Sunnova(NOVA) - 2020 Q3 - Quarterly Report

Special Note Regarding Forward-Looking Statements This report contains forward-looking statements concerning future events or Sunnova's future financial or operating performance, which may differ materially from actual outcomes due to various factors - This report contains forward-looking statements concerning future events or Sunnova's future financial or operating performance, which may differ materially from actual outcomes due to various factors[6][7] - Key areas of forward-looking statements include the effects of the coronavirus pandemic, federal/state/local regulations, electricity prices, capital raising ability, dealer relationships, supply chain management, customer retention/expansion, platform/product investments, system operation, brand protection, cost management, warranty obligations, litigation, and solar service agreement renewals[8] PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Sunnova Energy International Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and equity, along with detailed notes explaining accounting policies, significant changes, and specific financial instrument details for the periods ended September 30, 2020 and December 31, 2019 Unaudited Condensed Consolidated Balance Sheets The unaudited condensed consolidated balance sheets present total assets, liabilities, and equity for September 30, 2020, and December 31, 2019 Unaudited Condensed Consolidated Balance Sheets | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Total assets | $3,154,286 | $2,487,067 | | Total liabilities | $2,142,967 | $1,668,827 | | Total stockholders' equity | $722,594 | $645,935 | | Total equity | $875,472 | $691,111 | - Consolidated assets of Variable Interest Entities (VIEs) increased significantly from $790.2 million as of December 31, 2019, to $1,254.7 million as of September 30, 2020, representing assets that can only be used to settle VIE obligations[14] Unaudited Condensed Consolidated Statements of Operations This section details the unaudited condensed consolidated statements of operations, including revenue, operating income/loss, and net loss for the three and nine months ended September 30, 2020 and 2019 Unaudited Condensed Consolidated Statements of Operations | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Revenue | $50,177 | $36,615 | $122,796 | $97,942 | | Operating income (loss) | $1,649 | $(5,898) | $(17,800) | $(13,115) | | Net loss | $(73,294) | $(34,369) | $(179,027) | $(119,672) | | Net loss attributable to stockholders | $(64,181) | $(37,590) | $(160,514) | $(126,842) | | Net loss per share (basic and diluted) | $(0.73) | $(0.62) | $(1.88) | $(5.77) | - Revenue increased by 37% for the three months ended September 30, 2020, and by 25% for the nine months ended September 30, 2020, compared to the respective prior-year periods[16] - The company reported a significant loss on extinguishment of long-term debt of $50.7 million for both the three and nine months ended September 30, 2020, which was not present in the prior year[16] Unaudited Condensed Consolidated Statements of Cash Flows The unaudited condensed consolidated statements of cash flows present net cash used in operating and investing activities, and net cash provided by financing activities for the nine months ended September 30, 2020 and 2019 Cash Flow Activity | Cash Flow Activity | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net cash used in operating activities | $(101,796) | $(74,538) | | Net cash used in investing activities | $(594,275) | $(389,701) | | Net cash provided by financing activities | $757,469 | $486,464 | | Net increase in cash and restricted cash | $61,398 | $22,225 | | Cash at end of period | $84,635 | $51,026 | - Net cash used in operating activities increased by $27.3 million YoY, primarily due to increased inventory purchases[19][245] - Net cash provided by financing activities increased by $271.0 million YoY, driven by higher net borrowings and contributions from noncontrolling interests[19][247] Unaudited Condensed Consolidated Statements of Redeemable Noncontrolling Interests and Equity This section outlines the unaudited condensed consolidated statements of redeemable noncontrolling interests and equity, detailing changes in these components for the periods presented Redeemable Noncontrolling Interests and Equity | Metric | As of Sep 30, 2020 (in thousands) | As of Dec 31, 2019 (in thousands) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Redeemable noncontrolling interests | $135,847 | $127,129 | | Total stockholders' equity | $722,594 | $645,935 | | Noncontrolling interests | $152,878 | $45,176 | | Total equity | $875,472 | $691,111 | - Noncontrolling interests significantly increased from $45.2 million at December 31, 2019, to $152.9 million at