Q3 2023 Sunrun Inc Earnings Call

Good afternoon, and welcome to Sunlands third Clutter 2023 earnings Conference call. All participants have been placed on mute. Please note that this call is being recorded and that one hour has been allocated for the call, including the question and answer session to join the Q&A session.

After I prepared remarks, please press star one at any time, we asked participants to limit themselves to one question and one follow up question I will now turn the call over to Patrick Jonathan <unk> Senior Vice President Investor Relations. Please go ahead.

Thank you Sherry before we begin please note that certain remarks, we will make on this call constitute forward looking statements. Although we believe these statements reflect our best judgment based on factors currently known to US actual results may differ materially and adversely.

Please refer to the company's filings with the F. C C for a more inclusive discussion of risks and other factors that may cause our actual results to differ from projections maiden any forward looking statements. Please also note. These statements are being made as of today and we disclaim any obligation to update or revise them. During today's call. We will also be discussing certain non-GAAP financial.

As yours, which we believe can provide meaningful supplemental information for investors regarding the performance of our business and facilitating meaningful evaluation of current period performance on a comparable basis with prior periods.

These non-GAAP financial measures should be considered as a supplement to and not as a substitute for superior to Orient isolation from GAAP results you will find additional disclosures regarding the non-GAAP financial measures discussed on today's call in our press release issued this afternoon and our filings with the S. C C. Each of which is posted.

On our website on the call today are Mary Powell Sunrun C E O Danny Bachan Sunrun CFO at.

Fenster son runs co executive Chairman and cofounder is also on the call for the Q&A session Ah.

Presentation is available on Sunrise Investor Relations website, along with supplemental materials and audio replay of today's call along with a copy of today's prepared remarks, and transcript, including Q&A will be posted to Sunrise Investor Relations website. Shortly after the call. We have allocated 60 minutes for today's call, including the Q&A session.

And now let me turn the call over to marry.

Thank you Patrick.

This has been a volatile time across the solar industry with changes in important policies and rising interest rates leading to difficult conditions in the sector. We are taking action and responding to this environment, which results in a lower growth outlook than we expected at the start of the year. We are also sharpening our focus on cash generation.

And continue to execute a customer first sustainable growth strategy that does not require equity funding here.

Is what we are doing to respond to these tough conditions and improve our position.

First we are reshaping the business to be storage first.

During the quarter, we rapidly accelerated storage adoption and as a result, we are growing our lead as America's clean energy company, one that delivers a superior value proposition to customers and crew.

Multiple value streams for our shareholders.

Significant national change management exercise and one that most competitors have not yet undertaken.

Second we have made thoughtful decisions on solar only volume we are not chasing growth. It has sub par economics. Therefore, we rejected opportunities for growth in queue for it did not meet our return hurdles third we intensified cost reductions.

We were both processes <unk> and a best in class artificial intelligence T.

Improve the customer experience and build a strong foundation to deliver Easter value to customers over time.

We installed 176 megawatt hours of storage capacity in Q3, growing 131% compared to the prior year and 68% from the prior quarter. We now have more than 1.1 gigawatt hours of storage capacity installed across the country.

Our storage offerings provide customers enhanced value and generate significantly higher margins for sunrise, while providing a foundation for future monetization in the years to come.

Our storage attachment rate was over 33 per cent of our installations across the country in the third quarter.

<unk> increased from just 15% starting the year.

We expect this percentage will continue to climb.

Are accelerating storage attachment right presents a powerful opportunity to grow our clean energy generation business by providing add scale distributed powerplant capabilities across America.

We are driving enhance customer value and forging valuable longterm relationships with our customers.

Two four we launched our storage retrofit offering with strong early results.

[noise] ahead, we expect to be installing meaningful volumes of storage in our existing customer base as we have thousands of customers who have already expressed interest in the product.

Being the chosen trusted provider to deliver this clean energy future is critical.

A testament to our customer first approach our customer net promoter scores at the time of install increased nearly seven percentage points compared to the prior year two approximately 70.3.

Right.

We will launch an early renewal program in the coming quarter to provide customers with the opportunity to renew their subscriptions and lock in the benefits of our relationship.

Earliest customers have agreements scheduled to auto renew in about two and a half years. This program also provides sunrun with essential learning. So we can scale effectively and take advantage of significant upside opportunities for cash generation and period.

During the third quarter, we came in slightly below the midpoint of our guidance range on solar installation volume deploying 258 megawatts of solar capacity as we increased our focus on higher value sales to storage plus solar customers in.

In the third quarter, we grew our customer base to over 900000, representing 6.5 gigawatts of installed solar capacity.

[noise] to recent market research, we are not only the largest residential solar company in the United States, but in fact, we are second largest even when you include utility scale solar.

Overall, we are reiterating our commitment to drive a meaningful cash generation.

We aim to show the strength of our model with our customer first approach and differentiation as the leader in storage executing against our disciplined gross margin folks focused strategy.

We had 952 million in total cash at quarter end, and we have a durable funding model with no equity neat.

Turning to slide five to double click on our market leadership in California.

Right structure transition in California continues to present opportunities for Sunrun as we extend our lead with our pro consumer solar plus George offering.

While demand has been slower to recover than we were expecting we believe the opportunity remain significant given increasing utility rates and frequent grid outages well industry data is lagging anecdotal information on market trends suggest we have or will be gaining share in California and expect us to act.

Celebrate in periods of head, given our expertise and storage and subscription offerings.

[noise] runs, Georgia attachment rates and our direct business are over 85 per cent of sales in California, and closer to 100 per cent in the investor owned utility service territory.

This is substantially higher than the rest of the industry, which we observed at less than 40% attachment.

Importantly, we believe this provides customers with the best clean energy offering.

As compared to solar only installations in California customers enjoy similar utility bill savings with backup storage and significantly more savings with our shift product.

Our shift and backup storage products also provide stronger margins and future revenue opportunities for Sunrun as we network storage systems together to form distributed powerplants enhancing grid reliability and accelerating the transition to clean energy resources across the state.

Turning to slide six.

We continue to execute our margin focus growth strategy.

This quarter, we took action responding to higher interest rates with continued go to market optimizations remaining disciplined and how we participate in the affiliate partner segment of the market and focusing on our leadership and storage products.

These actions are fundamentally geared towards maximizing Val.

Valuation creation for our shareholders because of these actions we are adjusting our outlook for the full year. We are now guiding to 220 to 245 megawatts of solar capacity installations in queue for which implies full year growth of approximately two per cent to five per cent.

Lessen our prior guidance of 10% to 15% growth for the full year because of our strategic focus on storage products, both for new customers and existing customers. We are also introducing guidance approximately 71% to 78% growth in storage capacity.

[noise] installed for 20, twenty-three, which accelerates our cash generation trajectory.

There are four key drivers of our revised outlook for solar capacity installations as we highlight on the presentation slides.

First.

We remain focused on providing the most pro consumer offering in California, while.

While the opportunity remains strong in California, the rebound is taking longer than we initially expected sales in Q3 recovered from Q2 following the transition to the new rate structure and have increased by almost 15% from the prior quarter, they're still approximately down a third compared to the prior year, we have great customer <unk>.

Or is that are compelling in a market where grid outages are rampant and utility prices are increasing rats.

We offer shift are simple non backup product and are more sophisticated backup storage product, we believe our shift offering and backup storage product are the best options for customers and through our grid services programs deliver the most longterm value both for Sunrun and the communities where we operate.

Unknown Executive: and welcome to Sunrun's third quarter, 2023 earnings conference call. All participants have been pleased to meet. Please note that this call has been recorded, and that one hour has been allocated for the call, including the question and answer session.

Based on recent conversations with customers following the mid your policy change in California. It is apparent that the new regulatory environment has cause confusion for many consumers about the true value proposition for solar only systems.

Unknown Executive: To join the Q&A session, after prepared remarks, please press star 1 at any time. We ask participants to limit themselves to one question and one follow-up question.

Is taking time for consumers to adapt to the new policy and to understand that storage products are now by far the best consumer product offerings in California, all of our storage product offerings continued to far outpaced solar only sales.

Patrick Jobin: I will now turn the call over to Patrick Jobin, Sunrun, Senior Vice President, Investure Relations, please go ahead. Thank you, Sherry. Before we begin, please note that certain remarks we will make on this call constitute forward-looking statements. Although we believe these statements reflect our best judgment based on factors currently known to us, actual results may differ materially and adversely. Please refer to the companies filing with the SEC for more inclusive discussion of risks and other factors that may cause our actual results to differ from projections made in any forward-looking statements.

The longterm owner of assets our interests are aligned to deliver the best customer value and to continue to invest in products that benefit our customers in the short and long term.

The good news is that the value proposition of our shift offering a strong with typical year, one savings of 10% to 30% savings will only increase as utility rates increase for instance, P. G and he may get approval to increase rates by 13% in January California is committed to electrification.

Patrick Jobin: Please also note these statements are being made as of today. We just claim any obligation to update or revise them. During today's call, we will also be discussing certain non-gap financial measures, which we believe can provide meaningful supplemental information for investors regarding the performance of our business and facilitating meaningful evaluation of current period performance on a comparable basis with prior periods. These non-gap financial measures should be considered as a supplement to, and not as a substitute for, superior to or in isolation from gap results.

Good.

Rates are likely to increase rapidly and power shut off events will continue to drive customers to seek more affordable and reliable clean energy sources.

Well, California gets a lot of attention it's important to note the benefits of running a diversified business, which operates in many states.

Installations outside of California had been robust growing over 25 per cent in Q3 compared to the prior year. While sales also continue to grow a double digits from the prior year.

Patrick Jobin: You will find additional disclosures regarding the non-gap financial measures discussed on today's call and our press release issued this afternoon, and our filings with the SEC, each of which is posted on our website.

Second the business transition, we're undergoing to become a storage first company requires retraining thousands of sales and installation personnel.

Patrick Jobin: On the call today, our Mary Powell, Sunrun CEO, Danny Abadjan, Sunrun CFO, Ed Fenster, Sunrun's co-executive chairman and co-founder, is also on the call for the Q&A session. The presentation is available on Sunrun's Investor Relations website, along with supplemental materials. An audio replay of today's call, along with a copy of today's prepare remarks in transcript, including Q&A, will be posted to Sunrun's Investor Relations website shortly after the call.

Time, the rapid increase in attachment rates for higher value storage offerings will deliver bet better net subscriber values and increased opportunities for good service programs. We are pleased with consumers interest in uptake rates of our backup battery product, which has outsold our shift product. This is favorable development assistance.

Back of storage have higher margins, but the systems are more sophisticated to permit and install and therefore carry elongated cycle times between sales and installation.

Mary Powell: We have allocated 60 minutes for today's call, including the Q&A session, and now let me turn the call over to Mary. Thank you, Patrick. As you all know, this has been a volatile time across the solar industry with changes in important policies and rising interest rates, leading to difficult conditions in the sector.

We are working through this accelerated change management as our operations teams learned to optimize processes and our sales teams refine how they communicate them more sophisticated and nuanced value proposition to customers.

Mary Powell: We are taking action and responding to this environment, which results in a lower growth outlook than we expected at the start of the year. We are also sharpening our focus on cash generation and continue to execute a customer first sustainable growth strategy that does not require equity funding.

Third we are disciplined and how we participate through affiliate channel partners.

We value companies that are focused on customer experience that value our brand platform storage first product suite and sustainable pricing model.

We value partners that share a longterm orientation and are embracing the transition to a storage plus solar fugere we.

Mary Powell: Here is what we are doing to respond to these tough conditions and improve our position. First, we are reshaping the business to be storage first. During the quarter, we rapidly accelerated storage adoption. And as a result, we are growing our lead as America's clean energy company, one that delivers a superior value proposition to customers and creates multiple value streams for our shareholders.

We are seeing pockets of irrational behavior and the affiliate partner segment of the market with several financing only participants scaling with pricing that we consider unattractive, which can influence short term sales dealers volume allocations.

