このレポートには、1933年の証券法（修正された「証券法」）の第27A条および1934年の証券取引法（修正された「取引所法」）の第21E条の意義に基づく見通しに関する記述が含まれています。文脈が別の場合を除いて、用語「Sunnova」、「当社」、「当社」「我々」「私たち」「当社」とは、Sunnova Energy International Inc.（「SEI」）およびその連結子会社を指します。見通しに関する記述は、一般的に、将来のイベントまたはSunnovaの将来の財務または運営パフォーマンスに関連しています。実際の結果や成績は、こうした見通しに関する記述に表現されたものと大きく異なる場合があります。いくつかの場合、こうした記述を特定することができるのは、次のような言葉が含まれているためです。「予想する」「信じる」「検討する」「継続する」「可能性がある」「見積もる」「期待する」「将来」「目標」「意図する」「ありそうである」「するかもしれない」「計画する」「潜在的」「予測する」「プロジェクトする」「探求する」「すべきである」「目標とする」「将来」またはこれらの否定または他の類似の用語または表現が含まれている場合です。このレポートに含まれる見通しに関する記述には、次のようなものが含まれますが、これに限定されません。
•the willingness of and ability of our dealers and suppliers to fulfill their respective warranty and other contractual obligations;
•our expectations regarding litigation and administrative proceedings; and
•our ability to renew or replace expiring, canceled or terminated customer agreements at favorable rates or on a long-term basis.
Our actual results and timing of these 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 "Risk Factors" 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. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.
(in thousands, except share amounts and share par values)
Notes
As of September 30, 2024
As of December 31, 2023
Assets
Current assets:
Cash and cash equivalents
$
208,913
$
212,832
Accounts receivable—trade, net
2
46,416
40,767
Accounts receivable—other
2, 6
257,733
253,350
Other current assets, net of allowance of $5,193 and $4,659 as of September 30, 2024 and December 31, 2023, respectively
2, 4, 6
401,530
429,299
Total current assets
914,592
936,248
Property and equipment, net
2, 3
6,980,352
5,638,794
Customer notes receivable, net of allowance of $124,634 and $111,818 as of September 30, 2024 and December 31, 2023, respectively
2, 4, 6
3,930,847
3,735,986
Intangible assets, net
112,322
134,058
Other assets
2, 4, 6, 8, 14
944,199
895,885
Total assets (1)
$
12,882,312
$
11,340,971
Liabilities, Redeemable Noncontrolling Interests and Equity
Current liabilities:
Accounts payable
2
$
484,252
$
355,791
Accrued expenses
2
96,990
122,355
Current portion of long-term debt
3
324,748
483,497
Other current liabilities
2, 4, 14
153,036
133,649
Total current liabilities
1,059,026
1,095,292
Long-term debt, net
7
7,908,860
7,030,756
Other long-term liabilities
2, 5, 14
1,230,979
1,086,011
Total liabilities (1)
10,198,865
9,212,059
Commitments and contingencies
14
Redeemable noncontrolling interests
2, 10
256,440
165,872
Stockholders' equity:
Common stock, 124,923,776 and 122,466,515 shares issued as of September 30, 2024 and December 31, 2023, respectively, at $0.0001 par value
11, 12
12
12
Additional paid-in capital—common stock
2, 11, 12
1,780,464
1,755,461
Accumulated deficit
(1,573)
(228,583)
Total stockholders' equity
1,778,903
1,526,890
Noncontrolling interests
2, 10
648,104
436,150
Total equity
2,427,007
1,963,040
Total liabilities, redeemable noncontrolling interests and equity
$
12,882,312
$
11,340,971
(1) The consolidated assets as of September 30, 2024 and December 31, 2023 include $6,741,429 and $5,297,816, respectively, of assets of variable interest entities ("VIEs") that can only be used to settle obligations of the VIEs. These assets include cash of $91,642 and $54,674 as of September 30, 2024 and December 31, 2023, respectively; accounts receivable—trade, net of $22,242 and $13,860 as of September 30, 2024 and December 31, 2023, respectively; accounts receivable—other of $213,340 and $187,607 as of September 30, 2024 and December 31, 2023, respectively; other current assets of $745,644 and $693,772 as of September 30, 2024 and December 31, 2023, respectively; property and equipment, net of $5,527,005 and $4,273,478 as of September 30, 2024 and December 31, 2023, respectively; and other assets of $141,556 and $74,425 as of September 30, 2024 and December 31, 2023, respectively. The consolidated liabilities as of September 30, 2024 and December 31, 2023 include $312,125 and $278,016, respectively, of liabilities of VIEs whose creditors have no recourse to Sunnova Energy International Inc. These liabilities include accounts payable of $199,638 and $197,072 as of September 30, 2024 and December 31, 2023, respectively; accrued expenses of $967 and $157 as of September 30, 2024 and December 31, 2023, respectively; other current liabilities of $5,726 and $7,269 as of September 30, 2024 and December 31, 2023, respectively; and other long-term liabilities of $105,794 and $73,518 as of September 30, 2024 and December 31, 2023, respectively.
See accompanying notes to unaudited condensed consolidated financial statements.
(1) Description of Business and Basis of Presentation
We are an industry-leading energy services company focused on making clean energy more accessible, reliable and affordable for homeowners and businesses, serving over 422,000 customers in more than 50 United States ("U.S.") states and territories. Sunnova Energy Corporation was incorporated in Delaware on October 22, 2012 and formed Sunnova Energy International Inc. ("SEI") as a Delaware corporation on April 1, 2019. We completed our initial public offering on July 29, 2019 (our "IPO"); and in connection with our IPO, all of Sunnova Energy Corporation's ownership interests were contributed to SEI. Unless the context otherwise requires, references in this report to "Sunnova," the "Company," "we," "our," "us," or like terms, refer to SEI and its consolidated subsidiaries.
We partner with local dealers and contractors who originate, design and install our customers' solar energy systems, energy storage systems and related products and services on our behalf, as well as other sustainable home solutions, such as smart home devices, modern heating, ventilation and air conditioning, generators, upgraded roofing, water systems, water heaters, main panel upgrades and electric vehicle chargers. Our focus on our dealer and contractor model enables us to leverage our dealers' and contractors' specialized knowledge, connections and experience in local markets to drive customer origination while providing our dealers and contractors 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 true vertically integrated models.
We offer customers products to power and improve the energy efficiency and sustainability of their homes and businesses with affordable solar energy and related products and services. We are able to offer energy generation 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 products, and are able to also provide energy resiliency. Our customer agreements typically take the form of a legal-form lease (a "lease") of a solar energy system and/or energy storage system to the customer, the sale of the solar energy system's output to the customer under a power purchase agreement ("PPA") or the purchase of a solar energy system, energy storage system and/or accessory either with financing provided by us (a "loan") or paid in full by the customer (a "sale"). We also offer service plans and repair services for systems we did not originate. Complementary to our business, in some states we make it possible 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 customer agreements is typically between 10 and 25 years, during which time we provide or arrange for ongoing services to customers, including monitoring, maintenance and warranty services. Our lease and PPA agreements typically include an opportunity for customers to renew for up to an additional 10 years, via twofive-year or one10-year renewal options. Our ancillary products include both cash sales and loans with an initial term between one year and 20 years. Customer payments and rates can be fixed for the duration of the customer agreement or escalated at a pre-determined
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
percentage annually. We also receive tax benefits and other incentives from leases and PPAs, 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.
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements ("interim financial statements") include our Consolidated Balance Sheets, Statements of Operations, Statements of Cash Flows and Statements of Redeemable Noncontrolling Interests and Equity and have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") from records maintained by us. We have condensed or omitted certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP pursuant to the applicable rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. As such, these interim financial statements should be read in conjunction with our 2023 annual audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K filed with the SEC on February 22, 2024. Our interim financial statements reflect all normal recurring adjustments necessary, in our opinion, to state fairly our financial position and results of operations for the reported periods. Amounts reported for interim periods may not be indicative of a full year period because of our continual growth, seasonal fluctuations in demand for power, timing of maintenance and other expenditures, changes in interest expense and other factors.
Our interim financial statements include our accounts and those of our subsidiaries in which we have a controlling financial interest. In accordance with the provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, Consolidation, we consolidate any VIE of which we are the primary beneficiary. We form VIEs with our investors in the ordinary course of business to facilitate the funding and monetization of certain attributes associated with our solar energy systems. The typical condition for a controlling financial interest is holding a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve holding a majority of the voting interests. A primary beneficiary is defined as the party that has (a) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE. We do not consolidate a VIE in which we have a majority ownership interest when we are not considered the primary beneficiary. We have considered the provisions within the contractual arrangements that grant us power to manage and make decisions that affect the operation of our VIEs, including determining the solar energy systems contributed to the VIEs, and the installation, operation and maintenance of the solar energy systems. We consider the rights granted to the other investors under the contractual arrangements to be more protective in nature rather than substantive participating rights. As such, we have determined we are the primary beneficiary of our VIEs and evaluate our relationships with our VIEs on an ongoing basis to determine whether we continue to be the primary beneficiary. We have eliminated all intercompany transactions in consolidation.
Revisions
We have revised our previously issued interim and annual financial statements to correct immaterial errors related to the presentation of revenue and cost of revenue to comply with the requirements of Rule 5-03, Statements of comprehensive income, of Regulation S-X, which requires product, service and other revenues, as well as the associated cost of revenue, to be stated separately in the Consolidated Statements of Operations. Our previously issued interim and annual financial statements did not present such amounts separately in the Consolidated Statements of Operations. We have evaluated the historical presentation in our previously issued interim and annual financial statements and concluded this change in presentation is not material. Impacted periods not presented herein will be revised in future filings. The following table presents the revised presentation of revenue in the Consolidated Statements of Operations:
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents cost of revenue as shown in the Consolidated Statements of Operations in our previously issued interim financial statements:
Three Months Ended September 30, 2023
Nine Months Ended September 30, 2023
(in thousands)
Cost of revenue—depreciation
$
33,743
$
92,262
Cost of revenue—inventory sales
$
50,694
$
129,016
Cost of revenue—other
$
30,981
$
81,599
The following table presents the revised presentation of cost of revenue in the Consolidated Statements of Operations:
Three Months Ended September 30, 2023
Nine Months Ended September 30, 2023
(in thousands)
Cost of revenue—customer agreements and incentives
$
39,130
$
105,956
Cost of revenue—solar energy system and product sales
$
76,288
$
196,921
(2) Significant Accounting Policies
Included below are updates to significant accounting policies disclosed in our 2023 annual audited consolidated financial statements.
Use of Estimates
The application of GAAP in the preparation of the interim financial statements requires us to make estimates and assumptions that affect the amounts reported in the interim financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates.
Accounts Receivable
Accounts Receivable—Trade, Net. Accounts receivable—trade, net primarily represents trade receivables from customers that are generally collected in the subsequent month. Accounts receivable—trade, net is recorded net of an allowance for credit losses, which is based on our assessment of the collectability of customer accounts based on the best available data at the time. We review the allowance by considering factors such as historical experience, customer credit rating, contractual term, aging category and current economic conditions that may affect a customer's ability to pay to identify customers with potential disputes or collection issues. We write off accounts receivable when we deem them uncollectible.The following table presents the changes in the allowance for credit losses recorded against accounts receivable—trade, net in the Unaudited Condensed Consolidated Balance Sheets:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands)
Balance at beginning of period
$
3,174
$
2,143
$
2,559
$
1,676
Provision for current expected credit losses
2,934
1,474
6,893
3,579
Write off of uncollectible accounts
(2,451)
(1,257)
(5,916)
(3,005)
Recoveries
121
96
309
206
Other, net
(49)
—
(116)
—
Balance at end of period
$
3,729
$
2,456
$
3,729
$
2,456
Accounts Receivable—Other. Accounts receivable—other primarily represents receivables from ITC sales, receivables from sales of customer notes receivable and receivables from our dealers or other parties related to the sale of inventory and the
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
use of inventory procured by us.The following table presents the changes in the allowance for credit losses recorded against accounts receivable—other in the Unaudited Condensed Consolidated Balance Sheets:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands)
Balance at beginning of period
$
690
$
671
$
13,045
$
—
Provision for current expected credit losses
6,607
1,389
1,094
2,060
Write off of uncollectible accounts
(6,526)
(1,020)
(13,369)
(1,020)
Other, net
—
—
1
—
Balance at end of period
$
771
$
1,040
$
771
$
1,040
Inventory
Inventory is stated at the lower of cost and net realizable value using the first-in, first-out method. Inventory primarily represents (a) raw materials, such as energy storage systems, photovoltaic modules, inverters, meters and modems, (b) homebuilder construction in progress and (c) other associated equipment purchased. These materials are typically procured by us and used by our dealers, sold to our dealers or held for use as original parts on new solar energy systems or replacement parts on existing solar energy systems. We remove these items from inventory and record the transaction in typically one of these manners: (a) expense to operations and maintenance expense when installed as a replacement part for a solar energy system, (b) expense to cost of revenue—solar energy system and product sales if sold directly to a dealer or other party, (c) capitalize to property and equipment, net when installed on an existing home or business, (d) expense to cost of revenue—solar energy system and product sales when installed on a new home or business as part of a cash sale or (e) capitalize to property and equipment, net when placed in service under the homebuilder program. We periodically evaluate our inventory for unusable and obsolete items based on assumptions about future demand and market conditions. Based on this evaluation, provisions are made to write inventory down to net realizable value. At least quarterly, we perform a physical count of the majority of our inventory. We reconcile these counts to our records and expense any unreconciled amounts to operations and maintenance expense. The following table presents the detail of inventory as recorded in other current assets in the Unaudited Condensed Consolidated Balance Sheets:
As of September 30, 2024
As of December 31, 2023
(in thousands)
Energy storage systems and components
$
26,618
$
83,178
Homebuilder construction in progress
74,067
36,461
Modules and inverters
35,765
27,143
Meters and modems
169
1,793
Total
$
136,619
$
148,575
Fair Value of Financial Instruments
Fair value is an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions market participants would use in pricing an asset or a liability. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes inputs that may be used to measure fair value as follows:
•Level 1—Observable inputs that reflect unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.
•Level 2—Observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy must be determined based on the lowest level input that is significant to the fair value measurement. An assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability. Our financial instruments include cash, cash equivalents, accounts receivable, customer notes receivable, investments in solar receivables, accounts payable, accrued expenses, long-term debt, interest rate swaps and caps and contingent consideration. The carrying values of accounts receivable, accounts payable and accrued expenses approximate the fair values due to the fact that they are short-term in nature (Level 1). We estimate the fair value of our customer notes receivable based on interest rates currently offered under the loan program with similar maturities and terms (Level 3). We estimate the fair value of our investments in solar receivables based on a discounted cash flows model that utilizes market data related to solar irradiance, production factors by region and projected electric utility rates in order to build up revenue projections (Level 3). In addition, lease-related revenue and maintenance and service costs were supported through the use of available market studies and data. We estimate the fair value of our fixed-rate long-term debt based on an analysis of debt with similar book values, maturities and required market yields based on current interest rates (Level 3). We determine the fair values of the interest rate derivative transactions based on a discounted cash flow method using contractual terms of the transactions and counterparty credit risk as key inputs. The floating interest rate is based on observable rates consistent with the frequency of the interest cash flows (Level 2). For contingent consideration, we estimate the fair value of the installation earnout using the Monte Carlo model based on the forecasted placements for the installations and the microgrid earnout using a scenario-based methodology based on the probabilities of the microgrid earnout, both using Level 3 inputs. See Note 6, Customer Notes Receivable, Note 7, Long-Term Debt and Note 8, Derivative Instruments.
The following tables present our financial instruments measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023:
As of September 30, 2024
Total
Level 1
Level 2
Level 3
(in thousands)
Financial assets:
Investments in solar receivables
$
70,736
$
—
$
—
$
70,736
Derivative assets
2,470
—
2,470
—
Total
$
73,206
$
—
$
2,470
$
70,736
Financial liabilities:
Contingent consideration
$
6,534
$
—
$
—
$
6,534
Derivative liabilities
44,847
—
44,847
—
Total
$
51,381
$
—
$
44,847
$
6,534
As of December 31, 2023
Total
Level 1
Level 2
Level 3
(in thousands)
Financial assets:
Investments in solar receivables
$
69,334
$
—
$
—
$
69,334
Derivative assets
55,471
—
55,471
—
Total
$
124,805
$
—
$
55,471
$
69,334
Financial liabilities:
Contingent consideration
$
19,916
$
—
$
—
$
19,916
Total
$
19,916
$
—
$
—
$
19,916
Changes in the fair value of our investments in solar receivables are included in other operating (income) expense in the Consolidated Statements of Operations. The following table summarizes the change in the fair value of our financial assets
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
accounted for at fair value on a recurring basis using Level 3 inputs as recorded in other current assets and other assets in the Unaudited Condensed Consolidated Balance Sheets:
Nine Months Ended September 30,
2024
2023
(in thousands)
Balance at beginning of period
$
69,334
$
72,171
Additions
—
969
Settlements
(9,362)
(8,931)
Gain recognized in earnings
10,764
41
Balance at end of period
$
70,736
$
64,250
Changes in the fair value of our contingent consideration are included in other operating (income) expense in the Consolidated Statements of Operations.The following table summarizes the change in the fair value of our financial liabilities accounted for at fair value on a recurring basis using Level 3 inputs as recorded in other long-term liabilities in the Unaudited Condensed Consolidated Balance Sheets:
Nine Months Ended September 30,
2024
2023
(in thousands)
Balance at beginning of period
$
19,916
$
26,787
Settlements
(3,902)
(10,831)
Gain recognized in earnings
(9,480)
(3,082)
Balance at end of period
$
6,534
$
12,874
The following table summarizes the significant unobservable inputs used in the valuation of our liabilities as of September 30, 2024 using Level 3 inputs:
Unobservable Input
Weighted Average
Liabilities:
Contingent consideration - installation earnout
Volatility
30.00%
Revenue risk premium
15.62%
Risk-free discount rate
4.38%
Contingent consideration - microgrid earnout
Probability of success
5.00%
Risk-free discount rate
4.38%
Significant increases or decreases in the volatility, revenue risk premium, probability of success or risk-free discount rate in isolation could result in a significantly higher or lower fair value measurement.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue
The following table presents the detail of revenue as recorded in the Unaudited Condensed Consolidated Statements of Operations:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands)
PPA revenue
$
55,884
$
38,300
$
141,752
$
99,201
Lease revenue
62,297
37,966
170,548
103,468
Solar renewable energy certificate revenue
19,695
16,136
42,844
38,982
Loan revenue
12,565
9,283
35,651
24,538
Service revenue
4,195
4,756
8,794
12,247
Other revenue
2,902
1,751
4,759
4,412
Customer agreements and incentives
157,538
108,192
404,348
282,848
Inventory sales revenue
28,788
51,355
81,912
137,761
Cash sales revenue
37,591
24,284
93,523
62,827
Direct sales revenue
11,377
14,567
36,012
43,035
Solar energy system and product sales
77,756
90,206
211,447
243,623
Total
$
235,294
$
198,398
$
615,795
$
526,471
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. Revenue allocated to remaining performance obligations represents contracted revenue we have not yet recognized and includes deferred revenue and amounts we will invoice and recognize as revenue in future periods. Contracted but not yet recognized revenue related to our lease agreements was approximately $7.1 billion as of September 30, 2024, of which we expect to recognize approximately 4% over the next 12 months. Given the contracts in place at September 30, 2024, we do not expect the annual recognition to vary significantly over approximately the next 19 years as the majority of existing customer agreements have at least 19 years remaining, given the average age of the fleet of solar energy systems under contract is less than four years.
Certain customers may receive cash incentives. We defer recognition of the payment of these cash incentives and recognize them over the life of the contract as a reduction to revenue. The deferred payment is recorded in other assets for customers who receive the cash incentives under our lease and PPA agreements, and as a contra-liability in other long-term liabilities for customers who receive the cash incentives under our loan agreements.
PPA Revenue. Customers purchase electricity from us under PPAs. Pursuant to ASC 606, 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 PPAs. All customers must pass our credit evaluation process. 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 twofive-year or one10-year renewal options.
Lease Revenue. We are the lessor under lease agreements for solar energy systems and energy storage systems, which do not meet the definition of a lease under ASC 842, Leases. Accordingly, we account for these agreements as contracts with customers under ASC 606, 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. All customers must pass our credit evaluation process. 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 twofive-year or one10-year renewal options.
In most cases, 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, which is a significant proportion of its expected
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
output. The solar energy system may not achieve the specified minimum solar energy production output 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 the 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 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. While actual irradiance levels can significantly change year over year due to natural fluctuations in the weather, we expect the levels to average out over the term of a lease and to approximate the levels used in determining the amount of the performance guarantee. Generally, weather fluctuations are the most likely reason a solar energy system may not achieve a certain specified minimum solar energy production output.
If the solar energy system does not produce the guaranteed production amount, we must refund a portion of the previously remitted customer payments, where the 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 remittances of a customer's payments, if needed, are payable as early as the first anniversary of the solar energy system's placed in service date and then every annual period thereafter. See Note 14, Commitments and Contingencies.
Solar Renewable Energy Certificate Revenue. Each solar renewable energy certificate ("SREC") represents the environmental benefit of one megawatt hour (1,000 kWh) generated by a solar energy system. SRECs can be sold separate from the actual electricity generated by the renewable-based generation source. We account for the SRECs we generate from our solar energy systems 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 these SRECs as inventory held until sold and delivered to third parties. As we did not incur costs to obtain these governmental incentives, the inventory carrying value for the SRECs was $0 as of September 30, 2024 and December 31, 2023. We enter into economic hedges related to expected production of SRECs through forward contracts. 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 under ASC 606 upon satisfaction of the performance obligation to transfer the SRECs to the stated counterparty. Upon a sale, the purchaser of the SREC typically pays within one month of receiving the SREC. The costs related to the sales of SRECs are generally limited to broker fees (recorded in cost of revenue—customer agreements and incentives), which are only paid in connection with certain transactions. In certain circumstances we are required to purchase SRECs on the open market to fulfill minimum delivery requirements under our forward contracts.
Loan Revenue. See discussion of loan revenue in the "Loans" section below.
Service Revenue. Service revenue includes sales of service plans and repair services. 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 we perform the service.
Other Revenue. Other revenue includes certain state and utility incentives. We recognize revenue from state and utility incentives in the periods in which they are earned.
Inventory Sales Revenue. 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 or upon sale when a bill and hold agreement is in place. We include shipping and handling costs in cost of revenue—solar energy system and product sales in the Consolidated Statements of Operations.
Cash Sales Revenue. 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 under ASC 606 upon verification of the home closing.