September 30, 2020, reflecting new tax equity funds[27][109] - The company corrected immaterial classification errors in prior periods, reclassifying Class A members' interests in certain tax equity funds from redeemable noncontrolling interests to noncontrolling interests[36] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed notes explaining the accounting policies, significant changes, and specific financial instrument details supporting the unaudited condensed consolidated financial statements (1) Description of Business and Basis of Presentation Sunnova is a residential solar and energy storage service provider operating through a dealer model. Services are provided via long-term solar service agreements (leases, PPAs, loans), typically 10-25 years, including monitoring, maintenance, and warranty. The company consolidates Variable Interest Entities (VIEs) where it is the primary beneficiary - Sunnova serves over 98,000 customers in more than 20 U.S. states and territories, utilizing a differentiated residential solar dealer model[29][30] - Solar service agreements are structured as leases, Power Purchase Agreements (PPAs), or loans, typically with initial terms of 10, 15, or 25 years, and include ongoing services[31] - The company consolidates Variable Interest Entities (VIEs) where it is the primary beneficiary, formed to facilitate funding and monetization of solar energy system attributes[33] (2) Significant Accounting Policies This section details significant accounting policies, including the adoption of ASU No. 2016-13 (CECL methodology) with a $9.9 million cumulative-effect adjustment to equity, revisions for noncontrolling interests classification, and the impact of the COVID-19 pandemic on operations, supply chain, and financial estimates. It also covers fair value measurements, derivative instruments, and revenue recognition for various service types - Sunnova adopted ASU No. 2016-13 (CECL methodology) in January 2020, resulting in a cumulative-effect adjustment of approximately $9.9 million to stockholders' equity[35] Impact of ASC 326 Adoption on Balance Sheet (as of January 1, 2020) | Account | Impact of ASC 326 Adoption (in thousands) | | :-------------------------- | :-------------------------------------- | | Accounts receivable—trade, net | $240 | | Other current assets | $(451) | | Customer notes receivable | $(8,784) | | Other assets | $(913) | | Accumulated deficit | $(9,908) | - The COVID-19 pandemic has caused some business disruptions, but residential solar services are designated as essential, allowing installations and services to continue with contact-free processes. The company has seen minimal supply chain impact to date[40][41] Revenue Breakdown (in thousands) | Revenue Type | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | PPA revenue | $19,713 | $14,329 | $52,268 | $37,895 | | Lease revenue | $13,115 | $10,238 | $36,995 | $29,496 | | Solar renewable energy certificate revenue | $14,147 | $10,603 | $27,245 | $26,911 | | Loan revenue | $788 | $418 | $2,021 | $1,152 | | Other revenue | $2,414 | $1,027 | $4,267 | $2,488 | | Total Revenue | $50,177 | $36,615 | $122,796 | $97,942 | (3) Property and Equipment Property and equipment, net, primarily consists of solar energy systems and construction in progress. The net value increased significantly from $1,745.1 million at December 31, 2019, to $2,172.7 million at September 30, 2020 Property and Equipment, Net (in thousands) | Asset Category | As of Sep 30, 2020 | As of Dec 31, 2019 | | :------------------------- | :----------------- | :----------------- | | Solar energy systems | $2,131,054 | $1,689,457 | | Construction in progress | $167,246 | $143,449 | | Property and equipment, gross | $2,368,238 | $1,893,219 | | Less: accumulated depreciation | $(195,511) | $(148,159) | | Property and equipment, net | $2,172,727 | $1,745,060 | (4) Detail of Certain Balance Sheet Captions This note provides a detailed breakdown of 'Other current assets,' 'Other assets,' and 'Other current liabilities' on the consolidated balance sheets, highlighting significant changes in components like inventory, restricted cash, and deferred revenue Other Current Assets (in thousands) | Category | As of Sep 30, 2020 | As of Dec 31, 2019 | | :------------------------------------ | :----------------- | :----------------- | | Prepaid inventory | $0 | $96,167 | | Inventory | $111,011 | $43,749 | | Current portion of customer notes receivable | $20,083 | $13,758 | | Restricted cash | $54,096 | $10,474 | | Total Other Current Assets | $199,637 | $174,016 | Other Assets (in thousands) | Category | As of Sep 30, 2020 | As of Dec 31, 2019 | | :------------------------------------------ | :----------------- | :----------------- | | Restricted cash | $72,958 | $56,332 | | Construction in