As a result, we have reduced our volume expectations through the affiliate partner channel in the near term.

Mary Powell: This is a significant national change management exercise, and one that most competitors have not yet undertaken. Second, we have made thoughtful decisions on solar only volume. We are not chasing growth that has subpar economics. Therefore, we rejected opportunities for growth in Q4 that did not meet our return further.

We've seen this behavior several times and the company's 16 year history and won't chase volumes at economics that we do not view of sustainable. We believe are diversified market approach, which includes an integrated sales force and fulfillment capacity provides insulation from these behaviors from financing only firms and.

Mary Powell: Third, we intensified cost reductions through both process efficiency and a testing class artificial intelligence team. We have improved the customer experience and built a strong foundation to deliver increased value to customers over time. We installed 176 megawatt hours of storage capacity in Q3, growing 131 percent compared to the prior year and 68 percent from the prior quarter. We now have more than 1.1 gigawatt hours of storage capacity installed across the country.

A strategic benefit to Sunrun.

Fourth we are adjusting our geographic mix.

Those channels and product offerings to adapt to the new interest rate environment.

Near term these actions will maximize subscriber values and storage installations, rather than solar megawatt volumes. This includes repositioning our geographic mix such as exiting our direct business in Arizona earlier in the year and our recent growth in Texas.

Using our solar megawatt annual growth target is not something we take lightly but our focus on cash generation, having price discipline and leading with a customer centric mindset are prudent actions to take as we positioned the company to maximize longterm value as a storage first company.

Mary Powell: Our storage offerings provide customers enhanced value and generate significantly higher margins for Sunrun while providing a foundation for future monetization in the years to come. Our storage attachment rate was over 33 percent of our installations across the country in the third quarter, a significant increase from just 15 percent starting the year and we expect this percentage will continue to climb. Our accelerating storage attachment rate presents a powerful opportunity to grow our clean energy generation business by providing at scale distributed power plant capabilities across America. We are driving enhanced customer value and forging valuable long term relationships with our customers.

These actions coupled with continued cost reductions will maximize longterm value creation and position us for meaningful cash generation.

Taking a step back amidst all the equity market volatility and near term headwinds from a higher interest rates and difficult market conditions in the sector. The longterm value drivers are intact and son runs position in the market has improved we have been able to adapt to the higher interest rate environment.

Mary Powell: In Q4, we launched our storage retrofit offering with strong early results. In the quarters ahead, we expect to be installing meaningful volumes of storage in our existing customer base as we have thousands of customers have already expressed interest in the product.

As our pricing adjustments have coincided with utility rate inflation, while utility service reliability continues to deteriorate.

We were at the beginning of a massive transition towards electrification.

Driving more electricity use at the home and can offer at an affordable reliable source of clean energy for millions of households.

Mary Powell: Being the chosen trusted provider to deliver this clean energy future is critical. As a testament to our customer first approach, our customer net promoter scores at the time of install increased nearly 7 percentage points compared to the prior year to approximately 70 points in Q3.

I firmly believe that this challenging macroeconomic environment actually gives us opportunities to accelerate our longterm leadership position in the industry.

I am confident we will capitalize on the market shifts to strengthen our position by remaining customer focused and longterm oriented.

Mary Powell: We will launch an early renewal program in the coming quarter to provide customers with the opportunity to renew their subscriptions and lock in the benefits of our relationship. Our earliest customers have agreements scheduled to auto renew in about two and a half years. This program also provides Sunrun with essential learning so we can scale effectively and take advantage of significant upside opportunities for cash generation in periods.

Speaking of customer focus and discipline again this quarter I Wanna celebrate our teams across the country in the field and in our offices, who are helping accelerate this customer led revolution in energy and practicing are strong culture of doing it safely and efficiently.

This quarter, we are recognizing not one but two top performing teams in the country first.

Mary Powell: During the third quarter, we came in slightly below the midpoint of our guidance range on solar installation volume, deploying 258 megawatts of solar capacity as we increased our focus on higher value sales to storage plus solar customers. In the third quarter, we grew our customer base to over 900,000 representing 6.5 gigawatts of installed solar capacity. According to recent market research, we are not only the largest residential solar company in the United States, but in fact, we are second largest even when you include utility scale solar.

Thank you to our top ranked install crew based on performance safety and customer experience from Tampa, Florida.

Our top ranked sales team based on growth storage attachment rates and customer experience from Fresno, California, girlfriends, no-one Tampa I know you're listening and we appreciate you. Thank you for your contributions and leadership, it's Sunrun with that let me turn the call over to Danny for our financial upticks.

Thank you Mary today, I will cover our operating and financial performance in the corridor, along with an update on our capital markets activities at outlook, turning first of the results for the corner on flight 11.

Mary Powell: Overall, we are reiterating our commitment to drive meaningful cash generation. We aim to show the strength of our model with our customer first approach and differentiation as the leader in storage. Executing against our disciplined growth and margin focus strategy. We had a 952 million in total cash at quarter end and we have a durable funding model with no equity need.

The third quarter solar energy capacity installed was approximately 258 megawatts, a 1% increase from the same quarter last year and within our guidance of 255 to 275 megawatts.

Customer additions were approximately 33800, including approximately 29300 subscriber additions.

Mary Powell: Turning to slide five to double click on our market leadership in California. The rate structure transition in California continues to present opportunities for Sunrun as we extend our lead with our pro-consumer solar plus storage offering. While demand has been slower to recover than we were expecting, we believe the opportunity remains significant given increasing utility rates and frequent grid outages.

We're subscription mix represented 89 per cent of our deployments in the period, a meaningful inquiries from 83 per cent last quarter and the highest level in two years.

We have now installed over 76000, Solaren storage systems, we expect storage installations will grow substantially in the quarters ahead sales of storage attach systems have grown to over 40 per cent nationally, which continue to drive installed attachment rates meaningfully higher in future periods.

Mary Powell: While industry data is lagging, anecdotal information on market trends suggests we have or will be gaining share in California and expect this to accelerate in periods ahead given our expertise in storage and subscription offerings. Sunrun storage attachment rates in our direct business are over 85% of sales in California and closer to 100% in the investor owned utility service territories. This is substantially higher than the rest of the industry, which we observe at less than 40% attachment. Importantly, we believe this provides customers with the best clean energy offering. As compared to solar-only installations in California, customers enjoy similar utility bill savings with backup storage and significantly more savings with our shift product.

Backup storage offerings carry higher margins typically by several thousand dollars per customer.

During the quarter, we installed 176 megawatts of storage capacity, an increase of 131% from the same quarter last year, bringing total network storage capacity to over 1.1 gigawatt hours.

We ended Q3 with approximately 903000 customers and 754000 subscribers, representing six and a half gigawatts of network solar energy capacity, an increase of 20% year over year.

Our subscribers generates significant recurring revenue with most under 20 or 25 year contracts for the clean energy we provide.

At the end of two three hour annual recurring revenue or a R. R stood at over $1.2 billion up 28% over the same period last year.

Mary Powell: Our shift and backup storage products also provide stronger margins and future revenue opportunities for Sunrun as we network storage systems together to form distributed power plants, enhancing grid reliability and accelerating the transition to clean energy resources across the state.

Average contract life remaining of nearly 18 years.

Turning to slide 12.

In Q3 subscriber value was approximately $47100 and creation cause was approximately 36000, delivering a net subscriber value of $11030.

Mary Powell: Turning to slide six, we continue to execute our margin focus growth strategy. This quarter, we took action responding to higher interest rates with continued go to market optimization, remaining disciplined in how we participate in the affiliate partner segment of the market and focusing on our leadership and storage products. These actions are fundamentally geared towards maximizing valuation creation for our shareholders.

Q3 subscriber value in that subscriber value now reflect the blended 31% investment tax credit benefiting from approximately 13 per cent of our subscriber mixed I qualified for the energy communities I T C artery in the corner.

Total value generated which isn't that subscriber value multiplied by the number of subscriber additions in the period was $323 million in the third quarter.

Present value based metrics are presented using a 6% discount rate, but our financial underwriting already accounts for our current cost of capital, which is slightly below 8%.

Mary Powell: Because of these actions, we are adjusting our outlook for the full year. We are now guiding to 220 to 245 megawatts of solar capacity installations in Q4, which implies full year growth of approximately 2% to 5% less than our prior guidance of 10% to 15% growth. For the full year, because of our strategic focus on storage products, both for new customers and existing customers, we are also introducing guidance of approximately 71% to 78% growth in storage capacity installed for 20 to 23, which accelerates our cash generation trajectory.

As a reminder to enable ease of comparison across periods. We generally do not update the discount rate frequently instead, we provide advance rate ranges that reflect current interest rates, enabling investors to calculate the obtainable Ned unit catch that casts unit margins on our deployments.

In addition, we provide a pro forma net subscriber value using the cost of capital observed for the quarter.

At an 8% discount rate net subscriber value is $4715 and total value generated was $138 million.

Turning to slide 13.

Mary Powell: There are four key drivers of our revised outlook for solar capacity installations as we highlight on the presentation slide. First, we remain focused on providing the most pro consumer offering in California. While the opportunity remains strong in California, the rebound is taking longer than we initially expected. Sales in Q3 recovered from Q2 following the transition to the new rate structure and have increased by almost 15% from the prior quarter. They are still approximately down the third compared to the prior year.

We expect meaningful tailwinds to net subscriber value in future periods from the realization of additional like T. C adders and from lower hardware prices, we are seeing on our current procurement activities.

While the energy communities I T Theater was operationalized in Q3 additional cash proceeds for systems that qualify for the low income and domestic contact I T theaters are expected to be realized in the coming quarters, but.

But first low income at or application window has opened and quota allocation of words are expected and wait two four or early twenties twenty-four guide.

Mary Powell: We have great customer offers that are compelling in a market where grid outages are rampant and utility prices are increasing rapidly. We offer shift, our simple, non backup product and our more sophisticated backup storage product. We believe our shift offering and backup storage product are the best options for customers and through our grid services programs to deliver the most long term value both for Sunrun and the communities where we operate based on recent conversations with customers following the mid-year policy change in California.

Guidance on what will qualify for the domestic content at or has been issued but additional rule, making processes are not expected until into 2024.

Combined these three hours represent up to $450 million or more and additional annual run rate cash proceeds.

We're also seeing rapidly decreasing prices for key hardware components, which will start to flow through I'll report it costs over the next few quarters as we work through our higher cost inventory.

On a like for like basis for a seven and a half kilowatt solar with backup battery system by the end of next year hardware costs are expected to decline by over 20% or nearly $3000 per system from their second quarter piece.

Mary Powell: It is apparent that the new regulatory environment has caused confusion for many consumers about the true value proposition for solar only systems. It is taking time for consumers to adapt to the new policy and to understand that storage products are now by far the best consumer product offerings in California. All of our storage product offerings continue to far outpace solar only sales. As the long-term owner of assets, our interests are aligned to deliver the best customer value and to continue to invest in products that benefit our customers in the short and long term.

These beneficial trends may be obscured by an increasing mix of storage, which carries hired net margins, but will increase hardware and install costs and therefore impact creation costs.

Turning to slide 14.

We have presented a pro forma net subscriber value to show the potential impacts to unit margins from the forthcoming I T. C. Adders, it fully realized along with the hardware cost Tailwinds, we expect in the coming quarters faced.

Mary Powell: The good news is that the value proposition of our shift offering is strong with typical year one savings of 10 to 30%. Savings will only increase as utility rates increase. For instance, PG&E may get approval to increase rates by 13% in January. California is committed to electrification. Rates are likely to increase rapidly and power shut off events will continue to drive customers to seek more affordable and reliable clean energy sources.

Based on our mix of business in Q3 pro forma net subscriber valley with these benefits was approximately $14800 at a six per cent discount rate and $8500 at an 8% discount rate.

Turning now to gross and net earning assets and our balance sheet on slide 16.

