The following discussion and analysis contain forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed under "Special Note Regarding Forward-Looking Statements", "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
Company presentation
We are a leading residential energy service provider, serving over 195,000 customers in more than 25 U.S. states and territories. Our goal is to be the source of clean, affordable and reliable energy with a simple mission: to power energy independence so homeowners have the freedom to live life uninterrupted. We were founded to deliver customers a better energy service at a better price; and, through our energy service offerings, we are disrupting the traditional energy landscape and the way the 21st century customer generates and consumes electricity. We have a differentiated residential solar dealer model in which we partner with local dealers who originate, design and install our customers' solar energy systems and energy storage systems on our behalf. Our focus on our dealer model enables us to leverage our dealers' specialized knowledge, connections and experience in local markets to drive customer origination while providing our dealers with access to high quality products at competitive prices, as well as technical oversight and expertise. We believe this structure provides operational flexibility, reduces exposure to labor shortages and lowers fixed costs relative to our peers, furthering our competitive advantage. We offer customers products to power their homes with affordable solar energy. We are able to offer savings compared to utility-based retail rates with little to no up-front expense to the customer in conjunction with solar and solar plus energy storage, and in the case of the latter are able to also provide energy resiliency. Our solar service agreements typically take the form of a lease, PPA or loan; however, we also offer service plans for systems previously originated by our competitors. We make it possible in some states for a customer to obtain a new roof and other ancillary products as part of their solar loan. We also allow customers originated through our homebuilder channel the option of purchasing the system when the customer closes on the purchase of a new home. The initial term of our solar service agreements is typically between 10 and 25 years. Service is an integral part of our agreements and includes operations and maintenance, monitoring, repairs and replacements, equipment upgrades, on-site power optimization for the customer (for both supply and demand), the ability to efficiently switch power sources among the solar panel, grid and energy storage system, as appropriate, and diagnostics. During the life of the contract, we have the opportunity to integrate related and evolving home servicing and monitoring technologies to upgrade the flexibility and reduce the cost of our customers' energy supply. In the case of leases and PPAs, we also currently receive tax benefits and other incentives from federal, state and local governments, a portion of which we finance through tax equity, non-recourse debt structures and hedging arrangements in order to fund our upfront costs, overhead and growth investments. We have an established track record of attracting capital from diverse sources. From our inception throughDecember 31, 2021 , we have raised more than$9.0 billion in total capital commitments from equity, debt and tax equity investors. In addition to providing ongoing service as a standard component of our solar service agreements, we also offer ongoing energy services to customers who purchased their solar energy system through third parties. Under these arrangements, we agree to provide monitoring, maintenance and repair services to these customers for the life of the service contract they sign with us. We intend to expand our offerings to include complimentary products to our agreements as well as non-solar financing. Specifically, and subject to obtaining any applicable state and federal regulatory approvals and assessing any attendant risks, we plan to expand our offerings to include a non-solar loan program enabling customers to finance the purchase of products independent of a solar energy system or energy storage system. We believe the quality and scope of our comprehensive energy service offerings, whether to customers that obtained their solar energy system through us or through another party, is a key differentiator between us and our competitors. InApril 2021 , we acquired SunStreet, Lennar's residential solar platform that focuses primarily on solar energy systems and energy storage systems for homebuilders. In connection with that acquisition, we entered into an agreement pursuant to 64 -------------------------------------------------------------------------------- Table of Contents which we would be the exclusive residential solar and storage provider for Lennar's new home communities with solar across theU.S. for a period of four years. We believe the acquisition provides a new strategic path to further scale our residential solar business, reduces customer acquisition costs, provides a multi-year supply of homesites through the development of new home solar communities and allows us to pursue the development of clean and resilient residential microgrids across theU.S. We also enter into leases with third-party owners of pools of solar energy systems to receive such third party's interest in those systems. In connection therewith, we assume the related customer PPA and lease obligations, entitling us to future customer cash flows as well as certain credits, rebates and incentives (including SRECs) under those agreements, in exchange for a lease payment, whether upfront or over time, to the third-party owner, which may be made in the form of cash or shares of our common stock. We believe such arrangements enhance our long-term contracted cash flows and are complementary to our overall business model. We commenced operations inJanuary 2013 and began providing solar energy services under our first solar energy system inApril 2013 . Since then, our brand, innovation and focused execution have driven significant, rapid growth in our market share and in the number of customers on our platform. We operate one of the largest fleets of residential solar energy systems in theU.S. , comprising more than 1,140 megawatts of generation capacity and serving over 195,000 customers. Recent Developments Acquisition of SunStreet InFebruary 2021 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") with certain of our subsidiaries,SunStreet and LEN X, LLC , aFlorida limited liability company, the sole member of SunStreet and a wholly-owned subsidiary of Lennar ("Lenx"). Pursuant to the Merger Agreement, inApril 2021 , we acquired SunStreet, Lennar's residential solar platform, in exchange for up to 7,011,751 shares of our common stock (the "Acquisition"), comprised of 3,095,329 shares in initial consideration issued at closing, 27,526 shares related to the purchase price adjustments in the third quarter of 2021 and up to 3,888,896 shares issuable as earnout consideration after closing of the Acquisition as described below. In connection with the Acquisition, we entered into an agreement pursuant to which we would be the exclusive residential solar and storage service provider for Lennar's new home communities with solar across theU.S. for a period of four years.
Remuneration agreement
Pursuant to the Earnout Agreement entered into between us and Lenx, Lenx will have the ability to earn up to an additional 3,888,896 shares of common stock over a five-year period in connection with the Acquisition. The earnout payments are conditioned on SunStreet meeting certain commercial milestones and achieving specified in-service levels. There are two elements to the earnout arrangement. First, we will issue up to 2,777,784 shares to the extent we and our subsidiaries (including SunStreet) place target amounts of solar energy systems into service and enter into qualifying customer agreements related to such solar energy systems. The 2,777,784 shares of common stock issuable under this portion of the earnout can be earned in four installments on a yearly basis (if the in-service target for each such year is achieved) or at the end of the four-year period (if the cumulative in-service target is achieved by the fourth and final year), with the annual periods commencing on the closing date of the Acquisition. The second element of the earnout is related to the development of microgrid communities. Pursuant to this portion of the earnout, we will issue up to 1,111,112 shares if, prior to the fifth anniversary of the closing date of the Acquisition, we enter into binding agreements for the development of microgrid communities.
Tax fairness commitment
In connection with the Acquisition, Lennar has committed to contribute an aggregate$200.0 million (the "Funding Commitment") to four Sunnova tax equity funds, each formed annually during a period of four consecutive years (each such year, a "Contribution Year") commencing in 2021. The solar service agreements and related solar energy systems acquired by each of these four tax equity funds will generally be originated by SunStreet, though a certain number of solar service agreements may be originated by our dealers, subject to certain criteria and expected in-service levels for the year. Any amount not utilized during the first and second Contribution Years will increase the Funding Commitment during the third and fourth Contribution Year by that amount. Any amount not utilized during the third Contribution Year will increase the Funding Commitment during the fourth Contribution Year by that amount. In connection with the Funding Commitment, each of the tax equity funds will enter into typical tax equity fund transaction documentation, including development and purchase agreements, servicing agreements and limited liability company agreements. See "-Liquidity and Capital Resources-Financing Arrangements-Tax Equity Fund Commitments" below. 65 -------------------------------------------------------------------------------- Table of Contents Investments in Solar Receivables InNovember 2021 , one of our wholly-owned subsidiaries entered into a Master Lease Agreement withEnergy Asset HoldCo LLC , aDelaware limited liability company and subsidiary of Lennar, to lease two pools of solar energy systems and assume the related PPA and lease obligations from EAH Lessor. In exchange for the right to receive future customer cash flows as well as certain credits, rebates and incentives (including SRECs) under those pooled agreements, we made an upfront payment to Lennar consisting of$35.0 million in cash and 1,027,409 shares of our common stock for net consideration of$79.4 million . Pursuant to the terms of the EAH Master Lease, additional pools of solar energy systems may also be leased from EAH Lessor in the future in exchange for upfront lease payments.
Ancillary loans
InNovember 2021 , we began offering an accessory loan for services sold independent of a solar energy system or energy storage system. Accessory loans allow consumers to finance solutions, including home generators, roofing, electric vehicle chargers, home security systems and other offerings we may make available in the future. COVID-19 Pandemic
The ongoing COVID-19 pandemic has caused and may continue to have widespread negative effects on the global economy. We experienced resultant disruptions to our business operations as the COVID-19 virus continued to circulate across states and
Social distancing guidelines, stay-at-home orders and similar government measures associated with the COVID-19 pandemic, as well as actions by individuals to reduce their potential exposure to the virus, contributed to a decline in origination. This decline reflected an inability by our dealers to perform in-person sales calls based on the stay-at-home orders in some locations. To adjust to these government measures, our dealers expanded the use of digital tools and origination channels and created new methods that offset restrictions on their ability to meet with potential new customers in person. Such efforts drove an increase in new contract origination. We have seen the use of websites, video conferencing and other virtual tools as part of our origination process expand widely and contribute to our growth. Throughout the COVID-19 pandemic, we have continued to service and install solar energy systems. The industry is currently facing shortages and shipping delays affecting the supply of energy storage systems, modules and component parts for inverters and racking used in solar energy systems. These shortages and delays can be attributed in part to the COVID-19 pandemic as well as to government action in response to the pandemic, as well as to allegations regarding the use of forced labor in the Chinese polysilicon supply chain. While a majority of our dealers have secured sufficient quantities to permit them to continue installing and conducting repairs through much of 2022, if these shortages and delays persist, they could impact the timing of when solar energy systems and energy storage systems can be installed and repaired and when we can acquire and begin to generate revenue from those systems. In addition, if supply chains become significantly disrupted due to additional outbreaks of the COVID-19 virus or otherwise, or more stringent health and safety guidelines are implemented, our ability to install and service solar energy systems could become adversely impacted. We cannot predict the full impact the COVID-19 pandemic will have on our business, cash flows, liquidity, financial condition and results of operations at this time due to numerous uncertainties. We will continue to monitor developments affecting our workforce, our customers and our business operations generally, and will take actions we determine are necessary in order to mitigate these impacts. For additional discussion regarding risks associated with the COVID-19 pandemic, see "Risk Factors" elsewhere in this Annual Report on Form 10-K. Financing Transactions InOctober 2021 , we admitted a tax equity investor with a total capital commitment of approximately$11.6 million . InDecember 2021 , we admitted a tax equity investor with a total capital commitment of approximately$50.0 million . InFebruary 2022 , we admitted a tax equity investor with a total capital commitment of approximately$150.0 million . See "-Liquidity and Capital Resources-Financing Arrangements-Tax Equity Fund Commitments" below. InOctober 2021 , we amended the revolving credit facility associated with one of our financing subsidiaries that owns certain tax equity funds to, among other things, update the LIBOR transition terms and transfer a portion of the loan commitment to an additional lender. See "-Liquidity and Capital Resources-Financing Arrangements-Warehouse and Other Debt Financings" below. 66 -------------------------------------------------------------------------------- Table of Contents InOctober 2021 , one of our subsidiaries issued$68.4 million in aggregate principal amount of Series 2021-C Class A solar loan-backed notes,$55.9 million in aggregate principal amount of Series 2021-C Class B solar loan-backed notes and$31.5 million in aggregate principal amount of Series 2021-C Class C solar loan-backed notes (collectively, the "HELVII Notes") with a maturity date ofOctober 2048 . The HELVII Notes bear interest at an annual rate of 2.03%, 2.33% and 2.63% for the Class A, Class B and Class C notes, respectively. InFebruary 2022 , one of our subsidiaries entered into a Note Purchase Agreement related to the sale of$131.9 million in aggregate principal amount of Series 2022-A Class A solar loan-backed notes,$102.2 million in aggregate principal amount of Series 2022-A Class B solar loan-backed notes and$63.8 million in aggregate principal amount of Series 2022-A Class C solar loan-backed notes (collectively, the "HELVIII Notes") with a maturity date ofFebruary 2049 . The HELVIII Notes will bear interest at an annual rate of 2.79%, 3.13% and 3.53% for the Class A, Class B and Class C notes, respectively. The transaction is expected to close on or aboutFebruary 24, 2022 , subject to customary closing conditions. See "-Liquidity and Capital Resources-Financing Arrangements-Securitizations" below.
