Good afternoon, and welcome to Spruce Power's Fourth Quarter 2023 Conference Call. As a reminder, today's call is being recorded. All participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. Thank you. I will now turn the call over to Bronson Fleig, Head of Investor Relations for Spruce Power. Mr. Fleig, please go ahead.

Thank you. Good afternoon and welcome to Spruce Power's conference call to discuss results for the fourth quarter and full year 2023. With me today are Christian Fong, our Chief Executive Officer, and Sarah Wells, our Chief Financial Officer. Our call this afternoon will include statements that speak to the company's expectations, outlook and predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which may cause actual results to differ materially from those expressed in or implied by these statements. We're not obliged to revise or update any forward-looking statements, except as may be required by law. Please refer to our disclosures regarding risk factors and forward-looking statements in today's earnings release and other SEC filings. A copy of our press release has been posted up to the Investor Relations page of our website for reference. The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent and can be found in the press release that we issued this afternoon. With that, I will turn the call over to our CEO, Christian. Go ahead.

Thank you, Bronson, and thanks everyone for joining us today. Spruce's strategy is to be the dominant long-term owner and operator of distributed energy assets. We are delivering clean energy to about 80,000 households with significant cost savings to our customers and high operating margins to our shareholders. Adjacent to our renewable power technology is a servicing technology platform that facilitates long-term customer relationships, which we've improved to the point where our customer satisfaction scores routinely exceed 80%. Exceptional customer experience sets up exciting organic growth opportunities. In 2023, we grew our portfolio nearly 50% by acquiring the cash flows from about 25,000 home solar assets and contracts. We added this recurring cash flow strength in a disciplined manner executing two acquisitions at attractive equity returns above 20%. Importantly, we did so while retaining significant cash liquidity for future growth. Excluding the cash reserve for a few legal matters that Sarah will discuss, Spruce's net cash at year-end was $156 million. In 2024, we intend to stay very disciplined with acquisitions, only acquiring portfolios with high investment returns and immediate increases to our free cash flow. We have one of the lowest fixed cost platforms in the industry, which gives us flexibility and should enable us to create substantial value in the year ahead. How? First, Spruce is offering programmatic partnerships to the country's strongest installers. When installers need to solve liquidity constraints by selling assets or even exit the industry, Spruce stands ready as the industry's most experienced portfolio buyer. Second, we now offer a servicing technology platform that is unrivaled in the market. As far as we know, no one else is coming close to our 80% customer satisfaction. Last November, we announced Spruce Pro, and in January we launched it to offer that platform out to other distributed solar portfolio owners. It's too early to talk about results, but we're pleased with the early interest in both our existing residential segment and our extension of servicing technology into the commercial and industrial markets. Third, in 2024, we are launching an early renewal campaign to upgrade long-term hypothetical customer value and lock it in as contract value. Before turning to Q4 results, I want to express my belief that Spruce is in its strongest position ever as we progress into 2024. In 2024, we can forecast our long-term cash flow with incredible accuracy. We manage our cost structure to reduce volatility and to have positive operating free cash flow. In 2024, we have a large cash war chest. To any of our industry peers who might be looking at liquidity issues, I'd just say give us a call. Yes, we'll always be disciplined in not growing for the sake of growth, yet we're very experienced at acquisitions and management stands ready to make a big move. And in 2024, we will build on a pipeline of products that have emerged out of our existing business and customer base, whether it's ramping Spruce Pro in the B2B market or selling extended contracts in the B2C market, we believe we will achieve high-margin organic growth. Turning to Q4 and full year 2023 results, I'll focus my comments within the context of our three core pillars, which are industry-leading customer experience, operational excellence, and growth through disciplined capital allocation. First, customer experience. Spruce facilitates the consumption of clean energy by about 80,000 households. Every day, we strive for an exceptional customer experience. Doing so is a good business practice and it creates new opportunities to unlock value across our platform. Our fourth quarter customer satisfaction score was 75%, and for the full year averaged 74%, well above our 2023 target. These scores reflect new interactions with our customers, so our servicing teams don't get to rest on yesterday's results and are pressing higher. Our target in 2024 is a customer satisfaction level of 80%, and year-to-date we are already hitting that goal. An important element of customer satisfaction is our field services program. As I discussed last fall, we are putting our first in-market team in New Jersey. I'm pleased that we have hired an operations team and are in the early phases of that local build-out. We look forward to providing more updates as the year progresses, including whether we extend this to other markets where we have enough customer density for a team