progress - customer notes receivable | $65,288 | $37,137 | | Exclusivity and other bonus arrangements with dealers, net | $54,543 | $32,791 | | Total Other Assets | $243,548 | $169,712 | Other Current Liabilities (in thousands) | Category | As of Sep 30, 2020 | As of Dec 31, 2019 | | :------------------------------------ | :----------------- | :----------------- | | Interest payable | $11,669 | $14,680 | | Current portion of performance guarantee obligations | $2,921 | $4,067 | | Deferred revenue | $2,882 | $2,086 | | Total Other Current Liabilities | $18,572 | $21,804 | (5) Asset Retirement Obligations ("ARO") Asset Retirement Obligations (AROs) represent estimated costs to remove solar energy systems and restore sites. The balance increased from $31.1 million at the beginning of the nine-month period to $38.8 million at September 30, 2020, due to additional obligations incurred and accretion expense Changes in AROs (in thousands) | Metric | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------- | :-------------------------- | :-------------------------- | | Balance at beginning of period | $31,053 | $20,033 | | Additional obligations incurred | $6,179 | $2,980 | | Accretion expense | $1,577 | $989 | | Balance at end of period | $38,751 | $23,970 | (6) Customer Notes Receivable Customer notes receivable, net, increased to $448.7 million as of September 30, 2020, from $311.7 million at December 31, 2019. The allowance for credit losses also significantly increased, primarily due to the adoption of ASC 326. Interest income from these notes grew substantially Customer Notes Receivable (in thousands) | Metric | As of Sep 30, 2020 | As of Dec 31, 2019 | | :-------------------------- | :----------------- | :----------------- | | Customer notes receivable | $463,436 | $312,823 | | Allowance for credit losses | $(14,767) | $(1,091) | | Customer notes receivable, net | $448,669 | $311,732 | | Estimated fair value, net | $453,321 | $314,222 | Changes in Allowance for Credit Losses (Customer Notes Receivable, in thousands) | Metric | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Balance at beginning of period | $1,091 | $710 | | Impact of ASC 326 adoption | $9,235 | $0 | | Provision for current expected credit losses | $4,701 | $0 | | Balance at end of period | $14,767 | $949 | - Interest income from customer notes receivable increased from $8.2 million in the nine months ended September 30, 2019, to $16.9 million in the same period of 2020[79] (7) Long-Term Debt Long-term debt, net, increased to $1,795.0 million as of September 30, 2020, from $1,346.4 million at December 31, 2019, reflecting new financing arrangements including 9.75% convertible senior notes, SOLI Notes, and HELIV Notes. The company maintained compliance with all debt covenants and had $224.1 million in available borrowing capacity Long-Term Debt, Net (in thousands) | Metric | As of Sep 30, 2020 | As of Dec 31, 2019 | | :---------------- | :----------------- | :----------------- | | Long-term debt, net | $1,795,039 | $1,346,419 | | Current portion | $109,729 | $97,464 | | Total | $1,904,768 | $1,443,883 | - Sunnova issued $130.0 million of 9.75% convertible senior notes in May 2020, with an additional $60.0 million purchased in June 2020. Approximately $84.8 million of these notes were converted into common stock in Q3 2020[87][110] - New securitization vehicles were established: SOLI Notes ($412.5 million aggregate principal) in February 2020 and HELIV Notes ($158.5 million aggregate principal) in June 2020[96][97] - As of September 30, 2020, the company had $224.1 million of available borrowing capacity and was in compliance with all debt covenants[85] (8) Derivative Instruments Sunnova uses interest rate swaps to manage interest rate exposure, which are not designated as hedges. Several swaps were unwound in 2020 due to debt facility terminations, resulting in a realized loss of $38.7 million for the nine months ended September 30, 2020 Impact of Interest Rate Swaps on Statements of Operations (in thousands) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Realized loss | $665 | $265 | $38,668 | $12,637 | | Unrealized (gain) loss | $(1,788) | $12,813 | $2,755 | $30,262 | | Total | $(1,123) | $13,078 | $41,423 | $42,899 | - The aggregate notional amount of outstanding derivative instruments decreased from $524.1 million at December 31, 2019, to $356.9 million at September 30, 2020[104] (9) Income Taxes Sunnova's effective income tax rate was 0% for the periods presented due to a full valuation allowance against deferred tax assets. The CARES Act did not significantly impact the company's tax position due to existing net operating losses and the valuation allowance - The effective income tax rate was 0% for the three and nine months ended September 30, 2020 and 2019, primarily