Securitizations
As a source of long-term financing, we securitize qualifying solar energy systems, energy storage systems and related solar service agreements into special purpose entities who issue solar asset-backed and solar loan-backed notes to institutional investors. We also securitize the cash flows generated by the membership interests in certain of our indirect, wholly-owned subsidiaries that are the managing member of a tax equity fund that owns a pool of solar energy systems, energy storage systems and related solar service agreements that were originated by one of our wholly-owned subsidiaries. We do not securitize the Section 48(a) ITC incentives associated with the solar energy systems and energy storage systems as part of these arrangements. We use the cash flows these solar energy systems and energy storage systems generate to service the monthly, quarterly or semi-annual principal and interest payments on the notes and satisfy the expenses and reserve requirements of the special purpose entities, with any remaining cash distributed to their sole members, who are typically our indirect wholly-owned subsidiaries. In connection with these securitizations, certain of our affiliates receive a fee for managing and servicing the solar energy systems and energy storage systems pursuant to management, servicing, facility administration and asset management agreements. The special purpose entities are also typically required to maintain a liquidity reserve account and a reserve account for equipment replacements and, in certain cases, reserve accounts for financing fund purchase option/withdrawal right exercises or storage system replacement for the benefit of the holders under the applicable series of notes, each of which are funded from initial deposits or cash flows to the levels specified therein. The creditors of these special purpose entities have no recourse to our other assets except as expressly set forth in the terms of the notes. From our inception throughDecember 31, 2021 , we have issued$2.5 billion in solar asset-backed and solar loan-backed notes.
Tax Fairness Fund
Our ability to offer long-term solar service agreements depends in part on our ability to finance the installation of the solar energy systems and energy storage systems by co-investing with tax equity investors, such as large banks who value the resulting customer receivables and Section 48(a) ITCs, accelerated tax depreciation and other incentives related to the solar energy systems and energy storage systems, primarily through structured investments known as "tax equity". Tax equity investments are generally structured as non-recourse project financings known as "tax equity funds". In the context of distributed generation solar energy, tax equity investors make contributions upfront or in stages based on milestones in exchange for a share of the tax attributes and cash flows emanating from an underlying portfolio of solar energy systems and energy storage systems. In these tax equity funds, theU.S. federal tax attributes offset taxes that otherwise would have been payable on the investors' other operations. The terms and conditions of each tax equity fund vary significantly by investor and by fund. We continue to negotiate with potential investors to create additional tax equity funds. In general, our tax equity funds are structured using the "partnership flip" structure. Under partnership flip structures, we and our tax equity investors contribute cash into a partnership. The partnership uses this cash to acquire long-term solar service agreements, solar energy systems and energy storage systems developed by us and sells energy from such solar energy systems and energy storage systems, as applicable, to customers or directly leases the solar energy systems and energy storage systems, as applicable, to customers. We assign these solar service agreements, solar energy systems, energy storage systems and related incentives to our tax equity funds in accordance with the criteria of the specific funds. Upon such assignment and the satisfaction of certain conditions precedent, we are able to draw down on the tax equity fund commitments. The conditions precedent to funding vary across our tax equity funds but generally require that we have entered into a solar service agreement with the customer, the customer meets certain credit criteria, the solar energy system is expected to be eligible for the Section 48(a) ITC, we have a recent appraisal from an independent appraiser establishing the fair market value of the solar energy system and the property is in an approved state or territory. Certain tax equity investors agree to receive a minimum target rate of return, typically on an after-tax basis, which varies by tax equity fund. Prior to receiving a contractual rate of return or a date specified in the contractual arrangements, the tax equity investor receives substantially all of the non-cash value attributable to the solar energy systems and energy storage systems, which includes accelerated depreciation and Section 48(a) ITCs; however, 67 -------------------------------------------------------------------------------- Table of Contents we typically receive a majority of the cash distributions, which are typically paid quarterly. After the tax equity investor receives its contractual rate of return or after a specified date, we receive substantially all of the cash and tax allocations. We have determined we are the primary beneficiary in these tax equity funds for accounting purposes. Accordingly, we consolidate the assets and liabilities and operating results of these partnerships in our consolidated financial statements. We recognize the tax equity investors' share of the net assets of the tax equity funds as redeemable noncontrolling interests and noncontrolling interests in our consolidated balance sheets. The income or loss allocations reflected in our consolidated statements of operations may create significant volatility in our reported results of operations, including potentially changing net loss attributable to stockholders to net income attributable to stockholders, or vice versa, from quarter to quarter. We typically have an option to acquire, and our tax equity investors may have an option to withdraw and require us to purchase, all the equity interests our tax equity investor holds in the tax equity funds starting approximately five years after the last solar energy system in the applicable tax equity fund is operational. If we or our tax equity investors exercise this option, we are typically required to pay at least the fair market value of the tax equity investor's equity interest and, in certain cases, a contractual minimum amount. From our inception throughDecember 31, 2021 , we have received commitments of approximately$1.2 billion through the use of tax equity funds, of which an aggregate of$978.8 million has been funded and$106.0 million remains available for use.
Key financial and operational indicators
We regularly review a number of metrics, including the following key operational and financial metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate our financial projections and make strategic decisions. Number of Customers. We define number of customers to include every unique individual possessing an in-service product that is subject to a Sunnova lease, PPA or loan agreement, or with respect to which Sunnova is obligated to perform a service under an active agreement between Sunnova and the individual or between Sunnova and a third party. For all solar energy systems or energy storage systems installed by us, in-service means the related solar energy system or energy storage system, as applicable, must have met all the requirements to begin operation and be interconnected to the electrical grid. For all products other than solar energy systems or energy storage systems, which are subject to a loan agreement between Sunnova and a customer, in-service means the customer is obligated to begin making payments to Sunnova under the loan agreement. We do not include in our number of customers any customer possessing a solar energy system or energy storage system under a lease, PPA or loan agreement that has reached mechanical completion but has not received permission to operate from the local utility or for whom we have terminated the contract and removed the solar energy system. We also do not include in our number of customers any customer that has been in default under his or her lease, PPA or loan agreement in excess of six months. We track the total number of customers as an indicator of our historical growth and our rate of growth from period to period. As of December 31, 2021 2020 Change Number of customers 195,400 107,500 87,900 Weighted Average Number of Systems. We calculate the weighted average number of systems based on the number of months a customer and any additional service obligation related to a solar energy system is in-service during a given measurement period. The weighted average number of systems reflects the number of systems at the beginning of a period, plus the total number of new systems added in the period adjusted by a factor that accounts for the partial period nature of those new systems. For purposes of this calculation, we assume all new systems added during a month were added in the middle of that month. The number of systems for any end of period will exceed the number of customers, as defined above, for that same end of period as we are also including any additional services and/or contracts a customer or third party executed for the additional work for the same residence. We track the weighted average system count in order to accurately reflect the contribution of the appropriate number of systems to key financial metrics over the measurement period. 68
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Year Ended
December 31,
2021 2020 2019
Weighted average number of systems (excluding loan contracts and cash sales)
127,200 77,900 60,100 Weighted average number of systems with loan agreements 27,500 14,200 8,400 Weighted average number of systems with cash sales 600 - - Weighted average number of systems 155,300 92,100 68,500 Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) plus net interest expense, depreciation and amortization expense, income tax expense, financing deal costs, natural disaster losses and related charges, net, losses on extinguishment of long-term debt, realized and unrealized gains and losses on fair value instruments, amortization of payments to dealers for exclusivity and other bonus arrangements, legal settlements and excluding the effect of certain non-recurring items we do not consider to be indicative of our ongoing operating performance such as, but not limited to, costs of our initial public offering ("IPO"), acquisition costs, losses on unenforceable contracts and other non-cash items such as non-cash compensation expense, asset retirement obligation ("ARO") accretion expense, provision for current expected credit losses and non-cash inventory impairments. Adjusted EBITDA is a non-GAAP financial measure we use as a performance measure. We believe investors and securities analysts also use Adjusted EBITDA in evaluating our operating performance. This measurement is not recognized in accordance with accounting principles generally accepted inthe United States of America ("GAAP") and should not be viewed as an alternative to GAAP measures of performance. The GAAP measure most directly comparable to Adjusted EBITDA is net income (loss). The presentation of Adjusted EBITDA should not be construed to suggest our future results will be unaffected by non-cash or non-recurring items. In addition, our calculation of Adjusted EBITDA is not necessarily comparable to Adjusted EBITDA as calculated by other companies. We believe Adjusted EBITDA is useful to management, investors and analysts in providing a measure of core financial performance adjusted to allow for comparisons of results of operations across reporting periods on a consistent basis. These adjustments are intended to exclude items that are not indicative of the ongoing operating performance of the business. Adjusted EBITDA is also used by our management for internal planning purposes, including our consolidated operating budget, and by our Board in setting performance-based compensation targets. Adjusted EBITDA should not be considered an alternative to but viewed in conjunction with GAAP results, as we believe it provides a more complete understanding of ongoing business performance and trends than GAAP measures alone. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. 69
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Year Ended
December 31,
2021 2020 2019
(in thousands)
Reconciliation of Net Loss to Adjusted EBITDA:
Net loss $ (147,510) $ (307,818) $ (133,434)
Interest expense, net 116,248 154,580 108,024
Interest expense, net-affiliates - - 4,098
Interest income (34,228) (23,741) (12,483)
Income tax expense 260 181 -
Depreciation expense 85,600 66,066 49,340
Amortization expense 21,771 32 29
EBITDA 42,141 (110,700) 15,574
Non-cash compensation expense (1) 17,236 10,873 10,512
ARO accretion expense 2,897 2,186 1,443
Financing deal costs 1,411 4,454 1,161
Natural disaster losses and related charges, net - 31 54
IPO costs - - 3,804
Acquisition costs 6,709 - -
Loss on unenforceable contracts - - 2,381
Loss on extinguishment of long-term debt, net 9,824 142,772 -
Loss on extinguishment of long-term debt, net-affiliates - - 10,645
Unrealized (gain) loss on fair value instruments (21,988) (907) 150
Realized (gain) loss on fair value instruments - (835) 730
Amortization of payments to dealers for exclusivity and other bonus agreements
2,968 1,820 583 Legal settlements - - 1,260 Provision for current expected credit losses 23,679 7,969 - Non-cash inventory impairments 982 1,934 - Adjusted EBITDA$ 85,859 $ 59,597 $ 48,297 (1) Amount includes the non-cash effect of equity-based compensation plans of$17.2 million ,$10.9 million and$9.2 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively, and partial forgiveness of a loan to an executive officer used to purchase our capital stock of$1.3 million for the year endedDecember 31, 2019 . Interest Income and Principal Payments from Customer Notes Receivable. Under our loan agreements, the customer obtains financing for the purchase of a solar energy system from us and we agree to operate and maintain the solar energy system throughout the duration of the agreement. Pursuant to the terms of the loan agreement, the customer makes scheduled principal and interest payments to us and has the option to prepay principal at any time in part or in full. Whereas we typically recognize payments from customers under our leases and PPAs as revenue, we recognize payments received from customers under our loan agreements (a) as interest income, to the extent attributable to earned interest on the contract that financed the customer's purchase of the solar energy system; (b) as a reduction of a note receivable on the balance sheet, to the extent attributable to a return of principal (whether scheduled or prepaid) on the contract that financed the customer's purchase of the solar energy system; and (c) as revenue, to the extent attributable to payments for operations and maintenance services provided by us. While Adjusted EBITDA effectively captures the operating performance of our leases and PPAs, it only reflects the service portion of the operating performance under our loan agreements. We do not consider our types of solar service agreements differently when evaluating our operating performance. In order to present a measure of operating performance that provides comparability without regard to the different accounting treatment among our three types of solar service agreements, we consider interest income from customer notes receivable and principal proceeds from customer notes receivable, net of related revenue, as key performance metrics. We believe these two metrics provide a more meaningful and uniform method of 70
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analyzing our operating performance when viewed in light of our other key
performance metrics across the three primary types of solar service agreements.