to be profitable. Next, I'll address operational excellence within the context of cash flow generation. Our Q4 performance ratio, which is actual power production compared to the theoretical maximum of the installed solar panels, was 94%. And for the full year 2023, the weather-adjusted performance was a strong 102%. Spruce generated $30.1 million of total cash inflows in the fourth quarter, which we sometimes call top-of-the-funnel cash flows. These cash inflows consist primarily of PPA and lease payments, the sale of environmental commodities, and interest on cash invested. It's important to note that we do not consider proceeds from the issuance of debt as a factor in our ability to generate cash, as such an assumption would be dependent on periodic access to capital markets rather than actual operations. For 2024, we're affirming our previous cash flow projections. Sarah will address in detail the moderately positive cash flow we expect this year. Finally, let's discuss growth and acquisitions. In 2023, we extended our outstanding track record by acquiring the cash flows from about 25,000 rooftops. This represented close to 50% growth at an average underwritten IRR of 21%. The acquired assets from the SEMTH and Tredegar acquisitions have been integrated into our existing portfolio and are performing better than our underwritten expectations. While Spruce did not transact in Q4, our M&A team is actively looking at deals. Liquidity concerns across the residential solar sector are very real. With our strong balance sheet and reputation as a repeat buyer, we've gotten the first look at several opportunities in the secondary market. In addition to seasoned assets, last fall we saw a real-time shift of new installations to solar leases and PPAs. We view the very best installers having sponsors with working capital who can keep building, although some have reached out about Spruce becoming a programmatic portfolio buyer of finished systems. So, I'd underscore that growth is not gated by the availability of rooftop systems for sale, which remains plentiful. Yet bid-ask spreads have widened. Sellers are resistant to sell at wider levels hoping private capital will come to them. In contrast, as a levered buyer, we are crystal clear in our assessment of current value at more disciplined returns. We're holding tight on our return requirements, which is what we mean by staying disciplined in this market. For 2024, we are planting a flag on a formal growth target in terms of rooftop systems. We are focused on free cash flow and organic growth instead. And if portfolio prices move toward us, we're ready to buy. I'd like to elaborate on one of our organic growth initiatives. In 2024, we've been developing an early renewal program in which customers can opt to extend the contract period of their lease or PPA in advance of the original stated contract maturity. This is a win-win program. Customers enjoy visibility to continued cost savings versus retail electricity rates, which have been increasing much faster than general inflation in several of our core markets, California in particular. Spruce's shareholders get additional net asset value as contract extensions accrue to our portfolio. Spruce has the actuarial experience that enables us to price this offering appropriately. Since the beginning of 2021, we've managed a meaningful renewal cycle with a pocket of early solar adopters whose contract periods were only 10 or 15 years. This process gave us solid data on actual consumer behaviors that we're now using to design appropriate incentive structures. From a population of about 500 customers with expiring contracts, just over 50% show a post-contract renewal or system purchase plan that worked out to an average 35% discount to their then prevailing contract rate. The average extension was for 7 years. This is hard data from a statistically significant number and time series. The investor presentation posted today on Spruce's Investor Relations website uses that actual experience in calculating our net portfolio value. Last, I want to address how the capital markets are giving us the ability to grow. The appetite for and availability of non-recourse project debt for Spruce is very healthy. So we anticipate shifting portfolio acquisitions to using more non-recourse portfolio debt and less equity capital. This is a straightforward capital light model that supports keeping our cash balance at a high level. How do we do this? Due to the strong performance of our asset management and customer servicing teams, our portfolios have outperformed underwritten expectations at the time of acquisition. This value accretion is increasing our borrowing capacity. An example of this outperformance is our Spruce Power 4 portfolio where current loan to value stands at 70%. In this portfolio, over 90% of contracts are linked to utility rates, the majority of which are in California, which have been rising rapidly. Increasing cash flow in the portfolio both derisks any future refinancing of the non-recourse portfolio debt, but also gives us the opportunity to extract the equity cash needed for the next portfolio acquisition. This is Project Finance 101 where the cash flows from the assets and liabilities are tightly matched. The debt is hedged against future interest rate volatility and all the debt is non-recourse. Some closing remarks before handing off to Sarah. While there are broad concerns surrounding residential solar markets, we want to be crystal clear. First, Spruce has no liquidity concerns. Second, the shift in originations to more leases and PPAs creates tremendous tailwinds for our business as Spruce is the best long-term servicer and owner of these assets. Third, we have both organic growth and disciplined acquisition and partnership growth ahead of us. We intend to be a leader in the long-term energy transition.