Direct Sales Revenue. Direct sales revenue includes revenue from the direct sale of solar energy systems and energy storage systems to customers when we provide the financing. We recognize revenue from the direct sale of solar energy systems and energy storage systems in the period we place the systems in service.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Loans
We offer a loan program, under which the customer finances the purchase of a solar energy system, energy storage system and/or accessory through a customer agreement, typically for a term of 10, 15 or 25 years. We recognize cash payments received from customers on a monthly basis under our loan program (a) as interest income, to the extent attributable to earned interest on the contract that financed the customer's purchase; (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; and (c) as revenue, to the extent attributable to payments for operations and maintenance services provided by us. To qualify for the loan program, a customer must pass our credit evaluation process, which requires the customer to have a minimum FICO® score of 600 to 780 depending on certain circumstances, and we secure the loans with the solar energy systems, energy storage systems or accessories financed. We evaluate the customer's credit once for each customer at the time the customer enters into the customer agreement.
Our investments in solar energy systems, energy storage systems and/or accessories related to the loan program that are not yet placed in service are recorded in other assets in the Consolidated Balance Sheets and are transferred to customer notes receivable upon being placed in service. Customer notes receivable are recorded at amortized cost, net of an allowance for credit losses (as described below), in other current assets and customer notes receivable, net in the Consolidated Balance Sheets. Accrued interest receivable related to our customer notes receivable is recorded in accounts receivable—trade, net in the Consolidated Balance Sheets. Interest income from customer notes receivable is recorded in interest income in the Consolidated Statements of Operations. The amortized cost of our customer notes receivable is equal to the principal balance of customer notes receivable outstanding and does not include accrued interest receivable. Customer notes receivable continue to accrue interest until they are written off against the allowance unless the balance is in the process of collection. Customer notes receivable are considered past due one day after the due date based on the contractual terms of the loan agreement. In all cases, customer notes receivable balances are placed on a nonaccrual status or written off at an earlier date when we determine them to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously written off and expected to be written off. Accrued interest receivable for customer notes receivable placed on a nonaccrual status is recorded as a reduction to interest income. Interest received on such customer notes receivable is accounted for on a cash basis until the customer notes receivable qualifies for the return to accrual status. Customer notes receivable are returned to accrual status when there is no longer any principal or interest amounts past due and future payments are reasonably assured.
The allowance for credit losses is deducted from the customer notes receivable amortized cost to present the net amount expected to be collected. It is measured on a collective (pool) basis when similar risk characteristics (such as financial asset type, customer credit rating, contractual term and vintage) exist. In determining the allowance for credit losses, we identify customers with potential disputes or collection issues and consider our historical level of credit losses and current economic trends that might impact the level of future credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics, such as differences in underwriting standards. Expected credit losses are estimated over the contractual term of the loan agreements based on the best available data at the time and adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: (a) we have a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual customer or (b) the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancelable by us. Expected credit losses are recorded in provision for current expected credit losses and other bad debt expense in the Consolidated Statements of Operations. See Note 6, Customer Notes Receivable.
Deferred Revenue
Deferred revenue consists of amounts for which the criteria for revenue recognition have not yet been met and includes (a) payments for unfulfilled performance obligations that will be recognized on a straight-line basis over the remaining term of the respective customer agreements, net of any cash incentives earned by the customers, (b) down payments and partial or full prepayments from customers and (c) differences due to the timing of energy production versus billing for certain types of PPAs.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Deferred revenue was $615.6 million as of December 31, 2022. The following table presents the detail of deferred revenue as recorded in other current liabilities and other long-term liabilities in the Unaudited Condensed Consolidated Balance Sheets:
As of September 30, 2024
As of December 31, 2023
(in thousands)
Loans
$
1,007,014
$
930,999
PPAs and leases
63,458
55,651
Solar receivables
4,142
4,339
SRECs
8,124
—
Other
—
14
Total (1)
$
1,082,738
$
991,003
(1) Of this amount, $53.4 million and $50.8 million is recorded in other current liabilities as of September 30, 2024 and December 31, 2023, respectively.
During the nine months ended September 30, 2024 and 2023, we recognized revenue of $43.1 million and $28.8 million, respectively, from amounts recorded in deferred revenue at the beginning of the respective years.
Contract Assets and Contract Liabilities
Billing practices are governed by the contract terms of each project based upon costs incurred, production or predetermined schedules. Billings do not necessarily correlate with revenue recognized using the percentage-of-completion method to reflect the transfer of control over time. Contract assets include unbilled amounts typically resulting from revenue under contracts when the percentage-of-completion method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract liabilities consist of advance payments and billings in excess of revenue recognized. Retainage, included in contract assets, represents the amounts withheld from billings by our customers pursuant to provisions in the contracts and may not be paid to us until the completion of specific tasks or the completion of the project and, in some instances, for even longer periods. Retainage may also be subject to restrictive conditions such as performance guarantees. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. The payment terms of our contracts from time to time require the customer to make advance payments as well as interim payments as work progresses. As of September 30, 2024 and December 31, 2023, contract assets were $0 and $279,000, respectively, and contract liabilities were $5.4 million and $3.8 million, respectively. The decrease in contract assets was primarily due to revenue recognized on certain contracts and the timing of billings. The increase in contract liabilities was primarily due to the timing of advance payments partially offset by revenue recognized during the period. During the nine months ended September 30, 2024 and 2023, we recognized revenue of $961,000 and $0, respectively, from amounts recorded in contract liabilities at the beginning of the respective years.
Intangibles
Our purchased intangible assets are stated at cost less accumulated amortization. Our intangible assets acquired from a business combination or asset acquisition are stated at the estimated fair value on the date of the acquisition less accumulated amortization. We amortize intangible assets to general and administrative expense using the straight-line method.The following
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
table presents the detail of intangible assets as recorded in intangible assets, net in the Unaudited Condensed Consolidated Balance Sheets:
Useful Lives
As of September 30, 2024
As of December 31, 2023
(in years)
(in thousands)
Customer relationships - system sales
10
$
145,496
$
145,496
Customer relationships - servicing
10
3,471
3,471
Customer relationships - new customers
4
29,761
29,761
Trade name
15
11,899
11,899
Tax equity commitment
4
21,209
21,209
Software license
3
331
331
Trademark
3
68
68
Other
3-25
88
499
Intangible assets, gross
212,323
212,734
Less: accumulated amortization
(100,001)
(78,676)
Intangible assets, net
$
112,322
$
134,058
Warranty Obligations
In connection with our customer agreements, we warrant the solar energy systems against defects in workmanship, against component or materials breakdowns and against any damages to rooftops during the installation process. The dealers' warranties on the workmanship, including work during the installation process, and the manufacturers' warranties over component parts have a range of warranty periods which are generally 10 to 25 years. The following table summarizes the changes in our warranty reserve, which is recorded in other long-term liabilities in the Unaudited Condensed Consolidated Balance Sheets:
Nine Months Ended September 30,
2024
2023
(in thousands)
Balance at beginning of period
$
5,965
$
3,018
Accruals
2,708
1,937
Settlements
(313)
(12)
Balance at end of period
$
8,360
$
4,943
Equity-Based Compensation
We account for equity-based compensation, which requires the measurement and recognition of compensation expense related to the fair value of equity-based compensation awards. Equity-based compensation expense includes the compensation cost for all share-based awards granted to employees, consultants and members of our board of directors. We use the Black-Scholes option-pricing model to measure the fair value of stock options at the measurement date. For restricted stock units that will be settled in cash, we use the closing price of our common stock on the measurement date to measure the fair value at the measurement date and record in other current liabilities in the Consolidated Balance Sheets. For restricted stock units that will be settled in common stock, we use the closing price of our common stock on the grant date to measure the fair value at the measurement date and record in additional paid-in capital—common stock in the Consolidated Balance Sheets. We recognize the fair value of equity-based compensation awards as compensation cost in the financial statements, beginning on the grant date. We base compensation expense on the fair value of the awards we expect to vest, recognized over the service period, and adjusted for actual forfeitures as they occur. Equity-based compensation expense is recorded in general and administrative expense in the Consolidated Statements of Operations. See Note 12, Equity-Based Compensation.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Self-Insurance
In January 2023, we changed our health insurance policy for qualifying employees in the U.S. from a fully-insured policy to a self-insured policy in order to administer insurance coverage to our employees at a lower cost to us. The change in insurance policy did not have a significant impact on our consolidated financial statements and related disclosures. Under the self-insured policy, we maintain stop-loss coverage from a third party that limits our exposure to large claims. We record a liability associated with these benefits that includes an estimate of both claims filed and losses incurred but not yet reported based on historical claims experience. In estimating this accrual, we utilize a third-party actuary to estimate a range of expected losses, which are based on an analysis of historical data. Assumptions are monitored and adjusted when warranted by changing circumstances. We record our liability for estimated losses under our self-insured policy in accrued expenses in the Consolidated Balance Sheets. As of September 30, 2024 and December 31, 2023, our liability for self-insured claims was $3.6 million and $3.5 million, respectively, which represents our best estimate of the future cost of claims incurred as of that date. We believe we have adequate reserves for these claims as of September 30, 2024.
Sales of Investment Tax Credits ("ITCs")
We enter into tax credit purchase and sale agreements with third-party purchasers to sell to such third-party purchasers, for cash, the Section 48(a) ITCs generated by certain solar energy systems that have or will be placed in service, subject to certain conditions set forth therein. We account for ITCs using the flow-through method, which states the tax benefit is to be recognized when the ITC is realizable. For interim periods, we account for income tax under ASC 740-270 which prescribes the use of an estimated annual effective tax rate to be applied to year-to-date ordinary income or loss before tax to compute the year-to-date income tax provision. In calculating the estimated annual effective tax rate, we include the forecasted tax benefit from the sale of ITCs for the year. For tax credit purchase and sale agreements entered into by certain of our consolidated tax equity partnerships, we record our share of the sale as income tax benefit in the Consolidated Statements of Operations and the tax equity investor's share as an increase to redeemable noncontrolling interests or noncontrolling interests in the Consolidated Balance Sheets. We record an accrued distribution to redeemable noncontrolling interests and noncontrolling interests for their share of the ITC sales (at the time the ITC sale is recognized) when such accrual is stipulated in the operating agreement of the tax equity partnership. The following table presents the detail of receivables and payables related to ITC sales as recorded in the Unaudited Condensed Consolidated Balance Sheets:
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the detail of ITC sales as recorded in the Unaudited Condensed Consolidated Balance Sheets and Unaudited Condensed Consolidated Statements of Operations:
Three Months Ended September 30, 2024
Three Months Ended September 30, 2023
Financial Statement Classification
Financial Statement Classification
ITC
Sales
Redeemable
Noncontrolling
Interests and
Noncontrolling
Interests
Income
Tax
Benefit
ITC Sales
Redeemable Noncontrolling Interests and Noncontrolling Interests
Income Tax Benefit
(in thousands)
ITC sales related to tax equity partnerships
$
112,283
$
68,764
$
43,519
$
2,620
$
2,594
$
26
ITC sales unrelated to tax equity partnerships
28,264
—
28,264
11,802
—
11,802
Effect of ITC sales on estimated annual effective tax rate
—
—
(21,431)
—
—
—
Total
$
140,547
$
68,764
$
50,352
$
14,422
$
2,594
$
11,828
Nine Months Ended September 30, 2024
Nine Months Ended September 30, 2023
Financial Statement Classification
Financial Statement Classification
ITC
Sales
Redeemable
Noncontrolling
Interests and
Noncontrolling
Interests
Income
Tax
Benefit
ITC Sales
Redeemable Noncontrolling Interests and Noncontrolling Interests
Income Tax Benefit
(in thousands)
ITC sales related to tax equity partnerships
$
345,437
$
260,488
$
84,949
$
2,620
$
2,594
$
26
ITC sales unrelated to tax equity partnerships
29,202
—
29,202
11,802
—
11,802
Effect of ITC sales on estimated annual effective tax rate
—
—
57,809
—
—
—
Total
$
374,639
$
260,488
$
171,960
$
14,422
$
2,594
$
11,828
New Accounting Guidance
New accounting pronouncements are issued by the FASB or other standard setting bodies and are adopted as of the specified effective date.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting: Improvements to Reportable Segment Disclosures, to refine and ensure a broader and more transparent representation of segment-related financial activities. This ASU is effective for annual periods beginning in January 2024 and interim periods beginning in January 2025. We are currently evaluating the impact of this ASU on our consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes: Improvements to Income Tax Disclosures, to improve the transparency and effectiveness of income tax disclosures, including rate reconciliation and income taxes paid. This ASU is effective for annual periods beginning in January 2025. We are currently evaluating the impact of this ASU on our consolidated financial statements and related disclosures.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(3) Property and Equipment
The following table presents the detail of property and equipment, net as recorded in the Unaudited Condensed Consolidated Balance Sheets:
Useful Lives
As of September 30, 2024
As of December 31, 2023
(in years)
(in thousands)
Solar energy systems and energy storage systems
35
$
6,921,367
$
5,443,796
Construction in progress
514,959
530,180
Asset retirement obligations
30
96,279
78,538
Software and business technology systems
3
155,039
130,300
Computers and equipment
3-5
7,743
7,503
Leasehold improvements
1-6
7,208
6,170
Furniture and fixtures
7
1,172
1,172
Vehicles
4-5
1,640
1,640
Other
5-6
419
419
Property and equipment, gross
7,705,826
6,199,718
Less: accumulated depreciation
(725,474)
(560,924)
Property and equipment, net
$
6,980,352
$
5,638,794
The amounts included in the above table for solar energy systems and energy storage systems and substantially all the construction in progress relate to our customer contracts (including PPAs and leases). These assets had accumulated depreciation of $625.8 million and $489.7 million as of September 30, 2024 and December 31, 2023, respectively.
(4) Detail of Certain Balance Sheet Captions
The following table presents the detail of other current assets as recorded in the Unaudited Condensed Consolidated Balance Sheets:
As of September 30, 2024
As of December 31, 2023
(in thousands)
Inventory
$
136,619
$
148,575
Current portion of customer notes receivable
190,905
176,562
Restricted cash
10,186
62,188
Prepaid assets
38,921
25,996
Deferred receivables
16,932
7,601
Current portion of investments in solar receivables
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the detail of other assets as recorded in the Unaudited Condensed Consolidated Balance Sheets:
As of September 30, 2024
As of December 31, 2023
(in thousands)
Construction in progress - customer notes receivable
$
69,975
$
159,066
Restricted cash
254,826
219,382
Exclusivity and other bonus arrangements with dealers, net
209,513
166,359
Customer acquisition and other related costs
95,075
66,330
Investments in solar receivables
63,331
61,877
Straight-line revenue adjustment, net
75,966
62,941
Deferred tax asset
56,054
—
Prepaid assets
51,264
33,154
Other
68,195
126,776
Total
$
944,199
$
895,885
The following table presents the detail of other current liabilities as recorded in the Unaudited Condensed Consolidated Balance Sheets:
As of September 30, 2024
As of December 31, 2023
(in thousands)
Interest payable
$
71,759
$
67,647
Deferred revenue
53,434
50,815
Payroll and employee benefit liability
6,097
4,165
Current portion of operating and finance lease liability
5,373
4,231
Current portion of contract liability
4,687
3,397
Current portion of customer deposits
4,379
—
Grid services liability
3,824
555
Current portion of performance guarantee obligations
3,298
2,667
Other
185
172
Total
$
153,036
$
133,649
(5) Asset Retirement Obligations ("ARO")
AROs consist primarily of costs to remove solar energy system assets and costs to restore the solar energy system sites to the original condition, which we estimate based on current market rates. For each solar energy system, we recognize the fair value of the ARO as a liability and capitalize that cost as part of the cost basis of the related solar energy system. The related assets are depreciated on a straight-line basis over 30 years, which is the estimated average time a solar energy system will be installed in a location before being removed, and the related liabilities are accreted to the full value over the same period of time. We revise our estimated future liabilities based on recent actual experiences, including third party cost estimates, average size of solar energy systems and inflation rates, which we evaluate at least annually. Changes in our estimated future liabilities are recorded as either a reduction or addition in the carrying amount of the remaining unamortized asset and the ARO and either decrease or increase our depreciation and accretion expense amounts prospectively. The following table presents the changes in
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AROs as recorded in other long-term liabilities in the Unaudited Condensed Consolidated Balance Sheets:
Nine Months Ended September 30,
2024
2023
(in thousands)
Balance at beginning of period
$
96,227
$
69,869
Additional obligations incurred
17,794
14,106
Accretion expense
4,812
3,491
Other
(80)
(61)
Balance at end of period
$
118,753
$
87,405
(6) Customer Notes Receivable
We offer a loan program, under which the customer finances the purchase of a solar energy system, energy storage system and/or accessory through a customer agreement for a term of 10, 15 or 25 years. The following table presents the detail of customer notes receivable as recorded in the Unaudited Condensed Consolidated Balance Sheets and the corresponding fair values:
As of September 30, 2024
As of December 31, 2023
(in thousands)
Customer notes receivable
$
4,251,579
$
4,029,025
Allowance for credit losses
(129,827)
(116,477)
Customer notes receivable, net
$
4,121,752
$
3,912,548
Estimated fair value, net
$
3,993,267
$
3,800,754
The following table presents the changes in the allowance for credit losses related to customer notes receivable as recorded in other current assets and customer notes receivable, net in the Unaudited Condensed Consolidated Balance Sheets:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands)
Balance at beginning of period
$
111,218
$
102,337
$
116,477
$
81,248
Provision for current expected credit losses (1)
18,610
8,324
13,350
29,413
Other, net
(1)
—
—
—
Balance at end of period
$
129,827
$
110,661
$
129,827
$
110,661
(1) For the three months ended September 30, 2024 and 2023, the provision for current expected credit losses related to customer notes receivable was 6% and 4%, respectively, of total operating expense. For the nine months ended September 30, 2024 and 2023, the provision for current expected credit losses related to customer notes receivable was 2% and 4%, respectively, of total operating expense.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables present additional information related to our customer notes receivable.
As of September 30, 2024
As of December 31, 2023
(in thousands)
Investment in loan solar energy systems, energy storage systems and/or accessories not yet placed in service
$
69,975
$
159,066
Accrued interest receivable related to customer notes receivable
$
6,393
$
14,305
Customer notes receivable not accruing interest
$
77,728
$
34,200
Allowance recorded for loans on nonaccrual status
$
1,943
$
754
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands)
Interest income related to customer notes receivable
$
33,136
$
26,761
$
94,727
$
69,950
Interest income recognized for loans on nonaccrual status
$
—
$
—
$
—
$
—
Accrued interest receivable written off by reversing interest income
$
89
$
15
$
169
$
32
In May 2024, we ceased originating home security and monitoring loans with Brinks Home. In connection therewith, we sold approximately 58,000 home security and monitoring loans to Brinks Home. In the second and third quarter of 2024, we sold additional accessory loans to a third party. While we still have an obligation to service the accessory loans sold in the second and third quarter of 2024, no such obligation exists for the home security and monitoring loans sold in May 2024. During the nine months ended September 30, 2024, we sold approximately 63,000 accessory loans with a net customer notes receivable balance of $120.9 million for $81.0 million and recognized a loss of $43.4 million, which is recorded in other operating (income) expense in the Unaudited Condensed Consolidated Statements of Operations. As of September 30, 2024, $4.4 million is recorded in accounts receivable—other and $5.2 million is recorded in other assets for sales proceeds not yet received.
We consider the performance of our customer notes receivable portfolio and its impact on our allowance for credit losses. We also evaluate the credit quality based on the aging status and payment activity. The following table presents the aging of the amortized cost of customer notes receivable:
As of September 30, 2024
As of December 31, 2023
(in thousands)
1-90 days past due
$
182,507
$
164,150
91-180 days past due
40,321
40,428
Greater than 180 days past due
143,665
77,110
Total past due (1)
366,493
281,688
Not past due
3,885,086
3,747,337
Total
$
4,251,579
$
4,029,025
(1) As of September 30, 2024 and December 31, 2023, the total amount past due as a percent of gross customer notes receivable was 9% and 7%, respectively.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2024 and December 31, 2023, the amortized cost of our customer notes receivable more than 90 days past due but not on nonaccrual status was $106.3 million and $83.3 million, respectively. The following table presents the amortized cost by origination year of our customer notes receivable based on payment activity:
Amortized Cost by Origination Year
2024
2023
2022
2021
2020
Prior
Total
(in thousands)
Payment performance:
Performing
$
439,215
$
1,313,295
$
1,273,193
$
663,631
$
202,465
$
216,115
$
4,107,914
Nonperforming (1)
2,508
45,979
48,106
25,310
6,816
14,946
143,665
Total
$
441,723
$
1,359,274
$
1,321,299
$
688,941
$
209,281
$
231,061
$
4,251,579
(1) A nonperforming loan is a loan in which the customer is in default and has not made any scheduled principal or interest payments for 181 days or more.