Year Ended
December 31,
2021 2020 2019
(in thousands)
Interest income from customer notes receivable $ 33,696 $ 23,239 $ 11,588
Principal proceeds from customer notes receivable, net of
related revenue $ 59,274 $ 32,580 $ 20,044
Adjusted Operating Expense. We define Adjusted Operating Expense as total
operating expense less depreciation and amortization expense, financing deal
costs, natural disaster losses and related charges, net, amortization of
payments to dealers for exclusivity and other bonus arrangements, legal
settlements, direct sales costs, cost of revenue related to cash sales,
unrealized losses on fair value instruments and excluding the effect of certain
non-recurring items we do not consider to be indicative of our ongoing operating
performance such as, but not limited to, costs of our IPO, acquisition costs,
losses on unenforceable contracts and other non-cash items such as non-cash
compensation expense, ARO accretion expense, provision for current expected
credit losses and non-cash inventory impairments. Adjusted Operating Expense is
a non-GAAP financial measure we use as a performance measure. We believe
investors and securities analysts will also use Adjusted Operating Expense in
evaluating our performance. This measurement is not recognized in accordance
with GAAP and should not be viewed as an alternative to GAAP measures of
performance. The GAAP measure most directly comparable to Adjusted Operating
Expense is total operating expense. We believe Adjusted Operating Expense is a
supplemental financial measure useful to management, analysts, investors,
lenders and rating agencies as an indicator of the efficiency of our operations
between reporting periods. Adjusted Operating Expense should not be considered
an alternative to but viewed in conjunction with GAAP total operating expense,
as we believe it provides a more complete understanding of our performance than
GAAP measures alone. Adjusted Operating Expense has limitations as an analytical
tool and you should not consider it in isolation or as a substitute for analysis
of our results as reported under GAAP, including total operating expense.
We use per system metrics, including Adjusted Operating Expense per weighted
average system, as an additional way to evaluate our performance. Specifically,
we consider the change in this metric from period to period as a way to evaluate
our performance in the context of changes we experience in the overall customer
base. While the Adjusted Operating Expense figure provides a valuable indicator
of our overall performance, evaluating this metric on a per system basis allows
for further nuanced understanding by management, investors and analysts of the
financial impact of each additional system.
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Year Ended
December 31,
2021 2020 2019
(in thousands, except per system data)
Reconciliation of Total Operating Expense, Net to Adjusted
Operating Expense:
Total operating expense, net $ 296,642 $ 196,598 $ 153,826
Depreciation expense (85,600) (66,066) (49,340)
Amortization expense (21,771) (32) (29)
Non-cash compensation expense (17,236) (10,873) (10,512)
ARO accretion expense (2,897) (2,186) (1,443)
Financing deal costs (1,411) (4,454) (1,161)
Natural disaster losses and related charges, net - (31) (54)
IPO costs - - (3,804)
Acquisition costs (6,709) - -
Loss on unenforceable contracts - - (2,381)
Amortization of payments to dealers for exclusivity and other bonus agreements
(2,968) (1,820) (583) Legal settlements - - (1,260) Provision for current expected credit losses (23,679) (7,969) - Non-cash inventory impairments (982) (1,934) - Direct sales costs (733) - - Cost of revenue related to cash sales (14,525) - - Unrealized gain on fair value instruments 22,504 - - Adjusted Operating Expense$ 140,635 $ 101,233 $ 83,259 Adjusted Operating Expense per weighted average system $
906
Estimation of the gross value of the customer under contract. We calculate the Customer’s Estimated Gross Contract Value as defined below. We believe that the estimated gross customer contract value can serve as a useful tool for investors and analysts to compare the residual value of our customer contracts to that of our peers.
Estimated gross contracted customer value as of a specific measurement date represents the sum of the present value of the remaining estimated future net cash flows we expect to receive from existing customers during the initial contract term of our leases and PPAs, which are typically 25 years in length, plus the present value of future net cash flows we expect to receive from the sale of related SRECs, either under existing contracts or in future sales, plus the cash flows we expect to receive from energy services programs such as grid services, plus the carrying value of outstanding customer loans on our balance sheet. From these aggregate estimated initial cash flows, we subtract 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. These 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. For the purpose of calculating this metric, we discount all future cash flows at 4%. The anticipated operating, maintenance and administrative expenses included in the calculation of estimated gross contracted customer value include, among other things, expenses related to accounting, reporting, audit, insurance, maintenance and repairs. In the aggregate, we estimate these expenses are$20 per kilowatt per year initially, with 2% annual increases for inflation, and an additional$81 per year non-escalating expense included for energy storage systems. We do not include maintenance and repair costs for inverters and similar equipment as those are largely covered by the applicable product and dealer warranties for the life of the product, but we do include additional cost for energy storage systems, which are only covered by a 10-year warranty. Expected distributions to tax equity investors vary among the different tax equity funds and are based on individual tax equity fund contract provisions. Estimated gross contracted customer value is forecasted as of a specific date. It is forward-looking and we use judgment in developing the assumptions used to calculate it. Factors that could impact estimated gross contracted customer value include, but are not limited to, customer payment defaults, or declines in utility rates or early termination of a contract in certain 72 -------------------------------------------------------------------------------- Table of Contents circumstances, including prior to installation. The following table presents the calculation of estimated gross contracted customer value as ofDecember 31, 2021 and 2020, calculated using a 4% discount rate. As of December 31, 2021 2020 (in millions) Estimated gross contracted customer value$ 4,337 $ 2,997 Sensitivity Analysis. The calculation of estimated gross contracted customer value and associated operational metrics requires us to make a number of assumptions regarding future revenues and costs which may not prove accurate. Accordingly, we present below a sensitivity analysis with a range of assumptions. We consider a discount rate of 4% to be appropriate based on recent transactions that demonstrate a portfolio of residential solar service agreements is an asset class that can be securitized successfully on a long-term basis with a coupon of less than 4%. We also present these metrics with a discount rate of 4% based on industry practice. The appropriate discount rate for these estimates may change in the future due to the level of inflation, rising interest rates, our cost of capital and consumer demand for solar energy systems. In addition, the table below provides a range of estimated gross contracted customer value amounts if different cumulative customer loss rate assumptions were used. We are presenting this information for illustrative purposes only and as a comparison to information published by our peers. Estimated Gross Contracted Customer Value As of December 31, 2021 Discount rate Cumulative customer loss rate 2% 4% 6% (in millions) 5%$ 4,658 $ 4,101 $ 3,676 0%$ 4,976 $ 4,337 $ 3,853
Important factors and trends affecting our business
Our results of operations and our ability to grow our business over time could be impacted by a number of factors and trends that affect our industry generally, as well as new offerings of services and products we may acquire or seek to acquire in the future. Additionally, our business is concentrated in certain markets, putting us at risk of region-specific disruptions such as adverse economic, regulatory, political, weather and other conditions. See "Item 1A. Risk Factors" for further discussion of risks affecting our business. Financing Availability. Our future growth depends, in significant part, on our ability to raise capital from third-party investors on competitive terms to help finance the origination of our solar energy systems under our solar service agreements. We have historically used debt, such as convertible senior notes, asset-backed and loan-backed securitizations and warehouse facilities, tax equity, preferred equity and other financing strategies to help fund our operations. From our inception throughDecember 31, 2021 , we have raised more than$9.0 billion in total capital commitments from equity, debt and tax equity investors. With respect to tax equity, there are a limited number of potential tax equity investors, and the competition for this investment capital is intense. The principal tax credit on which tax equity investors in our industry rely is the Section 48(a) ITC. StartingJanuary 1, 2020 , the amount for the Section 48(a) ITC was equal to 30% of the basis of eligible solar property that began construction before 2020 if placed in service before 2026. By statute, the Section 48(a) ITC percentage decreased to 26% for eligible solar property that began construction during 2020 or 2021 or begins construction in 2022, 22% if construction begins in 2023 and 10% if construction begins after 2023 or if the property is placed into service after 2025. This reduction in the Section 48(a) ITC will likely reduce our use of tax equity financing in the future unless the Section 48(a) ITC is increased or replaced.IRS guidance includes a safe harbor that may apply when a taxpayer (or in certain cases, a contractor) pays or incurs 5% or more of the costs of a solar energy system before the end of the applicable year, even though the solar energy system is not placed in service until after the end of that year. For installations in 2021, we purchased prior to 2020 substantially all the inverters that we estimated would be deployed under our lease and PPA agreements that we expected would allow the related solar energy systems to qualify for the 30% Section 48(a) ITC by satisfying the 5% ITC Safe Harbor. Based on various market factors, however, not all solar energy systems installed in 2021 qualify for the Section 48(a) ITC at 30%. For solar energy systems installed in 2021 that did not meet all requirements for the 30% Section 48(a) ITC, such solar energy systems are expected to qualify for the 26% Section 48(a) ITC. Additionally, we may make further inventory purchases in future periods to extend the availability of each period's Section 48(a) ITC. Our ability to raise capital from third-party investors is affected by general economic conditions, the state of the capital markets, inflation levels and concerns about our industry or business. Specifically, interest rates remain subject to volatility that may result from action taken by theFederal Reserve . Recent data 73 -------------------------------------------------------------------------------- Table of Contents have suggested inflationary pressures may be more durable than anticipated, which could result in interest rate increases and/or the tapering of quantitative easing policies enacted towards the outset of the COVID-19 pandemic sooner than previously expected. Cost of Solar Energy Systems and Energy Storage Systems. Although the solar panel market has seen