Q4 2023 Spruce Power Holding Corp Earnings Call
Participants
Bronson Fleig; Head of IR; Spruce Power Holding Corporation
Christian Fong; CEO; Spruce Power Holding Corporation
Sarah Wells; CFO & Head of Sustainability; Spruce Power Holding Corporation
Joseph Osha; Analyst; Guggenheim Partners LLC
Presentation
Operator
Good afternoon, and welcome to Bruce Power's fourth quarter 2023 conference call. As a reminder, today's call is being recorded, and all participants are in a listen only mode after the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I will now turn the call over to Bronson Fleig, Head of Investor Relations for spruce power. Mr. flag, please go ahead.
Bronson Fleig
Thank you. Good afternoon and welcome to Spruce Power's conference call to discuss results for the fourth quarter and full year 2023. With me today are Christian Fong, our Chief Executive Officer, and Sarah Wells, our Chief Financial Officer.
For our call this afternoon will include statements that speak to the Company's expectations, outlook and predictions of the future, which are considered forward looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which may cause our actual results to differ materially from those expressed in or implied by these statements. We are not obliged to revise or update any forward-looking statements, except as may be required by law. Please refer to our disclosures regarding risk factors and forward-looking statements in today's earnings release and other SEC filings. A copy of our press release has been posted to the Investor Relations page of our website.
For reference, the non-GAAP financial measures discussed in this call are reconciled to the US GAAP equivalent and can be found in the press release that we issued this afternoon and with that, I'll turn the call over to our CEO. Christian, go ahead.
Christian Fong
Thank you, Bronson, and thanks, everyone, for joining us today. Spruce's strategy is to be the dominant long-term owner and operator of distributed energy assets. We are delivering clean energy to about 80,000 households with significant cost savings to our customers and high operating margins to our shareholders. Adjacent to our renewable power technology is a servicing technology platform that facilitates long-term customer relationships, which we've improved to the point where our customer satisfaction scores routinely exceed 80% exceptional customer experience sets up exciting organic growth opportunities.
In 2023, we grew our portfolio nearly 50% by acquiring the cash flows from about 25,000 rooftop solar assets and contracts. We added these recurring cash flow streams in a disciplined manner, executing two acquisitions at attractive equity returns above 20%. Importantly, we did so while retaining significant cash liquidity for future growth, excluding the cash reserved for a few legal matters that Sarah will discuss versus net cash at year end was $156 million in 2024 we intend to stay very disciplined on our acquisitions, only acquiring portfolios with high investment returns and immediate increases to our free cash flow. We have one of the lowest fixed cost platforms in the industry, which gives us flexibility and should enable us to create substantial value in the year ahead.
First, Spruce is offering programmatic partnerships to the country's strongest installers where installers need to solve liquidity constraints by selling assets or even exit the industry spruce stands ready as the industry's most experienced portfolio buyer.
Second, we now offer a servicing technology platform that is unrivaled in the market so far, as we know, no one else is coming close to our 80% customer satisfaction. Last November, we announced Spruce Pro and in January, we launched it to offer that platform out to other distributed solar portfolio owners too early to talk about results, but we're pleased with the early interest in both our existing residential segment and our extension of servicing technology into the commercial and industrial solar market.
Third, in 2024, we are launching an early renewal campaign to upgrade long-term hypothetical customer value and lock it in as contract value.
Before turning to Q4 results, I want to express my belief that spruce is in its strongest position ever as we progress into 2024. In 2024, we can forecast our long-term cash flow with incredible accuracy. We manage our cost structure to reduce volatility and have positive operating free cash flow in 2024, we have a large cash war chest to any of our industry peers who might be looking at liquidity issues. I'd just say give us a call.
Yes, we'll always be disciplined and not growing for the sake of growth. Yet we're very experienced at acquisitions and management stands ready to make a big move. And in 2024, we will build on a pipeline of products that have emerged out of our existing business and customer base, whether it's ramping Spruce Pro in the B2B market or selling extended contracts in the B2C market, we believe we will achieve high margin organic growth.