(7) Long-Term Debt
Our subsidiaries with long-term debt include Sunnova Energy Corporation, Sunnova EZ-Own Portfolio, LLC ("EZOP"), Sunnova Helios II Issuer, LLC ("HELII"), Sunnova RAYS I Issuer, LLC ("RAYSI"), Sunnova Helios III Issuer, LLC ("HELIII"), Sunnova TEP Holdings, LLC ("TEPH"), Sunnova Sol Issuer, LLC ("SOLI"), Sunnova Helios IV Issuer, LLC ("HELIV"), Sunnova Asset Portfolio 8, LLC ("AP8"), Sunnova Sol II Issuer, LLC ("SOLII"), Sunnova Helios V Issuer, LLC ("HELV"), Sunnova Sol III Issuer, LLC ("SOLIII"), Sunnova Helios VI Issuer, LLC ("HELVI"), Sunnova Helios VII Issuer, LLC ("HELVII"), Sunnova Helios VIII Issuer, LLC ("HELVIII"), Sunnova Sol IV Issuer, LLC ("SOLIV"), Sunnova Helios IX Issuer, LLC ("HELIX"), Sunnova Helios X Issuer, LLC ("HELX"), Sunnova Inventory Supply, LLC ("IS"), Sunnova Sol V Issuer, LLC ("SOLV"), Sunnova Helios XI Issuer, LLC ("HELXI"), Sunnova Helios XII Issuer, LLC ("HELXII"), Sunnova Asset Portfolio 9, LLC ("AP9"), Sunnova Hestia I Borrower, LLC ("HESI"), Sunnova Business Markets Borrower, LLC ("BMB"), Sunnova Sol VI Issuer, LLC ("SOLVI"), Sunnova Helios XIII Issuer, LLC ("HELXIII"), Sunnova Hestia II Borrower, LLC ("HESII"), Sunnova Helios XIV Issuer, LLC ("HELXIV") and Sunnova Sol VII Issuer, LLC ("SOLVII"). The following table presents the detail of long-term debt as recorded in current portion of long-term debt and long-term debt, net in the Unaudited Condensed Consolidated Balance Sheets:
Nine Months Ended
September 30, 2024
Weighted Average
Effective Interest
Rates
As of September 30, 2024
Year Ended December 31, 2023 Weighted Average Effective Interest Rates
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Deferred financing costs, net
(2,447)
—
(3,064)
—
IS
Revolving credit facility
10.65
%
9,236
—
8.90
%
31,300
—
SOLV
Solar asset-backed notes
6.93
%
306,311
8,131
6.93
%
312,844
7,775
Debt discount, net
(12,913)
—
(15,491)
—
Deferred financing costs, net
(5,568)
—
(6,682)
—
HELXI
Solar loan-backed notes
6.49
%
242,794
20,317
6.29
%
247,251
31,240
Debt discount, net
(10,623)
—
(12,007)
—
Deferred financing costs, net
(4,262)
—
(5,195)
—
HELXII
Solar loan-backed notes
6.96
%
202,026
21,102
6.71
%
210,263
26,661
Debt discount, net
(11,003)
—
(13,065)
—
Deferred financing costs, net
(3,545)
—
(4,135)
—
AP9
Revolving credit facility
26.75
%
—
—
19.30
%
12,118
—
Debt discount, net
(338)
—
(572)
—
HESI
Solar loan-backed notes
5.90
%
206,182
22,907
10.94
%
213,432
26,625
Debt discount, net
(6,762)
—
(7,616)
—
Deferred financing costs, net
(6,224)
—
(7,058)
—
BMB
Revolving credit facility
404.67
%
832
—
—
—
SOLVI
Solar asset-backed notes
6.79
%
220,017
3,994
—
—
Debt discount, net
(11,443)
—
—
—
Deferred financing costs, net
(5,841)
—
—
—
HELXIII
Solar loan-backed notes
6.29
%
189,004
23,767
—
—
Debt discount, net
(6,861)
—
—
—
Deferred financing costs, net
(4,705)
—
—
—
HESII
Solar loan-backed notes
6.18
%
146,052
18,390
—
—
Debt discount, net
(115)
—
—
—
Deferred financing costs, net
(6,552)
—
—
—
HELXIV
Solar loan-backed notes
7.35
%
197,497
30,287
—
—
Debt discount, net
(7,264)
—
—
—
Deferred financing costs, net
(5,149)
—
—
—
SOLVII
Solar asset-backed notes
6.90
%
314,740
5,461
—
—
Debt discount, net
(8,910)
—
—
—
Deferred financing costs, net
(9,412)
—
—
—
Total
$
7,908,860
$
324,748
$
7,030,756
$
483,497
Availability. As of September 30, 2024, we had $1.0 billion of available borrowing capacity, subject to certain conditions, under our various financing arrangements, consisting of $739.5 million under the EZOP revolving credit facility, $153.1 million under the TEPH revolving credit facility, $40.8 million under the IS revolving credit facility, $65.0 million under the AP9 revolving credit facility and $3.8 million under the BMB revolving credit facility. As of September 30, 2024, we were in compliance with all debt covenants under our financing arrangements.
Weighted Average Effective Interest Rates. The weighted average effective interest rates disclosed in the table above are the weighted average stated interest rates for each debt instrument plus the effect on interest expense for other items classified
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
as interest expense, such as the amortization of deferred financing costs, amortization of debt discounts and commitment fees on unused balances for the period of time the debt was outstanding during the indicated periods.
Sunnova Energy Corporation Debt. In June 2024, Sunnova Energy Corporation entered into an arrangement to finance $8.3 million of insurance premiums at an annual interest rate of 7.74% over ten months.
EZOP Debt. In February 2024, we amended the EZOP revolving credit facility to, among other things, (a) reflect certain assignments of commitments occurring within the Atlas Lender Group (as defined by such revolving credit facility) without increasing the existing commitments, and the assignment of the role of the Atlas funding agent for the Atlas Lender Group, (b) amend the thresholds for certain "Amortization Events" (as defined by such revolving credit facility) and (c) modify the "Liquidity Reserve Account Required Balance" (as defined by such revolving credit facility). In March 2024, we amended the EZOP revolving credit facility to, among other things, (a) amend the Advance Rate, Excess Concentration Amount (in each case, as defined by such revolving credit facility) and certain related definitions and (b) amend the eligibility criteria for the Solar Loans (as defined by such revolving credit facility). In June 2024, we amended the EZOP revolving credit facility to, among other things, (a) reflect the exit of the RBC Committed Lender, RBC Conduit Lender and RBC Funding Agent (each as defined by such revolving credit facility) from the facility and (b) reflect the joinder of Royal Bank of Canada as a Committed Lender and Funding Agent (each as defined by such revolving credit facility) and the establishment of a new Royal Bank of Canada Lender Group (as defined by such revolving credit facility). We currently do not have the resources to repay this facility when it becomes due in November 2025, though we believe we will be able to satisfy this obligation through an amendment and an extension of the maturity date of the facility or through a refinancing of the facility as is customary for these types of revolving credit facilities. Although we believe it is probable we will amend and extend or refinance this facility, there can be no assurance about our ability to do so on terms favorable to us or at all.
TEPH Debt. In February 2024, we amended the TEPH revolving credit facility to, among other things, reflect an assignment of commitments occurring within the Atlas Lender Group (as defined by such revolving credit facility) without increasing the existing commitments and the appointment of a new Atlas funding agent for the Atlas Lender Group. In April 2024, additional lenders joined the TEPH revolving credit facility and the aggregate commitment amount was increased from $1.3 billion to $1.4 billion. In August 2024, we amended the TEPH revolving credit facility to, among other things, modify certain eligibility criteria to allow for energy community, domestic content and low-income community tax credit bonuses.
AP8 Debt. In June 2024, we amended the AP8 credit facility to, among other things, extend the maturity date from September 2024 to October 2025. As a result of this amendment, (a) no further borrowings are permitted under the AP8 credit facility and (b) no distributions of cash are permitted without the consent of the agent thereunder. We currently do not have the resources to repay this facility when it becomes due in October 2025, though we believe we will be able to satisfy this obligation through a refinancing of the facility by means of a new facility or securitization. Although we believe it is probable we will refinance this facility, there can be no assurance about our ability to do so on terms favorable to us or at all.
IS Debt. In April 2024, we amended the IS revolving credit facility to, among other things, (a) change the date on which payments are made to borrower from the collections account from monthly to weekly and (b) increase the applicable margin by 0.75% which results in a revised margin of (i) 3.25% for term SOFR loans and (ii) 2.25% for base rate loans.
SOLVI Debt. In February 2024, we pooled and transferred eligible solar energy systems and the related asset receivables into wholly-owned subsidiaries of SOLVI, a special purpose entity, that issued $194.5 million in aggregate principal amount of Series 2024-1 Class A solar asset-backed notes, $16.5 million in aggregate principal amount of Series 2024-1 Class B solar asset-backed notes and $15.0 million in aggregate principal amount of Series 2024-1 Class C solar asset-backed notes (collectively, the "SOLVI Notes") with a maturity date of January 2059. The SOLVI Notes were issued at a discount of 4.66%, 7.08% and 13.98% for the Class A, Class B and Class C notes, respectively, and bear interest at an annual rate equal to 5.65%, 7.00% and 9.00% for the Class A, Class B and Class C notes, respectively. The cash flows generated by the solar energy systems and the related asset receivables of SOLVI's subsidiaries are used to service the quarterly principal and interest payments on the SOLVI Notes and satisfy SOLVI's expenses, and any remaining cash can be distributed to Sunnova SOL VI Depositor, LLC, SOLVI's sole member. In connection with the SOLVI Notes, certain of our affiliates receive a fee for managing the solar energy systems and servicing the related asset receivables pursuant to a transaction management agreement and management and servicing agreements. In addition, Sunnova Energy Corporation has guaranteed (a) the obligations of certain of our subsidiaries to manage the solar energy systems and service the related asset receivables pursuant to a transaction management agreement and management and servicing agreements, (b) the managing members' obligations, in such capacity, under the related financing fund's limited liability company agreement and (c) certain of our subsidiaries' obligations to repurchase or substitute certain ineligible solar energy systems eventually sold to SOLVI pursuant to the sale and contribution agreement. SOLVI is also required to maintain certain reserve accounts for the benefit of the holders of the SOLVI Notes, each of which must remain funded at all times to the levels specified in the SOLVI Notes. The indenture requires SOLVI to track the
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
debt service coverage ratio (such ratio, the "DSCR") of (a) the amount of certain payments received from customers, certain performance based incentives, certain energy credits and any applicable insurance proceeds as of a specific date to (b) interest and scheduled principal due on the SOLVI Notes as of such date, with the potential to enter into an early amortization period if the DSCR drops below a certain threshold. The holders of the SOLVI Notes have no recourse to our other assets except as expressly set forth in the SOLVI Notes.
HELXIII Debt. In February 2024, we pooled and transferred eligible solar loans and home improvement loans and the related receivables into HELXIII, a special purpose entity, that issued $166.0 million in aggregate principal amount of Series 2024-A Class A loan-backed notes, $33.9 million in aggregate principal amount of Series 2024-A Class B loan-backed notes and $27.1 million in aggregate principal amount of Series 2024-A Class C loan-backed notes (collectively, the "HELXIII Notes") with a maturity date of February 2051. The HELXIII Notes were issued at a discount of 2.77%, 2.83% and 7.18% for the Class A, Class B and Class C notes, respectively, and bear interest at an annual rate of 5.30%, 6.00% and 7.00% for the Class A, Class B and Class C notes, respectively. The cash flows generated by these solar loans and home improvement loans are used to service the monthly principal and interest payments on the HELXIII Notes and satisfy HELXIII's expenses, and any remaining cash can be distributed to Sunnova Helios XIII Depositor, LLC, HELXIII's sole member. In connection with the HELXIII Notes, certain of our affiliates receive a fee for managing the solar energy systems and servicing the loans pursuant to management and servicing agreements. In addition, Sunnova Energy Corporation has guaranteed, among other things, (a) the obligations of certain of our subsidiaries to manage the solar energy systems and service the loans pursuant to management and servicing agreements and (b) certain of our subsidiaries' obligations to repurchase or substitute certain ineligible loans eventually sold to HELXIII pursuant to the related sale and contribution agreement. HELXIII is also required to maintain certain reserve accounts for the benefit of the holders of the HELXIII Notes, each of which must be funded at all times to the levels specified in the HELXIII Notes. The holders of the HELXIII Notes have no recourse to our other assets except as expressly set forth in the HELXIII Notes.
HESII Debt. In June 2024, we pooled and transferred eligible solar loans and home improvement loans and the related receivables into HESII, a special purpose entity, that issued $152.0 million in aggregate principal amount of Series 2024-GRID1 Class A solar loan-backed notes and $16.9 million in aggregate principal amount of Series 2024-GRID1 Class B solar loan-backed notes (collectively, the "HESII Notes") with a maturity date of July 2051. The HESII Notes indirectly benefit from a partial guarantee provided by the U.S. Department of Energy ("DOE") Loan Programs Office. The HESII Notes are not directly guaranteed by the DOE. The HESII Notes were issued at a discount of 0.0036% and 0.67% for the Class A and Class B notes, respectively, and bear interest at an annual rate of 5.63% and 9.50% for the Class A and Class B notes, respectively.
HELXIV Debt. In June 2024, we pooled and transferred eligible solar loans and the related receivables into HELXIV, a special purpose entity, that issued $151.9 million in aggregate principal amount of Series 2024-B Class A solar loan-backed notes, $54.4 million in aggregate principal amount of Series 2024-B Class B solar loan-backed notes and $24.6 million in aggregate principal amount of Series 2024-B Class C solar loan-backed notes (collectively, the "HELXIV Notes") with a maturity date of May 2051. The HELXIV Notes were issued at a discount of 2.16%, 1.62% and 13.76% for the Class A, Class B and Class C notes, respectively, and bear interest at an annual rate of 6.15%, 7.00% and 8.00% for the Class A, Class B and Class C notes, respectively. The cash flows generated by these solar loans are used to service the monthly principal and interest payments on the HELXIV Notes and satisfy HELXIV's expenses, and any remaining cash can be distributed to Sunnova Helios XIV Depositor, LLC, HELXIV's sole member. In connection with the HELXIV Notes, certain of our affiliates receive a fee for managing and servicing the solar energy systems pursuant to management and service agreements. In addition, Sunnova Energy Corporation has guaranteed, among other things, (a) the obligations of certain of our subsidiaries to manage and service the solar energy systems pursuant to management and servicing agreements and (b) certain of our subsidiaries' obligations to repurchase or substitute certain ineligible solar loans eventually sold to HELXIV pursuant to the related sale and contribution agreement. HELXIV is also required to maintain certain reserve accounts for the benefit of the holders of the HELXIV Notes, each of which must be funded at all times to the levels specified in the HELXIV Notes. The holders of the HELXIV Notes have no recourse to our other assets except as expressly set forth in the HELXIV Notes.
SOLVII Debt. In August 2024, we pooled and transferred eligible solar energy systems and the related asset receivables into wholly-owned subsidiaries of SOLVII, a special purpose entity, that issued $308.5 million in aggregate principal amount of Series 2024-2 Class A solar asset-backed notes and $11.7 million in aggregate principal amount of Series 2024-2 Class B solar asset-backed notes (collectively, the "SOLVII Notes") with a maturity date of July 2059. The SOLVII Notes were issued at a discount of 2.54% and 9.99% for the Class A and Class B notes, respectively, and bear interest at an annual rate equal to 6.58% and 9.00% for the Class A and Class B notes, respectively. The cash flows generated by the solar energy systems and the related asset receivables of SOLVII's subsidiaries are used to service the quarterly principal and interest payments on the SOLVII Notes and satisfy SOLVII's expenses, and any remaining cash can be distributed to Sunnova Sol VII Depositor, LLC, SOLVII's sole member. In connection with the SOLVII Notes, certain of our affiliates receive a fee for managing the solar energy systems and servicing the related asset receivables pursuant to a transaction management agreement and management
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
and servicing agreements. In addition, Sunnova Energy Corporation has guaranteed (a) the obligations of certain of our subsidiaries to manage the solar energy systems and service the related asset receivables pursuant to a transaction management agreement and management and servicing agreements, (b) the managing members' obligations, in such capacity, under the related financing fund's limited liability company agreement and (c) certain of our subsidiaries' obligations to repurchase or substitute certain ineligible solar energy systems eventually sold to SOLVII pursuant to the sale and contribution agreement. SOLVII is also required to maintain certain reserve accounts for the benefit of the holders of the SOLVII Notes, each of which must remain funded at all times to the levels specified in the SOLVII Notes. The indenture requires SOLVII to track the debt service coverage ratio (such ratio, the "DSCR") of (a) the amount of certain payments received from customers, certain performance based incentives, certain energy credits and any applicable insurance proceeds as of a specific date to (b) interest and scheduled principal due on the SOLVII Notes as of such date, with the potential to enter into an early amortization period if the DSCR drops below a certain threshold. The holders of the SOLVII Notes have no recourse to our other assets except as expressly set forth in the SOLVII Notes.
Fair Values of Long-Term Debt. The fair values of our long-term debt and the corresponding carrying values are as
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
follows:
As of September 30, 2024
As of December 31, 2023
Carrying Value
Estimated Fair Value
Carrying Value
Estimated Fair Value
(in thousands)
SEI 0.25% convertible senior notes
$
575,000
$
543,943
$
575,000
$
528,927
SEI 2.625% convertible senior notes
600,000
590,915
600,000
582,463
Sunnova Energy Corporation notes payable
4,977
4,977
3,084
3,084
Sunnova Energy Corporation 5.875% senior notes
400,000
379,443
400,000
369,522
Sunnova Energy Corporation 11.75% senior notes
400,000
414,004
400,000
411,996
EZOP revolving credit facility
135,500
135,500
511,000
511,000
HELII solar asset-backed notes
195,267
192,717
203,998
198,590
RAYSI solar asset-backed notes
107,376
100,657
111,445
102,480
HELIII solar loan-backed notes
89,996
84,204
96,215
87,982
TEPH revolving credit facility
1,207,890
1,207,890
1,036,600
1,036,600
SOLI solar asset-backed notes
339,331
310,029
348,839
310,928
HELIV solar loan-backed notes
102,440
94,590
108,312
96,603
AP8 credit facility
210,335
210,335
215,000
215,000
SOLII solar asset-backed notes
222,611
192,711
229,150
192,589
HELV solar loan-backed notes
140,670
129,649
147,969
132,533
SOLIII solar asset-backed notes
259,241
229,318
273,307
235,318
HELVI solar loan-backed notes
166,414
151,924
173,422
153,836
HELVII solar loan-backed notes
128,593
118,830
133,715
120,413
HELVIII solar loan-backed notes
253,428
238,069
263,015
241,599
SOLIV solar asset-backed notes
326,444
322,746
334,076
325,816
HELIX solar loan-backed notes
203,710
198,972
211,420
203,375
HELX solar loan-backed notes
211,955
214,368
220,838
221,655
IS revolving credit facility
9,236
9,236
31,300
31,300
SOLV solar asset-backed notes
314,442
314,687
320,619
317,481
HELXI solar loan-backed notes
263,111
263,509
278,491
275,323
HELXII solar loan-backed notes
223,128
229,409
236,924
242,091
AP9 revolving credit facility
—
—
12,118
12,118
HESI solar loan-backed notes
229,089
239,929
240,057
249,318
BMB revolving credit facility
832
832
—
—
SOLVI solar asset-backed notes
224,011
233,945
—
—
HELXIII solar loan-backed notes
212,771
220,624
—
—
HESII solar loan-backed notes
164,442
171,716
—
—
HELXIV solar loan-backed notes
227,784
238,982
—
—
SOLVII solar asset-backed notes
320,201
324,281
—
—
Total (1)
$
8,470,225
$
8,312,941
$
7,715,914
$
7,409,940
(1) Amounts exclude the net deferred financing costs (classified as debt) and net debt discounts of $236.6 million and $201.7 million as of September 30, 2024 and December 31, 2023, respectively.
For the notes payable, EZOP, TEPH, AP8, IS, AP9 and BMB debt, the estimated fair values approximate the carrying amounts primarily due to the variable nature of the interest rates of the underlying instruments. For the convertible senior notes, senior notes and the HELII, RAYSI, HELIII, SOLI, HELIV, SOLII, HELV, SOLIII, HELVI, HELVII, HELVIII, SOLIV, HELIX, HELX, SOLV, HELXI, HELXII, HESI, SOLVI, HELXIII, HESII, HELXIV and SOLVII debt, we determined the
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
estimated fair values based on an analysis of debt with similar book values, maturities and required market yields based on current interest rates.
(8) Derivative Instruments
Interest Rate Swaps and Caps on EZOP Debt. During the nine months ended September 30, 2024 and 2023, EZOP entered into interest rate swaps and caps for an aggregate notional amount of $259.9 million and $924.4 million, respectively, to economically hedge its exposure to the variable interest rates on a portion of the outstanding EZOP debt. No collateral was posted for the interest rate swaps and caps as they are secured under the EZOP revolving credit facility. In July 2024, the notional amount of the interest rate swaps and caps began decreasing to match EZOP's estimated monthly principal payments on the debt. During the nine months ended September 30, 2024 and 2023, EZOP unwound interest rate swaps and caps with an aggregate notional amount of $699.7 million and $659.6 million, respectively, and recorded a realized gain of $26.7 million and $26.8 million, respectively.
Interest Rate Swaps and Caps on TEPH Debt. During the nine months ended September 30, 2024 and 2023, TEPH entered into interest rate swaps and caps for an aggregate notional amount of $968.0 million and $601.6 million, respectively, to economically hedge its exposure to the variable interest rates on a portion of the outstanding TEPH debt. No collateral was posted for the interest rate swaps and caps as they are secured under the TEPH revolving credit facility. In October 2025, the notional amount of the interest rate swaps and caps will begin decreasing to match TEPH's estimated quarterly principal payments on the debt. During the nine months ended September 30, 2024 and 2023, TEPH unwound interest rate swaps and caps with an aggregate notional amount of $889.0 million and $241.1 million, respectively, and recorded a realized gain of $23.0 million and $6.2 million, respectively.
Interest Rate Swaps and Caps on AP8 Debt. During the nine months ended September 30, 2024 and 2023, AP8 entered into interest rate swaps and caps for an aggregate notional amount of $0 and $140.0 million, respectively, to economically hedge its exposure to the variable interest rates on a portion of the outstanding AP8 debt. No collateral was posted for the interest rate swaps and caps as they are secured under the AP8 revolving credit facility. The notional amount of the interest rate swaps and caps is locked for the life of the contract. During the nine months ended September 30, 2024 and 2023, AP8 unwound interest rate swaps and caps with an aggregate notional amount of $0 and recorded a realized gain of $1.8 million and $470,000, respectively.
Interest Rate Swaps and Caps on AP9 Debt. During the nine months ended September 30, 2024 and 2023, AP9 entered into interest rate swaps and caps for an aggregate notional amount of $0 and $25.0 million, respectively, to economically hedge its exposure to the variable interest rates on a portion of the outstanding AP9 debt. No collateral was posted for the interest rate swaps and caps as they are secured under the AP9 revolving credit facility. During the nine months ended September 30, 2024 and 2023, AP9 unwound interest rate swaps and caps with an aggregate notional amount of $25.0 million and $0, respectively, and recorded a realized gain of $227,000 and $0, respectively. In September 2024, all AP9 interest rate swaps and caps were unwound and terminated.
The following table presents a summary of the outstanding derivative instruments:
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair value of the interest rate swaps and caps as recorded in the Unaudited Condensed Consolidated Balance Sheets:
As of September 30, 2024
As of December 31, 2023
(in thousands)
Other assets
$
2,470
$
55,471
Other long-term liabilities
(44,847)
—
Total, net
$
(42,377)
$
55,471
We did not designate the interest rate swaps and caps as hedging instruments for accounting purposes. As a result, we recognize changes in fair value immediately in interest expense, net. The following table presents the impact of the interest rate swaps and caps as recorded in the Unaudited Condensed Consolidated Statements of Operations:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands)
Realized gain
$
(16,875)
$
(17,753)
$
(51,789)
$
(33,522)
Unrealized (gain) loss
66,657
(18,219)
61,820
(10,208)
Total
$
49,782
$
(35,972)
$
10,031
$
(43,730)
(9) Income Taxes
Our effective income tax benefit rate for the three months ended September 30, 2024 and 2023 is 23% and 14%, respectively, and for the nine months ended September 30, 2024 and 2023 is 33% and 1%, respectively. Total income tax differs from the amounts computed by applying the statutory income tax rate to loss before income tax primarily as a result of our valuation allowance and income tax benefit from the sale of ITCs. For interim reporting, we apply a forecasted annualized effective tax rate to year-to-date loss before income tax. We assessed whether we had any significant uncertain tax positions taken in a filed tax return, planned to be taken in a future tax return or claim, or otherwise subject to interpretation and determined there were none not more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position, or prospectively approved when such approval may be sought in advance. Should a provision for any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to accrue for such in our income tax accounts. There were no such accruals as of September 30, 2024 and December 31, 2023 and we do not expect a significant change in gross unrecognized tax benefits in the next twelve months. Our tax years after 2013 remain subject to examination by the IRS and by the taxing authorities in the states and territories in which we operate.
