant accounting policies, see Note 2, Significant Accounting Policies, in our Annual Report on Form 10-K filed with theSEC onFebruary 23, 2023 and Note 2, Significant Accounting Policies, to our interim financial statements included elsewhere in this Quarterly Report on Form 10-Q. We identify our most critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and results of operations, and that require the most difficult, subjective, and/or complex judgments by management regarding estimates about matters that are inherently uncertain. We believe the assumptions and estimates associated with our principles of consolidation, the valuation of assets acquired and liabilities assumed in acquisitions, the estimated useful life of our solar energy systems, the valuation of the removal assumptions, including costs, associated with AROs, the valuation of redeemable noncontrolling interests and noncontrolling interests and our allowance for current expected credit losses have the greatest subjectivity and impact on our interim financial statements. Therefore, we consider these to be our critical accounting policies and estimates. There have been no material changes to our critical accounting policies and estimates as described in our Annual Report on Form 10-K. 51 -------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements
See Note 2, Significant Accounting Policies, to our interim financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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