Turning to Q4 and full year 2023 results, I'll focus my comments within the context of our three core pillars, which are industry leading customer experience, operational excellence and growth through disciplined capital allocation. First, customer experience, Spruce facilitates the consumption of clean energy by about 80,000 households every day. We strive for an exceptional customer experience doing so as a good business practice, and it creates new opportunities to unlock value across our platform.
Our fourth quarter customer satisfaction score was 75% and for the full year average 74%, well above our 2023 target. These scores reflect new interactions with our customers. So our servicing teams don't get to rest on yesterday's results and pressing higher. Our target in 2024 is a seasonal level of 80%. And year to date, we are already hitting that goal.
An important element of customer satisfaction is our field services program. As I discussed last fall, we are putting our first in-market team in New Jersey. I'm pleased that we have hired an operations team and are in the early phases of that local build-out. We look forward to providing more updates as the year progresses, including whether we extend this to other markets where we have enough customer density for a team to be profitable.
Next, I'll address operational excellence within the context of cash flow generation. Our Q4 performance ratio which is actual power production compared to the theoretical maximum of the installed solar panels was 94%. And for the full year 2023, the weather adjusted performance was a strong 102%. Spruce generated $30.1 million of total cash inflows in the fourth quarter. What we sometimes call top of the funnel cash flows, these cash inflows consist primarily of PPA and lease payments, the sale of environmental commodities and interest on cash invested. Important to note, we do not consider proceeds from the issuance of debt as a factor in our ability to generate cash. As such, an assumption would be dependent on periodic access to capital markets rather than actual operations.
For 2024, we're firming our previous cash flow projections. Sarah will address in detail the moderately positive cash flow we expect this year.
Finally, let's discuss growth and acquisitions. In 2023, we extended our outstanding track record, acquiring the cash flows from about 25,000 rooftops. This represented close to 50% growth at an average underwritten IRR of 21%. The acquired assets from the SCMTH and Tredegar acquisitions have been integrated into our existing portfolio and are performing better than our underwritten expectations. While spruce did not transact in Q4 our M&A team is actively looking at deals. Liquidity concerns across the residential solar sector are very real. So with our strong balance sheet and reputation as a repeat buyer, we've gotten the first look at several opportunities in the secondary market.
In addition to seasoned assets last fall, we saw a real time shift of new installations to solar leases and PPAs in our view, the very best installers have sponsors with working capital to keep building, though some have reached out about spruce becoming a programmatic portfolio buyer of finished systems. So I'd underscore that growth is not gated by the availability of rooftop systems for sale, which remains plentiful. Yet bid ask spreads have widened. Sellers are resistant to sell at wider levels, hoping private capital will come to them.
In contrast as a levered buyer, we are crystal clear in our assessment of current value at more disciplined returns. We're holding tight on our return requirements which is what we mean by staying disciplined in this market. So for 2024, we are planting a flag on a formal growth target in terms of the number of new customers are rooftop systems. We are focused on free cash flow and organic growth instead of portfolio prices new toward us, we're ready to buy.
I'd like to elaborate on one of our organic growth initiatives in 2024, we've been developing an early renewal program in which customers can opt to extend the contract period of their lease or PPA in advance of the original stated contract maturity. This is a win-win program. Customers enjoy visibility to continued cost savings versus retail electricity rates, which have been increasing much faster than general inflation in several of our core markets, California in particular. First, the shareholders get additional net asset value as contract extensions accrue to our portfolio.
Spruce has the actuarial experience that enables us to price this offering appropriately since the beginning of 2021, we've managed a meaningful renewal cycle with a pocket of early solar adopters whose contract periods were only 10 or 15 years. This process gave us solid data on actual consumer behaviors that we're now using to design appropriate incentive structures from a population of about 500 customers with expiring contracts just over 50% shows a post contract renewal or system purchase plan that worked out to an average 35% discount to the then prevailing contract rate. The average extension was for seven years. This is hard data from a statistically significant number and time series. The investor presentation posted today on Bruce's Investor Relations website uses that actual experience in calculating our net portfolio value.