an increase in supply, upward pressure on prices may occur due to growth in the solar industry, regulatory policy changes, tariffs and duties, inflationary cost pressures and an increase in demand. As a result of these developments, we may pay higher prices on imported solar modules, which may make it less economical for us to serve certain markets. Attachment rates for energy storage systems have trended higher while the price to acquire has remained steady and increased slightly for some suppliers due to several market variables, including COVID-19, raw material shortages and freight prices, but this still remains a potential area of growth for us. Energy Storage Systems. Our energy storage systems increase our customers' independence from the centralized utility and provide on-site backup power when there is a grid outage due to storms, wildfires, other natural disasters and general power failures caused by supply or transmission issues. In addition, at times it can be more economic to consume less energy from the grid or, alternatively, to export solar energy back to the grid. Recent technological advancements for energy storage systems allow the energy storage system to adapt to pricing and utility rate shifts by controlling the inflows and outflows of power, allowing customers to increase the value of their solar energy system plus energy storage system. The energy storage system charges during the day, making the energy it stores available to the home when needed. It also features software that can customize power usage for the individual customer, providing backup power, optimizing solar energy consumption versus grid consumption or preventing export to the grid as appropriate. The software is tailored based on utility regulation, economic indicators and grid conditions. The combination of energy control, increased energy resilience and independence from the grid is strong incentive for customers to adopt solar and energy storage. As energy storage systems and their related software features become more advanced, we expect to see increased adoption of energy storage systems. Climate Change Action. As a result of increasing global awareness of and aversion to climate change impacts, we believe the renewable energy market in which we operate, and investment in climate solutions more broadly, will continue to grow as the impact of climate change increases. This trend, along with increasing commitments to reduce carbon emissions, is expected to result in increased demand for our products and services. Under the current presidential administration, the focus on cleaner energy sources and technology to decarbonize theU.S. economy continues to accelerate. The Biden administration has taken immediate steps that we believe signify support for cleaner energy sources, including, but not limited to, rejoining the Paris Climate Accord, re-establishing a social price on carbon used in cost/benefit analysis for policy making and announcing a commitment to transition theU.S. economy to a net-zero carbon economy by 2050. We expect the Biden administration, combined with a closely dividedCongress , to continue to take actions that are supportive of the renewable energy industry, such as incentivizing clean energy sources and supporting new investment in areas like renewables. Government Regulations, Policies and Incentives. Our growth strategy depends in significant part on government policies and incentives that promote and support solar energy and enhance the economic viability of distributed residential solar. These policies and incentives come in various forms, including net metering, eligibility for accelerated depreciation such as the MACRS, SRECs, tax abatements, rebates, renewable targets, incentive programs and tax credits, particularly the Section 48(a) ITC and the Section 25D Credit. Policies requiring solar on new homes or new roofs, such as those enacted inCalifornia andNew York City , also support the growth of distributed solar. The sale of SRECs has constituted a significant portion of our revenue historically. A change in the value of SRECs or changes in other policies or a loss or reduction in such incentives could decrease the attractiveness of distributed residential solar to us, our dealers and our customers in applicable markets, which could reduce our customer acquisition opportunities. Such a loss or reduction could also reduce our willingness to pursue certain customer acquisitions due to decreased revenue or income under our solar service agreements. Additionally, such a loss or reduction may also impact the terms of and availability of third-party financing. If any of these government regulations, policies or incentives are adversely amended, delayed, eliminated, reduced, retroactively changed or not extended beyond their current expiration dates or there is a negative impact from the recent federal law changes or proposals, our operating results and the demand for, and the economics of, distributed residential solar energy may decline, which could harm our business.
Components of operating results
Revenue. We recognize revenue from contracts with customers as we satisfy our
performance obligations at a transaction price reflecting an amount of
consideration based upon an estimated rate of return, net of cash incentives. We
express this rate of return as the solar rate per kWh in the customer contract.
The amount of revenue we recognize does not equal customer cash payments because
we satisfy performance obligations ahead of cash receipt or evenly as we provide
continuous access on a stand-ready basis to the solar energy system. We reflect
the differences between revenue recognition and cash payments received in
accounts receivable, other assets or deferred revenue, as appropriate.
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PPAs. We have determined solar service agreements under which customers purchase
electricity from us should be accounted for as revenue from contracts with
customers. We recognize revenue based upon the amount of electricity delivered
as determined by remote monitoring equipment at solar rates specified under the
contracts. The PPAs generally have a term of 20 or 25 years with an opportunity
for customers to renew for up to an additional 10 years, via two five-year or
one 10-year renewal options.
Lease Agreements. We are the lessor under lease agreements for solar energy
systems and energy storage systems, which we account for as revenue from
contracts with customers. We recognize revenue on a straight-line basis over the
contract term as we satisfy our obligation to provide continuous access to the
solar energy system. The lease agreements generally have a term of 20 or 25
years with an opportunity for customers to renew for up to an additional 10
years, via two five-year or one 10-year renewal options.
We provide customers under our lease agreements a performance guarantee that
each solar energy system will achieve a certain specified minimum solar energy
production output. The specified minimum solar energy production output may not
be achieved due to natural fluctuations in the weather or equipment failures
from exposure and wear and tear outside of our control, among other factors. We
determine the amount of guaranteed output based on a number of different
factors, including (a) the specific site information relating to the tilt of the
panels, azimuth (a horizontal angle measured clockwise in degrees from a
reference direction) of the panels, size of the solar energy system and shading
on site; (b) the calculated amount of available irradiance (amount of energy for
a given flat surface facing a specific direction) based on historical average
weather data and (c) the calculated amount of energy output of the solar energy
system.
If the solar energy system does not produce the guaranteed production amount, we
are required to provide a bill credit or refund a portion of the previously
remitted customer payments, where the bill credit or repayment is calculated as
the product of (a) the shortfall production amount and (b) the dollar amount
(guaranteed rate) per kWh that is fixed throughout the term of the contract.
These bill credits or remittances of a customer's payments, if needed, are
payable in January following the end of the first three years of the solar
energy system's placed in service date and then every annual period thereafter.
See Note 17, Commitments and Contingencies, to our consolidated financial
statements included elsewhere in this Annual Report on Form 10-K.
SRECs. Each SREC represents the environmental benefit of one megawatt hour
(1,000 kWh) generated by a solar energy system. We sell SRECs to utilities and
other third parties who use the SRECs to meet renewable portfolio standards and
can do so separate from the actual electricity generated by the renewable-based
generation source. We account for SRECs generated from solar energy systems
owned by us, as opposed to those owned by our customers, as governmental
incentives with no costs incurred to obtain them and do not consider those SRECs
output of the underlying solar energy systems. We classify SRECs as inventory
held until sold and delivered to third parties. We enter into economic hedges
with major financial institutions related to expected production of SRECs
through forward contracts to partially mitigate the risk of decreases in SREC
market rates. While these fixed price forward contracts serve as an economic
hedge against spot price fluctuations for the SRECs, the contracts do not
qualify for hedge accounting and are not designated as cash flow hedges or fair
value hedges. The contracts require us to physically deliver the SRECs upon
settlement. We recognize the related revenue upon the transfer of the SRECs to
the counterparty. The costs related to the sales of SRECs are generally limited
to fees for brokered transactions. Accordingly, the sale of SRECs in a period
generally has a favorable impact on our operating results for that period. In
certain circumstances we are required to purchase SRECs on the open market to
fulfill minimum delivery requirements under our forward contracts.
Cash Sales. Cash sales revenue represents revenue from a customer's purchase of
a solar energy system from us typically when purchasing a new home. We recognize
the related revenue upon verification of the home closing.
Loan Agreements. We recognize payments received from customers under loan
agreements (a) as interest income, to the extent attributable to earned interest
on the contract that financed the customer's purchase of the solar energy
system; (b) as a reduction of a note receivable on the balance sheet, to the
extent attributable to a return of principal (whether scheduled or prepaid) on
the contract that financed the customer's purchase of the solar energy system;
and (c) as revenue, to the extent attributable to payments for operations and
maintenance services provided by us. Similar to our lease agreements, we provide
customers under our loan agreements a performance guarantee that each solar
energy system will achieve a certain specified minimum solar energy production
output, which is a significant proportion of its expected output.
Other Revenue. Other revenue includes certain state and utility incentives,
revenue from the direct sale of energy storage systems to customers and sales of
service plans. We recognize revenue from state and utility incentives in the
periods in which they are earned. We recognize revenue from the direct sale of
energy storage systems in the period in which the storage
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components are placed in service. Service plans are available to customers whose
solar energy system was not originally sold by Sunnova. We recognize revenue
from service plan contracts over the life of the contract, which is typically 10
years.
Cost of Revenue-Amortization. The cost of amortization of revenue represents the amortization of solar power systems under leases and PPAs that have been commissioned.