Gross everything out so that's where 13.3 billion at the end of the third quarter gross earnings assets is the measure of cash flows we expect to receive from subscribers overtime.

Of operating and maintenance costs distributions to tax equity partners and partnership flip structures and distributions the project equity financing partners all discounted at a six per cent on Levered capital cost.

Mary Powell: While California gets a lot of attention, it's important to note the benefits of running a diversified business which operates in many states. Installations outside of California have been robust, growing over 25% in Q3s compared to the prior year, while sales also continue to grow at double digits from the prior year. Second, the business transition we are undergoing to become a storage first company requires retraining thousands of sales in installation personnel. In time, the rapid increase in attachment rates for higher value storage offerings will deliver better net subscriber values and increased opportunities for good service programs.

Net earning out so that's where $4.6 billion at the end of the third quarter.

Earning assets is gross earning assets lots of cash, let's all death.

Net earning assets increased by $130 million this quarter.

Earning assets does not include inventory or other construction in progress assets or net derivative assets related to our interest rate swaps all of which represents additional value.

Mary Powell: We are pleased with consumers interest and uptake rates of our backup battery product which has outsold our shift product. This is favorable development as systems with backup storage have higher margins. But these systems are more sophisticated to permit and install and therefore carry elongated cycle times between sales and installation. We are working through this accelerated change management as our operations teams learn to optimize processes and our sales teams refine how they communicate the more sophisticated and nuanced value proposition to customers.

She and value creation upside, we expect from future Red services opportunities and selling additional electrification products and services to our customer base, including our storage retrofit offering are not reflected into the matrix.

We regularly enter into interest rate swaps to hedge capital costs on our newly installed customers. We are principally exposed to interest rate fluctuations between customer origination through shortly after installation when our systems are financed with project level non recourse dead nearly.

All of this financing is insulated from near term interest rate fluctuations as our that is either fixed coupon long dated securities or floating rate loans that had been hedged with interest rate swaps.

Mary Powell: Third, we are disciplined in how we participate through affiliate channel partners. We value companies that are focused on customer experience that value our brand platform storage first product suite and sustainable pricing model. We value partners that share a long term orientation and are embracing the transition to a storage plus solar future. We are seeing pockets of irrational behavior in the affiliate partner segment of the market with several financing only participants scaling with pricing that we consider unattractive which can influence short term sales dealers volume allocation.

Such we do not adjust the discount rate used in net earning assets to match current capital costs for new installations.

We ended the quarter with $952 million in total cash an increase of $31 million compared to the prior quarter, we pay down our recourse working capital facility by $35 million as well.

Turning briefly to our capital markets activities in outlook on slide 17.

Mary Powell: As a result, we have reduced our volume expectations through the affiliate partner channel in the near term. We've seen this behavior several times in the company's 16 year history and won't chase volumes at economics that we do not view as sustainable. We believe our diversified market approach, which includes an integrated sales force and fulfillment capacity, provides insulation from these behaviors from financing only firms and is a strategic benefit to Sunrun. Fourth, we are adjusting our geographic mix, sales channels and product offerings to adapt to the new interest rate environment.

We currently realize project level of capital cost slightly below 8%, which is a weighted average of our non recourse senior and subordinated debt interest rates our cost of capital indications are informed by both realized terms on our transactions as well as observable market data such as a longer term treasury yields as a <unk>.

Roxy for our base rate and credit spreads across numerous comparable transactions completed in our sector.

During the quarter, we successfully executed the largest ever residential solar securitization raising $750 million at a credit spread of 240 basis points of 25 basis point improvement from our public prior public securitization in may of this year.

Similar to prior transactions. We also raised an additional 253 million of subordinated Rotten non recourse that on the portfolio, bringing the cumulative advance rates are slightly above 84% of contracted subscriber value exceeding the range, we provided last quarter.

Mary Powell: In the near term, these actions will maximize subscriber values and storage installations rather than solar megawatt volumes. This includes repositioning our geographic mix, such as exiting our direct business in Arizona earlier in the year and our recent growth in Texas. Reducing our solar megawatt annual growth target is not something we take lightly, but our focus on cash generation, having price discipline and leading with a customer centric mindset are prudent actions to take as we position the company to maximize long term value as a storage first company.

We continue to maintain a robust project finance runway.

As of today close transactions and execute a term sheet to provide us with expected tax equity capacity to fund over 235 megawatts of projects for subscribers beyond what was deployed through the third quarter.

<unk> also had $555 million in unused commitments available and it's 1.8 billion non recourse senior revolving warehouse alone at the end of the quarter to fund approximately 195 megawatts of projects for subscribers.

Mary Powell: These actions coupled with continued cost reductions will maximize long term value creation and position us for meaningful cash generation. Taking a step back amidst all the equity market volatility and near term headwinds from higher interest rates and difficult market conditions in the sector, the long term value drivers are intact and Sunrun's position in the market has improved. We have been able to adapt to the higher interest rate environment as our pricing adjustments have coincided with utility rate inflation, while utility service reliability continues to deteriorate.

Strong capital runway allows us to be selective and timing are capital markets activity.

We recently closed our first tax equity fund, which leverages, the new tax credit transfer ability provisions from the inflation reduction act, enabling us to more easily monetize tax credits with large corporate buyers.

As more corporations become familiar with this new structure, we expect transferability funds to become a large part of our funding strategy. This.

This will deepen and diversify our investors universe.

Given the increased scale of our business, we plan to complete and upsize an extension of our non recourse warehouse alone in the coming few months as we have done several times before we are also planning to extend our asset based recourse working capital facility. In 2024 ahead of its January 20 twenty-five maturity as we have done.

Mary Powell: We are at the beginning of a massive transition towards electrification, driving more electricity use at the home and can offer an affordable, reliable source of clean energy for millions of households. I firmly believe that this challenging macro economic environment actually gives us opportunities to accelerate our long term leadership position in the industry. I am confident we will capitalize on the market shifts to strengthen our position by remaining customer focus and long term oriented.

Several times before as well.

We're working capital facilities Syndicate includes a diversified group of 13 relationship lenders.

Both loans or floating rate and neither is constrained by current borrowing base limitations.

Turning now to our outlook on slide 19.

Mary Powell: Speaking of customer focus and discipline, again this quarter I want to celebrate our teams across the country in the field and in our offices who are helping accelerate this customer led revolution in energy and practicing our strong culture of doing it safely and efficiently. This quarter we are recognizing not one but two top performing teams in the country. First, thank you to our top ranked install crew based on performance, safety and customer experience from Tampa, Florida.

We continue to believe the market is very underpenetrated and can sustain robust growth throughout this decade.

And a strong long term demand backdrop, our priority is to generate cash by continuing to increase customer values through growing storage adoption and other higher value products and services and reducing costs by driving further efficiencies across the business.

Given our storage first company strategy, we are introducing guidance for storage capacity installed storage capacity installed is expected to be in a range of 180 to 200 megawatt hours in queue for.

Mary Powell: Second, our top ranked sales team based on growth, storage attachment rates and customer experience from Fresno, California. Go Fresno and Tampa, I know you are listening and we appreciate you. Thank you for your contributions and leadership at Sunrun.

This represents 108% to 131% growth year over year for the full year 20 twenty-three that's range represents 71 to 78 per cent growth.

Solar energy capacity installed is expected to be in a range of 220 to 245 megawatts in queue for this represents full year 20 twenty-three growth of approximately two two approximately 5% compared to our prior guidance range of 10 to 15 per cent growth for the full year 2023.

Danny Abajian: With that, let me turn the call over to Danny for our financial update. Thanks. Thank you, Mary.

Danny Abajian: Today I will cover our operating and financial performance in the quarter, along with an update on our capital markets activities and outlook, turning first to the results for the quarter on slide 11. In the third quarter, solar energy capacity installed was approximately 258 megawatts, a 1% increase from the same quarter last year, and within our guidance of 255 to 275 megawatts. Customer additions were approximately 33,800, including approximately 29,300 subscriber additions. Our subscription mix represented 89% of our deployments in the period, a meaningful increase from 83% last quarter, and the highest level in two years.

[noise] reduction is due to the strategic decisions, we have made to prioritize cash generation and leaned further into our storage product offering as well as other factors we have noted.

We have we expect net subscriber value to be stable in queue for compared to Q3 as we transition are mixed a higher value storage systems. These more complex and time consuming installations resolved and more cause being realized for systems that have not yet met the definition of installed.

Our outlook does not include additional IPC out or benefits as we expect them to be realized in 2024, although this could occur sooner based on the pace of government processes.

Danny Abajian: We have now installed over 76,000 solar and storage systems. We expect storage installations will grow substantially in the quarters ahead. Sales of storage attached systems have grown to over 40% nationally, which had continued to drive installed attachment rates, meaningfully higher in future periods. Our backup storage offerings carry higher margins, typically by several thousand dollars per customer. During the quarter, we installed 176 megawatts of storage capacity, an increase of 131% from the same quarter last year, bringing total network storage capacity to over 1.1 gigawatt hours.

As is our practice, we will provide 2024 guidance on our fourth quarter earnings call as.

Q1, 2024 will have a significantly higher year over year storage attachment right.

And can you one of 2023 benefited from the anticipated phase out of them do in California, We expect year over year solar energy capacity installed will decline in that period.

Whether it's typically a headwind to rooftop solar installations in the winter season, we believe we can make significant progress as we ramp up our storage retrofit offering and also explore renewal opportunities.

Danny Abajian: We ended Q3 with approximately 903,000 customers and 754,000 subscribers representing six and a half gigawatts of network solar energy capacity, an increase of 20% year over year. Our subscribers generate significant recurring revenue with most under 20 or 25 year contracts for the clean energy we provide. At the end of Q3, our annual recurring revenue, or ARR, stood at over 1.2 billion dollars, up 28% over the same period last year. We had an average contract life remaining of nearly 18 years.

Turning to slide 20th.

We expect our disciplined and focused strategy will allow us to capitalize on our long term opportunity with our current focus on cash generation in 2024.

We are rid of reiterating hour range of $200 million to $500 million and recurring annual cats generation, which we expect to achieve by the fourth quarter of 2024 <unk>.

We generated cash in the third quarter, and we expect cumulative cashed generation to be positive through the end of 2024.

Danny Abajian: Turning to slide 12. In Q3, subscriber value was approximately $47,100, and creation cost was approximately $36,000, delivering a net subscriber value of $11,030. Our Q3 subscriber value and net subscriber value now reflect a blended 31% investment tax credit, benefiting from approximately 13% of our subscriber mix that qualified for the energy communities IPC adder in the quarter. Total value generated, which is net subscriber value multiplied by the number of subscriber additions in the period, with $323 million in the third quarter.

Keep in mind cash generation can be lumpy quarter to quarter based on project financing timing and inherent seasonality in our business.

Cash generation range is based on assumptions, we have outlined on the bottom of July 20th.

Have responded to the higher interest rate environment with our go to market optimization actions. We have noted the changes in our assumptions from last quarter on the slide which include a higher backup storage attachment rate of greater than 40 per cent.

A slightly higher weighted average I T C makes up 35% and it cost of capital range of 7.5% to 8%.

Danny Abajian: Our present value based metrics are presented using a 6% discount rate, but our financial underwriting already accounts for our current cost of capital, which is slightly below 8%. As a reminder, to enable ease of comparison across periods, we generally do not update the discount rate frequently. Instead, we provide advanced rate ranges that reflect current interest rates, enabling investors to calculate the obtainable net unit cash net cash unit margins on our deployments. In addition, we provide a pro form and net subscriber value using the cost of capital observed for the quarter. At an 8% discount rate, net subscriber value was $4,715, and total value generated was $138 million.

With that let me turn it back to Mary Thanks, Danny I am so appreciative of our hard working team, whose passion and ingenuity is helping sunrun transition to a storage first company to extend our differentiation expand our margins and deliver the best value to customers Importantly, I believe are steadfast commitment to.

[noise] are disciplined growth strategy will maximize the value we can create from a long line operator, we're ready for questions.