(10) Redeemable Noncontrolling Interests and Noncontrolling Interests
Redeemable Noncontrolling Interests
In February 2024, we admitted a tax equity investor as the Class A member of Sunnova TEP 8-D, LLC ("TEP8D"), a subsidiary of Sunnova TEP 8-D Manager, LLC, which is the Class B member of TEP8D. The Class A member of TEP8D made a total capital commitment of $195.0 million. In February 2024, the Class A member of Sunnova TEP 7-F, LLC increased its capital commitment from approximately $134.9 million to approximately $190.8 million. In March 2024, the Class A member of Sunnova TEP 7-E, LLC increased its capital commitment from $51.0 million to approximately $51.2 million. In May 2024, the Class A member of Sunnova TEP 7-B, LLC increased its capital commitment from $125.0 million to approximately $132.1 million. In August 2024, the Class A member of Sunnova TEP 7-B, LLC increased its capital commitment from approximately $132.1 million to approximately $137.7 million. In August 2024, the Class A member of Sunnova TEP 7-C, LLC increased its capital commitment from approximately $51.3 million to approximately $53.1 million. In August 2024, the Class A member of Sunnova TEP 7-E, LLC increased its capital commitment from approximately $51.2 million to approximately $59.8 million. In August 2024, the Class A member of Sunnova TEP 7-G, LLC increased its capital commitment from approximately $104.0 million to approximately $111.7 million. In August 2024, we admitted a tax equity investor as the Class A member of Sunnova TEP 8-F, LLC ("TEP8F"), a subsidiary of Sunnova TEP 8-F Manager, LLC, which is the Class B member of TEP8F. The Class A member of TEP8F made a total capital commitment of approximately $152.1 million.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Noncontrolling Interests
In February 2024, the Class A member of Sunnova TEP 7-A, LLC increased its capital commitment from approximately $59.0 million to approximately $61.4 million. In May 2024, we admitted a tax equity investor as the Class A member of Sunnova TEP 8-E, LLC ("TEP8E"), a subsidiary of Sunnova TEP 8-E Manager, LLC, which is the Class B member of TEP8E. The Class A member of TEP8E made a total capital commitment of approximately $250.0 million. In September 2024, the Class A member of Sunnova TEP 6-D, LLC increased its capital commitment from approximately $75.0 million to approximately $79.6 million.
(11) Stockholders' Equity
During the nine months ended September 30, 2024 and 2023, we issued 636,555 and 693,443 shares of our common stock to Len X, LLC pursuant to the terms of the earnout agreement, as amended, entered into in connection with the acquisition of SunStreet Energy Group, LLC.
(12) Equity-Based Compensation
In February 2024, the aggregate number of shares of common stock that may be issued pursuant to awards under the 2019 Long-Term Incentive Plan (the "LTIP") was increased by 2,960,908, an amount that, together with the shares remaining available for grant under the LTIP, is equal to 6,123,326 shares, or approximately 5% of the number of shares of common stock outstanding as of December 31, 2023.
Stock Options
The following tables summarize stock option activity:
Number of Stock Options
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term (Years)
Weighted Average Grant Date Fair Value
Aggregate Intrinsic Value
(in thousands)
Outstanding, December 31, 2023
4,018,149
$
17.61
4.97
$
5,542
Granted
1,989,147
$
6.87
9.45
$
4.25
Exercised
(11,357)
$
1.85
$
118
Forfeited
(612,934)
$
14.65
$
8.14
Outstanding, September 30, 2024
5,383,005
$
14.01
5.69
$
4,958
Exercisable, September 30, 2024
2,630,353
$
17.04
2.22
$
—
Vested and expected to vest, September 30, 2024
5,383,005
$
14.01
5.69
$
4,958
Non-vested, September 30, 2024
2,752,652
$
6.43
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands, except number of stock options vested)
Number of stock options vested
—
—
148,859
16,816
Grant date fair value of stock options vested
$
—
$
—
$
2,247
$
309
As of September 30, 2024, there was $10.2 million of total unrecognized compensation expense related to stock options, which is expected to be recognized over the remaining weighted average period of 2.01 years.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Units
The following tables summarize restricted stock unit activity:
Number of Restricted Stock Units
Weighted Average Grant Date Fair Value
Outstanding, December 31, 2023
2,384,205
$
16.60
Granted
6,129,134
$
6.20
Vested
(2,068,269)
$
11.05
Forfeited
(1,178,580)
$
9.52
Outstanding, September 30, 2024
5,266,490
$
9.10
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands, except number of restricted stock units vested)
Number of restricted stock units vested
206,441
145,115
2,068,269
961,682
Grant date fair value of restricted stock units vested
$
3,120
$
2,223
$
22,848
$
17,196
As of September 30, 2024, there was $36.0 million of total unrecognized compensation expense related to restricted stock units, which is expected to be recognized over the remaining weighted average period of 1.51 years.
Employee Stock Purchase Plan ("ESPP")
As of September 30, 2024 and December 31, 2023, the number of shares of common stock issued under the ESPP was 82,316 and 35,160, respectively.
(13) Basic and Diluted Net Loss Per Share
The following table sets forth the computation of our basic and diluted net loss per share:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands, except share and per share amounts)
Net loss attributable to stockholders—basic and diluted
$
(122,589)
$
(63,147)
$
(225,602)
$
(230,321)
Net loss per share attributable to stockholders—basic and diluted
$
(0.98)
$
(0.53)
$
(1.82)
$
(1.97)
Weighted average common shares outstanding—basic and diluted
124,852,073
119,554,008
123,998,539
116,971,318
The following table presents the weighted average shares of common stock equivalents that were excluded from the computation of diluted net loss per share for the periods presented because including them would have been anti-dilutive:
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(14) Commitments and Contingencies
Legal. We are a party to a number of lawsuits, claims and governmental proceedings that are ordinary, routine matters incidental to our business. In addition, in the ordinary course of business, we periodically have disputes with dealers and customers. We do not expect the outcomes of these matters to have, either individually or in the aggregate, a material adverse effect on our financial position or results of operations.
Performance Guarantee Obligations. The following table presents the detail of performance guarantee obligations as recorded in the Unaudited Condensed Consolidated Balance Sheets:
As of September 30, 2024
As of December 31, 2023
(in thousands)
Other current liabilities
$
3,298
$
2,667
Other long-term liabilities
$
4,576
$
4,086
Total
$
7,874
$
6,753
The changes in our performance guarantee obligations are as follows:
Nine Months Ended September 30,
2024
2023
(in thousands)
Balance at beginning of period
$
6,753
$
4,845
Accruals
3,887
3,620
Settlements
(2,766)
(2,855)
Balance at end of period
$
7,874
$
5,610
Operating and Finance Leases. We lease real estate and certain office equipment under operating leases and vehicles and certain other office equipment under finance leases. The following table presents the detail of lease expense as recorded in general and administrative expense in the Unaudited Condensed Consolidated Statements of Operations:
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the detail of right-of-use assets and lease liabilities as recorded in other assets and other current liabilities/other long-term liabilities, respectively, in the Unaudited Condensed Consolidated Balance Sheets:
As of September 30, 2024
As of December 31, 2023
(in thousands)
Right-of-use assets:
Operating leases
$
11,549
$
13,247
Finance leases
7,398
4,085
Total right-of-use assets
$
18,947
$
17,332
Current lease liabilities:
Operating leases
$
3,033
$
2,883
Finance leases
2,340
1,348
Long-term leases liabilities:
Operating leases
11,774
14,005
Finance leases
3,277
1,631
Total lease liabilities
$
20,424
$
19,867
Other information related to leases was as follows:
Nine Months Ended September 30,
2024
2023
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
2,646
$
2,187
Operating cash flows from finance leases
$
157
$
69
Financing cash flows from finance leases
$
1,272
$
725
Right-of-use assets obtained in exchange for lease obligations:
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments under our non-cancelable leases as of September 30, 2024 were as follows:
Operating Leases
Finance Leases
(in thousands)
Remaining 2024
$
899
$
733
2025
3,458
2,387
2026
3,240
1,575
2027
3,304
1,029
2028
3,372
404
2029 and thereafter
2,113
—
Total
16,386
6,128
Amount representing interest
(1,503)
(511)
Amount representing leasehold incentives
(76)
—
Present value of future payments
14,807
5,617
Current portion of lease liability
(3,033)
(2,340)
Long-term portion of lease liability
$
11,774
$
3,277
Guarantees or Indemnifications. We enter into contracts that include indemnifications and guarantee provisions. In general, we enter into contracts with indemnities for matters such as breaches of representations and warranties and covenants contained in the contract and/or against certain specified liabilities. Examples of these contracts include dealer agreements, debt agreements, asset purchases and sales agreements, service agreements and procurement agreements. We are unable to estimate our maximum potential exposure under these agreements until an event triggering payment occurs.
Dealer Commitments. As of September 30, 2024 and December 31, 2023, the net unamortized balance of payments to dealers for exclusivity and other similar arrangements was $209.5 million and $166.4 million, respectively. Under these agreements, we paid $46.4 million and $55.0 million during the nine months ended September 30, 2024 and 2023, respectively. We could be obligated to make maximum payments, excluding additional amounts payable on a per watt basis if even higher thresholds are met, as follows:
Dealer Commitments
(in thousands)
Remaining 2024
$
5,292
2025
52,637
2026
35,000
2027
30,000
2028
—
2029 and thereafter
—
Total
$
122,929
Purchase Commitments. In September 2024, we amended an agreement with a supplier in which we agreed to purchase approximately $163.0 million of solar energy systems from October 2024 through June 2025. As of September 30, 2024, we are committed to purchase (or have our dealers purchase) $54.2 million, $52.4 million and $56.5 million during the three months ended December 31, 2024, March 31, 2025 and June 30, 2025, respectively, for a total of $163.0 million. Based on historical experience, this supplier agreement could be modified from time to time.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Software and Business Technology Commitments. We have certain long-term contractual commitments related to software and business technology services and licenses. Future commitments as of September 30, 2024 were as follows:
Software
and Business
Technology
Commitments
(in thousands)
Remaining 2024
$
5,245
2025
10,807
2026
8,102
2027
7,405
2028
515
2029 and thereafter
515
Total
$
32,589
(15) Subsequent Events
TEPH Debt. In October 2024,we amended the TEPH revolving credit facility to, among other things, (a) extend the maturity date from November 2025 to August 2026, (b) extend the date upon which lender commitments terminate (and no further advances are permitted under the TEPH revolving credit facility) from May 2024 to May 2025, (c) require us to maintain a specified minimum working capital amount as of quarterly determination dates, (d) add certain events of default and (e) increase the aggregate commitment amount from $1.361 billion to $1.362 billion.
AP9 Debt. In October 2024, we voluntarily terminated the AP9 revolving credit facility. At the time of termination, no loans were outstanding under the AP9 revolving credit facility. Upon termination, all outstanding obligations under the AP9 revolving credit facility were paid in full and all hedging agreements permitted by the AP9 revolving credit facility were settled.
SOLVIII Debt. In October 2024, we pooled and transferred eligible solar energy systems and the related asset receivables into wholly-owned subsidiaries of SOLVIII, a special purpose entity, that issued $295.2 million in aggregate principal amount of Series 2024-3 Class A solar asset-backed notes and $12.9 million in aggregate principal amount of Series 2024-3 Class B solar asset-backed notes (collectively, the "SOLVIII Notes") with a maturity date of July 2059. The SOLVIII Notes were issued at a discount of 1.85% and 1.63% for the Class A and Class B notes, respectively, and bear interest at an annual rate equal to 6.45% and 8.78% for the Class A and Class B notes, respectively. The cash flows generated by the solar energy systems and the related asset receivables of SOLVIII's subsidiaries are used to service the quarterly principal and interest payments on the SOLVIII Notes and satisfy SOLVIII's expenses, and any remaining cash can be distributed to Sunnova Sol VIII Depositor, LLC, SOLVIII's sole member. In connection with the SOLVIII Notes, certain of our affiliates receive a fee for managing the solar energy systems and servicing the related asset receivables pursuant to a transaction management agreement and management and servicing agreements. In addition, Sunnova Energy Corporation has guaranteed (a) the obligations of certain of our subsidiaries to manage the solar energy systems and service the related asset receivables pursuant to a transaction management agreement and management and servicing agreements, (b) the managing members' obligations, in such capacity, under the related financing fund's limited liability company agreement and (c) certain of our subsidiaries' obligations to repurchase or substitute certain ineligible solar energy systems eventually sold to SOLVIII pursuant to the sale and contribution agreement. SOLVIII is also required to maintain certain reserve accounts for the benefit of the holders of the SOLVIII Notes, each of which must remain funded at all times to the levels specified in the SOLVIII Notes. The indenture requires SOLVIII to track the debt service coverage ratio (such ratio, the "DSCR") of (a) the amount of certain payments received from customers, certain performance based incentives, certain energy credits and any applicable insurance proceeds as of a specific date to (b) interest and scheduled principal due on the SOLVIII Notes as of such date, with the potential to enter into an early amortization period if the DSCR drops below a certain threshold. The holders of the SOLVIII Notes have no recourse to our other assets except as expressly set forth in the SOLVIII Notes.
Redeemable Noncontrolling Interests. In October 2024, we admitted a tax equity investor as the Class A member of Sunnova TEP 8-G, LLC ("TEP8G"), a subsidiary of Sunnova TEP 8-G Manager, LLC, which is the Class B member of TEP8G. The Class A member of TEP8G made a total capital commitment of approximately $95.0 million. In October 2024, we exercised our purchase option to purchase 100% of the Class A members' interests in Sunnova TEP II-B, LLC for approximately $4.2 million.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contain forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed under "Special Note Regarding Forward-Looking Statements" above and "Special Note Regarding Forward-Looking Statements", "Risk Factors" and elsewhere in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 22, 2024, our Quarterly Reports on Form 10-Q filed with the SEC on May 2, 2024 and August 1, 2024 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
See Note 1, Description of Business and Basis of Presentation. In addition, 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 between the solar energy system and/or energy storage system, and the grid, as appropriate, and also the solar energy system and energy storage system diagnostics. During the life of the contract, we have the opportunity to integrate related and evolving servicing and monitoring technologies and other sustainable home products 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, tax credit sales, non-recourse debt structures and hedging arrangements in order to fund our upfront costs, overhead and growth investments.
In addition to providing ongoing service as a standard component of our customer 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/or 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 or sustainable home products through third parties that are not otherwise covered by warranty.
We continue to expand our offerings to include additional sustainable home products to our agreements, including non-solar financing. Specifically, we have expanded our offerings to 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 expanding sustainable home product offerings, whether to customers that obtained their solar energy system or energy storage system through us or through a third party, is a key differentiator between us and our competitors.
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 rights and 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 in January 2013 and began providing solar energy services under our first solar energy system in April 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 the U.S., comprising more than 2,751 megawatts of generation capacity and our diversified offerings of sustainable home solutions serve over 422,000 customers as of September 30, 2024.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Recent Developments
Financing Transactions
In August 2024, four tax equity investors increased their capital commitment by approximately $23.7 million (from approximately $338.5 million to approximately $362.3 million) to accommodate the funding of domestic content and energy community tax credit bonuses. Similarly, in September 2024, a tax equity investor increased its capital commitment from approximately $75.0 million to approximately $79.6 million. Also, in August 2024, we admitted a tax equity investor with a total capital commitment of approximately $152.1 million, and in October 2024, we admitted a tax equity investor with a total capital commitment of approximately $95.0 million. See "—Liquidity and Capital Resources—Financing Arrangements—Tax Equity Fund Commitments" below.
In August 2024, we amended the revolving credit facility by and among Sunnova TEP Holdings, LLC ("TEPH"), certain of our other subsidiaries party thereto, Atlas Securitized Products Holdings, L.P., as administrative agent, and the lenders and other financial institutions party thereto, to, among other things, modify certain eligibility criteria to allow for energy community, domestic content and low-income community tax credit bonuses. In October 2024,we amended the TEPH revolving credit facility to, among other things, (a) extend the maturity date from November 2025 to August 2026, (b) extend the date upon which lender commitments terminate (and no further advances are permitted under the TEPH revolving credit facility) from May 2024 to May 2025, (c) require us to maintain a specified minimum working capital amount as of quarterly determination dates, (d) add certain events of default and (e) increase the aggregate commitment amount from $1.361 billion to $1.362 billion. In October 2024, we voluntarily terminated the revolving credit facility by and among Sunnova Asset Portfolio 9, LLC ("AP9"), Sunnova SLA Management, LLC, Sunnova Asset Portfolio 9 Holdings, LLC, and the lenders party thereto. At the time of termination, no loans were outstanding under the AP9 revolving credit facility. Upon termination, all outstanding obligations under the AP9 revolving credit facility were paid in full and all hedging agreements permitted by the AP9 revolving credit facility were settled. See "—Liquidity and Capital Resources—Financing Arrangements—Warehouse and Other Debt Financings" below.
In August 2024, one of our subsidiaries issued $308.5 million in aggregate principal amount of Series 2024-2 Class A solar asset-backed notes and $11.7 million in aggregate principal amount of Series 2024-2 Class B solar asset-backed notes (collectively, the "SOLVII Notes") with a maturity date of July 2059. The SOLVII Notes bear interest at an annual rate equal to 6.58% and 9.00% for the Class A and Class B notes, respectively. In October 2024, one of our subsidiaries issued $295.2 million in aggregate principal amount of Series 2024-3 Class A solar asset-backed notes and $12.9 million in aggregate principal amount of Series 2024-3 Class B solar asset-backed notes (collectively, the "SOLVIII Notes") with a maturity date of July 2059. The SOLVIII Notes bear interest at an annual rate equal to 6.45% and 8.78% for the Class A and Class B notes, respectively. See "—Liquidity and Capital Resources—Financing Arrangements—Securitizations" below.
Sales of Customer Notes Receivable
In May 2024, we ceased originating home security and monitoring loans with Brinks Home. In connection therewith, we sold approximately 58,000 home security and monitoring loans to Brinks Home. In the second and third quarter of 2024, we sold additional accessory loans to a third party. While we still have an obligation to service the accessory loans sold in the second and third quarter of 2024, no such obligation exists for the home security and monitoring loans sold in May 2024. During the nine months ended September 30, 2024, we sold approximately 63,000 accessory loans with a net customer notes receivable balance of $120.9 million for $81.0 million and recognized a loss of $43.4 million. As previously disclosed, during the year ended December 31, 2023, Monitronics International Inc. dba Brinks Home accounted for 30% of our net originations on a count basis.
Securitizations
As a source of long-term financing, we securitize qualifying solar energy systems, energy storage systems and related customer 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 systems and related customer agreements that were originated by one of our wholly-owned subsidiaries. We often obtain public or private credit ratings on our securitizations from nationally recognized statistical rating agencies. 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 the U.S. Internal Revenue Code of 1986, as amended. For projects that begin construction after December 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
Management's Discussion and Analysis of Financial Condition and Results of Operations
Section 48E ITC incentives, associated with the solar energy systems and energy storage systems as part of these arrangements. However, we may in the future securitize the expected proceeds from the sale of such tax credits. 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 through September 30, 2024, we have issued $5.9 billion in solar asset-backed and solar loan-backed notes.
Tax Equity Funds
Our ability to offer and finance 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, the U.S. federal income 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, the partnership flips and 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, 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 through September 30, 2024, we have received commitments of approximately $3.4 billion through the use of tax equity funds, of which an aggregate of $3.1 billion has been funded and $221.9 million remains available for use.
Management's Discussion and Analysis of Financial Condition and Results of Operations
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/discontinue or seek to acquire/divest 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 the SEC on February 22, 2024, our Quarterly Reports on Form 10-Q filed with the SEC on May 2, 2024 and August 1, 2024 and in this Quarterly Report on Form 10-Q for further discussion of risks affecting our business.
Financing Availability. Our future growth, profitability and ability to satisfy our obligations 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, senior notes, asset-backed and loan-backed securitizations and warehouse facilities, tax equity, preferred equity, common equity and other financing strategies to help fund our operations. With respect to tax equity, there are a limited number of potential tax equity investors and purchasers of ITCs, 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. Under the Inflation Reduction Act of 2022 ("IRA"), the Section 48(a) ITC is (a) 26% of the basis of eligible solar property that began construction after 2019 and was placed in service before 2022 and (b) 30% of the basis of eligible solar property or eligible energy storage property that begins construction before 2025 provided (i) the project satisfies certain labor and apprenticeship requirements, (ii) the project has a maximum net output or capacity of less than one megawatt (as measured in alternating current) or (iii) the project began construction prior to January 29, 2023. If no criterion is satisfied, the base amount of the Section 48(a) ITC will be equal to 6%. Depending on the location of a particular project, its size, its ability to satisfy certain labor and domestic content requirements and the category of consumers it serves, the ITC percentage can range between 6% and 70%, however, IRS guidance is limited and not all tax equity investors will invest against the fully enhanced credit. 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 generally be the same as the percentage for the Section 48(a) ITC and subject to similar 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 the U.S. Department of Treasury determines greenhouse gas emissions from the production of electricity in the 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 apprenticeship requirements of the IRA due to the maximum net output or capacity of most of our solar energy systems and energy storage systems. However, solar energy systems and energy storage systems financed by Hestia securitizations are subject to applicable labor and other requirements imposed by the U.S Department of Energy ("DOE") and the U.S. Department of Labor. 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. In September 2023, we entered into our first tax credit purchase and sale agreements and subsequently entered into additional tax credit purchase and sale agreements. It is unclear what long-term 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 over the past few years and remain subject to volatility that may result from action taken by the Federal Reserve.
Cost of Solar Energy Systems and Energy Storage Systems. Although we have experienced a prolonged period of component cost declines, upward pressure on prices of solar energy systems and energy storage systems may still occur due to growth in the solar industry, regulatory policy changes, tariffs and duties or inflationary cost pressures. As a result of these developments, we may pay higher prices on solar modules and other cost components, which may make it less economical for us to serve certain markets. While lower costs of components may benefit our growth and profitability, downward pressure on prices of solar energy systems and energy storage systems may lead to impairment of our inventory.
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,
Management's Discussion and Analysis of Financial Condition and Results of Operations
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. However, we expect to see a reduction in the amount of energy storage system loans we originate due to a shift in customer demand from solar loans (caused by increased loan financing costs as a result of increased interest rates) to leases and PPAs.