Cost of Revenue-Other. Cost of revenue-other represents costs related to cash sales, costs to purchase SRECs on the open market, SREC broker fees and other items deemed to be a cost of providing the service of selling power to customers or potential customers, such as certain costs to service loan agreements, costs for filing under the Uniform Commercial Code to maintain title, title searches, credit checks on potential customers at the time of initial contract and other similar costs, typically directly related to the volume of customers and potential customers. Operations and Maintenance Expense. Operations and maintenance expense represents costs from third parties for maintaining and servicing the solar energy systems, property insurance, property taxes and warranties. When services for maintaining and servicing solar energy systems are provided by Sunnova personnel rather than third parties, those amounts are included in payroll costs classified within general and administrative expense. During the years endedDecember 31, 2021 , 2020 and 2019, we incurred$14.3 million ,$7.4 million and$4.6 million , respectively, of Sunnova personnel costs related to maintaining and servicing solar energy systems, which are classified in general and administrative expense. In addition, operations and maintenance expense includes write downs and write-offs related to inventory adjustments, gains and losses on disposals and other impairments and impairments due to natural disaster losses net of insurance proceeds recovered under our business interruption and property damage insurance coverage for natural disasters. General and Administrative Expense. General and administrative expense represents costs for our employees, such as salaries, bonuses, benefits and all other employee-related costs, including stock-based compensation, professional fees related to legal, accounting, human resources, finance and training, information technology and software services, marketing and communications, IPO costs, acquisition costs, travel and rent and other office-related expenses. General and administrative expense also includes depreciation on assets not classified as solar energy systems, including information technology software and development projects, vehicles, furniture, fixtures, computer equipment and leasehold improvements and accretion expense on AROs. We capitalize a portion of general and administrative costs, such as payroll-related costs, that is related to employees who are directly involved in the design, construction, installation and testing of the solar energy systems but not directly associated with a particular asset. We also capitalize a portion of general and administrative costs, such as payroll-related costs, that is related to employees who are directly associated with and devote time to internal information technology software and development projects, to the extent of the time spent directly on the application and development stage of such software project. Other Operating Income. Other operating income primarily represents changes in the fair values of certain financial instruments related to our investments in solar receivables and contingent consideration.
Interest expense, net. Interest expense, net, represents interest on our borrowings under our various credit facilities, amortization of debt discounts and deferred financing fees, and realized and unrealized gains and losses on derivative instruments .
Interest income. Interest income represents interest income on notes receivable under our loan program and income on short-term investments with financial institutions.
Loss on Extinguishment of Long-Term Debt, Net. Loss on extinguishment of long-term debt, net resulted from a make-whole payment related to the early repayment of one of our solar asset-backed notes securitizations. See Note 8, Long-Term Debt, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Other (income) Expenses. Other (income) expenses mainly represent changes in the fair value of certain financial instruments related to non-operating assets.
Income Tax Expense. We account for income taxes under Accounting Standards Codification 740, Income Taxes. As such, we determine deferred tax assets and liabilities based on temporary differences resulting from the different treatment of items for tax and financial reporting purposes. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Additionally, we must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. We have a full valuation allowance on our deferred tax assets because we believe it is more likely than not that our deferred tax assets will not be realized. We evaluate the recoverability of our deferred tax assets on a quarterly basis. The income tax expense includes the effects of taxes incurred inU.S. territories where the tax code for the respective territory may have separate tax reporting 76 -------------------------------------------------------------------------------- Table of Contents requirements and taxes incurred in states with pass-through entity taxes.
Net income (loss) attributable to redeemable non-controlling interests and non-controlling interests. Net income attributable to redeemable non-controlling interests and non-controlling interests represents tax interests in the net income or net loss of certain subsidiaries consolidated on a hypothetical liquidation basis at book value.
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Table of Contents Results of Operations – Year Ended
The following table sets forth our consolidated statements of operations data
for the periods indicated.
Year Ended
December 31,
2021 2020 Change
(in thousands)
Revenue $ 241,752 $ 160,820 $ 80,932
Operating expense:
Cost of revenue-depreciation 76,474 58,431 18,043
Cost of revenue-other 21,834 6,747 15,087
Operations and maintenance 19,583 16,313 3,270
General and administrative 204,236 115,148 89,088
Other operating income (25,485) (41) (25,444)
Total operating expense, net 296,642 196,598 100,044
Operating loss (54,890) (35,778) (19,112)
Interest expense, net 116,248 154,580 (38,332)
Interest income (34,228) (23,741) (10,487)
Loss on extinguishment of long-term debt, net 9,824 142,772 (132,948)
Other (income) expense 516 (1,752) 2,268
Loss before income tax (147,250) (307,637) 160,387
Income tax expense 260 181 79
Net loss (147,510) (307,818) 160,308
Net loss attributable to redeemable non-controlling interests and non-controlling interests
(9,382) (55,534) 46,152 Net loss attributable to stockholders$ (138,128) $ (252,284) $ 114,156 Revenue Year Ended December 31, 2021 2020 Change (in thousands) PPA revenue$ 86,087 $ 65,760 $ 20,327 Lease revenue 71,784 51,650 20,134 SREC revenue 41,537 35,747 5,790 Cash sales revenue 27,176 - 27,176 Loan revenue 7,768 3,032 4,736 Other revenue 7,400 4,631 2,769 Total$ 241,752 $ 160,820 $ 80,932 Revenue increased by$80.9 million in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily as a result of an increased number of solar energy systems in service and theApril 2021 acquisition of SunStreet. The weighted average number of systems (excluding systems with loan agreements and cash sales) increased from approximately 77,900 for the year endedDecember 31, 2020 to approximately 127,200 for the year endedDecember 31, 2021 . Excluding SREC revenue, revenue under our loan agreements and cash sales revenue, on a weighted average number of 78 -------------------------------------------------------------------------------- Table of Contents systems basis, revenue decreased from$1,567 per system for the year endedDecember 31, 2020 to$1,299 per system for the same period in 2021 (17% decrease) primarily due to an increase in the number of service-only customers acquired from SunStreet, which generate significantly less revenue per customer. SREC revenue increased by$5.8 million in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily as a result of an increase in the number of solar energy systems in service, which resulted in additional SREC production. The fluctuations in SREC revenue from period to period are also affected by the total number of solar energy systems, weather seasonality and hedge and spot prices associated with the timing of the sale of SRECs. On a weighted average number of systems basis, revenues under our loan agreements increased from$214 per system for the year endedDecember 31, 2020 to$282 per system for the same period in 2021 (32% increase) primarily due to (a) higher battery attachment rates and (b) increasing expected battery replacement costs which are included in the loan resulting in larger customer loan balances. Cost of Revenue-Depreciation Year Ended December 31, 2021 2020 Change (in thousands) Cost of revenue-depreciation$ 76,474 $ 58,431 $ 18,043 Cost of revenue-depreciation increased by$18.0 million in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This increase was primarily due to an increase in the weighted average number of systems (excluding systems with loan agreements, service-only agreements and cash sales) from approximately 77,900 for the year endedDecember 31, 2020 to approximately 101,200 for the year endedDecember 31, 2021 . On a weighted average number of systems basis, cost of revenue-depreciation remained relatively flat at$750 per system for the year endedDecember 31, 2020 compared to$756 per system for the same period in 2021 (1% increase). Cost of Revenue-Other Year Ended December 31, 2021 2020 Change (in thousands) Cost of revenue-other$ 21,834 $ 6,747 $ 15,087 Cost of revenue-other increased by$15.1 million in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This increase was primarily due to costs of$14.5 million related to cash sales revenue, which began with theApril 2021 acquisition of SunStreet.
Operating and maintenance expenses
Year Ended
December 31,
2021 2020 Change
(in thousands)
Operations and maintenance $ 19,583 $ 16,313 $ 3,270
Operations and maintenance expense increased by $3.3 million in the year ended
December 31, 2021 compared to the year ended December 31, 2020 primarily due to
higher property insurance costs and truck roll costs, offset by lower
impairments and losses on disposals and property tax expense. Operations and
maintenance expense per weighted average system, excluding net natural disaster
losses and non-cash inventory impairments, decreased from $184 per system for
the year ended December 31, 2020 to $146 per system for the year ended
December 31, 2021 .
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General and Administrative Expense
Year Ended
December 31,
2021 2020 Change
(in thousands)
General and administrative $ 204,236 $ 115,148 $ 89,088
General and administrative expense increased by $89.1 million in the year ended
December 31, 2021 compared to the year ended December 31, 2020 primarily due to
increases of (a) $27.8 million of payroll and employee related expenses
primarily due to equity-based compensation expense, the hiring of personnel to
support growth and the acquisition of personnel from SunStreet, of which $6.9
million relates to the growth of our customers and performing additional
operations and maintenance work by Sunnova personnel rather than by third
parties, (b) $21.7 million of amortization expense primarily due to the
amortization of intangible assets acquired from SunStreet, (c) $15.7 million of
provision for current expected credit losses, (d) $6.7 million of transaction
costs related to acquisition activities and (e) $6.5 million in consultants,
contractors, and professional fees.
Other exploitation products
Other operating income increased by$25.4 million in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to the change in the fair value of certain financial instruments and contingent consideration. Interest Expense, Net Year Ended December 31, 2021 2020 Change (in thousands) Interest expense, net$ 116,248 $ 154,580 $ (38,332) Interest expense, net decreased by$38.3 million in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This decrease was primarily due to a decrease in realized losses on interest rate swaps of$49.0 million due to the termination of certain debt facilities in 2020 and a decrease in amortization of debt discounts of$5.7 million . These were partially offset by a decrease in unrealized gains on interest rate swaps of$8.9 million and an increase in amortization of deferred financing costs of$5.0 million . Interest Income Year Ended December 31, 2021 2020 Change (in thousands) Interest income$ 34,228 $ 23,741 $ 10,487 Interest income increased by$10.5 million in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This increase was primarily due to an increase in the weighted average number of systems with loan agreements from approximately 14,200 for the year endedDecember 31, 2020 to approximately 27,500 for the year endedDecember 31, 2021 . On a weighted average number of systems basis, loan interest income decreased from$1,637 per system for the year endedDecember 31, 2020 to$1,225 per system for the year endedDecember 31, 2021 primarily due to a decrease in the annual interest rate for new loans due to market conditions.
Loss on extinguishment of long-term debt, net
Loss on extinguishment of long-term debt, net decreased by$132.9 million in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to the conversion of approximately$150.8 million aggregate principal amount, including accrued and unpaid interest to the date of each conversion, of our 9.75% convertible senior notes that met the criteria for extinguishment accounting under GAAP during the year endedDecember 31, 2020 , offset by a make-whole 80 -------------------------------------------------------------------------------- Table of Contents payment related to the early repayment of one of our solar asset-backed notes securitizations during the year endedDecember 31, 2021 .
income tax expense
Income tax expense increased by$0.1 million in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to an increase in taxes incurred in jurisdictions with separate tax-reporting requirements.