Thank you if you would like to ask a question. Please press star one on your telephone keypad and confirmation tell indicate your designers and the question queue. You May press start to if he would like dream of your question from the queue for a participant she's a piece of equipment and may be necessary to pick up the handset before pressing the star He's one moment while.

Danny Abajian: Turning to slide 13. We expect meaningful tailwinds to net subscriber value and future periods from the realization of additional ITC adors and from lower hardware prices we are seeing on our current procurement activities. While the energy communities ITC Ador was operationalized in Q3, additional cash proceeds for systems that qualify for the low income and domestic content ITC adors are expected to be realized in the coming quarters.

He paused for questions.

Our first question is from Andrew Professor.

Morgan Stanley. Please proceed.

Thanks, so much for taking the question I I did just Wanna dig a little bit more into the tobacco storage uptake that you're seeing in California, I guess I'm, a little surprised by by the demand there, especially since it doesn't appear like there's any bill savings associated with that product. So can maybe just elaborate on what you're hearing from the customers specifically.

Danny Abajian: The first low income ador application window has opened and code allocation awards are expected in late Q4 or early 2024. Guidance on what will qualify for the domestic content ador has been issued, but additional rulemaking processes are not expected until into 2024. Combined, these three adors represent up to $450 million or more in additional annual run rate cash proceeds. We are also seeing rapidly decreasing prices for key hardware components, which will start to flow through our reported costs over the next few quarters as we work through our higher cost inventory.

So why they're they're going to that product versus just sticking with the the sun on ships product. Thank you.

Yeah, Great Andrew Thanks, Nice to nice to hear you, yes, I mean, one of the things we were really pleasantly surprised.

Surprised to accomplish was to really see the uptake in a backup home storage outpace the shift so again as we had talked about you know when we went into the transition. We were pleased that we had an innovative product offering with shift, but we also know that there was significant value for customers to consider whole home.

Danny Abajian: On a like for like basis for a seven and a half kilowatt solar with backup battery system. By the end of next year, hardware costs are expected to decline by over twenty percent or nearly three thousand dollars per system from their second quarter peaks. These beneficial trends may be obscured by an increasing mix of storage, which carries higher net margins, but will increase hardware and install costs and therefore impact creation costs.

[noise] backup and I you know if you look at the presentation, we really hit very clearly that you know in terms of the value to customers the value of homes storage you know, particularly in a state like California, one could say, it's actually priceless because of the number of outages and events that happened but.

If you if you look at that what you'll see is that you know even with a whole home back up the the you know what we provide to customers is stable pricing sort of equivalent you know as we show on the slides similar to to the current price that they're paying for power so they get to switch over and have.

Danny Abajian: Turning to slide 14, we have presented a pro forma net subscriber value to show the potential impacts to unit margins from the forthcoming ITC adors is fully realized along with the hardware cost kill winds we expect in the coming quarters. Based on our mix of business and Q3, pro forma net subscriber value with these benefits was approximately $14,800 at a six percent discount rate and $800 at an eight percent discount rate.

Similar pricing and have peace of mind have the capability to store energy and use it when they need it as well as protect themselves from the you know continuing to escalate rates in states like California. So again P. G and he has a request that is poised for next year at 13% I think.

Danny Abajian: Turning now to gross and net earning assets and our balance sheet on slide 16. Gross earning assets were 13.3 billion at the end of the third quarter. Gross earning assets is the measure of cash flows we expect to receive from subscribers over time net of operating and maintenance costs. Distribution to tax equity partners and partnership flip structures and distribution of the project equity financing partners all discounted at a six percent on levered capital cost.

The original request was for 26 per cent and 25 or 26 per cent and it looks like 13% is gonna go through so that kind of environment I think really makes the reliability environment and the price environment. It's driving I you know much more robust whole home backup market and one of the reasons I should also add that.

You know, we're really pleased with our investment in lunar that we've talked about it in the past, which is gonna be another best in class of storage offering for customers.

Danny Abajian: Net earning assets were $4.6 billion at the end of the third quarter. Net earning assets is gross earning assets plus cash less all debt net earning assets increased by $130 million this quarter. Net earning assets does not include inventory or other construction and progress assets or net derivative assets related to our interest rate swaps all of which represent additional value.

[noise] got it that makes a lotta sense and maybe just as a follow up I'm just interested in just your hardware procurement strategy here I think it's clear that that panel prices have been coming down in front of prices seemed to be coming down as well as well as battery prices. There too. So are you, adding additional vendors to your prevent or list how is <unk>.

Danny Abajian: In addition, value creation upside we expect from future grid services opportunities and selling additional electrification products and services to our customer base including our storage retrofit offering are not reflected in these metrics. We regularly enter into interest rate swaps to hedge capital costs on our newly installed customers. We are principally exposed to interest rate fluctuations between customer origination through shortly after installation when our systems are financed with project level non-recourse debt.

<unk> more at lower prices from existing vendors how're, you kind of managing the current landscape for for hardware. Thank you.

Yeah, I I think it's more of the the ladder as opposed to you know big movement in the number of vendors on the list or the the nature of that list I think it's it's really driven by procurement activity. We're seeing right now I'd also keep in mind as we as we've met.

Danny Abajian: Nearly all of this financing is insulated from near-term interest rate fluctuations as our debt is either fixed coupon long dated securities or floating rate loans that have been hedged with interest rate swaps. As such, we do not adjust the discount rate used in net earning assets to match current capital costs for new installations. We ended the quarter with $952 million in total cash, an increase of $31 million compared to the prior quarter. We paid down our recourse working capital facility by $35 million as well.

And a few times here in overtime is we still also are in the midst of burning down are elevated position of inventory. So as we cycled through that we won't necessarily see that deliver into our into our external metrics right away, but over.

The you know of course of a few quarters. We we definitely will you know based on the pricing indications.

You know and and firm pricing, we're getting on our purchases you know today.

Danny Abajian: Turning briefly to our capital markets activities and outlook on slide 17. We currently realize project level capital costs slightly below 8%, which is a weighted average of our non-recourse senior and subordinated debt interest rates. Our cost of capital indications are informed by both realized terms on our transactions, as well as observable market data, such as longer term treasury yield as a proxy for our base rate and credit spreads across numerous comparable transactions completed in our sector.

Alright, thanks, so much.

Our next question is from Brian Lee with Goldman Sachs. Please proceed.

Hey, everyone. Good afternoon, thanks for taking my questions and and I apologize in advance if you're already kind of went through this but I'd be curious if you could maybe give us.

Get more detail around where the biggest delta is coming from in the new megawatt installed guidance versus prior whether it's you know states customer types.

Danny Abajian: During the quarter, we successfully executed the largest ever residential solar securitization raising $715 million at a credit spread of 240 basis points, a 25 basis point improvement from our prior public securitization in May of this year. Similar to prior transactions, we also raised an additional $253 million of subordinated, rotten, non-recourse debt on the portfolio, bringing the cumulative advance rate to slightly above 84%.

Or maybe you know how much of a function of this as being you know less customers being available to meet your return requirements. Since you just kind of pulling back if you could maybe provide a little bit more.

Of a breakdown between you know where you're seeing the pullback in the the volume outlook here.

Yeah, I mean, as we look at you know the solar installed megawatt volume outlook, you know I think as we lay out in the deck in the presentation very clearly I mean, there's basically three things driving at Brian. So one is you know the the trajectory of.

Danny Abajian: We continue to maintain a robust project finance runway. As of today, close transactions and executed term sheets provide us with expected tax equity capacity to fund over 235 megawatts of projects for subscribers beyond what was deployed through the third quarter. Sunrun also had $555 million in unused commitments available in its 1.8 billion non-recourse senior revolving warehouse loan at the end of the quarter to fund approximately 195 megawatts of projects for subscribers. This strong capital runway allows us to be selective in timing our capital markets activity.

Like pure up sales recovery in California was a little bit slower than we anticipated so that definitely impacts the outlook as we also send in the call. We are seeing you know again really good numbers gross numbers in other states, but again, we break it down you know showing that again, we're losing.

Because of certain a certain amount of you know that that change in the uptick in the trajectory. We also leaned didn't really hard to haul home backup. So that was something that you know also really drove our outlook. When we saw that we could [laughter] you know really make strides in our goals towards cashed Jenner.

Danny Abajian: We recently closed our first tax equity fund which leverages the new tax credit transfer ability provisions from the Inflation Reduction Act, enabling us to more easily monetize tax credits with large corporate buyers. As more corporations become familiar with this new structure, we expect transferability funds to become a large part of our funding strategy. This will deepen and diversify our investor universe.

Nation by leveraging customers interest in storage and so that's why we also launched the storage retrofit program this quarter as well and then you know the other the third thing was we were seeing subpar economics, you know in the channel segment of the market and so we made really strategic decisions to prioritize.

Danny Abajian: Given the increased scale of our business, we plan to complete an upside and extension of our non-recourse warehouse loan in the coming few months as we have done several times before. We are also planning to extend our asset-based recourse working capital facility in 2024 ahead of its January 2025 maturity as we have done several times before as well. Our working capital facility syndicate includes a diversified group of 13 relationship lenders, both loans are floating rate and neither is constrained by current borrowing based limitations.

Value over your solar watt solar megawatt growth in certain areas.

Okay fair enough that all makes sense and then the second question report pass it on I I know the the the cash generation target your reiterating here $2 million to $500 million by the end of this year.

Why is there such a wide delta I mean, presumably you know, giving it's it's already November I mean, presumably financing is a swing factor. One is that is that correct and then too you know kind of what sort of options are on the table here three year and that that drive that swing factor and then what you know what's driving.

Danny Abajian: Turning now to our outlook on slide 19, we continue to believe the market is very under penetrated and can sustain robust growth throughout this decade.

Danny Abajian: In this strong long-term demand backdrop, our priority is to generate cash by continuing to increase customer values through a growing storage adoption and other higher value product and services and reducing costs by driving further efficient fees across the business. This.

The uncertainty around timing I suppose given it's you know a couple more months before the end of the year. Thank you.

Hey, Brian It's Danny I I, I think just to clarify at the top but the the the guidance for hitting cash generation annualized within the range is specific to the fourth quarter of next year.

Danny Abajian: Given our storage first company strategy, we are introducing guidance for storage capacity installed. Storage capacity installed is expected to be in a range of 180 to 200 megawatt hours in Q4. This represents 131% growth year over year.

And then the you know five quarters of total cumulative cash generation is also through the end of next year not through the end of this year just to make sure I clarified that cause I I think that's you know potentially where the where the question is coming from and thinking that it's it's 2023.

Danny Abajian: For the full year 2023, this range represents 71 to 78% growth. Solar energy capacity installed is expected to be in a range of 220 to 245 megawatts in Q4. This represents full year 2023 growth of approximately 2 to approximately 5% compared to our prior guidance range of 10 to 15% growth for the full year 2023.

But I think you know just generally looking at you know the the guidance and the assumptions Yeah I think the the the the few changes that we've made in the assumptions that we've noted on the page and it is I I called out in the remarks, and you know there's more specificity on the on the timing.

Danny Abajian: This reduction is due to the strategic decisions we have made to prioritize cash generation and lean further into our storage product offering, as well as other factors we have noted. We have we expect net subscriber value to be stable in Q4 compared to Q3. As we transition our mix to higher value storage systems, these more complex and time-consuming installations result in more cost being realized for systems that have not yet met the definition of installed.

And you know the the total cumulative cash generation, but again that's over the next five quarters through the I've taken us through the end of next year not through the end of this year.

Okay understood I appreciate the clarification I, just having said that though it's still a pretty wide delta what border kind of the swing factors, where you hit two verses five over five quarters.

But Ah you mean, the delta between 205 hundred within the range.

Danny Abajian: Our outlook does not include additional ITC outer benefits as we expect them to be realized in 2024. Although this could occur sooner based on the pace of government processes.

Correct Yeah.

Yeah, Yeah see I I think you know the.