Last, I wanted to address how the capital markets are giving us the ability to grow the appetite for and availability of nonrecourse project debt for spruce is very healthy. So we anticipate shifting portfolio acquisitions to using more nonrecourse portfolio debt and less equity capital. This is a straightforward capital light model that supports keeping our cash balance at a high level. How do we do this? Both due to the strong performance of our asset management and customer servicing teams. Our portfolios have outperformed underwritten expectations at the time of acquisition.
This value accretion is increasing our borrowing capacity. An example of this outperformance is our spruce power for portfolio shown on slide 18 of our investor presentation, where current loan to value stands at 70% in this portfolio, over 90% of contracts are linked to utility rate, the majority of which are in California, which have been rising rapidly increasing cash flow in the portfolio, both derisks any future refinancing of the non-recourse portfolio debt, but also gives us the opportunity to extract the equity cash needed for the next portfolio.
Acquisitions. This is project finance one to one with the cash flows from the assets and liabilities are tightly matched. The debt is hedged against future interest rate volatility and all the debt is non-recourse some closing remarks before handing off to Sarah, while there are broad concerns surrounding residential solar markets, we want to be crystal clear. First, Spruce has zero liquidity concerns. Second, the shift in originations to more leases and PPAs creates tremendous tailwinds for our business, as Bruce is the best long-term servicer and owner of these assets.
Third, we have both organic growth and disciplined acquisition and partnership growth ahead of us. We intend to be a leader in the long-term energy transition.
With that, let's go to the numbers with our CFO, Sarah wells.
Sarah Wells
Thanks, Christian. I'll first address some housekeeping items that impact our financial reporting, specifically an update on wrapping up legal proceedings related to legacy XL FleetCor and its operations at year end 2023, we accrued approximately $17 million in net expected legal settlement amounts. Most of this accrual amount a year end was tied to the Southern District of New York Securities class action lawsuits surrounding the 2020 merger of XL fleet and that class action lawsuit spruce made a payment in the amount of $15 million. This payment is subject to final approval and a hearing is set for this matter with the respective court in April.
Moving to fourth-quarter financial results. Fourth quarter revenue was $15.7 million, down from $18.1 million in the prior year period. The year-over-year decrease is a result of weather fluctuations. Fourth quarter core OpEx, which we define as SG&A and portfolio O&M, was $17.9 million in total as compared to $31.3 million for the prior year period. Breaking this out fourth quarter portfolio O&M expense increased to $5.5 million from $2.7 million in the prior year period. The increase is largely due to timing of normal O&M spend as supply chain and labor availability allowed us to finish planned 2023 O&M SG&A expenses decreased significantly to $12.5 million in the fourth quarter from $28.6 million in the fourth quarter of 2022. The prior year period saw outsized impact due to restructuring expenses and legal fees tied to legacy XL fleet lawsuits.
Finally, we first generated a GAAP net loss attributable to stockholders of $30.4 million in the fourth quarter. That said, management considers operating EBITDA as a key measure in evaluating versus operating performance. We define operating EBITDA as adjusted EBITDA plus net proceeds from the investment in the SDMTH. master lease interest earned on cash investments and proceeds from Biosyn prepayments. Let me explain why we assess our business performance this way.
First, GAAP earnings do not include cash flows we receive from our spruce Tower four portfolio. This is considered an investment in a master lease and proceeds from this investment flow through the cash flow from investing activities section of our consolidated cash flow statements to illustrate the relevance of this first tower for portfolio which we acquired in March 2023 partial year. Proceeds from this investment were approximately $20 million in 2023.
Next, interest earned on our cash investments is significant. We view the yield on our substantial cash balance invested as a material source of cash flows as we maintain our disciplined approach to near term M&A, which Christian earlier described as being our equity requirement is largely pre-funded with available debt capacity. Again, to underscore the relevance. We earned $8 million of interest on investment grade securities in 2023. Last cash inflows we received from buyout or prepayment of customer contracts represents a meaningful source of cash flows. For 2023, this amount totaled about $7 million.
