Skip to content

Article/Intelligence

Excel Model: Sunnova’s Equity Value in Securitizations Is Highly Sensitive to Discount Rate Assumptions

Share on X (opens in a new window) Share on Facebook (opens in a new window) Share on LinkedIn (opens in a new window)
Credit Research: Simran Bal

Relevant Items:
2024 10-K
Link to Supplemental Financials
Link to Excel Model
 

Key Takeways
 

  • Octus estimates that Sunnova Energy Corp.’s unsecured bonds could recover 4% to 100% and Sunnova Energy International Inc.’s unsecured convertible bonds could recover 0% to 89% of value from the company’s securitization vehicles if the assets in those vehicles were discounted at rates of 10% to 15%, as opposed to the 6% rate used by the company. This estimate is based on total customer contract value in the securitizations as of Dec. 31, 2024. The wide range of recoveries illustrates that the equity value of Sunnova’s securitizations is extremely sensitive to underlying discount rate assumptions.
     
  • Octus’ illustrative waterfall analysis values Sunnova’s contracts as of Dec. 31, 2024, which excludes subsequent contract additions financed by $295.8 million of SOL IX solar asset-backed notes due 2060, the February funding of $185 million of term loans due 2028 and the impact of tax equity funds raised after year-end.
     
  • Our top-down analysis is based on discounting cash flows from the assets within the securitization vehicles in comparison with Sunnova’s total securitization debt, as opposed to valuing the equity tranche of each of the company’s multiple securitization vehicles individually. While this is an oversimplification, we believe this provides investors with a view into Sunnova’s equity value in these vehicles.

 

In the below exhibit and HERE, Octus flexes the discount rate on Sunnova’s “estimated gross contracted customer value” and “estimated gross renewal customer value” figures (provided in its supplemental financials) from 6% to a range of 10% to 15%, which better aligns with Sunnova’s current cost of capital. On March 2, Sunnova entered into a $185 million nonrecourse asset-based term loan due 2028 provided by KKR that bears interest at 15% per annum. As discussed further below, sensitizing Sunnova’s underlying contract and cost assumptions to higher realized rates would decrease the customer contract value flowing to Sunnova.

 

(Click HERE to enlarge.)

Although Sunnova includes the value of construction in progress and inventory within its total customer value calculation, Octus omits such values from its calculations. It is unclear where the liquation value of these assets would flow to securitization vehicles or directly to the corporate level. Nonetheless, construction in progress and inventory would increase distributable value. As of Dec. 31, 2024, construction in progress and inventory totaled $499 million and $126.7 million, respectively.

A simplified organizational structure, included in the offering memorandum for its 11.75% unsecured notes due 2028, is shown below:
 

(Click HERE to enlarge.)

Not All Of Sunnova’s Unrestricted Cash Is Equivalent

As of Dec. 31, 2024, Sunnova had total consolidated cash of $548.1 million. The company classified $336.9 million as restricted cash and $211.2 million as unrestricted cash. However, $176.5 million of its unrestricted cash balance serves as collateral for its nonrecourse financing arrangements held in collection accounts at its special-purpose entities that is available for distribution to Sunnova only after satisfying the current obligations of the applicable special-purpose entity each payment period.

Certain of these financing arrangements require all excess cash flows from the special-purpose entity to be used to repay the financings in full prior to distributing any cash flows to Sunnova, for which the residual equity interests in all its securitizations will be pledged as collateral. Although Sunnova classifies this cash as unrestricted, the company may be required to use it to pay down securitized debt before it flows up to the corporate debt.

Restricted cash represents cash held to service certain payments under Sunnova’s various financing arrangements, to be used to purchase eligible solar energy systems and balances collateralizing outstanding letters of credit related to a reinsurance agreement and one of its operating leases for office space, as shown below:
 

As a result, Octus estimates $434.4 million of subsidiary-level restricted cash that could be used to service its securitization before flowing to corporate debt, and $34.7 million of unrestricted cash at the corporate level. These amounts exclude $73.4 million of tax equity reserves restricted cash and $5.7 million of collateralized letter of credit and operating lease restricted cash.