We've we've noted in the past like I'll I'll call out a few not to it every single one but you know the backup storage mix. That's the one we actually took up version over version as we've seen that strength and we just discussed you know the I T. C. Adders, we nudged up slightly from 34 to 35 the shape of.

Danny Abajian: As is our practice, we will provide 2024 guidance on our fourth quarter earnings call. As Q1, 2024 will have a significantly higher year over year storage attachment rate. And Q1 of 2023 benefited from the anticipated phase out of NEM to in California.

Danny Abajian: We expect year over year solar energy capacity installed will decline in that period. While whether it's typically a headwind to rooftop solar installations in the winter season, we believe we can make significant progress as we ramp up our storage retrofit offering and also explore renewal opportunities.

The attainment of that is more back handed over the course of of this period of time and the swing factor. There is really the last of which comes in is domestic content.

And there's a there's generally a wider range of outcomes ethnic content. There is less clarity at the moment, but we remain bullish on the upside there and that's back ended capital costs. We've adjusted the range, but are still planning for this amount within that range and you know we we've I think we've noted a quarter point is about.

Danny Abajian: Turning to slide 20. We expect our discipline and focus strategy will allow us to capitalize on our long term opportunity with our current focus on cash generation in 2024. We are re-enrating our range of $200 to $500 million in recurring annual cash generation, which we expect you achieved by the fourth quarter of 2024. We generated cash in the third quarter and we expect cumulative cash generation to be positive through the end of 2024. Keep in mind, cash generation can be lumpy quarter to quarter based on project financing timing and inherent seasonality in our business.

You know one percentage point change in our advance right.

Which annualizes somewhere in the range of about $50 million plus or minus so that they have the they.

They gave you that here a stick on the plus or minus an advance rates you know I would say that those are the the big costs falling equipment costs. Another one we mentioned Ah that is another.

Factor at play, which is you know delivering again over over time, an increase in your house.

Danny Abajian: Our cash generation range is based on assumptions we have outlined on the bottom of slide 20. We have responded to the higher interest rate environment with our go to market optimization actions. We have noted the changes in our assumptions from last quarter on the slide, which include a higher back up storage attachment rate of greater than 40%. A slightly higher weighted average ITC mix of 35% and a cost of capital range of 7.5% to 8%.

Alright Super helpful. Thank you.

Sure. Our next question is from jail.

Nourished. Please proceed.

[noise] alright. Thank you hold on hold on to follow up on Brian's line of questioning once we get to the end of 2024, Oh I'm seeing you use words Y Yo annualized in recording is the implication that that level of cash flow generation be something that we can expect to continue Andrew.

Mary Powell: With that, let me turn it back to Mary. Thanks, Danny. I am so appreciative of our hardworking teams with passion and ingenuity is helping us on our own transition to a storage first company to extend our differentiation, expand our margins, and deliver the best value to customers.

<unk> Oh in future years is is that what you're speaking with with that that language and then I have a couple of other questions.

Yeah, absolutely. That's the you know the the recurrence in nature is you know both recurring and with the objective of growing it over time. Once we you know stick the landing on getting within that range you know for all the reasons I I mentioned.

Mary Powell: Importantly, I believe our steadfast commitment to our discipline growth strategy will maximize the value we can create in a long time.

Unknown Executive: Operator, we're ready for questions. Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate you line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

Okay. Thank you second question. If if you look at what I'm paid cause it's the dogs for a job here today are pretty pretty shocking outlooks for the fourth quarter, driven Mary I think to some extent by inventory obviously some back from Europe with it which has nothing to do with you guys, but I am curious.

Unknown Executive: For a part to spend using speaker equipment, maybe necessary to pick up the handset before pressing the star keys. One moment will we think so much for taking the question.

Ah as to how you feel about yoga level of inventory on your own balance sheet and also what you receive out there and you know special deal. Thanks, and then I have one more question after that.

Andrew Percoco: I did just want to dig a little bit more into the back of storage uptake that you're seeing in California, I guess. I'm a little surprised by the demand there, especially since it doesn't appear like there's any bills haven't existed to do with that product. It can be just elaborate on what you're hearing from the customers specifically is so why they're going to that product versus thinking with the Sunrun Shift product.

Right. So so the the inventory you know I'd say very very simply we you know we've been above our targets.

You know, we we measured in days of supply based on our run rate installation activity and and that's been well you know we've been trending well north of our objectives Ah Ah Ah, but we've also made progress in reducing the inventory balance. So for instance in the last quarter, we drove the inventory of balanced down by a.

Mary Powell: Thank you. Yeah, great Andrew, thanks. Nice to hear you. Yes, I mean, one of the things we were really pleasantly surprised to accomplish was to really see the uptake in back up home storage outpace the shift. So, again, as we had talked about, you know, when we went into the transition, we were pleased that we had an innovative product offering with shift. But we also know that there was significant value for customers to consider whole home backup.

Mary Powell: And, you know, if you look at the presentation, we really hit very clearly that, you know, in terms of the value to customers, the value of home storage, you know, particularly in a state like California, one could say, it's actually priceless because of the number of outages and events that happened. But if you look at that, what you'll see is that, you know, even with a whole home backup, the, you know, what we provide to customers is stable pricing sort of equivalent.

$130 million I think we have another hundred to 200 million to go to get level is to our targets. So our our purchases are the rate of our purchasing activity is now you know and will be until we're right size beneath the rate of our installation flow as we right size and we think that's.

Going to take us another two to three quarters and Joe Hey, This is that I might I think there are three market that you know are reducing and murder sales, but haven't really impacted us we're calling out international is obviously one companies unable to make the transition to store just another and then the third which we have mostly sidestep.

[noise], you know markets within the United States to stop being cost effective with higher interest rates and and so that that's you know it it.

Mary Powell: You know, as we show on this slide, similar to the current price that they're paying for power. So, they get to switch over and have similar pricing and have peace of mind, have the capability to store energy and use it and they need it as well as protect themselves from the, you know, continuing to escalate rates in states like California. So, again, PG&E has a request that is poised for next year at 13%, I think the original request was for 26%, 25% or 26% and it looks like 13% is going to go through.

Differentiating factor that has helped us relatively.

Gotcha, that's nice to hear for Ya and then the last one and then it'll go away probably as in other words, maybe you how how are the economics of direct RTC monetization relative to traditional tax equity for you guys and in particular.

Is there some mechanism for a basic step up when you do a direct monetization I'm curious about that and that's it for me. Thank you.

So they're they're they're structural economics, and then there's a price per credit yeah, I'd say a as has been noted across the market. You know we're in a period of Ah everybody doing their first deal on both the sponsor side and the investor side and participation has been pleasing to see.

Mary Powell: So, that kind of environment, I think really makes the reliability environment and the price environment is driving a, you know, a much more robust whole home backup market. And one of the reasons I should also add that, you know, we're really pleased with our investment in lunar that we've talked about in the past, which is going to be another best-in-class storage offering for customers. Got it.

What deals are getting done for the first time and ultimately we think the price per credit is going to increase as we do it more and more of these transactions and that's why we also noted we expect it to be part of our mix that that is driving that you know as far as structurally I think there are you know different modes of transaction.

Mary Powell: That makes a lot of sense and maybe just as a follow-up, just interested in just your hardware procurement strategy here, I think it's clear that that pound of prices have been coming down and in-verter prices seem to be coming down as well as battery prices there too.

Being down in the market you know some of which you know do not have monetization you know for things like depreciation. Some do you know in some cases it might be it might look more like a traditional tax equity structure Ah where there's a subsequent sale of the credit not directly.

Mary Powell: So, are you adding additional vendors to your presenter list? How is there a redest buying more lower prices from existing vendors? How are you kind of managing the current landscape for hardware? Yeah, I think it's more the the latter as opposed to, you know, big movement in the number of vendors on the list or the nature of that list. I think it's really driven by procurement activity. We're seeing right now. I'd also keep in mind as we've as we've mentioned a few times here and over time is we still also are in the midst of burning down our elevated position of inventory.

By Us and so there there are you know emerging structures as well I think ultimately we'd expect to.

Preserve the value if you will relative to tax equity putting price per credit aside.

[noise] understood. Thank you.

Thank you.

Our next question is from James last with Evercore ISI. Please proceed.

Mary Powell: So as we cycle through that, we won't necessarily see that deliver into our into our external metrics, right away, but over the course of a few quarters, we definitely will, you know, based on the pricing indications and firm pricing we're getting on our purchases today.

[noise] good afternoon goes.

Okay marry you should think about those.

<unk> moved to stores first which makes perfect sense.

You're gonna have to do some re school and got a lot of stuff going on with the company in general.

How long of a transitional period should we expect to B B N four.

Oh, Great question, I mean, if we're well on our way I mean, the the good thing is is you know like son runs been invested in a storage future since 20th 16. So you know the cool thing is we already did have expertise and the company we had experience and it's.

Unknown Executive: Great. Thanks so much.

Brian Lee: Our next question is from Brian Lee with Goldman Sachs, please proceed. Hey, everyone. Good afternoon.

Brian Lee: Thanks for taking the questions and I apologize in advance if you already kind of went through this, but I'd be curious if you could maybe give us a bit more detail around where the biggest delta is coming from in the new megawatt install guidance versus prior. Whether it's, you know, states, customer types, or maybe, you know, how much of a function of this is being, you know, let's customers being available to meet your return requirements.

Really like it's it's really the challenge of scaling and you know taking that experience that we have and scaling it in a significant way, particularly admits you know a very rapid policy shift in one of our large markets in California. So you know I I were really well under are well on our way, it's just been <unk>.

Incredible to see the strides that had been made over the quarter as as well again, we're improving all of our customer communications, our sales training or you know or installation teams instead of having like you know a percent of them that are experts in installing storage, we're moving to having all of it.

Brian Lee: And so you're just kind of pulling back if you could maybe provide a little bit more of a breakdown between, you know, where you're seeing the pull back in the volume outlook here. Yeah, I mean, as we look at, you know, the solar installed megawatt volume outlook, you know, I think as we lay out in the deck in the presentation, very clearly, I mean, there's basically three things driving it, Brian. So one is, you know, the trajectory of just like pure up sales recovery in California was a little bit slower than we anticipated.

I'm being experts that install a storage. So I would say you know, we're well on our way and I'm I'm feeling really good about this you know this uptake that we saw I mean no question, we were working towards that kind of uptake. So we were just really pleased with the customer reaction to R. R.

Brian Lee: So that definitely impacts the outlook, as we also said in the call, we are seeing, you know, again, really good numbers growth numbers in other states. But again, we break it down, you know, showing that again, we're losing because of a certain amount of, you know, that change in the uptick in the trajectory. We also leaned in really hard to hold home backup. So that was something that, you know, also really drove our outlook when we saw that we could, you know, really make strides in our goals towards cash generation by leveraging customers interest in storage.

Our focus on whole home backup and storage across the country, particularly and particularly in California.

Okay. Okay got it and then as we think about things starting to at some point normal was.

<unk>.

What are the new normal environment. It looks like your prioritizing cashflows, how should we think about <unk> the normal volume growth should be on an annual basis.

I mean as you know we guide to next year at our next earnings call. You know again, we were talking about how we expect to see storage megawatt hours grow this quarter, because we think it is so strategic and so important. So you know as you think about how we're gonna talk about it.

Brian Lee: And so that's why we also launched the storage retrofit program this quarter as well. And then, you know, the other, the third thing was we were seeing some part economics, you know, in the channel segment of the market. And so we made really strategic decisions to prioritize value over your solar, what solar megawatt growth in certain areas. Okay, fair enough, that all makes sense.

Next year I think you can really anticipate that we're gonna be talking about growth in a broader context than we have historically, which is really important from a value creation perspective value creation for our customers and value creation for our shareholders.

And it's also really powerful like that's again why we we'd like we'd been really pleased with the initial reaction we're getting to our retrofit program for instance, and again. We're also launching you know our renewal you know crack.