Climate Change Action. As global awareness increases regarding the impact of climate change and as aversion to climate change impacts and the importance of energy resiliency rises, we believe the renewable energy market in which we operate, and investment in climate solutions more broadly, will continue to grow. 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 the U.S. economy continues to accelerate. The federal government's 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 the U.S. economy to a net-zero carbon economy by 2050. We expect the government, combined with a closely divided Congress, 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. There is no guarantee a new administration or a change in the makeup of Congress would continue to take supportive actions, and such a changed administration may make decisions and/or pass laws that are detrimental to our industry.
Government Regulations, Policies and Incentives. Our growth and operations 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, solar renewable energy certificates ("SRECs"), tax abatements, rebates, renewable targets, DOE loan guarantee programs, incentive programs and tax credits, particularly the Section 48(a) ITC and the Section 25D Credit. The IRA expanded and extended the tax credits available to solar energy projects to achieve the government's non-binding target of net-zero emissions by 2050, which we expect will increase demand for our services. The Section 25D Credit allows qualifying homeowners to deduct up to 30% of the cost of installing residential solar energy systems from their U.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. Policies requiring solar on new roofs, such as those enacted in California and New 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 customer 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. See Note 2, Significant Accounting Policies, to our interim financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Cost of Revenue—Customer Agreements and Incentives. Cost of revenue—customer agreements and incentives, which is core to our business operations, represents depreciation on solar energy systems under lease agreements and PPAs that have been placed in service, costs to purchase SRECs on the open market, SREC broker fees, payroll and related costs for Sunnova personnel who install solar energy systems and energy storage systems 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 ("UCC") 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.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Cost of Revenue—Solar Energy System and Product Sales. Cost of revenue—solar energy system and product sales represents costs related to cash sales and direct sales, which are core to our business operations, and non-core costs related to the procurement and direct sale of inventory to our dealers or other parties, including shipping and handling costs.
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 nine months ended September 30, 2024 and 2023, we incurred $43.4 million and $36.2 million, respectively, of Sunnova personnel costs related to maintaining and servicing solar energy systems. In addition, operations and maintenance expense includes write downs and write-offs related to inventory adjustments, gains and losses on disposals, other impairments, non-recoverable costs from terminated dealers 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, software and business technology services, marketing and communications, 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 software and business technology 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 software and business technology development projects, to the extent of the time spent directly on the application and development stage of such software project.
Provision for Current Expected Credit Losses and Other Bad Debt Expense. Provision for current expected credit losses and other bad debt expense primarily represents adjustments to the allowance for credit losses for customer notes receivable that is estimated over the contractual term of the loan agreements based on the best available data at the time.
Other Operating (Income) Expense. Other operating (income) expense primarily represents gains and losses on sales of customer notes receivable, 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 Expense. Other expense primarily represents changes in the fair value of certain financial instruments related to non-operating assets.
Income Tax Benefit. 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 evaluate the recoverability of our deferred tax assets on a quarterly basis. The income tax benefit includes the effects of taxes incurred in U.S. territories where the tax code for the respective territory may have separate tax reporting requirements, as applicable. We account for ITCs using the flow-through method, which states the tax benefit is to be recognized when the ITC is realizable. For interim reporting, we utilize a forecasted annualized effective tax rate. For tax credit purchase and sale agreements entered into by certain of our consolidated tax equity partnerships, we record our share of the sale as income tax benefit and the tax equity investor's share as an increase to redeemable noncontrolling interests or noncontrolling interests.
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.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Revenue
Three Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
PPA revenue
$
55,884
$
38,300
$
17,584
46
%
Lease revenue
62,297
37,966
24,331
64
%
SREC revenue
19,695
16,136
3,559
22
%
Loan revenue
12,565
9,283
3,282
35
%
Service revenue
4,195
4,756
(561)
(12)
%
Other revenue
2,902
1,751
1,151
66
%
Customer agreements and incentives
157,538
108,192
49,346
46
%
Inventory sales revenue
28,788
51,355
(22,567)
(44)
%
Cash sales revenue
37,591
24,284
13,307
55
%
Direct sales revenue
11,377
14,567
(3,190)
(22)
%
Solar energy system and product sales
77,756
90,206
(12,450)
(14)
%
Total
$
235,294
$
198,398
$
36,896
19
%
Three Months Ended September 30,
2024
2023
Change
% Change
(in thousands except weighted average number of
systems and per weighted average system amounts)
PPA and lease revenue
$
118,181
$
76,266
$
41,915
55
%
Weighted average number of PPA and lease systems
238,400
173,500
64,900
37
%
Per weighted average system
$
496
$
440
$
56
13
%
Revenue under our loan agreements
$
12,565
$
9,283
$
3,282
35
%
Weighted average number of systems with loan agreements
105,100
89,900
15,200
17
%
Per weighted average system
$
120
$
103
$
17
17
%
Three Months Ended September 30,
2024
2023
Change
% Change
(in thousands except number of
customers and per customer amounts)
Cash sales revenue
$
37,591
$
24,284
$
13,307
55
%
Number of cash sales customers
1,500
1,700
(200)
(12)
%
Per customer
$
25,061
$
14,285
$
10,776
75
%
Customer Agreements and Incentives. Customer agreements and incentives revenue, which is core to our business operations, increased by $49.3 million (+46%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to an increase in the number of solar energy systems in service. The fluctuations in revenue per weighted average system are affected by (a) market factors, (b) weather seasonality, (c) system sizes and (d) whether the systems include storage. PPA and lease revenue are generated from the solar energy systems and energy storage systems we own. The weighted average number of PPA and lease systems increased from 173,500 for the three months ended September 30, 2023 to 238,400 for the three months ended September 30, 2024 (+37%). PPA and lease revenue, on a weighted average number of systems basis, increased from $440 per system for the three months ended September 30, 2023 to $496 per system for the same period in 2024 (+13%) primarily due to slightly larger average system sizes and higher battery attachment rates, which increased from 33% for the three months ended September 30, 2023 to 40% for the three months ended September 30, 2024.
Management's Discussion and Analysis of Financial Condition and Results of Operations
SREC revenue increased by $3.6 million (+22%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to an increase in SREC volume in New Jersey, resulting in an increase in revenue of $2.1 million, and an increase in SREC volume in Pennsylvania, resulting in an increase in revenue of $1.3 million. 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.
Loan revenue increased by $3.3 million (+35%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to an increase in the number of systems with loan agreements. The weighted average number of systems with loan agreements increased from 89,900 for the three months ended September 30, 2023 to 105,100 for the three months ended September 30, 2024 (+17%). Loan revenue, on a weighted average number of systems basis, increased from $103 per system for the three months ended September 30, 2023 to $120 per system for the same period in 2024 (+17%) primarily due to an increase in higher priced products placed in service. Service revenue decreased by $0.6 million (-12%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to a decrease in the number of one-time transactions for repair services related to third-party solar energy systems.
Solar Energy System and Product Sales Revenue. Solar energy system and product sales revenue decreased by $12.5 million (-14%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to decreases in inventory sales revenue, which is non-core to our business operations, and direct sales revenue, partially offset by an increase in cash sales revenue. Inventory sales revenue decreased by $22.6 million (-44%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to our strategic focus to shift away from buying inventory to resell to our dealers or other parties in order to focus on our core business of providing energy services to our customers. Direct sales revenue decreased by $3.2 million (-22%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to a decrease in the number of direct sales battery loans installed and placed in service in 2024 when compared to the same period in 2023. This decrease is primarily due to a change to our in-service methodology in mid-2024 to require additional procedures; thus, these projects now take longer to be placed in service. Cash sales revenue increased by $13.3 million (+55%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023. On a per customer basis, cash sales revenue increased from $14,285 per customer for the three months ended September 30, 2023 to $25,061 per customer for the same period in 2024 (+75%) primarily due to larger system sizes with more storage included and thus, higher revenue (and higher associated costs).
Cost of Revenue—Customer Agreements and Incentives
Three Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
Depreciation related to solar energy systems and energy storage systems
$
49,042
$
33,743
$
15,299
45
%
Cost of revenue related to service customers, loan agreements and underwriting costs for new customers and solar energy systems
5,680
5,387
293
5
%
Total
$
54,722
$
39,130
$
15,592
40
%
Three Months Ended September 30,
2024
2023
Change
% Change
(in thousands except weighted average number of
systems and per weighted average system amounts)
Depreciation related to solar energy systems and energy storage systems
$
49,042
$
33,743
$
15,299
45
%
Weighted average number of PPA and lease systems
238,400
173,500
64,900
37
%
Per weighted average system
$
206
$
194
$
12
6
%
Cost of revenue—customer agreements and incentives, which is core to our business operations, increased by $15.6 million (+40%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to an increase in depreciation related to solar energy systems and energy storage systems, which increased by
Management's Discussion and Analysis of Financial Condition and Results of Operations
$15.3 million (+45%). This increase is aligned with the related revenue discussed above, which increased by 55%, and is primarily due to an increase in the weighted average number of PPA and lease systems from 173,500 for the three months ended September 30, 2023 to 238,400 for the three months ended September 30, 2024 (+37%). On a weighted average number of systems basis, depreciation related to solar energy systems and energy storage systems increased from $194 per system for the three months ended September 30, 2023 to $206 per system for the same period in 2024 (+6%). This overall increase is primarily due to a higher percentage of solar energy systems with storage, higher average costs and slightly larger average system sizes.
Cost of revenue related to service customers, loan agreements and underwriting costs (such as credit checks, title searches and the amortization of UCC filing costs) for new customers and solar energy systems increased by $0.3 million (+5%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to an increase in costs related to SRECs and loan agreements combined of $2.3 million, partially offset by a decrease of $2.0 million in internal labor costs to perform maintenance services in-house for third party contracts due to lower activity.
Cost of Revenue—Solar Energy System and Product Sales
Three Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
Inventory sales costs
$
27,720
$
50,694
$
(22,974)
(45)
%
Cash sales costs
22,238
12,698
9,540
75
%
Direct sales costs
16,356
12,635
3,721
29
%
Underwriting and other costs
365
261
104
40
%
Total
$
66,679
$
76,288
$
(9,609)
(13)
%
Three Months Ended September 30,
2024
2023
Change
% Change
(in thousands except number of
customers and per customer amounts)
Cash sales costs
$
22,238
$
12,698
$
9,540
75
%
Number of cash sales customers
1,500
1,700
(200)
(12)
%
Per customer
$
14,825
$
7,469
$
7,356
98
%
Cost of revenue—solar energy system and product sales decreased by $9.6 million (-13%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to a decrease in inventory sales costs, which is non-core to our business operations, partially offset by increases in costs related to our core business, which includes direct sales costs and cash sales costs. Inventory sales costs decreased by $23.0 million (-45%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to our strategic focus to shift away from buying inventory to resell to our dealers or other parties in order to focus on our core business of providing energy services to our customers. Cash sales costs increased by $9.5 million (+75%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023. On a per customer basis, cash sales costs increased from $7,469 per customer for the three months ended September 30, 2023 to $14,825 per customer for the same period in 2024 (+98%) primarily due to larger system sizes with more storage included and thus, higher costs. Direct sales costs increased by $3.7 million (+29%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to an increase in solar energy systems and energy storage systems installed, which have a higher cost basis than the battery loans we principally sold in 2023.
Prepaid design and engineering costs, not recoverable
363
—
363
N/A
Other impairments
3,375
1,142
2,233
196
%
Warranty and other operations and maintenance expense
814
2,014
(1,200)
(60)
%
Total
$
35,868
$
18,702
$
17,166
92
%
__________________
N/M → not meaningful
Operations and maintenance expense increased by $17.2 million (+92%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to charges recognized for non-recoverable costs from terminated dealers of $13.2 million. We recognized impairments on costs paid to certain terminated dealers for work-in-progress solar energy systems and energy storage systems that have cancelled or are estimated to cancel and are not expected to be recovered, along with unearned portions of exclusivity and bonus payments tied to such dealers, which we estimate are not recoverable. We may continue to incur charges of this nature. The increase is also due to an increase in property insurance costs of $1.2 million (+42%) due to more assets to insure and an increase in overall premium costs and an increase in inventory-related impairments of $0.5 million. We consider the inventory-related impairments of $6.9 million and $6.4 million in the three months ended September 30, 2024 and 2023, respectively, to be non-core in nature and do not expect these types of impairments in the future to be as significant due to our shift in strategic focus in the latter half of 2023 to pivot away from buying inventory to resell in order to focus on our core business of providing energy services to our customers. In addition, beginning in September 2024, we expect a majority of our future originations to qualify for the domestic content bonus credits and some of our inventory is not compatible with that directive. While we could use the equipment on loans, we do not expect sufficient loan origination volume to utilize all inventory, which resulted in a $6.9 million write-down in the third quarter of 2024. While we are not abandoning the inventory and will look for ways to realize value, at this juncture, we believe a full impairment is appropriate.
Management's Discussion and Analysis of Financial Condition and Results of Operations
General and Administrative Expense
Three Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
Payroll and employee related expense
$
55,994
$
49,175
$
6,819
14
%
Legal, insurance, office and business travel costs
10,821
9,474
1,347
14
%
Consultants, contractors and professional fees
10,596
10,043
553
6
%
Amortization expense
7,620
7,416
204
3
%
Software and business technology expense
8,413
7,271
1,142
16
%
Depreciation expense not related to solar energy systems and energy storage systems
10,498
6,339
4,159
66
%
Marketing expense
799
4,634
(3,835)
(83)
%
Sales, franchise, other taxes and bank fees
3,071
2,948
123
4
%
ARO accretion expense
1,724
1,258
466
37
%
Other
1,142
1,784
(642)
(36)
%
Total
$
110,678
$
100,342
$
10,336
10
%
General and administrative expense increased by $10.3 million (+10%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023, which is reflective of our commitment to proactively expand our platform to serve a consistently growing base of customers and other stakeholders. Payroll and employee related expenses increased by $6.8 million (+14%) primarily due to the additional employees we hired to serve our growing customer base. Total head count increased 9% in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 positioning us to scale our costs in future periods when we expect we can reduce the expense on a per-system basis. Payroll and employee-related expenses for employees not related to the operations and maintenance work for our customers increased by $8.9 million (+26%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Legal, insurance, office and business travel costs increased by $1.3 million (+14%) and consultants, contractors and professional fees increased by $0.6 million (+6%) both due to the growth in our customers. Depreciation expense not related to solar energy systems and energy storage systems increased by $4.2 million (+66%) primarily related to our software and business technology projects, for which depreciation on those assets increased by $4.0 million (+70%) primarily due to an additional $52.9 million of capitalized software and business technology projects being placed in service during the prior twelve months.
Provision for Current Expected Credit Losses and Other Bad Debt Expense
Three Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
Provision for current expected credit losses and other bad debt expense
$
22,646
$
11,203
$
11,443
102
%
Provision for current expected credit losses increased by $11.4 million (+102%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to our quarterly reassessment of our reserves for current expected credit losses that required we revise it based on the observed performance under our new underwriting and in-service operational policies.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Other operating income decreased by $6.2 million (-69%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to changes in the fair value of certain financial instruments and contingent consideration of $6.8 million.
Interest Expense, Net
Three Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
Interest expense, net
$
182,528
$
57,601
$
124,927
217
%
Interest expense, net increased by $124.9 million (+217%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023. This increase was primarily due to increases in unrealized loss on derivatives of $84.9 million and interest expense of $31.2 million. Interest expense increased due to higher levels of average debt outstanding in the three months ended September 30, 2024 by $1.4 billion (+21%) compared to the same period in 2023 and an increase in the weighted average interest rates by 0.49% (+10%).
Interest Income
Three Months Ended September 30,
2024
2023
Change
% Change
(in thousands except weighted average number of
systems and per weighted average system amounts)
Loan interest income
$
33,136
$
26,760
$
6,376
24
%
Weighted average number of systems with loan agreements, including accessory loans
108,000
133,300
(25,300)
(19)
%
Per weighted average system
$
307
$
201
$
106
53
%
Interest income increased by $8.0 million (+26%) in the three months ended September 30, 2024 compared to the three months ended September 30, 2023. This increase was primarily due to an increase in interest income from our loan agreements of $6.4 million (+24%). The weighted average number of systems with loan agreements, including accessory loans, decreased from approximately 133,300 for the three months ended September 30, 2023 to approximately 108,000 for the three months ended September 30, 2024. The decrease was primarily due to the sales of certain accessory loans and home improvement loans during the second quarter of 2024, which had smaller principal balances. On a weighted average number of systems basis, loan interest income increased from $201 per system for the three months ended September 30, 2023 to $307 per system for the three months ended September 30, 2024 primarily due to the sale of certain accessory loans during the second and third quarters of 2024, which generate less interest income than non-accessory loans.
Income Tax Benefit
Income tax benefit increased by $36.8 million in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to ITC sales that resulted in an income tax benefit and income tax benefit related to estimated future sales of ITCs for the current year.
Net Income (Loss) Attributable to Redeemable Noncontrolling Interests and Noncontrolling Interests
Net income (loss) attributable to redeemable noncontrolling interests and noncontrolling interests changed by $34.4 million in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to an increase in loss attributable to redeemable noncontrolling interests and noncontrolling interests from tax equity funds added in 2022, 2023 and 2024. In addition to the net income (loss) attributable to redeemable noncontrolling interests and noncontrolling interests, accumulated deficit is decreasing and total stockholders' equity is increasing as a result of the equity in subsidiaries attributable to parent. This is a result of solar energy systems being sold to the tax equity partnerships at fair market value, which exceeds the cost reflected in the solar energy systems on the Unaudited Condensed Consolidated Balance Sheets.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Revenue
Nine Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
PPA revenue
$
141,752
$
99,201
$
42,551
43
%
Lease revenue
170,548
103,468
67,080
65
%
SREC revenue
42,844
38,982
3,862
10
%
Loan revenue
35,651
24,538
11,113
45
%
Service revenue
8,794
12,247
(3,453)
(28)
%
Other revenue
4,759
4,412
347
8
%
Customer agreements and incentives
404,348
282,848
121,500
43
%
Inventory sales revenue
81,912
137,761
(55,849)
(41)
%
Cash sales revenue
93,523
62,827
30,696
49
%
Direct sales revenue
36,012
43,035
(7,023)
(16)
%
Solar energy system and product sales
211,447
243,623
(32,176)
(13)
%
Total
$
615,795
$
526,471
$
89,324
17
%
Nine Months Ended September 30,
2024
2023
Change
% Change
(in thousands except weighted average number of systems and per weighted average system amounts)
PPA and lease revenue
$
312,300
$
202,669
$
109,631
54
%
Weighted average number of PPA and lease systems
222,300
161,000
61,300
38
%
Per weighted average system
$
1,405
$
1,259
$
146
12
%
Revenue under our loan agreements
$
35,651
$
24,538
$
11,113
45
%
Weighted average number of systems with loan agreements
102,000
82,700
19,300
23
%
Per weighted average system
$
350
$
297
$
53
18
%
Nine Months Ended September 30,
2024
2023
Change
% Change
(in thousands except number of customers and per customer amounts)
Cash sales revenue
$
93,523
$
62,827
$
30,696
49
%
Number of cash sales customers
5,000
4,100
900
22
%
Per customer
$
18,705
$
15,324
$
3,381
22
%
Customer Agreements and Incentives. Customer agreements and incentives, which is core to our business operations, increased by $121.5 million (+43%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to an increase in the number of solar energy systems in service. The fluctuations in revenue per weighted average system are affected by (a) market factors, (b) weather seasonality, (c) system sizes and (d) whether the systems include storage. PPA and lease revenue are generated from the solar energy systems and energy storage systems we own. The weighted average number of PPA and lease systems increased from 161,000 for the nine months ended September 30, 2023 to 222,300 for the nine months ended September 30, 2024 (+38%). PPA and lease revenue, on a weighted average number of systems basis, increased from $1,259 per system for the nine months ended September 30, 2023 to $1,405 per system for the same period in 2024 (+12%) primarily due to slightly larger average system sizes and higher battery attachment rates, which increased from 27% for the nine months ended September 30, 2023 to 32% for the nine months ended September 30, 2024.
Management's Discussion and Analysis of Financial Condition and Results of Operations
SREC revenue increased by $3.9 million (+10%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to an increase in SREC volume in Massachusetts, resulting in an increase in revenue of $2.3 million, and an increase in SREC volume in Pennsylvania, resulting in an increase in revenue of $2.0 million, partially offset by a decrease in average SREC prices in New Jersey, resulting in a decrease in revenue of $0.9 million. 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.
Loan revenue increased by $11.1 million (+45%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to an increase in the number of systems with loan agreements. The weighted average number of systems with loan agreements increased from 82,700 for the nine months ended September 30, 2023 to 102,000 for the nine months ended September 30, 2024 (+23%). Loan revenue, on a weighted average number of systems basis, increased from $297 per system for the nine months ended September 30, 2023 to $350 per system for the same period in 2024 (+18%) primarily due to an increase in higher priced products being placed in service. Service revenue decreased by $3.5 million (-28%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to a decrease in the number of one-time transactions for repair services related to third-party solar energy systems.
Solar Energy System and Product Sales Revenue. Solar energy system and product sales revenue decreased by $32.2 million (-13%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to decreases in inventory sales revenue, which is non-core to our business operations, and direct sales revenue, partially offset by an increase in cash sales revenue that increased due to an increase in customers. Inventory sales revenue decreased by $55.8 million (-41%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to our strategic focus to shift away from buying inventory to resell to our dealers or other parties in order to focus on our core business of providing energy services to our customers. Direct sales revenue decreased by $7.0 million (-16%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to a decrease in the number of direct sales battery loans installed and placed in service in 2024 when compared to the same period in 2023. This decrease is primarily due to a change to our in-service methodology in mid-2024 to require additional procedures; thus, these projects now take longer to be placed in service. Cash sales revenue increased by $30.7 million (+49%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to an increase in the number of cash sales customers. This increase in customers is primarily due to more cash sales of storage and solar systems in 2024 whereas only solar systems were sold in 2023. The number of cash sales customers increased from 4,100 for the nine months ended September 30, 2023 to 5,000 for the nine months ended September 30, 2024 (+22%). On a per customer basis, cash sales revenue increased from $15,324 per customer for the nine months ended September 30, 2023 to $18,705 per customer for the same period in 2024 (+22%) primarily due to larger system sizes with more storage included and thus, higher revenue (and higher associated costs).
Cost of Revenue—Customer Agreements and Incentives
Nine Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
Depreciation related to solar energy systems and energy storage systems
$
137,642
$
92,262
$
45,380
49
%
Cost of revenue related to service customers, loan agreements and underwriting costs for new customers and solar energy systems
17,422
13,694
3,728
27
%
Total
$
155,064
$
105,956
$
49,108
46
%
Nine Months Ended September 30,
2024
2023
Change
% Change
(in thousands except weighted average number of systems and per weighted average system amounts)
Depreciation related to solar energy systems and energy storage systems
Management's Discussion and Analysis of Financial Condition and Results of Operations
Cost of revenue—customer agreements and incentives, which is core to our business operations, increased by $49.1 million (+46%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to an increase in depreciation related to solar energy systems and energy storage systems, which increased by $45.4 million (+49%). This increase is aligned with the related revenue discussed above, which increased by 54%, and is primarily due to an increase in the weighted average number of PPA and lease systems from 161,000 for the nine months ended September 30, 2023 to 222,300 for the nine months ended September 30, 2024 (+38%). On a weighted average number of systems basis, depreciation related to solar energy systems and energy storage systems increased from $573 per system for the nine months ended September 30, 2023 to $619 per system for the same period in 2024 (+8%). This overall increase is primarily due to a higher percentage of solar energy systems with storage and slightly larger average system sizes.