due to a full valuation allowance against deferred tax assets[105][108] - The CARES Act's provisions, such as the five-year carryback of net operating losses and temporary suspension of the 80% limitation, did not benefit the company due to its aggregate net operating losses and existing valuation allowance[108] (10) Redeemable Noncontrolling Interests and Noncontrolling Interests Sunnova admitted several new tax equity investors in 2020, with total capital commitments of $235.0 million, increasing redeemable noncontrolling interests and noncontrolling interests - In 2020, Sunnova admitted tax equity investors for TEPIVC, TEPIVD, TEPIVF, and TEPIVE, with total capital commitments of $75.0 million, $75.0 million, $10.0 million, and $75.0 million, respectively[109] (11) Stockholders' Equity In the third quarter of 2020, approximately $84.8 million of 9.75% convertible senior notes were converted into 6,277,982 shares of common stock, resulting in a $50.7 million loss on extinguishment of debt - Conversion of $84.8 million of 9.75% convertible senior notes into 6,277,982 shares of common stock resulted in a $50.7 million loss on extinguishment of debt for the three and nine months ended September 30, 2020[110] (12) Equity-Based Compensation This note details stock option and restricted stock unit activity. As of September 30, 2020, there were 3,619,606 stock options outstanding and 2,069,128 restricted stock units outstanding, with $20.0 million in unrecognized compensation expense for RSUs Stock Option Activity | Metric | As of Sep 30, 2020 | As of Dec 31, 2019 | | :-------------------------------- | :----------------- | :----------------- | | Outstanding Stock Options | 3,619,606 | 4,304,309 | | Weighted Average Exercise Price | $16.21 | $15.86 | | Aggregate Intrinsic Value (thousands) | $51,383 | $242 | Restricted Stock Unit Activity | Metric | As of Sep 30, 2020 | As of Dec 31, 2019 | | :-------------------------------- | :----------------- | :----------------- | | Outstanding Restricted Stock Units | 2,069,128 | 1,426,139 | | Weighted Average Grant Date Fair Value | $11.83 | $11.93 | | Unrecognized Compensation Expense (thousands) | $20,000 | N/A | (13) Basic and Diluted Net Loss Per Share The basic and diluted net loss per share attributable to common stockholders was $(0.73) for the three months ended September 30, 2020, and $(1.88) for the nine months ended September 30, 2020. Various common stock equivalents were excluded from diluted EPS calculation as they were anti-dilutive Net Loss Per Share Attributable to Common Stockholders | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss attributable to common stockholders | $(64,181) | $(37,590) | $(160,514) | $(151,567) | | Net loss per share (basic and diluted) | $(0.73) | $(0.62) | $(1.88) | $(5.77) | | Weighted average common shares outstanding | 87,768,712 | 60,890,129 | 85,276,841 | 26,245,493 | - Common stock equivalents, including equity-based compensation awards and convertible senior notes, were excluded from diluted EPS calculations due to their anti-dilutive effect[115] (14) Commitments and Contingencies Sunnova is involved in routine legal matters with no expected material adverse impact. The company has performance guarantee obligations of $4.9 million, operating lease liabilities of $9.9 million, and significant dealer and purchase commitments totaling $89.1 million and $103.2 million, respectively - Performance guarantee obligations for solar energy production output totaled $4.9 million as of September 30, 2020, down from $6.5 million at December 31, 2019[117] Future Minimum Lease Payments (Operating Leases, in thousands) | Year | Amount | | :---------------- | :----- | | Remaining 2020 | $381 | | 2021 | $1,536 | | 2022 | $1,559 | | 2023 | $1,594 | | 2024 | $1,616 | | 2025 and thereafter | $7,617 | | Total | $14,303 | Dealer Commitments (in thousands) | Year | Amount | | :---------------- | :----- | | Remaining 2020 | $484 | | 2021 | $33,312 | | 2022 | $33,477 | | 2023 | $10,505 | | 2024 | $9,766 | | 2025 and thereafter | $1,509 | | Total | $89,053 | Purchase Commitments (in thousands) | Year | Amount | | :---------------- | :----- | | Remaining 2020 | $3,327 | | 2021 | $26,629 | | 2022 | $26,810 | | 2023 | $26,605 | | 2024 | $19,807 | | Total | $103,178 | (15) Subsequent Events Subsequent events in October 2020 include the repayment of $28.0 million of EZOP debt, an increase in the TEPH revolving credit facility to $600.0 million, and the conversion of $32.5 million of 9.75% convertible senior notes into 2,406,523 shares of common stock - In October 2020, $28.0 million of EZOP debt was repaid using proceeds from the AP8 revolving credit facility[123] - The TEPH revolving credit facility was amended in October 2020, increasing the aggregate commitment amount