Sunnova Energy International (NOVA 3.85%) is one of the leading companies financing solar systems in the US. While its competitors try to excel at many things Sunnova has decided to laser-focus on just one: providing solar and storage as a service to homeowners. And that focus is paying off.
What sets Sunnova apart
Scaling a solar installation business is hard and capital-intensive. It requires expertise in navigating local regulatory and labor environments, and developing sales processes that make sense locally. Selling a residential solar system in Puerto Rico is very different from selling one in Arizona. As a result, very few solar installation companies have scaled successfully nationally, leading to thousands of local solar installation companies across the US that do great business in their communities, but lack the financial expertise, scale, and access to capital to develop their own financing products.
Sunnova understood this early on, creating a solar-as-a-service platform and deploying it across a network of local installers. These "dealers" get prenegotiated prices on high-quality equipment and the financing solutions they need to sell more solar. In return, Sunnova gets to finance lots of systems while it cultivates long-term relationships with homeowners, to whom it can sell additional products and services down the road. Homeowners get cheaper and more reliable energy at zero or little up-front cost.
How Sunnova creates shareholder value
To appreciate how Sunnova succeeds, it is useful to understand two terms that the company uses throughout its financial statements: "Estimated Net Contracted Value" and "Adjusted Operating Expense for weighted average customer." In essence, they respectively represent how much money Sunnova expects to receive from each new customer in the future, and how much it spends serving them in the present.
Every new customer who gets a solar system financed by Sunnova signs a contract for payments, or cash flows, to Sunnova for up to 35 years. After paying off investors and setting aside money to keep those systems running, Sunnova gets to keep the difference, or net, of these cash flows. The sum total of the net present value of the cash flows that Sunnova keeps from all of its existing customers -- or the equivalent dollar figure Sunnova would get if it could get all of those cash flows at once, today -- is what it calls "Estimated Net Contracted Customer Value."
To serve those customers -- manage their dealer network, make improvements to its Solar-as-a-Service platform, market its services, and just run the company -- Sunnova incurs an expense. Dividing this cost by the number of customers Sunnova has at any given time gets us the "Adjusted Operating Expense per weighted average customer."
As of its Q1 2020 earnings report, Sunnova claimed an Estimated Net Contracted Customer Value of between $895 million and $1.2 billion, depending on how conservative an investor would want to be, applying a discount rate of 6% or 4%, respectively. (A bigger discount rate means that things like higher interest rates and inflation will make future cash less valuable than cash today). This represents an increase of roughly 27% from the year-ago quarter.
Meanwhile, its Adjusted Operating Expense per weighted average customer decreased by about 4%, from $310 per customer per quarter to $289 per customer per quarter the previous year. In its latest earnings call, Sunnova projected that these per-customer costs would decrease by 10% year over year in 2020.
In other words, Sunnova is growing its future cash flows by signing up new customers while spending less to acquire and maintain them. As long as this trend continues, it should eventually lead to profits for Sunnova.
A few bumps in the road?
Sunnova is not yet profitable, though, and some of its financial health metrics don't look quite so healthy. Its quick ratio, for example -- its ability to convert its assets to cash and pay its creditors promptly -- comes in at just 0.86%, meaning it couldn't readily pay all it owes, should that debt come due all at once.
Additionally, to continue to finance solar systems Sunnova depends on outside investments in the form of loans and tax equity. A tax equity investor is usually a corporation with lots of profits looking to hedge some of its taxes by investing in tax-advantaged solar assets -- and there aren't many corporations with lots of profits running around in 2020.
Is there a bright side? The Fed lowered its benchmark interest rate, or "Fed rate" to around 0% and has pledged to keep it there until the economic effects of the pandemic are behind us. With more than 99% of its customers paying their bills on time, Sunnova should find plenty of banks eager to lend it money at historically low interest rates.
The future looks sunny
During its first-quarter earnings call, Sunnova reaffirmed its guidance for the year: to grow another 28,000 to 30,000 customers to its base of 78,000 by Dec. 31, 2020. This represents an addition of 35% in Estimated Net Contracted Value -- at a minimum. As the company attaches more storage to its customers' solar installations, the value of those cash flows should also increase -- battery storage systems cost more than solar-only systems, so its customers are on the hook to pay more for them each month.
In its first-quarter 2020 earnings presentation, Sunnova showed that 30% of all systems it sold during the previous quarter included storage. Past energy disruptions caused by the California fires and hurricane Maria in Puerto Rico -- two of Sunnova's largest markets -- are likely responsible for the acceleration in storage adoption. And during an economic downturn, customers' appetite for plain old affordable solar energy, even without a storage system, is only likely to increase.
If Sunnova can continue to weather the current economic downturn successfully: grow its customer base by more than 30% year over year, continue to lower what it spends per customer, and manage its cash carefully during 2020, the year might prove a pivotal one for Sunnova.