Cost of revenue related to service customers, loan agreements and underwriting costs (such as credit checks, title searches and the amortization of UCC filing costs) for new customers and solar energy systems increased by $3.7 million (+27%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to an increase in costs related to SRECs and loan agreements combined of $3.0 million.
Cost of Revenue—Solar Energy System and Product Sales
Nine Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
Inventory sales costs
$
79,442
$
129,016
$
(49,574)
(38)
%
Cash sales costs
55,457
34,001
21,456
63
%
Direct sales costs
46,978
33,199
13,779
42
%
Underwriting and other costs
1,234
705
529
75
%
Total
$
183,111
$
196,921
$
(13,810)
(7)
%
Nine Months Ended September 30,
2024
2023
Change
% Change
(in thousands except number of customers and per customer amounts)
Cash sales costs
$
55,457
$
34,001
$
21,456
63
%
Number of cash sales customers
5,000
4,100
900
22
%
Per customer
$
11,091
$
8,293
$
2,798
34
%
Cost of revenue—solar energy system and product sales decreased by $13.8 million (-7%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to a decrease in inventory sales costs, which is non-core to our business operations, partially offset by increases in costs related to our core business, which includes cash sales costs that increased due to an increase in customers and direct sales costs. Inventory sales costs decreased by $49.6 million (-38%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to our strategic focus to shift away from buying inventory to resell to our dealers or other parties in order to focus on our core business of providing energy services to our customers. Cash sales costs increased by $21.5 million (+63%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to an increase in the number of cash sales customers. This increase in customers is primarily due to more cash sales of storage and solar systems in 2024 whereas only solar systems were sold in 2023. The number of cash sales customers increased from 4,100 for the nine months ended September 30, 2023 to 5,000 for the nine months ended September 30, 2024 (+22%). On a per customer basis, cash sales costs increased from $8,293 per customer for the nine months ended September 30, 2023 to $11,091 per customer for the same period in 2024 (+34%) primarily due to larger system sizes with more storage included and thus, higher costs. Direct sales costs increased by $13.8 million (+42%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. This increase is primarily due to an increase in solar energy systems and energy storage systems installed, which have a higher cost basis than the battery loans we principally sold in 2023.
Prepaid design and engineering costs, not recoverable
4,014
—
4,014
N/A
Other impairments
6,301
2,824
3,477
123
%
Warranty and other operations and maintenance expense
2,151
3,772
(1,621)
(43)
%
Total
$
89,811
$
59,306
$
30,505
51
%
Operations and maintenance expense increased by $30.5 million (+51%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to charges recognized for non-recoverable costs from terminated dealers of $23.8 million. We recognized impairments on costs paid to certain terminated dealers for work-in-progress solar energy systems and energy storage systems that have cancelled or are estimated to cancel and are not expected to be recovered, along with unearned portions of exclusivity and bonus payments tied to such dealers, which we estimate are not recoverable. We may continue to incur charges of this nature. The increase is also due to (a) charges recognized for non-recoverable prepaid design and engineering costs of $4.0 million, (b) an increase in other impairments of $3.5 million and (c) an increase in property insurance costs of $2.7 million (+34%) due to more assets to insure and an increase in overall premium costs. This increase is partially offset by a decrease in inventory-related impairments of $3.1 million. We consider the inventory-related impairments of $19.0 million and $22.1 million in the nine months ended September 30, 2024 and 2023, respectively, to be non-core in nature and do not expect these types of impairments in the future to be as significant due to our shift in strategic focus in the latter half of 2023 to pivot away from buying inventory to resell in order to focus on our core business of providing energy services to our customers. In addition, beginning in September 2024, we expect a majority of our future originations to qualify for the domestic content bonus credits and some of our inventory is not compatible with that directive. While we could use the equipment on loans, we do not expect sufficient loan origination volume to utilize all inventory, which resulted in a $6.9 million write-down in the third quarter of 2024. While we are not abandoning the inventory and will look for ways to realize value, at this juncture, we believe a full impairment is appropriate.
Management's Discussion and Analysis of Financial Condition and Results of Operations
General and Administrative Expense
Nine Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
Payroll and employee related expense
$
172,461
$
137,225
$
35,236
26
%
Legal, insurance, office and business travel costs
29,909
28,550
1,359
5
%
Consultants, contractors and professional fees
34,370
27,393
6,977
25
%
Amortization expense
22,726
22,112
614
3
%
Software and business technology expense
24,043
18,231
5,812
32
%
Depreciation expense not related to solar energy systems and energy storage systems
28,446
15,695
12,751
81
%
Marketing expense
8,947
11,523
(2,576)
(22)
%
Sales, franchise, other taxes and bank fees
7,365
6,772
593
9
%
ARO accretion expense
4,812
3,491
1,321
38
%
Other
6,613
8,113
(1,500)
(18)
%
Total
$
339,692
$
279,105
$
60,587
22
%
General and administrative expense increased by $60.6 million (+22%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, which is reflective of our commitment to proactively expand our platform to serve a consistently growing base of customers and other stakeholders. Payroll and employee related expenses increased by $35.2 million (+26%) primarily due to the additional employees we hired to serve our growing customer base and to perform maintenance services in-house rather than by third parties (which increased by $7.2 million, or 20%) related to maintaining and servicing solar energy systems. We believe expanding our team in this area will position us to reduce third-party expense that supports our core business. Total head count increased 46% in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 positioning us to scale our costs in future periods when we expect we can reduce the expense on a per-system basis. Payroll and employee-related expenses for employees not related to the operations and maintenance work for our customers increased by $28.0 million (+28%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Consultants, contractors and professional fees increased by $7.0 million (+25%), software and business technology expense increased by $5.8 million (+32%), and legal, insurance, office and business travel costs increased by $1.4 million (+5%) all due to the growth in our customers. Depreciation expense not related to solar energy systems and energy storage systems increased by $12.8 million (+81%) primarily related to our software and business technology projects, for which depreciation on those assets increased by $12.2 million (+88%) primarily due to an additional $52.9 million of capitalized software and business technology projects being placed in service during the prior twelve months.
Provision for Current Expected Credit Losses and Other Bad Debt Expense
Nine Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
Provision for current expected credit losses and other bad debt expense
$
21,738
$
35,085
$
(13,347)
(38)
%
The provision for current expected credit losses decreased by $13.3 million (-38%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to a lower volume of loan originations in 2024 compared to 2023 and the sale of certain accessory loans in 2024.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Other Operating (Income) Expense
Nine Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
Other operating (income) expense
$
22,016
$
(3,134)
$
25,150
N/M
__________________
N/M → not meaningful
Other operating (income) expense changed by $25.2 million in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to a loss on sales of customer notes receivable of $43.4 million (which did not occur until the second quarter of 2024), partially offset by changes in the fair value of certain financial instruments and contingent consideration of $17.1 million.
Interest Expense, Net
Nine Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
Interest expense, net
$
388,642
$
200,155
$
188,487
94
%
Interest expense, net increased by $188.5 million (+94%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. This increase was primarily due to increases in (a) interest expense of $111.0 million primarily due to higher levels of average debt outstanding in the nine months ended September 30, 2024 by $1.8 billion (+28%) compared to the same period in 2023 and an increase in the weighted average interest rates by 0.79% (+17%), (b) unrealized loss on derivatives of $72.0 million, (c) amortization of deferred financing costs of $10.8 million and (d) amortization of debt discounts of $8.4 million, partially offset by an increase in realized gains on derivatives of $18.3 million.
Interest Income
Nine Months Ended September 30,
2024
2023
Change
% Change
(in thousands except weighted average number of systems and per weighted average system amounts)
Loan interest income
$
94,727
$
69,950
$
24,777
35
%
Weighted average number of systems with loan agreements, including accessory loans
135,200
110,500
24,700
22
%
Per weighted average system
$
701
$
633
$
68
11
%
Interest income increased by $28.0 million (+34%) in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. This increase was primarily due to an increase in interest income from our loan agreements of $24.8 million (+35%). The weighted average number of systems with loan agreements, including accessory loans, increased from approximately 110,500 for the nine months ended September 30, 2023 to approximately 135,200 for the nine months ended September 30, 2024. On a weighted average number of systems basis, loan interest income increased from $633 per system for the nine months ended September 30, 2023 to $701 per system for the nine months ended September 30, 2024 primarily due to the sale of certain accessory loans during the second and third quarters of 2024, which generate less interest income than non-accessory loans.
Income Tax Benefit
Income tax benefit increased by $157.8 million in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to ITC sales that resulted in an income tax benefit and income tax benefit related to estimated future sales of ITCs for the current year.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Loss Attributable to Redeemable Noncontrolling Interests and Noncontrolling Interests
Net loss attributable to redeemable noncontrolling interests and noncontrolling interests increased by $57.2 million in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to an increase in loss attributable to redeemable noncontrolling interests and noncontrolling interests from tax equity funds added in 2022, 2023 and 2024. In addition to the net loss attributable to redeemable noncontrolling interests and noncontrolling interests, accumulated deficit is decreasing and total stockholders' equity is increasing as a result of the equity in subsidiaries attributable to parent. This is a result of solar energy systems being sold to the tax equity partnerships at fair market value, which exceeds the cost reflected in the solar energy systems on the Unaudited Condensed Consolidated Balance Sheets.
Liquidity and Capital Resources
As of September 30, 2024, we had total cash of $473.9 million, of which $208.9 million was unrestricted, and $1.0 billion of available borrowing capacity under our various debt financing arrangements. As of September 30, 2024, we also had undrawn committed capital of approximately $221.9 million under our tax equity funds, which may only be used to purchase and install solar energy systems. The borrowing capacity under our current financing arrangements can be used to support the origination of certain product types (e.g. loan-focused debt financings or lease-focused tax equity, tax credit sales and related debt financing), but they are not typically available for general corporate purposes. Additionally, cash flows from collateral of our non-recourse financing arrangements are typically only available for general corporate purposes after satisfying the current obligations of, or as service fees we receive from, the applicable special purpose subsidiary.
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 14, 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 been tax equity, recourse debt (including unsecured notes, convertible notes, loans and certain other financing arrangements), non-recourse debt (including warehouse facilities, other credit facilities and investor asset-backed and loan-backed securitizations) and cash generated from operations. Recent guidance from the U.S. Treasury that enables enhanced values of Section 48(a) ITCs based on bonus credits for domestic content, system location and other factors has enabled us to access significant additional tax equity and related capital, with the potential for future guidance, equipment supply and investor acceptance to further increase our access to capital. However, the continued availability of these bonus credits and related capital on acceptable terms or at all depends on a variety of factors and risks described elsewhere in this Quarterly Report on Form 10-Q, and the loss or reduction of any bonus credits or additional capital could have a material adverse effect on our liquidity.
Our business model requires substantial outside financing arrangements to grow the business, facilitate the deployment of additional solar energy systems and fund our operations. However, in order to grow and fund our operations, we will continue to be dependent on financing from outside parties. If financing is not available to us on acceptable terms if and when needed, we may be required to reduce planned spending, which could have a material adverse effect on our operations. While there can be no assurances, we will seek to raise additional required capital, including from new and existing tax equity investors and tax credit purchasers, additional borrowings, securitizations, other potential debt and equity financing sources, forward-flow arrangements and other loan sales. Our ability to obtain additional sources of funding depends on our future financial position, results of operations and credit ratings, which are subject to general conditions in or affecting our industry and our customers and to general economic, political, competitive, legislative, regulatory and other financial and business factors, some of which are beyond our control. We believe our cash and financing arrangements, as further described below (including anticipated extensions or refinancings of certain credit facilities), will be sufficient to meet our anticipated cash needs for at least the next twelve months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, available credit via our credit facilities and various financing arrangements as noted below. As of September 30, 2024, we were in compliance with all debt covenants under our financing arrangements.
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 SEC on February 22, 2024 for a full description of our various financing arrangements.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Tax Equity Fund Commitments
In February 2024, we admitted a tax equity investor with a total capital commitment of $195.0 million and a tax equity investor increased its capital commitment from approximately $59.0 million to approximately $61.4 million. In February 2024, a tax equity investor increased its capital commitment from approximately $134.9 million to approximately $190.8 million. In March 2024, a tax equity investor increased its capital commitment from $51.0 million to approximately $51.2 million. In May 2024, we admitted a tax equity investor with a total capital commitment of approximately $250.0 million. In May 2024, a tax equity investor increased its capital commitment from $125.0 million to approximately $132.1 million. In August 2024, four tax equity investors increased their capital commitment from approximately $338.5 million to approximately $362.3 million. In August 2024, we admitted a tax equity investor with a total capital commitment of approximately $152.1 million. In September 2024, a tax equity investor increased its capital commitment from approximately $75.0 million to approximately $79.6 million. In October 2024, we admitted a tax equity investor with a total capital commitment of approximately $95.0 million.
Warehouse and Other Debt Financings
In February 2024, we amended the revolving credit facility by and among Sunnova EZ-Own Portfolio, LLC ("EZOP"), certain of our other subsidiaries party thereto, Atlas Securitized Products Holdings, L.P., as administrative agent, and the lenders and other financial institutions party thereto, to, among other things, (a) reflect certain assignments of commitments occurring within the Atlas Lender Group (as defined by such revolving credit facility) without increasing the existing commitments, and the assignment of the role of the Atlas funding agent for the Atlas Lender Group, (b) amend the thresholds for certain "Amortization Events" (as defined by such revolving credit facility) and (c) modify the "Liquidity Reserve Account Required Balance" (as defined by such revolving credit facility). In March 2024, we amended the EZOP revolving credit facility to, among other things, (a) amend the Advance Rate, Excess Concentration Amount (in each case, as defined by such revolving credit facility) and certain related definitions and (b) amend the eligibility criteria for the Solar Loans (as defined by such revolving credit facility). In June 2024, we amended the EZOP revolving credit facility to, among other things, (a) reflect the exit of the RBC Committed Lender, RBC Conduit Lender and RBC Funding Agent (each as defined by such revolving credit facility) from the facility and (b) reflect the joinder of Royal Bank of Canada as a Committed Lender and Funding Agent (each as defined by such revolving credit facility) and the establishment of a new Royal Bank of Canada Lender Group (as defined by such revolving credit facility). We currently do not have the resources to repay this facility when it becomes due in November 2025, though we believe we will be able to satisfy this obligation through an amendment and an extension of the maturity date of the facility or through a refinancing of the facility as is customary for these types of revolving credit facilities. Although we believe it is probable we will amend and extend or refinance this facility, there can be no assurance about our ability to do so on terms favorable to us or at all.
In February 2024, we amended the TEPH revolving credit facility to, among other things, reflect an assignment of commitments occurring within the Atlas Lender Group (as defined by such revolving credit facility) without increasing the existing commitments and the appointment of a new Atlas funding agent for the Atlas Lender Group. In April 2024, additional lenders joined the TEPH revolving credit facility and the aggregate commitment amount was increased from $1.3 billion to $1.4 billion. In August 2024, we amended the TEPH revolving credit facility to, among other things, modify certain eligibility criteria to allow for energy community, domestic content and low-income community tax credit bonuses. In October 2024,we amended the TEPH revolving credit facility to, among other things, (a) extend the maturity date from November 2025 to August 2026, (b) extend the date upon which lender commitments terminate (and no further advances are permitted under the TEPH revolving credit facility) from May 2024 to May 2025, (c) require us to maintain a specified minimum working capital amount as of quarterly determination dates, (d) add certain events of default and (e) increase the aggregate commitment amount from $1.361 billion to $1.362 billion. See "Item 5. Other Information.—Amendment to TEPH Credit Agreement" below.
In June 2024, we amended the credit facility by and among Sunnova Asset Portfolio 8, LLC ("AP8"), Banco Popular de Puerto Rico, as agent, and the lenders party thereto, to, among other things, extend the maturity date from September 2024 to October 2025. As a result of this amendment, (a) no further borrowings are permitted under the AP8 credit facility and (b) no distributions of cash are permitted without the consent of the agent thereunder. We currently do not have the resources to repay this facility when it becomes due in October 2025, though we believe we will be able to satisfy this obligation through a refinancing of the facility by means of a new facility or securitization. Although we believe it is probable we will refinance this facility, there can be no assurance about our ability to do so on terms favorable to us or at all.
In April 2024, we amended the revolving credit facility by and among Sunnova Inventory Supply, LLC, Texas Capital Bank, as agent and lender, and the lenders party thereto, to, among other things, (a) change the date on which payments are made to borrower from the collections account from monthly to weekly and (b) increase the applicable margin by 0.75% which results in a revised margin of (i) 3.25% for term SOFR loans and (ii) 2.25% for base rate loans.
Management's Discussion and Analysis of Financial Condition and Results of Operations
In October 2024, we voluntarily terminated the AP9 revolving credit facility. At the time of termination, no loans were outstanding under the AP9 revolving credit facility. Upon termination, all outstanding obligations under the AP9 revolving credit facility were paid in full and all hedging agreements permitted by the AP9 revolving credit facility were settled.
Securitizations
In February 2024, one of our subsidiaries issued $194.5 million in aggregate principal amount of Series 2024-1 Class A solar asset-backed notes, $16.5 million in aggregate principal amount of Series 2024-1 Class B solar asset-backed notes and $15.0 million in aggregate principal amount of Series 2024-1 Class C solar asset-backed notes (collectively, the "SOLVI Notes") with a maturity date of January 2059. The SOLVI Notes bear interest at an annual rate of 5.65%, 7.00% and 9.00% for the Class A, Class B and Class C notes, respectively.
In February 2024, one of our subsidiaries issued $166.0 million in aggregate principal amount of Series 2024-A Class A solar loan-backed notes, $33.9 million in aggregate principal amount of Series 2024-A Class B solar loan-backed notes and $27.1 million in aggregate principal amount of Series 2024-A Class C solar loan-backed notes (collectively, the "HELXIII Notes") with a maturity date of February 2051. The HELXIII Notes bear interest at an annual rate of 5.30%, 6.00% and 7.00% for the Class A, Class B and Class C notes, respectively.
In June 2024, one of our subsidiaries issued $152.0 million in aggregate principal amount of Series 2024-GRID1 Class A solar loan-backed notes and $16.9 million in aggregate principal amount of Series 2024-GRID1 Class B solar loan-backed notes (collectively, the "HESII Notes") with a maturity date of July 2051. The HESII Notes indirectly benefit from a partial guarantee provided by the U.S. Department of Energy ("DOE") Loan Programs Office. The HESII Notes are not directly guaranteed by the DOE. The HESII Notes bear interest at an annual rate of 5.63% and 9.50% for the Class A and Class B notes, respectively.
In June 2024, one of our subsidiaries issued $151.9 million in aggregate principal amount of Series 2024-B Class A solar loan-backed notes, $54.4 million in aggregate principal amount of Series 2024-B Class B solar loan-backed notes and $24.6 million in aggregate principal amount of Series 2024-B Class C solar loan-backed notes (collectively, the "HELXIV Notes") with a maturity date of May 2051. The HELXIV Notes bear interest at an annual rate of 6.15%, 7.00% and 8.00% for the Class A, Class B and Class C notes, respectively.
In August 2024, one of our subsidiaries issued $308.5 million in aggregate principal amount of Series 2024-2 Class A solar asset-backed notes and $11.7 million in aggregate principal amount of Series 2024-2 Class B solar asset-backed notes with a maturity date of July 2059. The SOLVII Notes bear interest at an annual rate equal to 6.58% and 9.00% for the Class A and Class B notes, respectively.
In October 2024, one of our subsidiaries issued $295.2 million in aggregate principal amount of Series 2024-3 Class A solar asset-backed notes and $12.9 million in aggregate principal amount of Series 2024-3 Class B solar asset-backed notes with a maturity date of July 2059. The SOLVIII Notes bear interest at an annual rate equal to 6.45% and 8.78% for the Class A and Class B notes, respectively.
Historical Cash Flows—Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended September 30,
2024
2023
Change
% Change
(in thousands)
Net cash used in operating activities
$
(239,981)
$
(194,791)
$
(45,190)
23
%
Net cash used in investing activities
(1,352,720)
(1,891,769)
539,049
(28)
%
Net cash provided by financing activities
1,572,224
2,266,053
(693,829)
(31)
%
Net increase (decrease) in cash, cash equivalents and restricted cash
$
(20,477)
$
179,493
$
(199,970)
(111)
%
Operating Activities
Net cash used in operating activities increased by $45.2 million in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. This increase is primarily due to an increase in cash paid for inventory of $101.3
Management's Discussion and Analysis of Financial Condition and Results of Operations
million, partially offset by an increase in net cash received for derivative origination and breakage fees of $62.6 million. This increase is partially offset by net inflows of $46.2 million in 2024 compared to net outflows of $78.3 million in 2023 based on: (a) our net loss of $320.1 million in 2024 excluding non-cash operating items of $366.3 million, primarily from depreciation, impairments and losses on disposals, amortization of intangible assets, amortization of deferred financing costs and debt discounts, non-cash direct sales revenue, provision for current expected credit losses and other bad debt expense, unrealized net losses on derivatives, unrealized net gains on fair value instruments and equity securities, losses on sales of customer notes receivable and equity-based compensation charges, which results in net inflows of $46.2 million and (b) our net loss of $267.6 million in 2023 excluding non-cash operating items of $189.3 million, primarily from depreciation, impairments and losses on disposals, amortization of intangible assets, amortization of deferred financing costs and debt discounts, non-cash direct sales revenue, provision for current expected credit losses and other bad debt expense, unrealized net gains on derivatives, unrealized net losses on fair value instruments and equity securities and equity-based compensation charges, which results in net outflows of $78.3 million. These net differences between the two periods resulted in a net change in operating cash flows of $124.5 million in 2024 compared to 2023.
Investing Activities
Net cash used in investing activities decreased by $539.0 million in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. This decrease is primarily due to a decrease in payments for investments and customer notes receivable of $447.1 million, an increase in proceeds from sales of customer notes receivable of $65.9 million and an increase in proceeds from customer notes receivable of $39.6 million. This decrease is partially offset by an increase in purchases of property and equipment, primarily solar energy systems, of $14.0 million.
Financing Activities
Net cash provided by financing activities decreased by $693.8 million in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. This decrease is primarily due to a decrease in net borrowings under our debt facilities of $1.1 billion and a decrease in net proceeds from the issuance of common stock of $83.2 million. This decrease is partially offset by increases in proceeds from sales of investment tax credits of $311.4 million and net contributions from our redeemable noncontrolling interests and noncontrolling interests of $119.5 million.