Sunnova’s Values for Customer Contracts Incorporate Undisclosed Assumptions

Sunnova provides estimated gross contracted customer value and estimated gross renewal customer value in its supplemental financials on a quarterly basis, which can be used as a proxy for contract values as of a specific date in time.

Sunnova warns that its estimated future cash flows “reflect the projected monthly customer payments over the life of our solar service agreements and depend on various factors including but not limited to solar service agreement type, contracted rates, expected sun hours and the projected production capacity of the solar equipment installed.” Without further disclosure as to these variables, it is difficult to estimate how changes to them might impact total contract value. For example, delinquency and cancellation rates could be expected to increase in times of economic uncertainty.

Estimated Gross Contracted Customer Value

Estimated gross contracted customer value represents the net present value of initial current customer contracts (including power purchase agreements, leases and loans), which currently have a weighted average remaining life of 19 years, according to the 10-K, while estimated gross renewal customer value represents the net present value of expected-to-be-renewed customer PPAs and lease contracts over a 10-year period (two five-year renewal terms) following its initial contract completion. Sunnova assumes that 100% of its PPA and lease agreements would be renewed for each five-year renewal period at a price 10% lower each period. Sunnova discounts all future cash flows at a 4%, 6% and 8% discount rate in its supplemental financials.

Estimated gross contracted customer value represents the following:
 

  • The sum of the present value of the remaining estimated future net cash flows Sunnova expects to receive from existing customers during the initial contract term of customer agreements, which are typically 25 years in length;
     
  • Plus the present value of future net cash flows Sunnova expects to receive from the sale of related solar renewable energy certificates, or SREC, either under existing contracts or in future sales;
     
  • Plus the cash flows Sunnova expects to receive from energy services programs such as grid services;
     
  • Plus the carrying value of outstanding customer loans on its balance sheet.
     

From these aggregate estimated initial cash flows, Sunnova subtracts the following:
 

  • The present value of estimated net cash distributions to redeemable noncontrolling interests and noncontrolling interests; and
     
  • Estimated operating, maintenance and administrative expenses associated with the solar service agreements.
     

The anticipated operating, maintenance and administrative expenses include, among other things, expenses related to accounting, reporting, audit, insurance, maintenance and repairs. In the aggregate, Sunnova estimates that these expenses are $20 per kilowatt per year initially, with 2% annual increases for inflation, and an additional $81 per year non-escalating expense included for energy storage systems. Sunnova does not include maintenance and repair costs for inverters and similar equipment, as those are largely covered by the applicable product and dealer warranties for the life of the product, but it does include additional cost for energy storage systems, which are covered by only a 10-year warranty.

Estimated Gross Renewal Customer Value

Estimated gross renewal customer value represents the sum of the present value of future net cash flows Sunnova would receive from customers during two five-year renewal terms of its leases and PPAs, plus the present value of future net cash flows Sunnova expects to receive from the sale of related SRECs, either under existing contracts or in future sales. From these aggregate estimated renewal cash flows Sunnova subtracts the present value of estimated net cash distributions to redeemable noncontrolling interests and noncontrolling interests and estimated operating, maintenance and administrative expenses associated with the solar service agreements.

Sunnova’s estimated renewal gross customer value uses “the established industry convention, which assumes 100% of solar leases and PPAs are renewed, due to the expected useful life of the system and costs to the customer associated with an election to purchase or remove the equipment.” The company further assumes that these contracts are renewed at 90% of the contractual price in effect at expiration of the term of the solar service agreement. Since the customer has two renewal options of five years each, for the second renewal period Sunnova assumes a contractual price of 90% of the price in the first renewal period. Loan agreements are not included in estimated renewal gross customer value, since they do not contain a renewal feature.