So with these items in mind, I'll now bridge fourth quarter operating EBITDA. Adjusted EBITDA was $390,000 for the fourth quarter, adding in the net proceeds from this first power for a portfolio of $6.4 million brings the total to $6.8 million. Next adding $1.9 million of interest earned on cash investments and $1.3 million of proceeds from buyouts and prepayments, operating EBITDA totaled $9.9 million for the fourth quarter.
Next, I'll quickly address our capital and liquidity position. As of December 2023, we had cash and cash equivalents of $173 million. This compares to $240 million of cash and cash equivalents as of December 31, 2022, the net change in cash is primarily attributable to XL wind-down activities, including the previously disclosed settlement payment to the SEC in October, and cash usage for discontinued operations as well as our two acquisitions and share repurchase activity.
The total principal balance of long-term debt was $647 million as of December 31, 2023, with a blended interest rate of 5.7%, including the impact of hedge arrangements. As a reminder, Spruce has no corporate level debt. All our debt consists of project-level debt that is supported by our solar loan portfolios and is non-recourse to the Company. At year end, 97% of our debt profile was hedged with mark-to-market on our swaps of positive $27 million.
Finally, versus gross portfolio value, which represents the present value of remaining net cash flows from customers at a 6% discount rate was $784 million at year end. As Christian mentioned, this reflects an update to our renewal assumptions. Finally, after deducting non-recourse debt and adding back cash balances, our net portfolio value was $311 million, excluding the $17 million of net cash settlements that are expected or reserved as of year end. This results in net portfolio value per share of over $16. Last, I'll address first, the financial outlook for 2024.
First, we expect operating EBITDA, as I previously defined to the adjusted EBITDA plus net cash flows from this first tower for portfolio interest on cash invested and proceeds from customer buyouts and prepayments to range between $68 million and $86 million for 2024. After deducting project finance debt service and making some other adjustments for noncash items. We expect adjusted free cash flow to range between zero and $5 million for 2024. The reconciliation of these non-GAAP measures can be found in our updated investor relations presentation posted on our Investor Relations website.
This concludes our prepared remarks. Operator, please open up the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Jordan Levy, Truist Securities.
Hey, guys. It's Henry on for Jordan here. Thanks for taking my question. Firstly, congrats on the launch of the spruce Pro. Just looking at that product a bit more. I know it's early days, but just can you talk to how the ramp is going to start the year and any initial feedback on the product so far? Thanks.
Christian Fong
Yes, hi, Henry. Thanks for joining today on spruce Pro, I entered the market with far more momentum than we anticipated. But that way would when we look at this, we looked at the full building out of our servicing technology platform that took it was before we are public. We spent the last four or five years really getting this down, getting those customer satisfaction levels to 80% and then saying, look, if we're doing that well in building best-in-class, let's just offer this as an additional product. I know the firm can rent a platform, so to speak on and that's half of it. The other half of it is the S Ruck trading.
And we call that the environmental commodities markets. And in both cases, we just said there are folks outside of spruce outside of our own portfolio that can quote rent-up rent the platform on the and ECM or the S rec desk. That's a fairly well known market on and there are other players that are doing that. And so I'll just say that we are working with major owners of assets, both C&I and residential that are in some of the major esoteric markets, but don't have the sort of trading desk that we have.
There's a few of them under typically institutional. We do have our first C. and I. contract already signed on and the registration of the assets are in process so that that happened as planned. I'll put it that way. What we did not anticipate was the pain that's going on in residential solar and where that would drive external participants to trying to rent a servicing platform. And our Head of Corporate Development sometimes says servicing is what keeps the refrac, how does this industry?
It's really hard and it takes a lot of years to build. So the incoming on that, we have a fairly deep pipeline of clients that are talking with us about signing up contracts. As I said previously, it's a little bit early. We just launched this in January eight weeks, and we had to take the step of actually reassigning people internally into that program because the incoming interest was so strong. So let me just leave that there. It's a little bit premature because there's no revenue. So it's not that much fun to talk about to the cash flow starts starts happening.