from $437.5 million to $600.0 million[123] - In October 2020, approximately $32.5 million of 9.75% convertible senior notes were converted into 2,406,523 shares of common stock[124] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Sunnova's financial condition and results of operations, highlighting the company's business model, recent developments including the impact of COVID-19, key financial and operational metrics, and significant factors affecting the business. It also offers a detailed comparison of financial performance for the three and nine months ended September 30, 2020, versus 2019, and discusses liquidity and capital resources Company Overview Sunnova is a leading residential solar and energy storage service provider, serving over 98,000 customers. The company operates through a differentiated dealer model, offering solar service agreements (lease, PPA, loan) with integrated services and leveraging tax benefits and incentives to fund growth - Sunnova is a leading residential solar and energy storage service provider with over 98,000 customers and more than 720 megawatts of generation capacity[126][132] - The company utilizes a dealer model for customer origination, design, and installation, providing operational flexibility and lower fixed costs[127] - Sunnova offers long-term solar service agreements (leases, PPAs, loans) typically 10, 15, or 25 years, including comprehensive operations, maintenance, monitoring, and repair services[128] Recent Developments Recent developments include the ongoing impact of the COVID-19 pandemic, which initially caused a decline in new contract origination but later saw recovery through digital tools. The company has also engaged in significant financing transactions, including new tax equity funds and securitizations, and has successfully raised over $6.1 billion in total capital commitments since inception - COVID-19 initially caused a decline in new contract origination in March and April 2020, but recovery was seen from May to September 2020 due to expanded use of digital tools and virtual sales methods[134] - Residential solar services were designated as essential, allowing installations and services to continue with contact-free processes, and the supply chain experienced minimal impact[135][136] - Sunnova has raised over $6.1 billion in total capital commitments from equity, debt, and tax equity investors since inception through September 30, 2020[129][175] - The company closed two additional tax equity funds, expanded an existing credit facility, and closed one additional credit facility, demonstrating continued access to capital markets despite pandemic volatility[140][142][144] Key Financial and Operational Metrics Sunnova tracks key metrics such as the number of customers, weighted average number of customers, Adjusted EBITDA, interest income and principal payments from customer notes receivable, Adjusted Operating Cash Flow, Adjusted Operating Expense, and Estimated Gross Contracted Customer Value to evaluate performance and liquidity Number of Customers | Metric | As of Sep 30, 2020 | As of Dec 31, 2019 | Change | | :---------------- | :----------------- | :----------------- | :----- | | Number of customers | 98,600 | 78,600 | 20,000 | Weighted Average Number of Customers | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Weighted average number of customers | 95,000 | 70,400 | 88,500 | 66,100 | Adjusted EBITDA (in thousands) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Adjusted EBITDA | $25,414 | $15,867 | $49,607 | $37,533 | Adjusted Operating Cash Flow (in thousands) | Metric | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------ | :-------------------------- | :-------------------------- | | Adjusted Operating Cash Flow | $501 | $(12,876) | Estimated Gross Contracted Customer Value (in millions) | Metric | As of Sep 30, 2020 | As of Dec 31, 2019 | | :-------------------------------- | :----------------- | :----------------- | | Estimated gross contracted customer value | $2,424 | $1,879 | Significant Factors and Trends Affecting Our Business Key factors influencing Sunnova's business include the availability of competitive financing, the cost of solar energy systems, the increasing adoption and technological advancements of energy storage systems, and government regulations, policies, and incentives, particularly the Section 48(a) Investment Tax Credit (ITC) - Future growth is significantly dependent on the ability to raise capital from third-party investors on competitive terms, with over $6.1 billion raised since inception[175] - The Section 48(a) ITC is scheduled to decrease from 30% (for construction before 2020) to 26% for 2020, 22% for 2021, and 10% after 2021, which may reduce the use of tax equity financing[176] - Energy storage systems are a growing