Net loss attributable to redeemable non-controlling interests and non-controlling interests
Net loss attributable to redeemable noncontrolling interests and noncontrolling interests decreased by$46.2 million in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to a decrease in loss attributable to noncontrolling interests from tax equity funds added in 2019.
Results of operations – Year ended
See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 " in our Annual Report on Form 10-K filed with theSEC onFebruary 25, 2021 .
Cash and capital resources
As ofDecember 31, 2021 , we had total cash of$391.9 million , of which$243.1 million was unrestricted, and$411.8 million of available borrowing capacity under our various financing arrangements. We seek to maintain diversified and cost-effective funding sources to finance and maintain our operations, fund capital expenditures, including customer acquisitions, and satisfy obligations arising from our indebtedness. For a discussion of cash requirements from contractual and other obligations, see Note 17, Commitments and Contingencies, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Historically, our primary sources of liquidity included non-recourse and recourse debt, investor asset-backed and loan-backed securitizations and cash generated from operations. Our business model requires substantial outside financing arrangements to grow the business and facilitate the deployment of additional solar energy systems. We will seek to raise additional required capital, including from new and existing tax equity investors, additional borrowings, securitizations and other potential debt and equity financing sources. We believe our cash and financing arrangements, as further described below, will be sufficient to meet our anticipated cash needs for at least the next twelve months. As ofDecember 31, 2021 , we were in compliance with all debt covenants under our financing arrangements.
Financing modalities
The following is a description of our various financing arrangements. For a complete description of the facilities in place as ofDecember 31, 2021 see Note 8, Long-Term Debt, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Tax Fairness Fund Commitments
As ofDecember 31, 2021 , we had undrawn committed capital of approximately$106.0 million under our tax equity funds, which may only be used to purchase and install solar energy systems. We intend to establish new tax equity funds in the future depending on their attractiveness, including the availability and size of Section 48(a) ITCs and related safe harbors, and on investor demand for such funding. The terms of the tax equity funds' operating agreements contain allocations of taxable income (loss) and Section 48(a) ITCs that vary over time and adjust between the members after either the tax equity investor 81 -------------------------------------------------------------------------------- Table of Contents receives its contractual rate of return or after a specified date. The following table summarizes our tax equity commitments as ofDecember 31, 2021 : Date Class A Class A Member Member Admitted Capital Commitment (in thousands) March 2017 $ 97,500 December 2017 $ 45,000 December 2017 $ 57,000 January 2019 $ 50,000 August 2019 $ 75,000 December 2019 $ 50,000 February 2020 $ 75,000 May 2020 $ 155,000 July 2020 $ 10,000 September 2020 $ 75,000 November 2020 $ 100,000 April 2021 $ 50,000 April 2021 $ 25,000 May 2021 $ 150,000 July 2021 $ 150,000 October 2021 $ 11,634 December 2021 $ 50,000 InFebruary 2022 , we admitted a tax equity investor with a total capital commitment of approximately$150.0 million . For additional information regarding our tax equity fund commitments, see Note 13, Redeemable Noncontrolling Interests and Noncontrolling Interests, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Warehouse and other debt financing
We from time to time enter into warehouse credit facilities as a source of
funding. Under the warehouse credit facilities, revolving or term financing is
provided to special purpose entities, which are typically our wholly-owned
subsidiaries, and secured by qualifying solar energy systems (including, if
applicable, energy storage systems) and related solar service agreements. The
cash flows generated by these solar service agreements are used to cover
required debt service payments under the related credit facility and satisfy the
expenses and reserve requirements of the special purpose entities. The warehouse
credit facilities allow for the pooling and transfer of eligible solar energy
systems and related solar service agreements on a non-recourse basis to the
subsidiary or us, subject to certain limited exceptions. In connection with
these warehouse credit facilities, certain of our affiliates receive a fee for
managing and servicing the solar energy systems pursuant to management and
servicing agreements. The special purpose entities are also typically required
to maintain reserve accounts, including a liquidity reserve account and a
reserve account for equipment replacements, each of which are funded from
initial deposits or cash flows to the levels specified therein.
The warehouse credit facility structures include certain features designed to
protect lenders. One of the common primary features relates to certain events,
such as the insufficiency of cash flows in the collateral pool of assets to meet
contractual requirements, the occurrence of which triggers an early repayment of
the loans and limits the relevant borrower's ability to obtain additional
advances or distribute funds to us. We refer to this as an "amortization event",
which may be based on, among other things, a debt service coverage ratio falling
or remaining below certain levels, default levels of solar assets exceeding
certain thresholds or excess spread falling below certain levels over a multiple
month period. In the event of an amortization event, the availability period
under a revolving warehouse credit facility may terminate and the borrower may
be required to repay the affected outstanding borrowings using available
collections received from the asset pool. However, the period of ultimate
repayment would be determined by the amount and timing of collections received.
An amortization event would impair our liquidity and may require us to utilize
our other available contingent liquidity or rely on alternative funding sources,
which may or may not be available at the time. The debt agreements of our
warehouse credit facilities also typically contain customary events of default
for solar warehouse financings that entitle the lenders to take various actions,
including the acceleration of
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amounts due under the related debt agreement and foreclosure on the borrower's
assets.
In April 2017 , one of our subsidiaries entered into a secured revolving credit
facility with Credit Suisse AG, New York Branch, as administrative agent, and
the lenders party thereto. The credit facility was amended and restated in March
2019 and further amended in September 2019 , December 2019 , January 2020 , March
2020 , September 2020 and March 2021 . Under the amended credit facility, the
subsidiary may borrow up to $350.0 million , subject to a borrowing base
calculated based on a specified advance rate applied to the net outstanding
principal balance of the solar loans securing the credit facility. The proceeds
of the loans under the credit facility are available for funding the purchase of
solar loans, making deposits in the subsidiary's reserve accounts and paying
fees in connection with the credit facility. The credit facility bears interest
at an annual rate of adjusted LIBOR plus an applicable margin. The credit
facility has a maturity date occurring in November 2023 . Sunnova Energy
Corporation guarantees the performance obligations of certain affiliates under
agreements entered into in connection with the credit facility, as well as
certain indemnity and refund obligations. In June 2020 , we used proceeds from
the HELIV Notes (as defined below) to repay $149.3 million in aggregate
principal amount outstanding. In October 2020 , we used proceeds from another
credit facility entered into in September 2020 to repay $28.0 million in
aggregate principal amount outstanding. In February 2021 , we used proceeds from
the HELV Notes (as defined below) to repay $107.3 million in aggregate principal
amount outstanding. In July 2021 , we used proceeds from the HELVI Notes (as
defined below) to repay $144.0 million in aggregate principal amount
outstanding. As of December 31, 2021 , we had $10.0 million of available
borrowing capacity under the credit facility.
In September 2019 , one of our subsidiaries entered into a secured revolving
credit facility with Credit Suisse AG, New York Branch, as administrative agent,
and the lenders party thereto. The credit facility was amended in December 2019
and further amended in January 2020 , February 2020 , March 2020 , May 2020 , June
2020 , October 2020 , November 2020 , January 2021 , September 2021 and October
2021 . Under the amended credit facility, the subsidiary may borrow up to an
initial $460.7 million with a maximum facility amount of $600.0 million based on
the aggregate value of solar assets owned by the borrower's subsidiaries, which
are primarily tax equity funds, subject to certain concentration limitations.
The proceeds from the credit facility are available for funding certain reserve
accounts required by the credit facility, making distributions to us and paying
fees incurred in connection with closing the credit facility. The credit
facility bears interest at an annual rate of adjusted LIBOR plus a weighted
average margin of 4.15%. The credit facility has a maturity date occurring in
November 2022 . Sunnova Energy Corporation guarantees the performance obligations
of certain affiliates under agreements entered into in connection with the
credit facility, as well as certain indemnity and repurchase obligations. In
November 2020 , we used proceeds from the SOLII Notes (as defined below) to repay
$211.5 million in aggregate principal amount outstanding. In June 2021 , we used
proceeds from the SOLIII Notes (as defined below) to repay $105.1 million in
aggregate principal amount outstanding. As of December 31, 2021 , we had $341.8
million of available borrowing capacity under the credit facility.
In December 2019 , one of our subsidiaries entered into a secured revolving
credit facility with Credit Suisse AG, New York Branch, as administrative agent,
and the lenders party thereto. The credit facility was amended in September 2020
and November 2020 . Under the credit facility, the subsidiary could borrow up to
an initial $95.2 million with a maximum facility amount of $137.6 million ,
subject to lender consent and certain other conditions. The proceeds from the
credit facility were available for purchasing certain eligible equipment the
borrower intends will allow certain related solar energy systems to qualify for
the 30% Section 48(a) ITC by satisfying the 5% ITC Safe Harbor outlined in IRS
Notice 2018-59, funding a reserve account required by the credit facility and
paying fees incurred in connection with closing the credit facility. The credit
facility bore interest at an annual rate of either LIBOR divided by a percentage
equal to 100% minus a reserve percentage or a base rate, plus an applicable
margin. The credit facility had a maturity date occurring in December 2022 .
Sunnova Energy Corporation guaranteed the performance obligations of certain
affiliates under agreements entered into in connection with the credit facility
and also provided a limited payment guarantee in respect of the borrower's
obligations under the credit facility that was subject to a cap of $9.5 million ,
which equates to 10% of the initial commitments. The availability period for
additional borrowings under the credit facility ended in December 2020 . In May
2021 , we used proceeds from the 0.25% convertible senior notes to fully repay
the aggregate principal amount outstanding of $48.2 million and the credit
facility was terminated.
In September 2020 , one of our subsidiaries entered into a secured revolving
credit facility with Banco Popular de Puerto Rico . Under the credit facility,
the subsidiary may borrow up to $60.0 million , subject to a borrowing base
calculated based on a specified advance rate applied to the net outstanding
principal balance of the solar loans securing the credit facility. The proceeds
of the loans under the credit facility are available for funding the purchase of
solar loans, making deposits in the subsidiary's reserve account and paying fees
in connection with the credit facility. The credit facility bears interest at an
annual rate of adjusted LIBOR plus an applicable margin. The credit facility has
a maturity date occurring in September 2023 . Sunnova Energy Corporation
guarantees the performance obligations of certain affiliates under agreements
entered into in connection with the credit facility. In February 2021 , we used
proceeds from the HELV Notes (as defined below) to repay $29.5 million in
aggregate principal amount outstanding. In July 2021 , we used proceeds from the
HELVI Notes (as defined below) to repay
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InApril 2021 , in connection with the Acquisition, we entered into an arrangement to finance the purchase of$29.0 million of inventory at an annual interest rate of 6.00% plus LIBOR (or acceptable replacement index) over twelve months (the "MR Note"). InAugust 2021 , the aggregate principal amount of the MR Note was increased to$32.3 million as part of the purchase price adjustments. InAugust 2021 , the aggregate principal amount outstanding under the MR Note of$23.7 million was fully repaid.