So thanks for that. And then another one for you, Christian, I know you've spoken recently on programmatic partnerships. I just wanted to dig a little bit more into that. I'm curious if these installers that have done PPA and lease origination before, are they new entrants into the market and then some of the channel TPO players, are those branching out given current liquidity constraints?
Christian Fong
The last quarter we actually call this programmatic off-taker and we've gone a step further again through the spruce Pro. And this is really the these are two major products that we can immediately launch off our platform because of our core competencies. The there's two ways that we filter out who we're working with.
But let me add a third, but right now, there is a question of which installers from the NAS., the most national level all the way to the regional or local level, which ones are even going to survive and still be in business. I'll just say we are working with those that have significant enough liquidity and sponsorships that they're strong enough to be there a year from now two years from now, three years from now, we're looking for sustainability in their business models, too.
But otherwise, what we're looking at are folks that can do 1,000 systems or more per year, but this is not the old fashion channel partnership where you just kind of tell everyone you can use our product and whether you do 20 or 50 or 100 or 10,000, I will take anybody. We're looking for the volume. The super regionals, if you well, the second thing and the other way is this a little bit different than a traditional channel partnership is that we are not offering working capital. It's a way to also filter because the strongest players in the market not only can do well over 1,000 per year, maybe 5,000, 10,000, but they also have their own financing lined up that way. We're not having to step into providing working capital and in our mind and in our experience because we used to do channel partnerships before we were public. That's the drag. That's the Achilles' heel of that business, but we're just not stepping there.
So to answer your second question of where are they coming from? Because again, they're doing 1,000 plus per year, very experienced at doing PPAs and leases depending on the market on and they are coming from existing well, let's say it carefully. I don't want to name names, but they are absolutely coming from other platforms that have previously provided PPA and lease working capital style financing. And they're leading those platforms out of a concern of whether those platforms are going to make it and they're going to a place of strength. It's worth we've got plenty of cash or cash flow positive. We're going to be here, we're going to be here for the long term. So there's a shuffling of the deck, if you will, and that's going on upstream from us. And we are the happy recipients of a lot of those phone calls.
Operator
Joseph Osha, Guggenheim Partners.
Joseph Osha
I am in a car. So I apologize if it's hard to hear me. Can I get your comments. I'll comment a little bit on the success you've had on up-selling existing customers, in particular on on storage. And also curious as to whether you're as part of that, given some of that momentum we're seeing for us, some of the products with that have integrated inverters, whether that's that something that you're finding might be on the table as well?
Christian Fong
Yes. Let me speak to the first on and I will pass on the second of the we are we are component agnostic. So that was so I actually don't spend a lot of time looking at what are the kinds of components that are are getting placed on in terms of in terms of batteries, the way that we're approaching the market would be retro fit batteries to differentiate it from someone that's getting a solar plus storage. Those attachment rates are being well reported by some of our installer peers.
In terms of retrofit batteries, I had previously spoken of the pace of about $200,000 a year of sales revenues leases. I'll just mix it all together. $200,000 probably said it's just not enough to model it barely enough to just kind of keep a small team going to provide it for our customers. And that number has remained unchanged until California changed to the NIM 3.0, and then it went even further down. So while we have always said, this is not a core business. We'll offer it when our customers are asking for it, then 3.0, I'm just going to say destroyed the economics and the incentives behind a retrofit battery system. And while we always want to be there for our customers that they're asking us for a product that they have an individual need for the life of me. I can't understand how it's economic for them or for anybody.
Joseph Osha
Thank you. And just with regard to your thought and answer to the previous question, or without naming names at Paris, you are beginning it sounds like you see some larger regional super regionals bleed off from some of that, the very large partners based on some of the well well-reported liquidity concerns, and you are saying that.
Christian Fong
Yes, I am.
Operator
Seeing no more questions in the queue. Let me turn the call back to Mr. Fleig to conclude the call.
Bronson Fleig
Thank you, operator, and thanks, everyone, for joining our call today. This is going to include the call and if you have any questions, please reach out to me or our team, and we'll get back to you. Thank you.
Operator
This concludes today's call. You may now disconnect.
Bronson Fleig
Thank you.
Operator
This concludes today's.