area, increasing customer independence and providing on-site backup power, with technological advancements making them more economic and adaptable to utility rate shifts[178] - Government policies and incentives, such as net metering, accelerated depreciation, SRECs, and tax credits, are crucial for promoting solar energy and enhancing economic viability[179] Components of Results of Operations This section defines how Sunnova recognizes various revenue streams (PPAs, leases, loans, SRECs, other) and categorizes operating expenses, including cost of revenue (depreciation and other), operations and maintenance, general and administrative, interest expenses, and non-recurring items like loss on extinguishment of debt - Revenue is recognized from PPAs based on electricity delivered, from leases on a straight-line basis, and from loans as interest income, principal reduction, and operations/maintenance revenue[181][182][185] - SREC revenue is generated from selling certificates representing solar energy production, accounted for as governmental incentives with no acquisition costs[186] - Operating expenses include depreciation on solar energy systems, costs related to SRECs and loan agreements, operations and maintenance (third-party services, insurance, taxes, impairments), and general and administrative costs (employee-related, professional fees, IT, marketing, rent)[188][189][190][191] - Interest expense, net, includes interest on borrowings and amortization of debt discounts/deferred financing costs. Loss on extinguishment of long-term debt arises from GAAP treatment of convertible senior note conversions[192][194] Results of Operations—Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 For the three months ended September 30, 2020, revenue increased by $13.6 million (37%) YoY, driven by more solar energy systems in service and higher SREC pricing/volumes. Operating income improved significantly, but a $50.7 million loss on extinguishment of debt led to a higher net loss attributable to stockholders Key Financial Results (3 Months Ended Sep 30, in thousands) | Metric | 2020 | 2019 | Change | | :--------------------------------------- | :----- | :----- | :----- | | Revenue | $50,177 | $36,615 | $13,562 | | Operating income (loss) | $1,649 | $(5,898) | $7,547 | | Net loss attributable to stockholders | $(64,181) | $(37,590) | $(26,591) | | Loss on extinguishment of long-term debt, net | $50,721 | $0 | $50,721 | - Revenue increased by $13.6 million (37%) YoY, primarily due to an increased number of solar energy systems in service and higher SREC pricing and volumes in New Jersey and Massachusetts[202][203] - Operating income improved by $7.5 million, turning from a loss to a gain, despite increases in cost of revenue—depreciation and operations and maintenance expenses[201][204][206] - Interest expense, net, decreased by $0.9 million, primarily due to an increase in unrealized gain on interest rate swaps, partially offset by higher principal debt balances[209] Results of Operations—Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 For the nine months ended September 30, 2020, revenue increased by $24.9 million (25%) YoY, driven by growth in solar energy systems. Operating loss widened by $4.7 million, and net loss attributable to stockholders increased by $33.7 million, largely due to a $50.7 million loss on extinguishment of debt and higher interest expenses Key Financial Results (9 Months Ended Sep 30, in thousands) | Metric | 2020 | 2019 | Change | | :--------------------------------------- | :----- | :----- | :----- | | Revenue | $122,796 | $97,942 | $24,854 | | Operating loss | $(17,800) | $(13,115) | $(4,685) | | Net loss attributable to stockholders | $(160,514) | $(126,842) | $(33,672) | | Loss on extinguishment of long-term debt, net | $50,721 | $0 | $50,721 | - Revenue increased by $24.9 million (25%) YoY, primarily due to an increased number of solar energy systems in service, with PPA and lease revenues showing significant growth[217] - Operating loss increased by $4.7 million, driven by higher cost of revenue—depreciation ($11.3 million increase) and general and administrative expenses ($13.6 million increase)[216][219][223] - Interest expense, net, increased by $27.9 million, mainly due to a $26.0 million increase in realized loss on interest rate swaps from debt facility terminations and higher principal debt balances[224] Liquidity and Capital Resources As of September 30, 2020, Sunnova had $211.7 million in total cash ($84.6 million unrestricted) and $224.1 million in available borrowing capacity. The company relies on diversified funding sources, including debt, securitizations, and tax equity, to finance growth and operations, and expects sufficient liquidity for the next 12 months - As of September 30, 2020, total cash