Key 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 or Sunnova-financed 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 September 30, 2024
As of December 31, 2023
Change
Number of customers
422,700
419,200
3,500
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.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Weighted average number of systems, excluding loan agreements and cash sales
290,900
225,200
274,400
210,900
Weighted average number of systems with loan agreements plus accessory loans
108,000
133,300
135,200
110,500
Weighted average number of systems with cash sales
16,700
10,000
15,200
8,600
Weighted average number of systems
415,600
368,500
424,800
330,000
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 the Northeastern 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 the SEC on February 22, 2024 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.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Recent Accounting Pronouncements
See Note 2, Significant Accounting Policies, to our interim financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to various market risks in the ordinary course of our business. Market risk is the potential loss that may result from market changes associated with our business or with an existing or forecasted financial or commodity transaction. Our primary exposure includes changes in interest rates because certain borrowings bear interest at floating rates based on SOFR or a similar index plus a specified margin. We sometimes manage our interest rate exposure on floating-rate debt by entering into derivative instruments to hedge all or a portion of our interest rate exposure on certain debt facilities. We do not enter into any derivative instruments for trading or speculative purposes. Changes in economic conditions could result in higher interest rates, thereby increasing our interest expense and operating expenses and reducing funds available for capital investments, operations and other purposes. A hypothetical 10% increase in our interest rates on our variable-rate debt facilities would have increased our interest expense by $3.6 million and $11.5 million for the three and nine months ended September 30, 2024, respectively.
Item 4. Controls and Procedures.
Internal Control Over Financial Reporting
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act. In connection with that evaluation, our CEO and our CFO concluded our disclosure controls and procedures were effective and designed to provide reasonable assurance the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms as of September 30, 2024, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. The term "disclosure controls and procedures", as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure information required to be disclosed by a company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure information required to be disclosed by a company in the reports it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the third quarter of 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. However, our management, including our principal executive and principal financial officers, does not expect that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been detected.
Although we may, from time to time, be involved in litigation, claims and government proceedings arising in the ordinary course of business, we are not a party to any litigation or governmental or other proceeding we believe will have a material adverse impact on our financial position, results of operations or liquidity. In the ordinary course of business, we have disputes with dealers and customers. In general, litigation claims or regulatory proceedings can be expensive and time consuming to bring or defend against, may result in the diversion of management attention and resources from our business and business goals and could result in settlement or damages that could significantly affect financial results and the conduct of our business.
On February 16, 2024, a purported stockholder class action was filed against us and certain of our current and former individual executives in the Southern District of Texas, Houston Division. On June 28, 2024, the court-appointed lead plaintiffs filed their first amended complaint on behalf of a class of persons who purchased our stock between July 25, 2019 and May 1, 2024, alleging certain statements made during the class period about our business, operations and compliance policies were false and misleading and we failed to disclose customer service complaints and alleged improper business practices. The lead plaintiffs seek an unspecified amount of damages. On August 6, 2024, we filed a motion to dismiss and are awaiting a decision from the court. We believe the lawsuit to be without merit.
On June 18, 20 and 21, 2024, three purported stockholders filed largely overlapping derivative complaints against us, certain of our current and former individual executives, our current directors and certain of our former directors in the Southern District of Texas, Houston Division. In August 2024, the lawsuits were consolidated into a single lawsuit and a consolidated complaint was filed on September 3, 2024. The consolidated complaint, in addition to naming additional defendants, generally asserts state-law claims for breach of fiduciary duty, unjust enrichment and other similar claims, as well as claims under Sections 10(b) and 14(a) of the Securities Exchange Act of 1934, based on the largely same purported wrongdoing as in the putative securities class action suit. We believe the lawsuit to be without merit and intend to vigorously defend ourselves.
Item 1A. Risk Factors.
We are supplementing the risk factors as previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K filed with the SEC on February 22, 2024, to add or update the following risk factors. There have been no material changes in the risks facing us as described in our Annual Report on Form 10-K filed with the SEC on February 22, 2024 and our Quarterly Reports on Form 10-Q filed with the SEC on May 2, 2024 and August 1, 2024 except as described below.
Risks Related to the Solar Industry
The solar energy industry is an emerging market which is constantly evolving and may not develop to the size or at the rate we expect.
The solar energy industry is an emerging and constantly evolving market opportunity. We believe the solar energy industry is still developing and maturing, and we cannot be certain the market will grow to the size or at the rate we expect. The growth and sustainability of the solar energy market and the success of our solar service offerings and operations depend on many factors beyond our control, including:
•recognition and acceptance of the solar service market by consumers;
•fluctuations in economic and market conditions that affect the viability of conventional and other renewable energy sources, such as increases or decreases in the prices of oil, gas and other fossil fuels;
•the availability of favorable regulation for solar power and battery energy storage within the electric power industry and the broader energy industry;
•the continuation and expansion of expected tax benefits and other government incentives;
•increases in the cost or reduction in supply of solar energy system and energy storage system components due to tariffs or trade restrictions imposed by the U.S. government;
•the availability and cost of capital to finance new solar and battery storage projects and working capital, including interest rates, risk premiums charged to solar industry borrowers, tax equity and tax credit purchases;
•the success of other renewable energy technologies such as wind power, hydroelectric power, clean hydrogen, geothermal power and biomass fuel;
•capital expenditures by end users of solar power and battery storage products and services; and
•our ability to provide our solar service offerings cost effectively.
If the markets for solar energy and related financing sources do not develop to the size or at the rate we expect, our business may be adversely affected.
Solar energy has yet to achieve broad market acceptance and depends in part on continued support in the form of rebates, tax credits and other incentives from federal, state and local governments. Additionally, there have been significant changes in the residential solar policy and pricing framework in several markets, including California and Arizona, and proposed changes in other markets such as Puerto Rico. Further, if support diminishes materially for solar policy related to rebates, tax credits, bill crediting or other incentives, including interest in related financings by tax equity investors and financiers, our ability to obtain external financing on acceptable terms, or at all, could be materially adversely affected. These types of funding limitations could lead to inadequate financing support for our business.
Growth in residential solar energy depends in part on macroeconomic conditions, retail prices of electricity and customer preferences, each of which can change quickly. For example, recent interest rate increases and resulting loan financing costs have led to a shift in customer demand from solar loans to leases and PPAs, which in turn requires a shift by industry participants in required financing sources to support such originations from loan-focused debt financings to tax equity, tax credit sales and related debt financing. Although tax credit incentives exist under the IRA, competition for these forms of financing sources continues to increase and may not be available on terms or timing or in sufficient quantity to fund our growth or operations, and we may not be able to shift our financing sources quickly enough to use them. Similarly, declining macroeconomic conditions, including in job markets and residential real estate markets, could contribute to instability and uncertainty among customers and impact their financial wherewithal, credit scores or interest in entering into long-term contracts, even if such contracts would generate immediate and long-term savings.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions supporting the solar industry or the financial services industry generally, or similar events at companies in the solar industry or businesses that provide tax equity to or purchase tax credits from the solar industry, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems or challenges in the availability or cost of capital for the solar industry.
Any adverse changes in macroeconomic conditions, changes in the availability or cost of capital or solar energy system and energy storage system components, changes in retail prices of electricity, changes in regulatory condition or government incentives or changes in customer preferences would adversely impact our business.
Increases in the cost or reduction in supply of solar energy system and energy storage system components due to tariffs or trade restrictions imposed by the U.S. government could have an adverse effect on our business, financial condition and results of operations.
China is a major producer of solar cells and other solar products. Certain solar cells, modules, laminates and panels from China are subject to various U.S. anti-dumping and countervailing duty rates, depending on the exporter supplying the product, imposed by the U.S. government as a result of determinations that the U.S. was materially injured as a result of such imports being sold at less than fair value and subsidized by the Chinese government. While historically our dealers have endeavored to purchase these products from manufacturers outside of China, some of these products are purchased from manufacturers in China or from manufacturers in other jurisdictions who rely, in part, on products sourced in China. If alternative sources are no longer available on competitive terms in the future, we and our dealers may be required to purchase these products from manufacturers in China. In addition, tariffs on solar cells, modules and inverters in China may put upward pressure on prices of these products in other jurisdictions from which our dealers currently purchase equipment, which could reduce our ability to offer competitive pricing to potential customers.
The anti-dumping and countervailing duties discussed above are subject to annual review and may be increased or decreased. Furthermore, under Section 301 of the Trade Act of 1974, the Office of the United States Trade Representative ("USTR") imposed tariffs on $200 billion worth of imports from China, including inverters and certain AC modules and non-lithium-ion batteries, effective September 2018. In May 2019, the tariffs were increased from 10% to 25%. In September 2024, the USTR announced tariffs would increase 50% for solar cells modules. These Section 301 tariffs may be raised by the USTR in the future. Since these tariffs impact the purchase price of the solar products, these tariffs raise the cost associated with purchasing these solar products from China and reduce the competitive pressure on providers of solar cells not subject to these tariffs.
In August 2021, an anonymous trade group filed a petition with the U.S. Department of Commerce (the "DOC") requesting an investigation into whether solar panels and cells imported from Malaysia, Thailand and Vietnam are circumventing anti-dumping and countervailing duties imposed on solar products manufactured in China. The group also requested the imposition
of tariffs on such imports ranging from 50% - 250%. In November 2021, the DOC rejected the petition, citing the petitioners' ongoing anonymity as one of the reasons for its decision. In March 2022, the DOC announced it was initiating country-wide circumvention inquiries to determine whether imports of solar cell and modules produced in Cambodia, Malaysia, Thailand and Vietnam that use components from China were circumventing anti-dumping and countervailing duty orders on solar cells and modules from China. The DOC's inquiries were initiated pursuant to a petition filed by Auxin Solar, Inc. in February 2022.
In December 2022, the DOC announced its preliminary determination in the investigation. In its determination, the DOC found that certain Chinese solar manufacturers circumvented U.S. import duties by routing some of their operations through Cambodia, Malaysia, Thailand and Vietnam. Given the DOC preliminarily found that circumvention was occurring through each of the four Southeast Asian countries, the DOC made a "country-wide" circumvention finding, which designates each country as one through which solar cells and modules are being circumvented from China. However, companies in these countries will be permitted to certify they are not circumventing the U.S. import duties, in which case the circumvention findings may not apply. In August 2023, after completing its investigation, which included conducting in-person audits and gathering public comments, the DOC issued a final determination that affirmed its preliminary determination in most respects and found that five of eight manufacturers investigated were circumventing anti-dumping and countervailing duty orders.
Notably, however, in June 2022, the President of the United States issued an emergency declaration establishing a two-year tariff exemption on new tariffs for solar panels and cells imported from Cambodia, Malaysia, Thailand and Vietnam, delaying the possibility of the imposition of new anti-dumping and countervailing duties until the end of such two-year period. In September 2022, the DOC issued its final rule effectuating the two-year exemption period, and new dumping duties will not be imposed on solar panels and cells imported from Cambodia, Malaysia, Thailand and Vietnam until the earlier of two years after the date of the emergency declaration or when the emergency is terminated. Tariffs were reinstated in June 2024 following the exemption period, but under the DOC's rule, imports of solar cells and modules were not subject to retroactive tariffs during the exemption period. In December 2023, Auxin Solar and Concept Clean Energy commenced a new lawsuit challenging the DOC's authority to effect the exemption period and seeking to "reliquidate" imports completed during that period in order to retroactively apply anti-dumping and countervailing duty tariffs. In April 2024, a new rule, originally issued by the DOC in March 2024, went into effect. The new rule enhances the DOC's ability to enforce and administer anti-dumping and countervailing duty rules, including to consider cross-border subsidies in its calculations. Also in April 2024, a group of U.S. solar manufacturers filed new petitions seeking new anti-dumping and countervailing duties on solar components from Cambodia, Malaysia, Thailand and Vietnam. The addition of new anti-dumping and countervailing duties would significantly disrupt the supply of solar cells and modules to customers in the U.S., as a large percentage of solar cells and modules used in the U.S. are imported from Cambodia, Malaysia, Thailand and Vietnam. If imposed, these or similar tariffs could put upward pressure on prices of these solar products, which could reduce our ability to offer competitive pricing to potential customers.
In addition, in December 2021, the U.S. International Trade Commission recommended the President extend tariffs initially imposed in 2018 under Section 201 of the Trade Act of 1974 on imported crystalline silicon PV cells and modules for another four years, until 2026. Under Presidential Proclamation 10339, published in February 2022, President Biden extended the tariff beyond the scheduled expiration date in February 2022, with an initial tariff of 14.75%, which will gradually be reduced to 14% by the eighth year of the measure. Since such actions increase the cost of imported solar products, to the extent we or our dealers use imported solar products or domestic producers are able to raise their prices for their solar products, the overall cost of the solar energy systems will increase, which could inhibit our ability to offer competitive pricing in certain markets.
Additionally, the U.S. government has imposed various trade restrictions on Chinese entities determined to be acting contrary to U.S. foreign policy and national security interests. For example, the DOC's Bureau of Industry and Security has added a number of Chinese entities to its entity list for enabling human rights abuses in the Xinjiang Uyghur Autonomous Region ("XUAR") or for procuring U.S. technology to advance China's military modernization efforts, thereby imposing severe trade restrictions against these designated entities. Moreover, in June 2021, U.S. Customs and Border Protection issued a Withhold Release Order pursuant to Section 307 of the Tariff Act of 1930 barring the entry into U.S. commerce of silica-based products (such as polysilicon) manufactured by Hoshine Silicon Industry Co. Ltd. ("Hoshine") and related companies, as well as goods made using those products, based on allegations related to Hoshine labor practices in the XUAR to manufacture such products. Additionally, in December 2021, Congress passed the Uyghur Forced Labor Prevention Act, which, with limited exception, prohibits the importation of all goods or articles mined or produced in whole or in part in the XUAR, or goods or articles mined or produced by entities working with the XUAR government to recruit, transport or receive forced labor from the XUAR. Although we maintain policies and procedures designed to maintain compliance with all governmental laws and regulations, these and other similar trade restrictions that may be imposed against Chinese entities in the future may have the effect of restricting the global supply of, and raising prices for, polysilicon and solar products, which could increase the overall cost of solar energy systems and reduce our ability to offer competitive pricing in certain markets.
We cannot predict what additional actions the U.S. may adopt with respect to tariffs or other trade regulations or what actions may be taken by other countries in retaliation for such measures. The tariffs described above, the adoption and expansion of trade restrictions, the occurrence of a trade war or other governmental action related to tariffs, trade agreements or related policies have the potential to adversely impact our supply chain and access to equipment, our costs and ability to economically serve certain markets. If additional measures are imposed or other negotiated outcomes occur, our ability or the ability of our dealers to purchase these products on competitive terms or to access specialized technologies from other countries could be further limited, which could adversely affect our business, financial condition and results of operations.
Risks Related to Our Financing Activities
We need to obtain substantial additional financing arrangements to provide working capital and growth capital. If financing is not available to us on acceptable terms when needed, our ability to continue to fund our operations, grow our business and satisfy our obligations would be materially adversely impacted.
Distributed solar power is a capital-intensive business that relies heavily on the availability of debt and equity financing sources to fund solar energy system purchase, design, engineering and other capital and operational expenditures. Our future success depends in part on our ability to raise capital from third-party investors and commercial sources, such as banks and other lenders, on competitive terms to help finance the deployment of our solar energy systems. We seek to minimize our cost of capital in order to improve profitability and maintain the price competitiveness of the electricity produced by, the payments for and the cost of our solar energy systems. We rely on access to capital, including through tax equity financing and indebtedness in the form of debt facilities, asset-backed securities and loan-backed securities, to cover the costs related to bringing our solar energy systems and energy storage systems in service, although our customers ultimately bear responsibility for those costs pursuant to our solar service agreements.
To meet the capital and liquidity needs of our business, we will need to obtain additional debt or equity financing from current and new investors. We have limited cash resources with which to operate our business and we may have difficulty in accessing financing on a timely basis or at all. The contract terms in certain of our existing investment fund documents contain various conditions with respect to our ability to draw on financing commitments from the fund investors, including conditions that restrict our ability to draw on such commitments if an event occurs that could reasonably be expected to have a material adverse effect on the fund or, in some instances, us. If we are not able to satisfy such conditions due to events related to our business, a specific investment fund, developments in our industry, including tax or regulatory changes, or otherwise, and as a result, we are unable to draw on existing funding commitments, we could experience a material adverse effect on our business, liquidity, financial condition, results of operations and prospects. Any delays in accessing financing could have an adverse effect on our ability to pay our operational expenses, make capital expenditures and fund other general corporate purposes. Further, our flexibility in planning for and reacting to changes in our business may be limited and our vulnerability to adverse changes in general economic, industry, regulatory and competitive conditions may be increased.
If any of our current debt or equity investors decide not to invest in us in the future for any reason, or decide to invest at levels inadequate to support our anticipated needs or materially change the terms under which they are willing to provide future financing, we will need to identify new investors and financial institutions to provide financing and negotiate new financing terms. In addition, our ability to obtain additional financing through the asset-backed securities market, loan-backed securities market or other debt markets is subject to our having sufficient assets eligible for securitization as well as our ability to obtain appropriate credit ratings. If we are unable to raise additional capital in a timely manner, our credit ratings are downgraded or we are unable to obtain appropriate credit ratings on new debt, our ability to meet our capital needs and fund future growth and profitability may be limited.
Delays in obtaining financing could cause delays in expansion in existing markets or entering into new markets and hiring additional personnel. Any future delays in capital raising could similarly cause us to delay deployment of a substantial number of solar energy systems for which we have signed solar service agreements with customers. Our future ability to obtain additional financing depends on banks', other financing sources' and credit rating agencies' continued confidence in our business model and the renewable energy industry as a whole. It could also be impacted by the liquidity needs and credit ratings of such financing sources themselves. Additionally, we currently expect to reduce the pace at which we seek additional guarantees of certain of our indebtedness from the DOE due to a shift in customer demand from solar loans to leases and PPAs as well as technical reporting burdens on our dealers. We face intense competition from a variety of other companies, technologies and financing structures for such limited investment capital. If we are unable to continue to offer a competitive investment profile, we may lose access to these funds or they may only be available to us on terms less favorable than those received by our competitors. For example, if we experience higher customer default rates than we currently experience, it could be more difficult or costly to attract future financing. Any inability to secure financing could lead us to cancel planned installations, impair our ability to accept new customers or increase our borrowing costs, any of which could have a material adverse effect
on our business, financial condition and results of operations. Further, because we must continue to comply with certain additional rules and requirements imposed by the DOE in connection with its loan guarantees, any material noncompliance may result in penalties that limit our ability to access capital. If we are unable to arrange new or alternative methods of financing on favorable terms, our business, liquidity, financial condition, results of operations and prospects could be materially and adversely affected.
We enter into securitization structures, warehouse financings and other financings that may limit our ability to access the cash of our subsidiaries and include acceleration events that, if triggered, could adversely impact our financial condition.
Since April 2017 through September 30, 2024, we have pooled and transferred eligible solar energy systems, energy storage systems and the related asset receivables into 24 special purpose entities for securitizations, which sold solar asset-backed notes and solar loan-backed notes to institutional investors, the net proceeds of which were distributed to us. As of September 30, 2024, we currently have outstanding 33 tax equity funds and 6 warehouse credit facilities at special purpose entities. We intend to monetize additional solar energy systems, energy storage systems and other sustainable home products in the future through contributions to new special purposes entities for cash. Our securitizations, warehouses and tax equity financings typically require the cash flows from related customer contracts be paid into a secured collection account and only be available for general use after amounts on deposit in such accounts are first applied to satisfy the current obligations of the applicable special purpose entity.
There is a risk the institutional investors that have purchased the notes, loans or equity interests issued by these special purpose entities will be unwilling to make further investments at attractive prices. Although the creditors of these special purpose entities have no recourse to our other assets except as expressly set forth in the terms of the related securities, the special purpose entities are typically required to maintain some or all of the following: a liquidity reserve account, a reserve account for equipment replacements, as well as, in certain cases, reserve accounts to finance purchase option/withdrawal right exercises, storage system replacement or payment of liquidated damages, each of which are funded from initial deposits or cash flows to the levels specified therein.
The securitization structures, warehouse financings and other financings often include certain other features designed to protect investors. The primary feature relates to the availability and adequacy of cash flows in the pool of assets to meet contractual requirements, the insufficiency of which triggers an early repayment of the indebtedness. We refer to this as "early amortization", which may be based on, among other things, a debt service coverage ratio falling or remaining below certain levels or exceeding certain allowable thresholds for customer defaults or delinquencies. In the event of an early amortization, the applicable borrower or notes issuer would be required to repay the affected indebtedness using available collections received from the asset pool. However, the period of ultimate payment would be determined based on the amount and timing of collections received and, in limited circumstances, early amortization may be cured prior to full repayment. An early amortization event would impair our liquidity and may require us to utilize other available contingent liquidity or rely on alternative funding sources, which may not be available at the time. Certain of the securitizations, warehouse financings and other financings also contain a "cash trap" feature, which requires excess cash flow to be held in an account based on, among other things, a debt service coverage ratio falling or remaining below certain levels. If the cash trap conditions are not cured within a specified period, then the cash in the cash trap account must be applied to repay the indebtedness. If the cash trap conditions are timely cured, the cash is either released back to the borrower or used to repay the indebtedness at the borrower's option. The indentures of our securitizations also typically contain customary events of default for solar securitizations that may entitle the noteholders to take various actions, including the acceleration of amounts due and foreclosure on the issuer's assets. Any significant payments we may be required to make as a result of these arrangements could adversely affect our financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Arrangements".
Servicing our existing debt requires a significant amount of cash. We may not have sufficient cash flow from our business to timely pay our interest and principal obligations and may be forced to take other actions to satisfy our payment obligations.
As of September 30, 2024, our total indebtedness was approximately $8.2 billion and the available borrowing capacity under our credit facilities was $1.0 billion. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations sufficient to service our debt and make necessary capital expenditures to operate our business. For example, we currently do not have the resources to repay the EZOP revolving credit facility or the AP8 credit facility when they become due in the third quarter of 2025. Although we believe we will be able to satisfy these obligations through either a refinancing of the facility or an amendment and extension, there can be no assurance about our ability to do so. Absent a refinancing or extension, a failure to pay the principal and interest on the credit facilities when due or prior to the delivery deadline for our audited financial statements for the year ended December 31,
2024, would result in an event of default under our credit facilities that enables the requisite lenders to demand immediate payment, terminate any commitment to make further loans under the facility or exercise other remedies, such as imposing a cash trap, draw stop or early amortization or charging default interest, any of which may have a materially adverse effect on us. If the lenders were to demand immediate repayment, the non-recourse borrower would not have sufficient liquidity to meet its obligations when they come due and the lenders would be able to seek foreclosure of the collateral.
