Good afternoon, and welcome to the Spruce Power First Quarter 2023 Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] For opening remarks and introductions, I'd like to turn the call over to Bronson Fleig, Head of Investor Relations for Spruce Power. Mr. Fleig, please go ahead.

Thank you. Good afternoon, and welcome to Spruce Power's conference call to discuss results for the first quarter of 2023. With me today are Christian Fong, our Chief Executive Officer; Donald Klein, our outgoing Chief Financial Officer; and Sarah Wells, our incoming Chief Financial Officer. Our call this afternoon will include statements that speak to the company's expectations, outlook or predictions of the future, which are considered forward-looking statements within the meaning of federal securities laws. These forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which may cause our actual results to differ materially from those expressed in or implied by these statements. Similarly, out of our control is the timing of some of the processes we will discuss today, which could impact the expectation-related statements you will hear shortly. We are not obliged to revise or update any forward-looking statements except as may be required by law. Please refer to our disclosures regarding risk factors and forward-looking statements in today's earnings release, our annual report on Form 10-K and other Securities and Exchange Commission filings. A copy of our press release has been posted to the Investor Relations page of our website for reference. The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent and can be found in the press release that we issued this afternoon. With that, I will turn the call over to our CEO, Christian Fong. Christian, go ahead.

Thank you, Bronson, and thanks to everyone for joining us on the call today. Spruce is in its strongest position ever with a focus on maintaining strong customer service, owning a large portfolio of zero-carbon, clean electricity rooftop power systems and operating the long-term, high-margin contracts that generate a steady stream of cash. During the quarter, we essentially completed the transformation of Spruce Power to a pure-play residential rooftop solar company with just a few final changes left. One of those is a long-planned management transition as Sarah Wells becomes our new CFO. More on that later. Another is the runoff of expenses tied to the wind down of XL Fleet, some of which impacted the Q1 bottom line. Those expenses are mostly encouraged so our numbers going forward will really showcase the attractiveness of our business model. So looking ahead, we have a substantial cash balance to drive incremental growth and value creation for shareholders, and we can put cash to work to grow through acquisitions as we've demonstrated at the end of March in buying the portfolio we renamed Spruce Power 4. That deal increased our overall portfolio by 44%, a full year's customers' growth target in one swing. Today, I'll be presenting our operating results for the quarter and talking about some recent events in the context of the 3 core pillars of our strategy. The first pillar is to build the industry-leading customer experience. Our first quarter customer satisfaction score was 71%, beating our 70% target and up substantially year-on-year from 54% in Q1 of 2022. We are also on track with this year's technology road map to ensure month in, month out reliability and system visibility to a customer base that now numbers over 72,000. For IT upgrades, we successfully implemented a customized new billing…

Thanks, Christian. Before we discuss our first quarter results, I'd like to walk through a few items that impacted our financial reporting. As discussed in our last quarterly update, the old Drivetrain and XL Grid businesses were classified as discontinued operations. The final legacy businesses were disposed in the first quarter, and though there will be some cleanup items in future quarters, we do not expect material expenses going forward as it relates to discontinued operations. However, our continuing operating results will reflect certain expenses related to XL Fleet, namely legal expenses tied to the previously disclosed SEC inquiry and related shareholder lawsuits. We're unable to comment on the timing or outcome of this matter, but we do expect to incur additional moderate legal expenses. And as a note on our 10-Q, we filed an extension as we finished the technical accounting for the Spruce Power 4 purchase in March, but we don't expect it to impact anything we're talking about today. With that, let's move on to results. First quarter revenue, which consisted exclusively of Spruce-related revenue, was $18.1 million compared to $18.1 million in the fourth quarter of '22. As Christian mentioned, revenue was moderately impacted in the quarter by the outsized impact of weather on our West Coast assets. This was partially offset by higher-than-expected proceeds from the renewable energy credit sales. Recall that the fourth and first quarters typically generate lower revenue due to weather-related impacts on electrical production. First quarter OpEx, which includes both SG&A and portfolio O&M, was $17.6 million compared to $30.6 million last quarter. The sequential decline largely reflects much lower integration costs tied to our acquisition by XL Fleet. Also of note, SG&A expense during the quarter includes approximately $8 million of expenses attributable to legacy XL Fleet business, namely legal…

