Spruce Power Holding Corp (SPRU) Q3 2026 Earnings Call Transcript

Conference over to Julia Gasparri, Corporate Development and Investor Relations. Julia, please go ahead.

Thank you, Operator. Good afternoon, everyone, and welcome to Spruce Power's third quarter 2026 earnings conference call. Joining me today are Chris Hayes, Spruce's chief executive officer, and Tom Cimino, the company's chief financial officer. Before we begin, I would like to remind you that we will comment on our financial performance using both GAAP and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to the most comparable GAAP measures, is included in our earnings release for the third quarter of 2026, which is available on the Investor Relations section of our website. Our discussion today will also include forward-looking statements to reflect management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our earnings release and SEC filings for discussion of these risk factors. With that, I will now turn the call over to Chris Hayes, Chief Executive Officer of Spruce Power. Chris?

Thanks, Julia, and good afternoon, everyone. Our most important update is the progress we made on refinancing. On October 30th, we executed a non-binding term sheet covering SP1, SP2, and SP3, satisfying the condition to extend the SP1 maturity to January 30th, 2027. This is a meaningful milestone, but it is not a committed or completed refinancing. We and our financial advisor are focused on negotiating definitive arrangements before that deadline. As disclosed in our Form 10Q, uncertainty regarding the upcoming maturities continues to give rise to a going concern disclosure. We take that risk seriously. Preserving liquidity and completing the refinancing are our immediate priorities. Tom will provide more detail on the maturities and financial implications. Turning to operations, our third quarter results reflected variability in our contracted residential solar portfolio, offset by the benefits of a lower corporate cost base. Electricity production declined year over year, contributing to a lower PPA and SREC revenue. Unusually challenging weather conditions across several key markets were a contributing factor, including record summer heat that reduced panel efficiency, as well as heavier rainfall, cloud cover, and storms in the Northeast and California. We continue working to improve system availability and service execution while maintaining reliable service for customers. We are striving to improve the efficiency of our platform by simplifying operations and reducing overhead. We are actively deploying AI-enabled tools across our operations, helping us reduce staffing count by more than 25% while improving quality. We are also working to reduce the backlog of outstanding service tickets and improve the timeliness of non-routine service. These efforts have increased near-term O&M costs. Our in-house field services model remains central to our operating strategy. By combining internal teams with our third-party vendor network, we aim to improve response times, manage service costs, and maintain system availability. We are prioritizing practical improvements that make the platform more efficient without compromising service quality. As of the end of Q3, our portfolio encompassed approximately 83,000 residential solar customer contracts. Our reported customer satisfaction score was 79% for the quarter. We are focused on responsiveness, system performance, and reducing the backlog of outstanding service requests. Spruce Pro gives us an opportunity to extend our servicing capabilities to third-party owners. We remain selective about new relationships and will prioritize signed contracts with attractive economics over adding overhead ahead of revenue. Beyond refinancing, our focus is on reliable service, a sustainable cost structure, and disciplined pursuit of attractive growth opportunities. With that, I'll turn the call over to Tom for detailed financial results.

Thanks, Chris. Good afternoon, everyone. I will begin with a more detailed review of our third quarter financial results. Revenue totaled $29.7 million, down approximately 3% year over year. The decline was primarily reflected in lower non-cash amortization revenue and lower SREC revenue. This was partially offset by higher lease and other revenue. Non-cash amortization revenue decreased approximately $0.7 million year-over-year and will be fully amortized in the fourth quarter. PPA revenue was $11.2 million, down approximately 2% year-over-year, while lease revenue increased approximately 5% to $10.3 million. SREC revenue was $5.9 million, down approximately 10%, reflecting in part lower electricity production and lower pricing on uncontracted SRECs. Total operating expenses were $21.2 million, down approximately 5% year-over-year. The quarter included a $0.5 million net loss on asset disposals, representing approximately a $0.9 million unfavorable year-over-year swing. This non-cash line item included prior period adjustments that should not be viewed as recurring operating performance. SG&A expense was $10.3 million, down approximately 23% year-over-year, reflecting a leaner staffing model, reduced professional service spending, and the absence of certain prior-year transaction-related costs. O&M expense was $3.3 million, up approximately 72% year-over-year, reflecting expanding servicing responsibilities and work to reduce outstanding service requests. We remain on track to reduce our O&M expense for the full year. For the first nine months of 2026, O&M expense was approximately 13% below the prior year period. Income from operations was $8.5 million, essentially flat with the prior year quarter, as lower SG&A offset the revenue decline and higher quarterly O&M expense. Net income attributable to stockholders was $6 million compared with a net loss in the prior year quarter. Earnings per share were $0.31 basic and $0.28 diluted. The improvement was substantially influenced by non-cash interest rate swap valuation movements, a $5.2 million fair value gain in this quarter versus a fair value loss a year ago, representing an approximate $6.7 million favorable swing. Accordingly, the increase in gap net income should not be interpreted as an equivalent increase in recurring operating cash generation. For the first nine months of 2026, adjusted cash flow from operations was $30.6 million, a significant improvement of approximately 52% year-over-year. The improvement was driven by lower operating costs, led by the 23% drop in SG&A expenses. During the first nine months, we repaid $38.1 million of debt. As of September 30, 2026, cash and cash equivalents were $40.1 million, and restricted cash was $47.3 million, for total cash and restricted cash of $87.3 million. It is important to note that restricted cash is not equivalent to freely available corporate liquidity. Total debt principal outstanding was $657.6 million. The gap-carrying amount, net of unamortized fair value adjustments and deferred financing costs, was $642.7 million. Our debt is structured at the project level and is generally non-recourse to the parent, subject to the terms of their respective agreements. Interest rate swaps covered approximately 91% of floating rate term loans. As Chris mentioned, on October 30th, we obtained a non-binding term sheet covering SB1, SB2, and SB3, satisfying the conditions to extend the SB1 maturity to January 30th, 2027. The term sheet does not constitute a binding commitment to provide refinancing, and the proposed transaction remains subject to negotiation, definitive documentation, and closing conditions. SB1 had approximately $163.1 million of principal outstanding as of September 30, while SB2 had approximately $65.8 million and matures on May 14, 2027. SB3 had approximately $45.9 million of principal outstanding and matures on November 13, 2027. We are working with our financial advisors and potential lenders on these facilities and the broader refinancing process. As disclosed in our Form 10-Q, absent successful refinancing or other actions, liquidity would not be sufficient to repay the relevant facilities at maturity. Therefore, the financial statements include a going concern disclosure. Looking ahead, our balance sheet priorities for the remainder of the year are to preserve liquidity and advance the refinancing process. From an operating perspective, the fourth quarter revenue is typically affected by seasonal solar production. We remain focused on maximizing recurring PPA and lease performance, SREC production, and service execution. Spruce Pro Growth will depend on converting opportunities into signed agreements with attractive economics. On expenses, SG&A remains meaningfully lower than a year ago, and O&M expense in line with plan. We will continue to balance near-term cost discipline with the service investment required to support customers and portfolio performance. With that, I'll turn the call back over to Chris for closing comments.