If we are unable to generate sufficient cash flows to timely pay our interest and principal obligations, we may be required to adopt one or more alternatives, such as slowing or ceasing the origination of new customer agreements, selling assets, restructuring debt or obtaining additional debt and equity capital on terms that may be onerous or highly dilutive. Our securitizations and warehouse financings are structured so cash flows generated by the pool of solar energy systems, energy storage systems, other sustainable home products and related customer agreements deposited in the related collection account are initially used to repay outstanding principal amounts and other obligations based on the priority of payments in the agreement. However, should these cash flows decrease below applicable thresholds or other triggering events occur, all excess cash flows from such asset pool must be applied to pay down the related indebtedness, which would reduce the cash available to otherwise fund our business. Our ability to timely repay or otherwise refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Furthermore, we and our subsidiaries expect to incur additional debt in the future, subject to the restrictions contained in our debt instruments. Increases in our existing debt obligations would further heighten the debt related risk discussed above. In addition, we may not be able to enter into new debt instruments on acceptable terms or at all. If we were unable to satisfy financial covenants and other terms under existing or new instruments, or obtain waivers or forbearance from our lenders, or if we were unable to obtain refinancing or new financings for our working capital, equipment and other needs on acceptable terms if and when needed, our business would be adversely affected.
Volatility and continued increases in interest rates would raise our cost of capital and may adversely impact our business.
Due to recent increases in inflation, the U.S. Federal Reserve has raised its benchmark interest rates. Further increases in the federal benchmark rate could result in an increase in market interest rates, which may increase our interest expense under our variable-rate borrowings and the costs of refinancing existing indebtedness or obtaining new debt. For example, borrowings under our existing warehouse credit facilities accrue interest based on the Secured Overnight Financing Rate ("SOFR") as a benchmark for establishing the rate of interest. Consequently, rising interest rates or continued higher interest rates will increase our cost of capital and may decrease the amount of capital available to us to fund our operations and finance deployment of new solar energy systems, energy storage systems and other sustainable home products. Our future success depends in part on our ability to raise capital from investors and obtain secured lending to help finance the deployment of our customer agreements. As a result, rising interest rates may have an adverse impact on our ability to offer attractive pricing on our customer agreements to our customers. If in the future we have a need for significant borrowings and interest rates increase or continue at high interest rates, that may increase the cost of the systems we purchase, which either would make those systems more expensive for customers, which is likely to reduce demand, or would lower our operating margins, or both.
The majority of our cash flows to date have been from solar service agreements monetized under various tax equity fund structures and secured lending arrangements. One of the components of this monetization is the present value of the payment streams from customers who enter into these long-term solar service agreements. If the rate of return required by capital providers, including debt providers, rises as a result of a rise in interest rates, it will reduce the present value of the customer payment stream and consequently reduce the total value derived from this type of monetization. Any measures we could take to mitigate the impact of rising interest rates on our ability to secure third-party financing could ultimately have an adverse impact on the value proposition we offer our customers or our profitability.
Risks Related to Regulations
We rely on net metering and related policies to offer competitive pricing to our customers in most of our current markets and changes to net metering policies may significantly reduce demand for electricity from solar energy systems.
Net metering is one of several key policies that have enabled the growth of distributed generation solar energy systems in the U.S., providing significant value to certain qualifying residential and commercial customers for electricity generated by their solar energy systems but not directly consumed on-site. Net metering allows a homeowner or a business to pay the local electric utility for power usage net of production from the solar energy system or other distributed generation source. Homeowners or businesses receive a credit for the energy an interconnected solar energy system generates in excess of that needed by the home to offset energy purchases from the centralized utility made at times when the solar energy system is not
generating sufficient energy to meet the customer's demand. In many markets, this credit is equal to the retail rate for electricity and in other markets, such as Hawaii and Nevada, the rate is less than the retail rate and may be set, for example, as a percentage of the retail rate or based upon a valuation of the excess electricity. In some states and utility territories, customers are also reimbursed by the centralized electric utility for net excess generation on a periodic basis.
Net metering programs have been subject to legislative and regulatory scrutiny in some states and territories including, but not limited to, California, New Jersey, Arizona, Nevada, Connecticut, Florida, Maine, Kentucky, Puerto Rico and Guam. These jurisdictions, by statute, regulation, administrative order or a combination thereof, have recently adopted or are considering new restrictions and additional changes to net metering programs either on a state-wide basis or within specific utility territories. Many of these measures were introduced and supported by centralized electric utilities. These measures vary by jurisdiction and may include a reduction in the rates or value of the credits customers are paid or receive for the power they deliver back to the electrical grid, caps or limits on the aggregate installed capacity of generation in a state or utility territory eligible for net metering, expiration dates for and phasing out of net metering programs, replacement of net metering programs with alternative programs that may provide less compensation and limits on the capacity size of individual distributed generation systems that can qualify for net metering. Net metering and related policies concerning distributed generation also received attention from federal legislators and regulators.
In California, the California Public Utilities Commission (the "CPUC") issued an order in 2016 retaining retail-based net metering credits for residential customers of California's major utilities as part of Net Energy Metering 2.0 ("NEM 2.0"). Under NEM 2.0, new distributed generation customers receive the retail rate for electricity exported to the grid, less certain non-bypassable fees. Customers under NEM 2.0 also are subject to interconnection charges and time‑of-use rates. Existing customers who receive service under the prior net metering program, as well as new customers under the NEM 2.0 program, currently are permitted to remain covered by them on a legacy basis for a period of 20 years. In December 2022, the CPUC's Net Energy Metering 3.0 ("NEM 3.0") order reduced the value of net metering credits from the retail rate to an avoided cost rate for new customers not covered by the legacy NEM 2.0 program. While NEM 3.0 is currently under judicial review, it remains in effect. Proceedings on distributed energy policy and utility rates before the CPUC or legislation concerning these matters could also result in changes that affect customers with distributed generation systems.
In New Jersey, the Board of Public Utilities has the option under state law of limiting participation in the retail rate net metering program if the aggregate capacity of owned and operating systems reaches 5.8% of total annual kWh sold in the state. As of December 31, 2023, that threshold had not yet been reached. In October 2023, the Arizona Corporation Commission voted to reopen the proceeding that set the level of net metering credits. The value of credits, the current schedule for the step-down of the credit value over time and the length of the period during which the value of credits are locked in for customers may all be subject to review. No final action has been taken at this stage.
In Puerto Rico, legislation enacted in January 2024 known as Act 10 extended net metering policies through 2031, absent further regulatory action. In July 2024, the Puerto Rico Financial Oversight and Management Board ("FOMB") filed a lawsuit to invalidate Act 10, advocating the Act was a legislative overreach on the political independence of the Puerto Rico Energy Bureau ("PREB"), as well as highlighting the need for the study of proper policy decisions. Subsequently, the PREB completed a study on net metering it may use in future cost-shifting arguments and regulatory action in favor of devaluing Puerto Rico net metering. Based on the historical record, we believe the FOMB will likely prevail in invalidating Act 10. Nevertheless, without the completion of the PREPA bankruptcy (as defined below) and without further action by PREB, the landscape remains uncertain with respect to any immediate changes to net metering in Puerto Rico.
Net metering customers in Puerto Rico may be impacted by transition charges and other requirements contemplated in a restructuring agreement between the Puerto Rico Electric Power Authority ("PREPA") and its creditors, currently pending before the U.S. District Court for the District of Puerto Rico in bankruptcy-like proceedings under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act. Nevertheless, that matter has not been finally adjudicated by the Title III Court and creditors could appeal any final judgement. In recent court filings, the Title III Court has extended mediation efforts until November 13th and rescheduled a hearing on a motion from certain creditors to name a Trustee over PREPA to December 11th. However, the PREPA bankruptcy is ongoing and its ultimate effects on net metering in Puerto Rico are currently unknown.
In Guam, the Consolidated Commission on Utilities adopted a resolution in 2018 recommending retail rate net metering for customers of the Guam Power Authority be replaced with a "buy all/sell all" or similar program that provides for compensation to homeowners at a lower, avoided cost rate. In other jurisdictions, including Minnesota, Connecticut and parts of Texas, replacing net metering with a "value of distributed energy", "feed-in", or "sell-all/ buy-all" tariff is also being considered or has been adopted.
Net metering and related policies concerning distributed generation have received attention from federal legislators and regulators and challenge by various stakeholders. For example, in April 2020, the New England Ratepayers Association petitioned the Federal Energy Regulatory Commission ("FERC") to declare its exclusive federal jurisdiction over distributed generation, including residential solar, and to establish new federal customer compensation rates for excess energy in lieu of state net metering programs. While the FERC rejected the petition on procedural grounds, further challenges to net metering based on federal law may occur. Changes in federal law, including those made by statute, regulation, rule or order, could negatively affect net metering or other related policies that otherwise promote and support solar energy and enhance the economic viability of distributed solar.
Additionally, distributed solar customers in certain jurisdictions may be subject to higher charges from centralized electric utilities than non-solar customers and such charges should be evaluated together with the net metering policies in place. If such charges are imposed, the cost savings associated with switching to solar energy may be significantly reduced and our ability to expand our portfolio of solar service agreements and related solar energy systems and energy storage systems and compete with centralized electric utilities could be impacted.
Our business is subject to consumer protection laws. Such laws and regulatory enforcement policies and priorities are subject to change that may negatively impact our business.
We are subject to a constantly evolving consumer protection and consumer finance regulatory environment that is difficult to predict and may affect our business. We must comply with various international, federal, state, and local regulatory regimes, including those applicable to consumer credit transactions, leases, and marketing activities. These laws and regulations, including those applicable to consumer loans and their origination, are subject to change and modification by statute, administrative rules and orders, and judicial interpretation. As a result of infrequent or sparse interpretations, ambiguities in these laws and regulations may create uncertainty with respect to what type of conduct is permitted or restricted under such laws and regulations. Regulators, such as the Federal Trade Commission and the Consumer Financial Protection Board, as well as state attorney generals and agencies, also can initiate inquiries into market participants, which can lead to investigations and, ultimately, enforcement actions. For example, state attorneys general of several states have filed lawsuits against other solar financing companies alleging (among other claims) that certain so-called "upfront fees" related to loan financing were not properly disclosed to consumers. These lawsuits are at an early stage and we cannot predict their outcome or how, if any of them is adversely determined to the other solar financing companies, they will affect our practices.
The laws to which we may be subject to include federal and state laws that prohibit unfair, deceptive or abusive business acts or practices (such as the Federal Trade Commission Act and the Dodd-Frank Act), regulate lease and loan disclosures and terms and conditions (such as the Truth-in-Lending Act and the Consumer Leasing Act), prohibit discrimination (such as the Equal Credit Opportunity Act), and provide additional protections for certain customers in the military (such as the Servicemembers Civil Relief Act). Our business is or may also be subject to federal and state laws that regulate consumer credit report information, data privacy, debt collection, electronic fund transfers, service contracts, home improvement contracting and marketing activities (such as telemarketing, door-to-door sales, and e-mails).
While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance is given that our compliance policies and procedures will be effective. Failure to comply with these laws and with regulatory requirements applicable to our business could subject us to damages, revocation of licenses, class action lawsuits, administrative enforcement actions, civil and criminal liability, settlements, limits on offering certain products and services, changes in business practices, increased compliance costs, indemnification obligations to our capital providers, loan repurchase obligations and reputational damage that may harm our business, results of operations and financial condition.
Our business currently depends in part on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits or incentives or our ability to monetize them could adversely impact our business.
Our business depends in part on current government policies that promote and support solar energy and enhance the economic viability of distributed solar. Revenues from SRECs constituted approximately 7% of our revenues for the nine months ended September 30, 2024 and 2023. U.S. federal, state and local governments established various incentives and financial mechanisms to reduce the cost of solar energy and to accelerate the adoption of solar energy. These incentives come in various forms, including rebates, tax credits and other financial incentives such as payments for renewable energy credits associated with renewable energy generation, exclusion of solar energy systems from property tax assessments or other taxes and system performance payments. However, these programs may expire on a particular date, end when the allocated funding is exhausted or be reduced or terminated as solar energy adoption rates increase. For example, New Jersey's SREC program closed in 2020 due to legislation requiring it be closed by the earlier of the share of electricity sold by the state's utilities
supplied by solar reaching 5.1% or June 2021. Following the close of the program in June 2020, customers became eligible for Transitional Renewable Energy Credits ("TRECs") under an interim transitional program replacing SRECs that provides for a lower level of revenue than the SREC program. In July 2021, the New Jersey Board of Public Utilities closed the TREC program effective August 27, 2021 and approved the long-term successor program to the TREC program, which is referred to as the Successor Solar Incentive Program ("SuSI"). Under the SuSI program, which became effective on August 28, 2021, residential facilities are eligible for the Solar Renewable Energy Certificate-II ("SREC-II") incentive. For net metered residential facilities, the SREC-II provides an administratively-determined fixed payment per megawatt hour that is guaranteed for 15 years, but is lower than the level revenue provided by the TREC program. The financial value of certain incentives decreases over time. The value of SRECs in a market tends to decrease over time as the supply of SREC‑producing solar energy systems installed in that market increases. If we overestimate the future value of these incentives, it could adversely impact our business, results of operations and financial results.
A loss or reduction in such incentives could decrease the attractiveness of new solar energy systems to customers, which could adversely impact our business and our access to capital. We also enter into economic hedges related to expected production of SRECs through forward contracts that require us to physically deliver the SRECs upon settlement. These arrangements may, depending on the instruments used and the level of additional hedges involved, limit any potential upside from SREC production increases. We may be exposed to potential economic loss should a counterparty be unable or unwilling to perform their obligations under the terms of a hedging agreement. In addition, we are exposed to risks related to changes in interest rates and may engage in hedging activities to mitigate related volatility. We may fail to properly hedge these SRECs or may fail to do so economically, which may also adversely affect our results of operations.
The economics of purchasing a solar energysystem and energy storage system are also improved by eligibility for accelerated depreciation, also known as the modified accelerated cost recovery system, which allows for the depreciation of equipment according to an accelerated schedule set forth by the IRS. This accelerated schedule allows a taxpayer, such as us and investors in tax equity financing arrangements, to recognize the depreciation of tangible solar property on a five-year basis even though the useful life of such property is generally greater than five years. We benefit from accelerated depreciation on the solar energy systems and energy storage systems we own. To the extent these policies are changed in a manner that reduces the incentives that benefit our business, we may experience reduced revenues and reduced economic returns, experience increased financing costs and encounter difficulty obtaining financing.
The federal government currently provides for the Section 48(a) ITC, the Section 48E ITC for eligible property that begins construction after 2024 and the Section 25D Credit. Under current law, the Section 48(a) ITC of the Code allows taxpayers to claim an investment tax credit that, depending on the location of a particular project, its size, its ability to satisfy certain labor and domestic content requirements and the category of consumers it serves, can range between 6% and 70% of the basis of certain commercially owned energy property, in each case construction of which begins before 2025. The Section 48E ITC percentage generally will be the same as the percentage for the Section 48(a) ITC. The Section 48E ITC percentage will begin to phase down for projects that began construction after (a) 2033 or (b) if later, the first year after the year in which the U.S. Treasury Department determines greenhouse gas emissions from the production of electricity in the U.S. are no more than 25% of 2022 levels. To be eligible for the Section 48(a) ITC or the Section 48E ITC at the 30% level, the eligible energy property must either (a) meet certain labor and apprenticeship requirements or (b) have a maximum net output of less than one megawatt (as measured in alternating current). Beginning in 2023, we are able to claim the Section 48(a) ITC or the Section 48E ITC, as applicable, for energy storage systems regardless of whether such systems are installed in conjunction with solar energy systems. We would be able to claim the Section 48(a) ITC or the Section 48E ITC, as applicable, when available for solar energy systems or energy storage systems we originate under lease agreements or PPAs based on our ownership of the solar energy system at the time it is placed in service. Additionally, the IRA allows for the transfer of ITCs, increasing opportunities to monetize the relevant credits.
The IRA also created several ITC "bonus credits" to further incentivize various types of solar and storage facilities. Under these new rules, the ITC may be increased by 10 percentage points if it has sufficient "domestic content", by 10 percentage points if it is located in an "energy community", and by 10 or 20 percentage points if it is located in a low-income community and receives an allocation from the Department of Treasury of a portion of the annual "environmental justice solar and wind capacity limitation". The U.S. Department of the Treasury is in various stages of issuing guidance on these ITC bonus credits, and it has issued multiple notices or other pieces of guidance for each bonus credit. Our ability to use the domestic content bonus credit will depend in part on the extent we can obtain the necessary information from our equipment suppliers, provide comfort to our financing partners and insurers that we have complied with the burdensome existing guidance, and comply with current and future guidance.
Section 25D of the Code allows an individual to claim a 30% federal tax credit with respect to a residential solar energy system and/or energy storage system that is owned by the homeowner. As a result, the Section 25D Credit is claimed by
customers who purchase solar energy systems and/or energy storage systems. This Section 25D 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 2034, unless it is extended before that time. The Section 25D Credit reduces the cost of consumer ownership of solar energy systems and/or energy storage systems, such as under the loan program.
The Section 48(a) ITC has been a significant driver of the financing supporting the adoption of residential solar energy systems in the U.S. and the Section 25D Credit has been a significant driver of consumer demand for ownership of solar energy systems. Any reduction in, or expiration of, these tax credits will likely impact the attractiveness of residential solar and could harm our business. For example, we expect the expiration of the Section 25D Credit will increase the cost of consumer ownership of solar energy systems, such as under the loan program.
Applicable authorities may adjust or decrease incentives from time to time or include provisions for minimum domestic content requirements or other requirements to qualify for these incentives. Reductions in, eliminations or expirations of or additional application requirements for governmental incentives could adversely impact our results of operations and ability to compete in our industry by increasing our cost of capital, causing distributed solar power companies to increase the prices of their energy and solar energy systems and reducing the size of our addressable market. In addition, this would adversely impact our ability to attract investment partners and lenders and our ability to expand our portfolio of solar service agreements and related solar energy systems and energy storage systems.
General Risk Factors
The loss of one or more members of our senior management or key employees may adversely affect our ability to implement our strategy.
We depend on our experienced management team and the loss of one or more key executives could have a negative impact on our business. In particular, we are dependent on the services of our founder and CEO, William J. Berger. We also depend on our ability to retain and motivate key employees and attract qualified new employees. We have experienced recent changes to our finance organization, including the departure of our prior Chief Financial Officer and the hiring of our new Chief Financial Officer, which could adversely affect our ability to execute our business plan if not properly managed. None of our key executives are bound by employment agreements for any specific term. We may be unable to replace key members of our management team and key employees if we lose their services. Integrating new employees into our team could prove disruptive to our operations, require substantial resources and management attention and ultimately prove unsuccessful. An inability to attract and retain sufficient managerial personnel who have critical industry experience and relationships could limit or delay our strategic efforts, which could have a material adverse effect on our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
10b-5 Trading Plan
During the three months ended September 30, 2024, Paul Matthews, Chief Operating Officer, adopted a trading plan (the "10b5-1 Plan") intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act. The 10b5-1 Plan, which commences on February 3, 2025, and ends on February 28, 2025, authorizes an agent to sell such securities as are necessary to satisfy tax withholding obligations, commissions and any fees, arising exclusively from the vesting of up to 1,711 restricted stock units.
On October 28, 2024, TEPH entered into that certain Third Amendment to Second Amended and Restated Credit Agreement (the "TEPH Amendment"), which, among other things, amends that certain Second Amended and Restated Credit Agreement, dated as of November 3, 2023 (as previously amended, the "TEPH Credit Agreement"), by and among TEPH, as borrower, Sunnova TE Management, LLC, as facility administrator (the "Facility Administrator"), Atlas Securitized Products Administration, L.P., as administrative agent (the "Administrative Agent"), and the lenders, funding agents and other financial institutions party thereto.
The TEPH Amendment amended the TEPH Credit Agreement to, among other things, (a) extend the facility maturity date from November 2025 to August 2026 (subject to possible further extension and/or earlier maturation in accordance with the terms of the TEPH Amendment), (b) extend the date upon which the lender commitments terminate (and upon which no further advances are permitted to be drawn under the TEPH Credit Agreement) from May 2024 to May 2025, (c) add a contingent cash reserve requirement that is triggered by the failure of Sunnova Energy Corporation (for purposes of this section, the "Parent") to maintain a specified minimum working capital requirement amount as of quarterly determination dates and that requires funds otherwise distributable by TEPH to be reserved in a WIP reserve account and applied to cause photovoltaic systems and energy storage systems used in connection with photovoltaic systems to achieve placement in service, (d) add a contingent stepdown in advance rates that is triggered by the failure of the Parent to satisfy on a quarterly basis certain working capital requirements beginning with the quarter ending March 31, 2025 through the quarter ending September 30, 2026, with such stepdown in advance rates having the effect of limiting the availability of advances and triggering a potential prepayment under the TEPH Credit Agreement based on the reduced availability caused by the stepdown, (e) add an event of default for the incurrence, restructuring, or refinancing of any indebtedness of the Company or the Parent to the extent such incurrence, restructuring, or refinancing has reduced, or will reduce, TEPH's ability to make principal payments under the TEPH Credit Agreement by reducing cash flows to TEPH, (f) add an event of default triggered by the failure of TEPH to implement, by March 31, 2025 (or a later date with the Administrative Agent's consent), a transition of its management and billing and collection services to an acceptable back-up third-party vendor or to a newly-established Sunnova entity or a restructured Facility Administrator (in either case, with such new entity of the Facility Administrator structured in a way to mitigate its inclusion in a bankruptcy of the Company or the Parent), (g) add the Company to the scope of the definition of "material adverse effect", which, among other things, results in a drawstop under the TEPH Credit Agreement if the Company experiences a "material adverse effect", (h) add certain provisions giving the Administrative Agent the right to enforce certain rights of TEPH and its subsidiaries to cause systems in Financing Funds (as defined in the TEPH Credit Agreement) to be placed into service or to be transferred from such Financing Funds to Sunnova SAP IV, LLC, a wholly owned subsidiary of TEPH, (i) add certain requirements to use commercially reasonable efforts to complete certain amendments to tax equity finance documents by a specific date, (j) reflect Atlas Securitized Products Administration, L.P. as successor Administrative Agent to Atlas Securitized Products Holdings, L.P., (k) increase the aggregate commitment amount from $1.361 billion to $1.362 billion and (l) make certain other amendments as set forth therein.
The foregoing description of the TEPH Amendment is qualified in its entirety by reference to the full text of the TEPH Amendment, a copy of which is filed as Exhibit 10.3 to this Quarterly Report on Form 10-Q and is incorporated into this Item 5 by reference.
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∞ Portions of this exhibit have been omitted in accordance with Items 601(a)(5) and 601(b)(10) of Regulation S-K. We agree to furnish a copy of any omitted schedule or exhibit to the SEC upon request.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.