Securitizations
We from time to time securitize solar service agreements and related assets as a source of funding. We access the Rule 144A asset-backed securitization market using wholly-owned special purpose entities to securitize pools of assets, which historically have been solar energy systems and the related lease agreements and PPAs and ancillary rights and agreements both directly or indirectly through interests in the managing member of our tax equity funds. We also securitize our loan agreements and ancillary rights and agreements. InApril 2017 , one of our subsidiaries issued$191.8 million in aggregate principal amount of Series 2017-1 Class A solar asset-backed notes,$18.0 million in aggregate principal amount of Series 2017-1 Class B solar asset-backed notes, and$45.0 million in aggregate principal amount of 2017-1 Class C solar asset-backed notes (collectively, the "HELI Notes") with a maturity date ofSeptember 2049 . The HELI Notes bore interest at an annual rate of 4.94%, 6.00% and 8.00% for the Class A, Class B and Class C notes, respectively. InJune 2021 , we used proceeds from the SOLIII Notes (as defined below) to fully repay the aggregate principal amount outstanding of$205.7 million . InNovember 2018 , one of our subsidiaries issued$202.0 million in aggregate principal amount of Series 2018-1 Class A solar asset-backed notes and$60.7 million in aggregate principal amount of Series 2018-1 Class B solar asset-backed notes (collectively, the "HELII Notes") with a maturity date ofJuly 2048 . The HELII Notes bear interest at an annual rate of 4.87% and 7.71% for the Class A and Class B notes, respectively. InMarch 2019 , one of our subsidiaries entered into a note purchase agreement pursuant to which certain institutional investors committed to purchase up to$358.0 million principal amount of notes ("RAYSI Notes") in one or more asset-backed private placement securitizations. InMarch 2019 , our subsidiary, the RAYSI Notes issuer, issued an aggregate$133.1 million principal amount of RAYSI Notes pursuant to this note purchase agreement. InJune 2019 , the RAYSI Notes issuer issued an aggregate$6.4 million in principal amount of RAYSI Notes pursuant to a supplemental note purchase agreement. InJune 2019 , one of our subsidiaries issued$139.7 million in aggregate principal amount of Series 2019-A Class A solar loan-backed notes,$14.9 million in aggregate principal amount of Series 2019-A Class B solar loan-backed notes and$13.0 million in aggregate principal amount of Series 2019-A Class C solar loan-backed notes (collectively, the "HELIII Notes") with a maturity date ofJune 2046 . The HELIII Notes bear interest at an annual rate of 3.75%, 4.49% and 5.32% for the Class A, Class B and Class C notes, respectively. InFebruary 2020 , one of our subsidiaries issued$337.1 million in aggregate principal amount of Series 2020-1 Class A solar asset-backed notes and$75.4 million in aggregate principal amount of Series 2020-1 Class B solar asset-backed notes (collectively, the "SOLI Notes") with a maturity date ofJanuary 2055 . The SOLI Notes bear interest at an annual rate of 3.35% and 5.54% for the Class A and Class B notes, respectively. InJune 2020 , one of our subsidiaries issued$135.9 million in aggregate principal amount of Series 2020-A Class A solar loan-backed notes and$22.6 million in aggregate principal amount of Series 2020-A Class B solar loan-backed notes (collectively, the "HELIV Notes") with a maturity date ofJune 2047 . The HELIV Notes bear interest at an annual rate of 2.98% and 7.25% for the Class A and Class B notes, respectively. InNovember 2020 , one our subsidiaries issued$209.1 million in aggregate principal amount of Series 2020-2 Class A solar asset-backed notes and$45.6 million in aggregate principal amount of Series 2020-2 Class B solar asset-backed notes (collectively, the "SOLII Notes") with a maturity date ofNovember 2055 . The SOLII Notes bear interest at an annual rate of 2.73% and 5.47% for the Class A and Class B notes, respectively.
In
84 -------------------------------------------------------------------------------- Table of Contents 1.80% and 3.15% for the Class A and Class B notes, respectively. InJune 2021 , one of our subsidiaries issued$319.0 million in aggregate principal amount of Series 2021-1 solar asset-backed notes (the "SOLIII Notes") with a maturity date ofApril 2056 . The SOLIII Notes bear interest at an annual rate of 2.58%. InJuly 2021 , one of our subsidiaries issued$106.2 million in aggregate principal amount of Series 2021-B Class A solar loan-backed notes and$106.2 million in aggregate principal amount of Series 2021-B Class B solar loan-backed notes (collectively the "HELVI Notes") with a maturity date ofJuly 2048 . The HELVI Notes bear interest at an annual rate of 1.62% and 2.01% for the Class A and Class B notes, respectively. InOctober 2021 , one of our subsidiaries issued$68.4 million in aggregate principal amount of Series 2021-C Class A solar loan-backed notes,$55.9 million in aggregate principal amount of Series 2021-C Class B solar loan-backed notes and$31.5 million in aggregate principal amount of Series 2021-C Class C solar loan-backed notes with a maturity date ofOctober 2048 . The HELVII Notes bear interest at an annual rate of 2.03%, 2.33% and 2.63% for the Class A, Class B and Class C notes, respectively. InFebruary 2022 , one of our subsidiaries entered into a Note Purchase Agreement related to the sale of$131.9 million in aggregate principal amount of Series 2022-A Class A solar loan-backed notes,$102.2 million in aggregate principal amount of Series 2022-A Class B solar loan-backed notes and$63.8 million in aggregate principal amount of Series 2022-A Class C solar loan-backed notes with a maturity date ofFebruary 2049 . The HELVIII Notes will bear interest at an annual rate of 2.79%, 3.13% and 3.53% for the Class A, Class B and Class C notes, respectively. The transaction is expected to close on or aboutFebruary 24, 2022 , subject to customary closing conditions. The securitization structures include certain features designed to protect investors. The primary feature relates to the availability and adequacy of cash flows in the securitized pool of assets to meet contractual requirements, the insufficiency of which triggers an early repayment of the notes. We refer to this as "early amortization", which may be based on, among other things, a debt service coverage ratio falling or remaining below certain levels. As ofDecember 31, 2021 , we have not had any early amortizations under any of our securitizations. In the event of an early amortization, the notes issuer would be required to repay the affected outstanding securitized borrowings using available collections received from the asset pool. However, the period of ultimate repayment would be determined based on the amount and timing of collections received and, in limited circumstances, early amortization may be cured prior to full repayment. An early amortization event would impair our liquidity and may require us to utilize our available non-securitization related contingent liquidity or rely on alternative funding sources, which may or may not be available at the time. The indentures of our securitizations also typically contain customary events of default for solar securitizations that may entitle the noteholders to take various actions, including the acceleration of amounts due under the related indenture and foreclosure on the issuer's assets.
Senior Notes
During the year endedDecember 31, 2020 , certain of the holders of our 9.75% convertible senior notes ("9.75% convertible senior notes") converted approximately$150.8 million aggregate principal amount, including accrued and unpaid interest to the date of each conversion, of our 9.75% convertible senior notes into 11,168,874 shares of our common stock. During the year endedDecember 31, 2021 , the remaining holders of our 9.75% convertible senior notes converted approximately$97.1 million aggregate principal amount, including accrued and unpaid interest to the date of each conversion, of our 9.75% convertible senior notes into 7,196,035 shares of our common stock. As such, there are no longer any 9.75% convertible senior notes outstanding. InMay 2021 , we issued and sold an aggregate principal amount of$575.0 million of our 0.25% convertible senior notes ("0.25% convertible senior notes") in a private placement at a discount to the initial purchasers of 2.5%, for an aggregate purchase price of$560.6 million . The 0.25% convertible senior notes mature inDecember 2026 unless earlier redeemed, repurchased or converted. In connection with the pricing of the 0.25% convertible senior notes, we used proceeds of$91.7 million to enter into privately negotiated capped call transactions, which are expected to reduce the potential dilution to common shares and/or offset potential cash payments that could be required to be made in excess of the principal amount upon any exchange of notes. Such reduction and/or offset is subject to a cap initially equal to$60.00 per share, subject to adjustments. InAugust 2021 , we issued and sold an aggregate principal amount of$400.0 million of our 5.875% senior notes ("5.875% senior notes") in a private placement at a discount to the initial purchasers of 1.24%, for an aggregate purchase price of$395.0 million . The 5.875% senior notes mature inSeptember 2026 . 85
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Contractual obligations
The following table summarizes our contractual obligations as ofDecember 31, 2021 : Payments Due by Period (1) Total 2022 2023-2024 2025-2026 Beyond 2026 (in thousands) Debt obligations (including future interest) (2)$ 3,919,518 $ 232,809 $ 728,137 $ 1,350,397 $ 1,608,175 AROs 54,396 - - - 54,396 Operating lease payments (3) 22,176 1,364 5,881 6,293 8,638 Finance lease payments 1,761 702 925 134 - Guaranteed performance obligations 5,293 3,175 1,980 138 - Inventory purchase obligations 4,974 - 4,974 - - Other obligations (4) 50,979 28,149 22,817 13 - Total$ 4,059,097 $ 266,199 $ 764,714 $ 1,356,975 $ 1,671,209 (1)Does not include amounts related to the contingent obligation to purchase all of a tax equity investor's units upon exercise of their withdrawal rights. The withdrawal price for the tax equity investors' interest in the respective fund is equal to the sum of: (a) any unpaid, accrued priority return and (b) the lesser of: (i) a fixed price and (ii) the fair market value of such interest at the date the option is exercised. Due to uncertainties associated with estimating the timing and amount of the withdrawal price, we cannot determine the potential future payments that we could have to make under these withdrawal rights. For additional information regarding the withdrawal rights see Note 13, Redeemable Noncontrolling Interests and Noncontrolling Interests, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. (2)Interest payments related to long-term debt and interest rate swaps are calculated and estimated for the periods presented based on the amount of debt outstanding and the interest rates as ofDecember 31, 2021 . (3)Includes reimbursements of approximately$847,000 for leasehold improvements expected in 2022 through 2024. (4)Other obligations relate to information technology services and licenses and distributions payable to redeemable noncontrolling interests.