was $211.7 million ($84.6 million unrestricted), with $224.1 million in available borrowing capacity[231] - The business model requires substantial outside financing, with historical sources including non-recourse/recourse debt, securitizations, tax equity, and preferred equity[231] - The company expects sufficient cash, investment fund commitments, and securitization commitments to meet working capital, debt service, and capital expenditure needs for at least the next 12 months[233] Historical Cash Flows (9 Months Ended Sep 30, in thousands) | Cash Flow Activity | 2020 | 2019 | Change | | :----------------------------------- | :--------- | :--------- | :--------- | | Net cash used in operating activities | $(101,796) | $(74,538) | $(27,258) | | Net cash used in investing activities | $(594,275) | $(389,701) | $(204,574) | | Net cash provided by financing activities | $757,469 | $486,464 | $271,005 | | Net increase in cash and restricted cash | $61,398 | $22,225 | $39,173 | Item 3. Quantitative and Qualitative Disclosures About Market Risk Sunnova is primarily exposed to market risk from changes in interest rates on its variable-rate debt. A hypothetical 10% increase in interest rates would have increased interest expense by $567,000 and $1.9 million for the three and nine months ended September 30, 2020, respectively - The primary market risk exposure is to changes in interest rates on variable-rate debt, which is sometimes managed with derivative instruments[256] Impact of Hypothetical 10% Interest Rate Increase (in thousands) | Period | Increase in Interest Expense | | :-------------------------- | :--------------------------- | | 3 Months Ended Sep 30, 2020 | $567 | | 9 Months Ended Sep 30, 2020 | $1,900 | Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that Sunnova's disclosure controls and procedures were effective as of September 30, 2020, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely. No material changes in internal control over financial reporting occurred during the third quarter of 2020 - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2020, designed to provide reasonable assurance of timely and accurate financial reporting[257] - No material changes in internal control over financial reporting occurred during the third quarter of 2020[258] - Management acknowledges that any control system provides only reasonable, not absolute, assurance of achieving its objectives[259] PART II - OTHER INFORMATION Item 1. Legal Proceedings Sunnova is involved in routine lawsuits, claims, and governmental proceedings incidental to its business, including disputes with dealers and customers. The company does not expect these matters to have a material adverse impact on its financial position, results of operations, or liquidity - Sunnova is a party to routine lawsuits, claims, and governmental proceedings, but does not expect them to have a material adverse impact on financial position or results[262] Item 1A. Risk Factors This section updates the material risks facing Sunnova, primarily focusing on the adverse impacts of the ongoing COVID-19 pandemic. Key risks include potential declines in new contract origination, disruptions to installations and services, reduced access to capital markets, increased delinquency rates, and supply chain disruptions - The COVID-19 pandemic could adversely affect business, financial condition, and results of operations, with initial declines in new contract origination and potential future disruptions[264][265] - Future success depends on the ability to raise capital; reduced access to capital markets due to COVID-19 could adversely impact financing for solar energy system deployment[266] - Worsening economic conditions from the pandemic may increase unemployment, reduce consumer credit ratings, and lead to higher delinquency and default rates on solar service agreements[267] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the current report Item 3. Defaults Upon Senior Securities This item is not applicable to the current report Item 4. Mine Safety Disclosures This item is not applicable to the current report Item 5. Other Information There is no other information to report under this item Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including supplemental indentures, credit agreements, guaranties, certifications, and XBRL documents - Exhibits include various financial agreements such as the First Supplemental Indenture, Amendment No. 6 to Amended and Restated Credit Agreement, and a new Credit Agreement for Sunnova Asset Portfolio 8, LLC[275] - Certifications from the Chief Executive Officer and Chief Financial Officer, pursuant to the Sarbanes-Oxley Act of 2002, are included[275] - XBRL (eXtensible Business Reporting Language) documents are provided for interactive data filing[275]