Thanks, Tom. Our priorities remain straightforward. Complete the refinancing process, deliver reliable service to customers, and build on the efficiencies we have achieved. The contracted portfolio provides a foundation for the business, but we recognize that resolving the near-term debt maturities is essential to our next phase. We appreciate the continued support of our investors and look forward to updating you on our progress. Operator, please open the line for questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Will Hamilton with Kestrel Merchant Partners. Your line is open. Please go ahead.

Good afternoon, guys. Congrats on the term sheet and the cash flow for quarter and year-to-date. Tom, I was just wondering, like, is there anything more you could share to shareholders about the term sheet and, like, in the details? What may might need to be still done in terms of the finalizing and closing it? And if if that is completed, do you envision the going concern going away?

Yeah, I'm happy to take the lead, Tom. You can follow up with anything here. Well, thanks so much for the question. We really appreciate it. Yeah, so look, as the quarter goes, obviously, we're thrilled about that term sheet. It's nothing but good news. In terms of what has to happen, you know, this is kind of like a standing closing checklist, which has myriad documents and pages and things like this. So it's really a lot of blocking and tackling, getting that done. We would expect that that disclosure. The ongoing concern would go because we would be paying it off. The issue, obviously, is the shortfall in our cash on hand versus what we owe to SP1. So that would go away. Tom, anything you'd care to follow on with?

No, other than yes, we're happy to have it, and that'll take out one, two, and three with the financing. Great.

Um, and then in terms of just the, the business, uh, So, there's obviously the seasonal nature to it. So, I just wanted to make sure I had sort of my expectations right and others. Last quarter – oh, sorry. Last year, you had about a 20% sequential decline in revenue from Q4, from Q3. I know there's some movement with SRAC, but is that a fair number to expect again this year, just given the seasonal nature? or anything else that we should know of.

I could take that, Chris. Yeah, I mean, fourth quarter is seasonally affected. The 20% number, I'm not really sure of because there are some escalators in the lease payments. PPAs adjust. The California PPAs adjust the rate, so higher rates could be a little bit better, but definitely a Q4 seasonal adjustment from Q3.

Okay. Got it. And is the SG&A expense run rate you had in the quarter, like, at this point, like, fully reflects the cost cutting you've done, or is there more to be that will be shown going forward?

No, it's not a full run rate. It could taper down in future quarters. So we continue to monitor. Streamline costs. Use AI, as we mentioned. So, I wouldn't use Q3 as a full-year run rate and would expect something less.

All right.

Thanks.

Last question is, obviously, a lot of this year has been focused on the balance sheet and getting the refinancing done. Assuming that it's completed, can you just give us an update as to what the growth focus is for the company? A lot of the capital free cash flow you've generated this year have gone towards the debt repayment, too. But going forward, how do you envision a capital allocation?

Yeah, for sure.

So, obviously, we're thrilled to have paid. 20 million plus in principle down in the quarter. But in terms of getting this term sheet closed and behind us before the January 30th deadline, we still continue to have a robust M&A portfolio and pipeline. So that, of course, is top of mind. And Spruce Pro continues to have some of these large whales that I've talked about in quarters past. That are definitely real and kind of slow, longer sales cycles, but, you know, it's capital light business and highly accretive from a margin perspective. So that remains truly the primary focus here from a growth perspective. Thank you for the time. I really appreciate the support. Well, thank you.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.