Historical Cash Flows – End of Year
The following table summarizes our cash flows for the periods indicated:
Year Ended
December 31,
2021 2020 Change
(in thousands)
Net cash used in operating activities
Net cash used in investing activities (1,241,216) (829,519) (411,697)
Net cash provided by financing activities 1,464,450 1,188,587 275,863
Net increase in cash and restricted cash $ 14,004 $ 227,602 $ (213,598)
Operating Activities
Net cash used in operating activities increased by $77.8 million in the year
ended December 31, 2021 compared to the year ended December 31, 2020 . This
increase is primarily a result of increases in purchases of inventory and
prepaid inventory of $102.4 million and payments to dealers for exclusivity and
other bonus arrangements of $3.0 million . This increase is offset by an increase
in net inflows of $17.4 million in 2021 compared to net outflows of $57.3
million in 2020 based on: (a) our net loss of $147.5 million in 2021 excluding
non-cash operating items of $164.9 million , primarily from depreciation,
impairments and losses on disposals, amortization of intangible assets,
amortization of deferred financing costs and debt discounts, unrealized net
gains on derivatives, unrealized net gains on fair value instruments, losses on
extinguishment of long-term debt and equity-based compensation charges, which
results in net outflows of $17.4 million and (b) our net loss of $307.8 million
in
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Investing activities
Net cash used in investing activities increased by$411.7 million in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This increase is primarily a result of increases in payments for investments and customer notes receivable of$443.7 million ($728.9 million in 2021 compared to$285.2 million in 2020) and payments for investments in solar receivables of$32.2 million in 2021. This increase is partially offset by purchases of property and equipment, primarily solar energy systems, of$23.8 million ($554.5 million in 2021 compared to$578.4 million in 2020) and proceeds from customer notes receivable of$66.9 million (of which$48.8 million was prepaid) in 2021 compared to$35.5 million (of which$28.2 million was prepaid) in 2020.
Fundraising activities
Net cash provided by financing activities increased by$275.9 million in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This increase is primarily a result of increases in net borrowings under our debt facilities of$571.3 million ($1.3 billion in 2021 compared to$682.9 million in 2020) and net contributions from our redeemable noncontrolling interests and noncontrolling interests of$20.5 ($334.3 million in 2021 compared to$313.7 million in 2020). This increase is partially offset by proceeds from the issuance of common stock of$10.5 million in 2021 compared to$152.3 million in 2020, the purchase of capped call transactions of$91.7 million in 2021 and net proceeds from the equity component of a debt instrument of$73.7 million in 2020.
Historical Cash Flows – End of Year
See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Historical Cash Flows-Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 " in our Annual Report on Form 10-K filed with theSEC onFebruary 25, 2021 pursuant to the Securities Exchange Act of 1934, as amended.
Seasonality
See “Activity-Seasonality”.
Significant Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with GAAP which requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses, cash
flows and related disclosures. We base our estimates on historical experience
and on various other assumptions we believe to be reasonable under the
circumstances. In many instances, we could have reasonably used different
accounting estimates, and in other instances, changes in the accounting
estimates are reasonably likely to occur from period-to-period. Actual results
may differ from these estimates. Our future consolidated financial statements
will be affected to the extent our actual results materially differ from these
estimates.
We identify our most critical accounting policies as those that are the most
pervasive and important to the portrayal of our financial position and results
of operations, and that require the most difficult, subjective, and/or complex
judgments by management regarding estimates about matters that are inherently
uncertain. We believe the assumptions and estimates associated with our
principles of consolidation, the valuation of assets acquired and liabilities
assumed in acquisitions, the estimated useful life of our solar energy systems,
the valuation of the removal assumptions, including costs, associated with AROs,
the valuation of redeemable noncontrolling interests and noncontrolling
interests and our allowance for current expected credit losses have the greatest
subjectivity and impact on our consolidated financial statements. Therefore, we
consider these to be our critical accounting policies and estimates and discuss
these items in detail below. See Note 2, Significant Accounting Policies, to our
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for further discussion of our accounting policies.
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Principles of Consolidation
Our consolidated financial statements reflect our accounts and those of our
subsidiaries in which we have a controlling financial interest. The typical
condition for a controlling financial interest is holding a majority of the
voting interests of an entity. However, a controlling financial interest may
also exist in entities, such as variable interest entities ("VIEs"), through
arrangements that do not involve holding a majority of the voting interests. We
consolidate any VIE of which we are the primary beneficiary, which is defined as
the party that has (a) the power to direct the activities of a VIE that most
significantly impact the VIE's economic performance and (b) the obligation to
absorb losses or receive benefits from the VIE that could potentially be
significant to the VIE. We evaluate our relationships with our VIEs on an
ongoing basis to determine whether we continue to be the primary beneficiary. We
have eliminated all intercompany transactions in consolidation.
Acquisitions
Business combinations are accounted for using the acquisition method of accounting. The purchase price of an acquisition is measured at the estimated fair value of the assets acquired, equity instruments issued and liabilities assumed at the acquisition date. Any noncontrolling interests acquired are also initially measured at fair value. Costs that are directly attributable to the acquisition are expensed as incurred to general and administrative expense. We recognize goodwill if the aggregate fair value of the total purchase consideration and the noncontrolling interests is in excess of the aggregate fair value of the assets acquired and liabilities assumed. Asset acquisitions are measured based on the cost to us, including transaction costs. Asset acquisition costs, or the consideration transferred by us, are assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash we paid to the seller, as well as transaction costs incurred. Consideration given in the form of non-monetary assets, liabilities incurred or equity instruments issued is measured based on either the cost to us or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated fair values.Goodwill is not recognized in an asset acquisition. The fair values of the assets acquired and liabilities assumed are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. Significant estimates include, but are not limited to, discount rates, forecasted cash flows, forecasted customer growth and earnout consideration. These estimates are inherently uncertain and unpredictable.
Useful life of solar power systems
Our solar energy systems have an estimated useful life of 35 years. We considered both (a) available information related to the technology currently being employed in the solar energy systems and (b) the terms of the solar leases that have a 25 year term with two five-year renewal options to conclude a 35 year useful life is appropriate. In addition, we reviewed numerous published and online sources from academia, government institutions and private industry and held discussions with certain manufacturers of our solar energy systems to support our estimated useful life of 35 years for the crystalline silicone solar modules we use. We define the useful life of a solar module as the duration for which a solar module operates at or above 80% of its initial power output, which we understand to be the generally accepted standard used by government, academia and the solar industry. Depreciation and amortization of solar energy systems are calculated using the straight-line method over the estimated useful lives of the solar energy systems and are recorded in cost of revenue-depreciation. Depreciation begins when a solar energy system is placed in service. Costs associated with improvements to a solar energy system, which extend the life, increase the capacity or improve the efficiency of the solar energy systems, are capitalized and depreciated over the remaining life of the asset.
BRA
We have AROs arising from contractual or regulatory requirements to perform
certain asset retirement activities at the time the solar energy systems are
disposed. We recognize an ARO at the point an obligating event takes place,
typically when the solar energy system is placed in service. An asset is
considered retired when it is permanently taken out of service, such as through
a sale or disposal.
The liability is initially measured at fair value based on the present value of
estimated removal costs and subsequently adjusted for changes in the underlying
assumptions and for accretion expense. We estimate approximately half of our
solar
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energy systems will require removal at our expense in the future. The
corresponding asset retirement costs are capitalized as part of the carrying
amount of the solar energy system and depreciated over the solar energy system's
remaining useful life. We may revise our estimated future liabilities based on
recent actual experiences, changes in certain customer-specific estimates and
other cost estimate changes. If there are changes in estimated future costs,
those changes will be recorded as either a reduction or addition in the carrying
amount of the remaining unamortized asset and the ARO and either decrease or
increase depreciation and accretion expense amounts prospectively. Inherent in
the calculation of the fair value of our AROs are numerous assumptions and
judgments, including the ultimate settlement amounts, inflation factors, credit
adjusted discount rates, timing of settlement and changes in the legal,
regulatory, environmental and political environments. Due to the intrinsic
uncertainties present when estimating asset retirement costs, as well as asset
retirement dates, our ARO estimates are subject to ongoing volatility.
Redeemable Non-Controlling Interests and Non-Controlling Interests
Noncontrolling interests represent third-party interests in the net assets of
certain consolidated subsidiaries (the "tax equity entities"). For these tax
equity entities, we have determined the appropriate methodology for calculating
the noncontrolling interest balances that reflects the substantive economic
arrangements in the operating agreements is a balance sheet approach using the
hypothetical liquidation at book value ("HLBV") method. Under the HLBV method,
the amounts reported as noncontrolling interests in the consolidated balance
sheets represent the amounts third-party investors would hypothetically receive
at each balance sheet date under the liquidation provisions of the operating
agreements, assuming the net assets of the subsidiaries were liquidated at
amounts determined in accordance with GAAP and distributed to the investors. The
noncontrolling interest balances in these subsidiaries are reported as a
component of equity in the consolidated balance sheets. The amount of income or
loss allocated to noncontrolling interests in the results of operations for the
subsidiaries using HLBV are determined as the difference in the noncontrolling
interest balances in the consolidated balance sheets at the start and end of
each reporting period, after taking into account any capital transactions
between the subsidiaries and the third-party investors. Factors used in the HLBV
calculation include GAAP income (loss), taxable income (loss), capital
contributions, investment tax credits, distributions and the stipulated targeted
investor return specified in the subsidiaries' operating agreements. Changes in
these factors could have a significant impact on the amounts that investors
would receive upon a hypothetical liquidation. The use of the HLBV method to
allocate income (loss) to the noncontrolling interest holders may create
volatility in the consolidated statements of operations as the application of
HLBV can drive changes in net income or loss attributable to noncontrolling
interests from period to period. We classify certain noncontrolling interests
with redemption features that are not solely within our control outside of
permanent equity in the consolidated balance sheets. Redeemable noncontrolling
interests are reported using the greater of the carrying value at each reporting
date as determined by the HLBV method or the estimated redemption value at the
end of each reporting period. Estimating the redemption value of the redeemable
noncontrolling interests requires the use of significant assumptions and
estimates, such as projected future cash flows.
Currently expected credit losses
Our allowance for current expected credit losses is deducted from the customer notes receivable amortized cost to present the net amount expected to be collected. It is measured on a collective (pool) basis when similar risk characteristics (such as financial asset type, customer credit rating, contractual term and vintage) exist. In determining the allowance for credit losses, we identify customers with potential disputes or collection issues and consider our historical level of credit losses and current economic trends that might impact the level of future credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics, such as differences in underwriting standards. Expected credit losses are estimated over the contractual term of the loan agreements based on the best available data at the time, and are adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: (a) we have a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual customer or (b) the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancelable by us. We review the allowance quarterly for any significant macroeconomic trends affecting the market but not yet impacting us. Assessments performed throughout the year include normal macroeconomic trends (e.g. delinquency and default and loss rates from leading credit bureaus by industry) as well as trends specifically related to the COVID-19 pandemic (e.g. forbearance and credit quality). While making adjustments to loss rates is ultimately a subjective determination, we have created an internal and external data-driven evaluation process to ensure any adjustments or updates to the model are informed and fact-based prior to executing such a change.
Recent accounting pronouncements
See Note 2, Significant Accounting Policies, to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
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