Mary Powell: And then just second question before passing on. I know the cash generation target you're reiterating here to the $500 million by the end of this year. Why is there such a wide delta, I mean, presumably, you know, given it's, it's already November, I mean, presumably financing as a swing factor. One, is that, is that correct? And then to, you know, kind of what sort of options are on the table here through a year and that drive that swing factor.

Practices around you know, helping customers renew their contracts and as a part of that that gives us the opportunity to cross sell to up sell you know and to lock in even longer term relationships would add it sounded like you wanted to add something odd yeah. This isn't gonna square storage is significantly higher entry barrier business, that's probably most obvious.

Mary Powell: And then what, you know, what's driving the uncertainty around timing, I suppose given it's a couple more months here before the end of the year. Thank you. Hey Brian, it's Danny. I think just to clarify at the top, the guidance for hitting cast generation annualized within the range is specific to the fourth quarter of next year. And then the five quarters of total cumulative cast generation is also through the end of next year, not through the end of this year, just to make sure I clarify that because I think that's potentially where the question is coming from and thinking that it's 2023.

If you look historically at what happened in Hawaii, where our market share grew several times after the market effectively required storage.

Mary Powell: But I think just generally looking at the guidance and the assumptions, I think the few changes we've made in the assumptions that we've noted on the page and as I called out in the remarks and there's more specificity on the timing and the total cumulative cast generation. But again, that's over the next five quarters through the end taking us through the end of next year, not through the end of this year.

George is harder to price design itself permitted requires working capital there are obvious fantastic economies of scale and grit services and that's in part why we're making the strong.

And so obviously volume Holistically is still very important to US you know solar named played megawatts, we're deemphasizing a little bit and we're now focusing on total value proposition a broader suite of products and cash flow, yeah, and we haven't talked a lot about <unk> services on this call. So far but you know the program that we just did with P. G N P J.

This summer was very very powerful and as a former utility executives to build on what Ed said you know, it's incredibly powerful to think about the amount of clean energy generation, we're gonna be sending on top of with this kind of storage attachment right and with the ability to now go back.

And retrofit customers with George.

Very helpful place coast.

Our next question is from pennies to teach with Wells Fargo. Please proceed.

Mary Powell: Okay, understood, appreciate the clarification. I just having said that though, it's still a pretty wide delta. What are the kind of the swing factors where you hit two versus five over five quarters? You mean the delta between 200 and 500 within the range? Correct, yeah. Yeah, I think we've noted in the past, I'll call out a few not to hit every single one, but the backup storage mix, that's one we actually took up version over version.

Thanks. Good afternoon. So you mentioned P. G N E looks like they are on track for a 13% a rate increase just wondering how that impacts your pricing strategy in California, do you envision kind of raising prices and in lockstep with P. G N E R or leaving pricing unchanged in and maybe.

Fitting from a higher paces of installs just trying to understand maybe how you how you think about capturing that benefit in January.

Well I would say you know first and foremost you know it makes what we are currently selling a lot more attractive to customers. So I think first and foremost that's really important you know secondly, I think as I've described on other calls and we have a very flexible.

Mary Powell: As we've seen before to 35, the shape of the attainment of that is more backended over the course of this period of time. And the swing factor there is really the last of which comes in is domestic content. And there's generally a wider range of outcomes, domestic content, as there is less clarity at the moment, but we remain bullish on the upside there. And that's backended capital costs. We've adjusted the range, but are still planning for this amount within that range.

Pricing strategy I mean, you know, where we were very opportunistic but we're also you know always evaluating it from a whole host of different factors. So you know no decisions have been made and I would say you know again, we're gonna keep our nimble flexible approach to you know every single market and geography within every mark.

Mary Powell: And I think we've noted a quarter point is about one percentage point change in our advanced rate, which annualizes somewhere in the range of about $50 million plus or minus. So that's the give you the heuristic on the plus or minus on advanced rates. Those are the big costs following, equipment costs, another one we mentioned, that is another factor at play, which is delivering again over time in increased outcomes.

That we're in.

And will make the right decisions at that time focused on sustainable profitable growth.

Got it and then maybe just switching to the the tax equity market. I guess are you seeing any constraints from your end in terms of accessing the tax equity market given some of the proposals that are out there and in uncertainty and then if so is that is that impacting your your growth plans at all.

Brian Lee: All right, super helpful. Thank you.

And then I guess longer term you know, obviously I I assume there's gonna be a mix shift here to to ITC transfers any sense in terms of you know what that mix looks like over the next few years.

Joseph Osha: Our next question is from Joe Oshawa with Guggenheim Partners. Please proceed. Oh, I thank you.

Sure. This is at all because this isn't a couple of days. So so first it's definitely not concerning our growth.

Joseph Osha: Hello, hello, hello, to follow up on Brian's line of questioning. Once we get to the end of 2024, I'm seeing you use words like, you know, annualized and recurring, is the implication that that level of cash flow generation be something that we can expect to continue and or grow in future years. Is that what you're signaling with that language? And then I have a couple of them. Yeah, absolutely that's the, you know, the recurrence in nature is, you know, both recurring and with the objective of growing it over time, once we, you know, thick the landing on getting within that range, you know, for all the reasons I mentioned.

The market is growing rapidly both on the supply and demand side for tax equity Ah, but we we don't have any concerns about clearing the market I. I think you were indirectly would also referencing you know the potential Basel rules. Those are the only effect 2025 in the future. So it's certainly not.

Not showing up for residential funds at the moment in my conversations with the tax equity investors, who are having the direct conversation with the regulators regarding boswell it it seems pretty clear that the the proposed treatment for tax equity was you know it was viewed as a mess and their pay bring the file to fix that you know there's obviously no.

Guarantee that that will happen, but people are starting to feel pretty comfortable that will occur.

Got it thank you.

Our next question is from Julian to move in Smith with Bank of America. Please proceed.

Danny Abajian: Okay, thank you. Today are pretty, pretty shocking outlooks for the fourth quarter driven, I think to some extent by inventory, obviously some of that's in Europe, which is nothing to do with you guys, but I am curious as to how you feel about, you know, the level of inventory on your own balance sheet and also what you're seeing out there in, you know, especially in deal. Thanks. And then I have one more question after that.

Hey, guys. It's Alex on for Julian just you know you guys give a lot of color when when you start talking about the <unk> into a into storage is sort of a whole company. In addition to this more measured sort of gross profile I'm curious right. Let me do that also come and we sort of think about the <unk>.

Danny Abajian: Great, so the inventory, you know, I'd say very, very simply, you know, we've been above our targets, you know, we measure in days of supply based on our run rate installation activity and that's been well, you know, we've been trending well north of our objectives. But we've also made progress in reducing the inventory balance. So, for instance, in the last quarter, we drove the inventory balance down by $130 million, I think we have another hundred to 200 million to go to get levelized to our targets.

Backdrop with any sort of reassessment of the overhead that you guys need to be carrying again with a sort of like <unk> on the cash generation targets hiding and she got sort of Fork you run right next year.

Yeah, I I think you know getting the.

Transition to storage is a is a key element like affecting the near term so so dealing with.

Also if you look at our you know our value creation metric like the the speed at which we recognize storage projects, obviously that affects the subscriber value. We broke in period relative to the expenses were broken period, but also we capture proceeds on that Ah at the point of install.

Danny Abajian: So, our purchase, our rate of our purchasing activity is now, you know, and will be until we're right size beneath the rate of our installation flow as we right size, and we think that's going to take us another two to three quarters.

So there's just I would call it like in order to cash cycle realization element in there that's an efficiency and I think getting you know and and then you know cycled time being the you know the point here you know getting cycle times accelerated Ah for storage you.

Edward Fenster: And Joe, hey, this is Ed. I think there are three markets that, you know, are reducing inverter sales that haven't really impacted us with calling out international is obviously one companies, unable to make the transition to storage is another. And then the third, which we've mostly sidesteped, is, you know, markets within the United States to stop being cost effective with higher interest rates. And so, that's, you know, a difference in the factor that has helped us relatively. Gotcha. Nice to hear from you, Ed.

Thinking about how we design those systems to streamline their operation along the you know dimension that AD was talking through earlier like Ah you know home upgrades electrical work, how do we design the backup configuration to simplify all that so that those are all part of the picture and then you also mentioned an overhead.

Unknown Executive: And then the last one, and then I'll go away. Probably, it's number one, maybe you had. How, how are the economics of direct ITC monetization relative to traditional tax equity for you guys? And in particular, is there some mechanism for a basis step up when you do a direct monetization? I'm curious about that.

You know overhead we've been managing quite well yeah. You know, it's really operating costs leverage on the overhead by getting more units through to install on an accelerated fashion I would say, it's the bigger lever then bringing down the gross dollars of overhead which we've.

Danny Abajian: And that's it for me. Thank you. So that there's structural economics and there's price for credit. You know, as has been noted across the market, you know, we're in a period of everybody doing their first deal on both the sponsor side and the investor side and participation has been pleasing to see. But deals are getting done for the first time. And ultimately, we think the price per credit is going to increase as we do more and more of these transactions.

Been doing yeah, we've been at that for you know for you know forever, but you know over the several last several quarters.

We've been pretty aggressive on containing I'm cutting overhead where we can't throughout the business.

Got it yeah Super clear just on on the pro forma hours you guys are indicating sort of a housekeeping 0.1 do you expect this will be a cash true up as those those rules are are are finalized and then I mean, I guess, what we think about the net subscriber valued.

Danny Abajian: And that's why we also noted we expected to be part of our mix. That is driving that. You know, as far as structurally, I think there are, you know, different modes of transaction being done in the market. You know, some of which, you know, do not have monetization for things like depreciation. Some do, you know, in some cases, it might be, it might look more like a traditional tax equity structure where there's a subsequent sale of the credit, not directly by us. And there are, you know, emerging structures as well. I think ultimately, we'd expect to kind of preserve the value if you will relative to tax equity, putting price per credit aside.

Metric that you guys are expecting the guide you would that include you know this sort of true upper pro forma for for what you expect it to be or what sort of what it is realized in period. Thanks.

Great. So definition Holly in the past, we have not put in the catch up into the net subscriber value unit metric.

We have generally floated that just through cash and we've indicated to people Ah what the dollar amounts of catch up have been as we've claim them through our tax equity funds. So that will be the case again for energy community Adders, which we did report in the metric in the period we are actively.

Unknown Executive: I just do it. Thank you.

Aiming on tax equity.

James West: Our next question is from James West with Evercore ISI, please proceed. Good afternoon, guys.

And there is a stop portion four systems that will get retroactive treatment.

That we will claim through tax equity. So we haven't yet done a lot of that activity that it'll probably be over the course of Q4 and Q1 and we've we've given information on that it you know in the past so energy communities does have a retroactive catch up element to it. That's lives are low income as we noted the application window.

Mary Powell: Mary, as you think about this mood to storage first, which makes perfect sense, but you're going to have to do some re-skilling. You got a lot of stuff going on with the company in general. How long of a transitional period should we expect to be being for? Great question. I mean, it's well on our way. I mean, the good thing is, as you know, like Sunrun's been invested in a storage future since 2016.

Opened we are well underway and submitting our initial batch of applications.

And the award when it comes in you know there should be an initial you know lump sum element that is a catch up and then we should run rate going forward as as the future windows for applications open up.

Mary Powell: So, you know, the cool thing is we already did have expertise in the company. We had experience and it's really like, it's really the challenge of scaling and, you know, taking that experience that we have and scaling it in a significant way, particularly amidst, you know, a very rapid policy shift in one of our large markets in California. So, you know, we're really well under our, well on our way. It's just been incredible to see the strides that have been made over the quarter.

And are there any troops will not be a net subscriber value just to make sure I'm clear on that we will not go restate prior metrics and we will not put them in the prospective metric for the unit margin as far as the ketchup element to any of these domestic content not yet live will also have.

It has the potential to be retroactive, but we're still waiting final guidance and rulemaking on that.