Thanks, Christian. I'll first address some housekeeping items that impact our financial reporting, specifically an update on wrapping up legal proceedings related to legacy XL Fleet Corp and its operations. At year-end 2023, we accrued approximately $17 million in net expected legal settlement amounts. Most of this accrual amount at year-end was tied to the Southern District of New York securities class action lawsuit surrounding the 2020 merger of XL Fleet. In that class action lawsuit, Spruce made a payment of $15 million. This payment is subject to final approval and a hearing is set for this matter with the respective court in April. Moving to fourth quarter financial results. Fourth quarter revenue was $15.7 million, down from $18.1 million in the prior year period. The year-over-year decrease is a result of weather fluctuations. Fourth quarter core operating expenses, which we define as SG&A and portfolio O&M, was $17.9 million in total as compared to $31.3 million for the prior year period. Breaking this out, fourth quarter portfolio O&M expense increased to $5.5 million from $2.7 million in the prior year period. The increase is largely due to timing of normal O&M spend as supply chain and labor availability allowed us to finish planned 2023 O&M. SG&A expenses decreased significantly to $12.5 million in the fourth quarter from $28.6 million in the fourth quarter of 2022. The prior year period saw outsized impact due to restructuring expenses and legal fees tied to legacy XL Fleet lawsuits. Finally, Spruce generated a GAAP net loss attributable to stockholders of $30.4 million in the fourth quarter. That said, management considers operating EBITDA as a key measure in evaluating Spruce's operating performance. We define operating EBITDA as adjusted EBITDA plus net proceeds from the investment in the SEMTH master lease, interest earned on cash investments, and proceeds from buyouts and prepayments. Let me explain why we assess our business performance this way. First, GAAP earnings do not include cash flows we received from our Spruce Power 4 portfolio. This is considered an investment in a master lease and proceeds from this investment flow through the cash flow from investing activities section of our consolidated cash flow statement. To illustrate the relevance of the Spruce Power 4 portfolio, which we acquired in March 2023, partial year proceeds from this investment were approximately $20 million in 2023. Next, interest earned on our cash investments is significant. We view the yield on our substantial cash balance invested as a material source of cash flows as we maintain our disciplined approach to near-term M&A, which Christian earlier described as meeting our equity requirements largely prefunded with available debt capacity. Again, to underscore the relevance, we earned $8 million of interest on investment-grade securities in 2023. Last, cash inflows we receive from buyout or prepayment of customer contracts represents a meaningful source of cash flows. For 2023, this amount totaled about $7 million. So, with these items in mind, I'll now bridge fourth quarter operating EBITDA. Adjusted EBITDA was $390,000 for the fourth quarter. Adding in the net proceeds from the Spruce Power 4 portfolio of $6.4 million brings the total to $6.8 million. Next, adding $1.9 million of interest earned on cash investments and $1.3 million of proceeds from buyouts and prepayments, operating EBITDA totaled $9.9 million for the fourth quarter. Next, I'll quickly address our capital and liquidity position. As of December 2023, we had cash and cash equivalents of $173 million. This compares to $240 million of cash and cash equivalents as of December 31, 2022. The net change in cash is primarily attributable to XL financing activities, including the previously disclosed settlement payment to the SEC in October and cash usage for discontinued operations as well as our two acquisitions and share repurchase activity. The total principal balance of long-term debt was $647 million as of December 31, 2023, with a blended interest rate of 5.7%, including the impact of hedge arrangements. As a reminder, Spruce has no corporate level debt. All our debt consists of project-level debt that is supported by our solar loan portfolios and is non-recourse to the company. At year-end, 97% of our debt profile was hedged with mark-to-market on our swaps of positive $27 million. Finally, Spruce's gross portfolio value, which represents the present value of remaining net cash flows from customers at a 6% discount rate, was $784 million at year-end. As Christian mentioned, this reflects an update to our renewal assumptions. Finally, after deducting non-recourse debt and adding back cash balances, our net portfolio value was $311 million. Excluding the $17 million of net cash settlements that are expected or reserved as of year-end, this results in a net portfolio value per share of over $16. Last, I'll address Spruce's financial outlook for 2024. Spruce expects operating EBITDA, as I previously defined, to range between $68 million and $86 million for 2024. After deducting Project Finance Debt Service and making some other adjustments for non-cash items, we expect adjusted free cash flow to range between $0 and $5 million for 2024. The reconciliation of these non-GAAP measures can be found in our updated Investor Relations presentation posted on our Investor Relations website. This concludes our prepared remarks. Operator, please open up the line for questions.

Your first question comes from the line of Jordan Levy with Truist Securities.