Thank you, Don. And I will just add that I'm excited to begin my next chapter at Spruce as CFO. Before opening the call to Q&A, I'd like to further address the transformative impact of the Spruce Power 4 acquisition. The acquisition immediately enhances our cash flow generation. The acquired assets sit outside of our mezzanine facility, which was put in place years ago and currently claims excess cash after senior debt service of our legacy portfolios. Spruce Power 4 is a cash generator, underwritten to stand-alone portfolio customer billings of $21 million and portfolio EBITDA of $18 million. With the acquisition closing late in March, second quarter results will reflect the first full quarter contribution from Spruce Power 4. I'd like to note some accounting technicalities surrounding this transaction. The portfolio consists of the pass-through leasehold interest of about 22,500 residential solar contracts. In other words, while we are entitled to 100% of the customer payment streams through their contractual period, Spruce does not own the underlying rooftop solar systems. GAAP accounting for these leasehold interests will place the majority of the customer payment streams through the cash flows from investing section of our consolidated statement of cash flows. Regardless of where accounting rules put the cash in the financial statements, we believe the critical takeaway is the strong cash inflows that Spruce Power 4 contributes to our core residential solar business. To that end, this is how the Spruce team internally evaluates our business, with a focus on cash inflows from our long-term contracts with customers or what we refer to as business cash inflows. Because of the nuance of accounting for Spruce Power 4, we think it is beneficial to investors for Spruce to provide this framework to clarify the impact to the underlying business performance of…

[Operator Instructions] Looks like we'll have a question from Tristan Richardson with Scotiabank.

Just with all the growth we're seeing, third-party owned and commentary from installers, just curious about other avenues of growth for Spruce. I mean is a potential avenue to partner with an installer down the road and be that source of flow-forward arrangement? Or maybe just curious about the trends you're seeing in third-party owned growth and how that could lead to other growth avenues for Spruce.

Sure. Tristan, it's Christian. Look, the percentage of installs that are now going to PPA and leases is going up, and you can read through from some of our peers that have reported this already this quarter. But long term, kind of 28% is what has been reported by some of the third-party researchers, and it's pushing into the 30s, maybe 40% range. So there's a lot coming down the pike. And so your question is a fair one. Remember that Spruce's historical origins was as a channel partner. And that's what that model would be called where you just partner with the installers, provide a PPA and lease document and provide the capital for that. It's actually not a bad business at all. It's clearly like -- Sonovus does that. Sunrun does that, and we used to do that. About 22,000 of our 72,000 customers were originated through that sort of flow partnership. Could we do it again? Absolutely. It's one of those -- sometimes called real options, right? So it's kind of a real option that sits back there. We have the experience doing it. We've got the paperwork doing it. It's just that we were able to grow so fast through M&A. So could we ever turn it back on? Yes. Should we turn it back on? Well, this is where we go to the cost of an acquired customer. We had reported back in September that it was about $421 per customer. It's down to around $375 per customer. When we were doing that channel partnership, the cost actually was much higher. There were sales teams that you had to keep, just the relationship management and working with those different installers. So I don't want to say that we would never do it. Clearly, just because something is super high margin doesn't mean that you don't look at other channels. But for right now, we're meeting our growth objectives at a very -- from an industry standpoint, a very competitive cost of acquisition. And so we'll keep at that for the time being. But the answer is yes. Simply put, yes, we could.

And then just in your script, you talked about maintaining a minimum level of cash. I mean could you talk about a scenario that might trigger or create an instance where you spend down to that level? Would it just be a large opportunity? Or how do you think about the current level of cash versus spending down to that minimum?