Mary Powell: As we're, again, we're improving all of our customer communications, our sales training, our, you know, our installation teams instead of having like, you know, a percent of them that are experts in installing storage, we're moving to having all of them being experts that install our storage. So, I would say, you know, we're well on our way and I'm feeling really good about this, you know, this uptake that we saw. I mean, no question.

Got it I appreciate the clarification guys will take the rest off one thanks.

Thank you.

Our next question is from Colin Rash with Oppenheimer and company. Please proceed.

Thanks, So much guys you know could you talk a little bit about the the V. P. P monetization and the maturity of that model at this point I guess I'm trying to get a sense of when to start learning some of that revenue under the under the models on hold on.

Mary Powell: We were working towards that kind of uptake. So, we were just really pleased with the customer reaction to our, you know, our focus on whole home backup and storage across the country, particularly and particularly in California. Okay, okay, got it.

Yeah, I mean, you know as as I articulated a number of times you know, we we really see this value as <unk>.

Growing.

Exponentially in years to come when you think about how fast for scaling and know how fast we're scaling with storage and you put that against the backdrop of the grid challenges as society, Electrifies, which creates lumpy uneven load on a grid that's already.

Mary Powell: And then as we think about things starting to, at some point, normalize here in the, whatever the new normal environment looks like, you are prioritizing cash flows. So, how should we think about, you know, what the normal volume growth should be on an annual basis? I mean, as you know, we guide to next year at our next earnings call, you know, again, we, we're talking about how we expect to see storage megawatts hours grow this quarter because we think it is so strategic and so important.

Strained so we see programs like what we just did with P G and E.

As opposed to card from the future of what you're going to start to see all over the country and that was you know a program whereby we were providing nearly 30 megawatts every day to the grid during peak times from August through to October you know, we're in active discussions with them to upsize the fleet in the <unk>.

Mary Powell: So, you know, as you think about how we're going to talk about it next year, I think you can really anticipate that we're going to be talking about growth in a broader context than we have historically, which is really important from a value creation perspective, value creation for our customers and value creation for our shareholders. And that's, and it's also really powerful, like that's again why we, like we've been really pleased with the initial reaction we're getting to our retrofit program, for instance.

Future and are growing experience with good services increases our conviction that we can realize 2000 or more and per customer and P. V. From these types of assets. So that's certainly how we're looking at it and again you know you just see the headlines all over the country where.

Mary Powell: And again, we're also launching, you know, our renewal you know, practices around, you know, helping customers renew their contracts. And as a part of that, that gives us the opportunity to cross sell, to upsell, you know, and to lock in even longer term relationships. But Ed, it's something like you want to add something on.

<unk> and so many parts of the country are really struggling with keeping up with the load keeping up with the different climatic events and I see more and more that utilities are gonna need what you know we proved at at a utility way back in 2015, and some have proven sense, which is these provide incredible let.

[noise] symbol resources, unlike any other to support the bread.

Edward Fenster: Yeah, it's going to store just significantly higher entry barrier business. That's probably most obvious if you look historically, what happened in Hawaii, where our market share grew several times after the market effectively required storage. You know, storage is harder to price, design, sell, permit, it requires working capital. There are obvious, fantastic economies, the scale and grid services. And so that's in part why we're making this strong pivot. And so obviously, volume holistically is still very important to us, you know, solar nameplate megawatts were deemphasizing a little bit, and we're now focusing on total value proposition of broader suit of products and cash flow.

Great to remind my mom previously Jose we you know we have previous et cetera, remember again that like lifetime grid services value can be about $2000. So I customer of theirs data that it's maybe even $2000 per customer career for a vehicle to right Yep.

Okay. They have some followed so I'll turn it off on you know it and thanks for the the the clarity around some of the inventory on models and and murders I I'm just curious about some of the the racking immature that you guys may I have another balances system elements that you'll need to work through just in terms of the the days on hand.

Mary Powell: Yeah, and we haven't talked a lot about grid services on this call so far. But, you know, the program that we just did with PG&E this summer was very, very powerful. And as a former utility executive to build on what Ed said, you know, it's incredibly powerful to think about the amount of clean energy generation we're going to be sitting on top of with this kind of storage attachment rate and with the ability to now go back and retrofit customers with storage. Very helpful.

Yeah on on racking you know we have you know.

Unknown Executive: Let's go.

More direct control over that just because we do ona racking manufacturing company called snapping rack and we do both distribute that equipment and use it an hour installations I would say once we get beyond modules inverters batteries.

[noise] racking as far as inventory is concerned racking and other balances system becomes a much smaller than dollar value, but we have been managing those inventory levels and bringing them down in line with everything else.

Prince Satish: Our next question is from Prince Satish with Wells Fargo, please proceed. Thanks. Good afternoon. So you mentioned PG&E looks like they're on track for a 13% rate increase. Just wondering how that impacts your pricing strategy in California. Do you envision kind of raising prices and in lockstep with PG&E or leaving pricing unchanged? And maybe benefiting from a higher pace of installs, just trying to understand maybe how you think about capturing that benefit in January?

Great. Thanks, so much faster.

Thank you.

Our next question is from Martha Trust with J P. Morgan. Please proceed.

[noise] Hi, this is drawn from mark Thanks for taking our questions first one just back on the inventory topic I think you've mentioned that you know we.

Get back to that 60 to 80 day level and in the early you know.

First part of next year and that would be when you can start to expect to see some of the pricing declines come through you know sure you're with the relatively or papering over the.

Mary Powell: Well, I would say first and foremost, it makes what we are currently selling a lot more attractive to customers. So I think first and foremost, that's really important. Secondly, I think as I've described on other calls, we have a very flexible pricing strategy. We are very opportunistic, but we're also always evaluating it from a whole host of different factors. So, you know, no decisions have been made. And I would say, you know, again, we're going to keep our nimble flexible approach to, you know, every single market and geography within every market that we're in, and we'll make the right decisions at that time focused on sustainable, profitable growth. Got it.

[noise] outlook here could there be any headwinds Judy to the first half value creation because of that or am I reading too much into that.

I would say the yeah the the the.

The pace of so we it's expensing inventory so the yeah.

The actual price reductions are already accruing to us on new purchases. It's just that we're not purchasing as much as we're installing Ah and we're expecting more expensive inventory that we've held so that's that's what the nature of that timeline is and I'd say, we we'd get it Ah.

Prince Satish: And then maybe just switching to the tax equity market.

<unk> probably over the next.

Edward Fenster: I guess are you seeing any constraints from your end in terms of accessing the tax equity market, given some of the proposals that are out there and uncertainty. And then if so, is that is that impacting your growth plans at all? And then I guess longer term, you know, obviously, I assume there's going to be a mixed shift here to ITC transfers at any sense in terms of, you know, what that mix looks like over the next few years.

Couple of quarters, and then you'd probably see it more significantly after that but we we remember we've also cautioned as you look at our creation cost what you're also getting concurrently is ER each system coming with more and more batteries.

And because the battery unit cost is high in relation to the all of the solar only equipment, you're getting an increase in the installation costs due to equipment. Although the units of equipment are coming in at a lower unit price just something to keep in mind as you observe that over the next few quarters, but it's all contributing to a P.

Edward Fenster: Sure, this is Ed.

Edward Fenster: I'll speak to this in a couple of ways. So first, it's definitely not constraining our growth. The, you know, market is growing rapidly, both on the supply and demand side for tax equity, but we don't have any concerns about clearing the market. I think you are indirectly also referencing, you know, the potential causal rules, those that only affect 2025 in the future. So it's certainly not showing up for residential funds, the moment in my conversations with the tax equity investors who are having the direct conversation with the regulators regarding Basel, it seems pretty clear that the proposed treatment for tax equity was viewed as a mess in their papering the file to fix that. You know, there's obviously no guarantee that that will happen, but people are starting to feel pretty comfortable with that will occur. Got it.

Unknown Executive: Thank you.

Pick up and that's subscriber value.

As we put it in higher value storage attaching get operating costs leverage back as volume paces up.

Okay that makes sense. That's helpful. And then just one quick one are in California.

Pearce said this morning that they're having.

Some longer did interconnection times, where some of utilities in California, and that's been a headwind too if you're getting systems into operation is that you're into the same for you guys and does that have anything to do with maybe some some slower and of of installs in California.

I mean, yeah to a degree I, you know I, but I again, I would say that's like routinely a challenge for us, but you know at the same time. We're also encouraged you know again as a a very storage obsessed company. We're really encouraged by you know what.

Julien DeMoulin Smith: Our next question is from Julian DeMoulin Smith with Think of America, please proceed. Hey guys, it's Alex on for Julian. Just, you know, you guys give a lot of color when, you know, start talking about the pivot into into storage as sort of a whole company in addition to this more measured sort of growth profile. I'm curious, right. I mean, does that also come when we sort of think about the current backdrop with any sort of reassessment of the overhead that you guys need to be carrying again with a sort of like eye on on the cash generation targets.

We've seen with the adoption of meter callers for instance, with some storage devices, which actually should help accelerate installation times overtime. So we're seeing some some good moves in the context of you know where our focus is which is whole home back up with solar.

Okay, great. Thank you.

Our final question will be friends Phillips sheds with Roth M. Cam. Please proceed.

Hi, all thanks for taking my questions just a quick follow up on the tax credit monetization discussion can you give us a sense of the timing of when you're first deal could be and then how much of your 2024 P. P O volumes could be supported by tax credits Hills.

Julien DeMoulin Smith: I'm hiding into that sort of work you run right next year. Yeah, I think, you know, getting the transition to storage is a key element like affecting the near term. So dealing with, also, if you look at our, you know, our value creation metric, like the speed at which we recognize storage projects, obviously that affects the subscriber value we book in period relative to the expenses we book in period, but also we capture proceeds on that at the point of install.

Yeah. So we we've closed the first transaction we are in the final stages of completing the the the the transfer element of that fund and will be a heavy user of that fund for the balance of the year. So that that's that's the status of the of the transaction generally.

Right and do you expect it to be a majority of your financing.

Julien DeMoulin Smith: So there's just a, I would call it like an order to cash cycle realization element in there. That's an efficiency. And I think getting, you know, and then, you know, cycle time being the, you know, the point here, you know, getting cycle times accelerated for storage, you know, thinking about how we design those systems to streamline their operation along the, you know, dimension that Ed was talking through earlier, like, you know, home upgrades, electrical work.

As it relates to the credit financing for 2024.

I think it would be a substantial portion I don't know if it's a majority have I think over time definitely at these funds are very you know it could be very large in size.

At some points of the year it might be more transfer ability at other points in the year it might be more traditional tax equity depending on what we're utilizing overtime.

But you know I think the other thing to keep in mind just one other thing I guess, you know similar to the equipment peace you know as far as like gap treatment.

Julien DeMoulin Smith: How do we design the backup configuration to simplify all that? So those are all part of the picture. And then you also mentioned overhead, you know, overhead, we've been managing quite well. You know, it's really operating cost leverage on the overhead by getting more units through to install on an accelerated fashion. I would say the bigger lever than bringing down the gross dollars of overhead, which we've been doing, you know, we've been at that for, you know, forever, but, you know, over the several last several quarters, you know, we've been pretty aggressive on containing and cutting overhead where we can throughout the business.

B M I T C transfer the traditional tax equity delivers a lot of income through the Ah Noncontrolling interest line of our piano as we transition to I T. C transfer the the treatment of the I T. C is will look more like you know likely contra.

Preciation, so it'll have impacts on the trending of our a P. S overtime to something to keep in mind again as you attract all that activity throw a gap statements.

Alright, Thanks, Danny Oh can you also talk about the growth of your installation costs and why they're up 40 cents for what sequentially is it due to increased storage penetration and if so wire proceeds are going why persons that are going on or why orange pros.

Danny Abajian: Got it. Yeah, super clear. Just on the pro forma adders, you guys are indicating sort of a housekeeping point. One, do you expect this will be a cash true up as those, those rules are finalized? And then, I mean, I guess when we think about the next subscriber value metric that you guys are expecting to guide you, would that include, you know, this sort of true upper pro forma for what you expect it to be?