It's Henry on for Jordan here. Thanks for taking my question. Firstly, congrats on the launch of the Spruce Pro. Just looking at that product a bit more. I know it's early days, but can you talk to how that ramp is going to start the year? Any initial feedback on the product so far?

Spruce Pro entered the market with far more momentum than we anticipated. When we looked at this, we looked at the full building out of our servicing technology platform. That took, that was before we were public. We spent the last four or five years really getting this down and getting those customer satisfaction levels to 80%. Then we said, look, if we're doing that well in building best-in-class, let's just offer this as an additional product. Another firm can rent the platform, so to speak. The other half of it is the SREC trading, which we call the environmental commodities markets. We just said there are folks outside of Spruce, outside of our own portfolio, that can rent the platform. Regarding the ECM or the SREC desk, that's a fairly well-known market, and there are other players that are doing that. We are working with major owners of assets, both C&I and residential that are in some of the major SREC markets but don't have the sort of trading desks that we have. They are typically institutional. We do have our first C&I contract already signed, and the registration of the assets is in process. So, that happened as planned. What we did not anticipate was the pain that's going on in residential solar and where that would drive external participants to try to rent a servicing platform. Our head of corporate development sometimes says servicing is what keeps the riffraff out of this industry. It's really hard and it takes a lot of years to build. Regarding the incoming interest, we have a fairly deep pipeline of clients that are talking with us about signing up contracts. As I said previously, it's a little bit early. We just launched this in January, eight weeks in. We had to take the step of actually reassigning people internally into that program because the incoming interest was so strong. So, let me just leave that there. It's a little bit premature because there's no revenue. It's not that much fun to talk about until the cash flow starts happening.

And then another one for you, Christian. I know you've spoken recently on programmatic partnerships. I want to dig a little bit more into that. I'm curious if these installers that have done PPA and lease origination before, are they new entrants into the market? Are some of the channel PPA players branching out given current liquidity constraints?

Last quarter, we actually called this programmatic off-taker, and we've gone a step further. Through Spruce Pro and these are two major products that we can immediately launch off our platform, because of our core competencies. There are two ways that we filter out who we're working with. Let me add a third. Right now, there is a question of which installers, from the most national level all the way to the regional or local level, which ones are even going to survive and still be in business. We are working with those that have significant enough liquidity and sponsorships that they're strong enough to be there a year from now, 2 years from now, 3 years from now. We're looking for sustainability in their business models too. Otherwise, we're looking at those who can do a thousand systems or more per year. This is not the old-fashioned channel partnership where you just kind of tell everyone they can use our product regardless of volume. We're looking for volume, the super regionals, if you will. Second, we are not offering working capital. That also filters out potential partners because the strongest players in the market can do well over a thousand per year, maybe 5,000, or 10,000, and they also have their own financing lined up. By doing this, we're not having to step in to provide working capital. In our mind and experience, because we used to do channel partnerships before we were public, that's the drag and Achilles heel of that business model. Regarding where they're coming from, they are coming from existing platforms that have provided PPA and lease working capital-style financing but are now leaving those platforms due to concerns about sustainability and coming to us because we're financially stable. We have plenty of cash, we're cash flow positive, and we're going to be here for the long term. So there's a shuffling of the deck going on upstream from us where we are the fortunate recipients of many of those phone calls.

I'm wondering if you could comment a little bit on the success you've had upselling existing customers on storage and also curious to know whether, given the momentum we're seeing for products with integrated inverters, whether that's something that might be on the table as well?

Let me speak to the first, and I will pass on the second. We are component agnostic, let's put it that way. I don't spend a lot of time looking at the different types of components being placed. In terms of batteries, the way we're approaching the market is to retrofit batteries to differentiate from someone who's getting a solar plus storage solution. Those attachment rates are well reported by some of our installer peers. In terms of retrofit batteries, I've previously mentioned the pace of about $200,000 a year in revenues, leases, etc. At that level, it’s just not enough to model. It barely keeps a small team working to provide it for our customers, and that number has remained unchanged until California changed to NEM 3.0, which further decreased the incentive structures for retrofit battery systems. While we always want to be there for our customers if they ask for a product, I don't see how it’s economical for them or for anyone else.

And just with regard to your answer to the previous questioner, without naming names, you are beginning to see some larger regional, super regionals move away from very large partners based on some of the well-reported liquidity concerns, are you saying that?

Yes, I am.

Seeing no more questions in the queue, let me turn the call back to Mr. Fong to conclude the call.

Thank you, operator, and thanks everyone for joining our call today. This is going to conclude the call. If you have any questions, please reach out to me or our team and we'll get back to you. Thank you.

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