Sure. So we are calling it all of the above at the moment. And if we walk through like where did we come up with $75 million, it's because we could meet the maximum size of the share repurchase program that we just announced. We could take care of the about $5 million of annual discretionary CapEx that is mostly around customer experience. And then when you start thinking about how much growth capital does that leave, then from $155 million to -- down to the, like, 2 years' worth of discretionary CapEx, the $155 million down to $75 million, $80 million -- okay. So let's put that in the context of what we just accomplished with the Spruce Power 4 acquisition where we spent a net cash of $23 million and got 22,500 customers, those contracts feeding into the cash inflows. So we start thinking about it as $1,000, and that was a very, very efficient acquisition. I want to think we'll do that every quarter. But it leaves a lot of dry powder to grow through the customer acquisition side, far beyond the 90,000 customer target that we've set for 2024. So it's one of those moments where we felt very comfortable saying $75 million as a minimum liquidity threshold for just where we are as an economy and still leaving a lot of dry powder for something transformative, again, if it came our way.

[Operator Instructions] Next, we'll go to Jordan Levy with Truist Securities.

Sarah, congrats on the CFO role. Maybe you mentioned earlier an outlook for positive cash flow, we think later this year or later in the coming quarters. It seems like the Spruce Power 4 acquisition is playing a big role in that. Maybe if you could just talk about what's -- what it is about that acquisition that makes that outlook for positive free cash flow more achievable.

Jordan, thank you so much. We have very strong cash flows coming off of Spruce Power 4. And it's unique because it sits outside of our mezz facility, unlike our legacy assets. The cash flows are unencumbered and then after our OpEx and debt interest, everything else comes to Spruce.

And maybe just as a quick follow-up, and I think I might have asked this last earnings, but I'm just curious, Chris, in the environment you're seeing out there in terms of deals and any competition you're seeing pop up as leases become more prominent.

Yes. We get most of our deals from 3 -- I'll call them 3 buckets of sources. You got utilities that are active, sometimes out of territory. It's a different sector, but the return on capital requirements and their inflationary pressures are pretty well-known in that sector. You've got financial investors that accumulate them and then you've got the installers themselves, that whether they're large and well-known or part of what is -- by far, it's a very fractured industry, so folks all over the country that may be working in their local markets. And so again, we're not going to speak to the specifics of how many bids we have out or how many bilateral negotiations we have out. I'll just say the answer is yes to both of them in real time, and yet these are real-time negotiations. And so I just don't want to compromise what might be there. We stand behind the target of a mid-teens IRR. We think that's very achievable and because we can flex the pricing of the equity that we put out. We're a lot less concerned about what may be happening in the debt markets. If debt goes down 50 basis points, then the sellers probably are just going to price it in and want the same -- you got to split the pie, so to speak, when you're dealing with arm's length buyers and sellers. So yes, we are seeing things. We expect to see them a little bit further on. So let me just take the opportunity of the question to remind that so many of the deals that we see are seasoned deals. So rather than -- a little bit, like, Tristan had just asked, could we partner with an installer? Yes, we could, and then we can get them straight as they're coming off the construction pipelines of those installers. By acquiring portfolios that are seasoned, let's just say that some of the teething pain is over. The portfolios are performing really strongly. It's why our weather-adjusted portfolio ratio can exceed 100% pretty significantly, just that seasoning and buying really, really good stuff. And that means the current push toward PPA and leases, that's occurring because of the rise in interest rates. Solar loans are just marginally less attractive. It's going to feed a pipeline for the next 4 to 5 years as those different types of owners pick their exit points.

Seeing no further questions in the queue, let me turn the call back over to Mr. Fleig to conclude today's call.

Thank you, operator, and thank you again for joining us today and for your continued support. If you have any questions, please contact me or our Investor Relations team. This concludes our call today. You may all disconnect.

This concludes today's conference. You may now disconnect.