He's growing up in line with that thanks.

Yep I think the general point about we're making the transition so we picked up.

Danny Abajian: Or sort of what it is realized in period, thanks. Great. So definitionally in the past, we have not put in the catch up into the net subscriber value unit metric. We have generally floated that just through cash. And we've indicated to people what the dollar amounts of catch up have been as we've claimed them through our tax equity fund. So that will be the case. Again, for energy community adders, which we did report in the metric in the period, we are actively claiming on tax equity.

18 percentage points are sorry, 15 percentage points on the battery attach over last quarter, we started spending against that.

And we expect more pick up to come and the expenditure against the battery install as we've been transitioning our mix has been proceeding. So so that that's a little bit of a of a drag him you know the volume being down a little bit is you know negative operating leverage.

On the non variable elements to install cost such as like getting permits and doing site audits et cetera. So, but you know battery equipment negative operating leverage the recognition of the subscriber valley, you're not coming in as quickly enough.

Danny Abajian: And there is a stop portion for systems that will get retroactive treatment that we will claim through tax equity. So we haven't yet done a lot of that activity, that will probably be over the course of Q4 and Q1. And we've given information on that in the past. So energy communities does have a retroactive catch up element to it. That's live low income as we noted the application window opened. We are well underway in submitting our initial batch of applications.

There are a few other elements, but I would say those are the the largest factors.

Okay, great. Thanks, and then the final question here is around some reports questioning the switch.

Scriber counts and customer accounts that uses so there seems to be a difference was wondering if you could ah breakdown the disconnect or the difference between the two.

Danny Abajian: And the award when it comes in, you know, there should be an initial lump sum element that is a catch up. And then we should run rate going forward as the future windows for applications open up. And the any true ups will not be in net subscriber value just to make sure I'm clear on that. We will not go restate prior metrics and we will now put them in the prospective metric for the unit margin as far as the catch up element to any of these. Domestic content not yet live will also have a potential to be retroactive, but we're still awaiting final guidance and rulemaking on that. I appreciate the clarification, guys.

Yeah, how happy to run through that a little bit here I think we we we have responded to that Ah publicly. Obviously, we think are response was was adequate happy to go into more detail here on this call and you know I would say just you know first and foremost like the the numbers are from.

Two different sources are not comparable we do define what we express and our metric. It's been the same it hasn't changed as far as subscriber count and as any diligent company would would do where it's not clear.

Unknown Executive: We'll take the rough offline. Thanks. Thank you.

Colin Rusch: Our next question is from Colin Rusch with Oppenheimer Inc. Please proceed. Thanks so much, guys.

You know in this case C. I, a asking us for information, we do have conversations with them to make sure. We cover off all of the nuances and give them exactly what they're looking for and that's what our team is done over time through you know multiple conversations between our team and directly with the I a and there are you know like a typical aspects of our <unk>.

Mary Powell: Can you talk a little bit about the VPP monetization and the maturity of that model at this point? I guess I'm trying to get a sense of when to start layering some of that revenue into the model going forward. Yeah, I mean, you know, as I articulated a number of times, you know, we really see this value as growing exponentially in years to come. When you think about how fast we're scaling and now how fast we're scaling with storage, and you put that against the backdrop of the grid challenges as society electrifies, which creates lumpy uneven load on a grid that's already strained.

And is that a generic reporting guideline that you'd pull from their website what in perfectly address so you know ask the solar customers. There a couple of places yeah. Yeah. He has requested that we did diverge from gap. The first places are prepaid customers, which they've said, we should not report because we don't.

Actively bill them and they're trying to obtain billing data and we have Ah well more than 50000 of those customers that gives rise to 865 million and prepayments on our balance sheet and if they change their mind and asked US to report that we would we would happily do so in other areas like the monthly billing customers.

Mary Powell: So we see programs like what we just did with PG&E as a postcard from the future of what you're going to start to see all over the country. And that was, you know, a program whereby we were providing nearly 30 megawatts every day to the grid during peak times from August through to October. You know, we're in active discussions with them to upsize the fleet in the future, and our growing experience with grid services increases our conviction that we can realize 2000 or more in per customer NPV from these types of assets.

And you know whether you you get with the gap number you know we have a contract that escalates from 10 cents to 20 cents over 25 years Gap Records 15 cents of Levelized payments over the contract term and we actually report our current cash billing amount, which would be 10 cents an ear one so that's a nuance we've.

Check that's how we reported.

And another unusual area is revenue from storage systems, and how do we report that over time and we're currently in discussions with them on how to report that to their satisfaction you know directly and then finally, one one other element to head is the you know estimates on the system.

Mary Powell: So that's certainly how we're looking at it. And again, you know, you just see the headlines all over the country where utilities and so many parts of the country are really struggling with keeping up with the load, keeping up with the different climatic events. And I see more and more that utilities are going to need what, you know, we proved that at a utility way back in 2015 and some have proven sense, which is these provide incredible, flexible resources unlike any other to support the grid.

Cos and.

I would say before that they're also you know so that the the the delay in recognition of assets I didn't hit which is the permission to operate Ah you know, we we do have a much longer lag in permission to operate that you know from getting from installed the permission operates and commencing billing.

Edward Fenster: Great. And we have previously said over again that like lifetime grid services value could be about $2,000 customer of and there's data that it's maybe even $2,000 for customer career for vehicle. Yep.

[noise] that is understood and that's a another large portion of the difference and then on the cost side, which I was gonna get into you know as as as visible on our balance sheet. We have 830 813 million N C. I P. A much of which is awaiting placement in service.

Unknown Executive: I have some follow up, so I'll pick it off. You know, and thanks for the clarity around some of the inventory on modules and inverters that I'm curious about some of the rack in inventory that you guys may have and other bounce assistant elements that you'll need to work through just in terms of the days on hand. Yeah, on on racking, you know, we have, you know, more direct control over that just because we do own a racking manufacturing company called snap and rack.

And that doesn't get you know that wasn't picked up in the analysis that was done and also there's you know mm gap expense recognition versus capitalization differences.

Between when you sell an asset Ah and when you lease it to a subscriber and examples of that include warehouses branches vehicles, we don't capitalize that into the basis of the outside and we expense that in period and that also wasn't picked up in the analysis. That's been done and you know I would say it just kind of leave it with the last.

Unknown Executive: And we do both distribute that equipment and use it on our installations. I would say once we get beyond modules, inverters, batteries, racking, as far as inventory is concerned, racking and other balances system becomes much smaller and dollar value. But we have been managing those inventory levels and bringing them down in line with every, and everything else.

Unknown Executive: Great. Thanks so much, guys.

Peace here, you know as far as you know, what we do and how that relates to you know I T. C claims on tax equity funds that does go through numerous elements of third party due diligence as well and that's been a very well scrutinized by third parties and we welcome it.

Unknown Executive: Thank you.

Great. Thanks for the details I'll pass it on.

I'd better do it.

Thank you that all the time that we have a lot of heated farther Q&A you may I'll disconnect. Your lines at this time and have a wonderful day.

Mark Strauss: Our next question is from Mark Strauss with KPMorgan, please proceed. Hi, this is Drone from Mark. Thanks for taking our questions.

Everyone. It looks like no one else is going to join this call.

Unknown Executive: First one just back on the inventory topic. I think you've mentioned that, you know, we expect to get back to that 60 to 80 day level in the early, you know, first part of next year and that would be when you can start to expect to see some of the pricing declines come through. You know, with the relatively, or tapering of the growth outlook here, you know, could there be any headwinds to the first half value creation because of that, or am I reading too much into that?

Goodbye.

[noise].

Unknown Executive: I would say, yeah, the pace of, so we, it's expensing inventory. So the, the actual price reductions are already accruing to us on new purchases. It's just that we're not purchasing as much as we're installing and we're expensing more expensive inventory that we've held. So that's, that's what the nature of that timeline is. And I'd say we'd get it gradually probably over the next couple of quarters and then you'd probably see it more significantly after that, but we remember we've also cautioned as you look at our creation cost, what you're also getting concurrently is each system coming with more and more batteries.

[noise] mm.

Mm mm.

[noise].

Unknown Executive: And because the battery unit cost is high in relation to the, all of the solar only equipment, you're getting an increase in the installation cost due to equipment, although the units of equipment are coming in at a lower unit price, just something to keep in mind as you observe that over the next few quarters, but it's all contributing to a pickup and net subscriber value as we put in higher value, storage attached and get operating cost leverage back as volume paces up.

Danny Abajian: Okay, that makes sense, that's helpful.

Mary Powell: And then just one quick one on California, you're pierced at this morning that they're having some elongated, I guess, interconnection times with some of the utilities in California that's been a headwind to getting systems into operation. Is that kind of the same for you guys? And does that have anything to do with some, maybe some, some lowering of, of installs in California? Yeah, to a degree, you know, but again, I would say that's like routinely a challenge for us, but at the same time, we're also encouraged, again, as a very storage obsessed company, we're really encouraged by what we've seen with the adoption of meter collars, for instance, with some storage devices, which actually should help accelerate installation times over time. So we're seeing some good moves in the context of where our focus is, which is hold home backup with solar.

Unknown Executive: Okay, great. Thank you.

Mmm.

[noise].

Philip Shen: Our final question will be from Philips Shendt with Russ MKM, please proceed.

Philip Shen: Hi, all. Thanks for taking my questions. Just had a quick follow up on the tax credit monetization discussion. Can you give us a sense of the timing of when your first deal could be? And then how much of your 2024 TPO volumes could be supported by tax credit sales? Yeah, so we've closed the first transaction. We are in the final stages of completing the transfer element of that fund. And we'll be a heavy user of that fund for the balance of the year.

Philip Shen: So that's that's the status of the of the transaction generally. And do you expect it to be a majority of your financing as it relates to the credit financing for 2024? I think it would be a substantial portion. I don't know if it's majority half, I think over time, definitely. As these funds are very, you know, could be very large in size. At some points of the year, it might be more transferability at other points in the year, it might be more traditional tax equity, depending on what we're utilizing over time.

Philip Shen: But, you know, I think the other thing to keep in mind, just one other thing, I guess, you know, similar to the equipment piece, you know, as far as like gap treatment, the ITC trends of the traditional tax equity delivers a lot of income through the non-controlling interest line of our P&L. As we transition to ITC transfer, the treatment of the ITCs will look more like, you know, likely counter depreciation. So it'll have impact on the trending of our EPS over time, just something to keep in mind again as you attract all that activity through our gap statements.

[noise] [noise].

Danny Abajian: Thanks, Danny. Can you also talk about the growth of your installation costs and why they're up 40 cents per watt sequentially? Is it due to increased storage penetration? And if so, why are proceeds are going up or why aren't proceeds going up in line with that? Thanks. Yeah, I think the general point about we're making the transition so we picked up 18 percentage points or sorry, 15 percentage points on the battery attach over last quarter.

Mhm.

[noise].

Danny Abajian: We started spending against that and we expect more pickup to come and the expenditure against the battery install as we've been transitioning our mix has been proceeding. So that's a little bit of a drag. You know, the volume being down a little bit is a negative operating leverage on the non variable elements to install cost such as like getting permits and doing site audits, et cetera. So battery equipment, negative operating leverage, the recognition of the subscriber value not coming in as quickly enough. There are a few other elements, but I would say those would be the largest facts. [inaudible] Great, thanks for the detail, Danny.

Mhm.

Mmm.

Unknown Executive: I'll pass it on. Happy to do it.

Unknown Executive: Thank you, that is all the time that we have a lot of catered for the Q&A. You may all disconnect your lines at this time and have a wonderful day. Everyone, it looks like no one else is going to join this call.

Unknown Executive: Goodbye. Michael Blum, Paul Dickson, Paul Dickson, Paul Dickson, Paul Dickson, Paul Dickson[inaudible]