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

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

Thank you, Bronson, and thanks to everyone for joining us on the call today as we discuss our strong second quarter results and progress on 2023’s initiatives that extend our core business of distributed generation solar power. For those new to Spruce, we have 3 primary businesses. First, we create and sell clean electricity through our growing solar power portfolio. Second, we deliver power services to our customers with servicing creating strong margins and business development opportunities. Third, we profit through participating in the related environmental commodities markets. This year, we kept our differentiated customer strategy rather than carry a high cost sales force, we add customers through the acquisition of existing power portfolios with long-term purchase contracts and leases. It’s simpler, it’s flexible, and it’s allowed us to have arguably the lowest customer acquisition costs in the industry. We demonstrated the strength of that growth strategy by expanding our portfolio of home solar assets and contracts by over 40% with the acquisition of the Spruce Power 4 portfolio. With the transitional tasks associated with our merger with XL Fleet mostly complete and the first full quarter of Spruce Power 4 in the books, what we’re showing today are the result of a clean quarter. I want to break my comments into 3 focus areas. The first will be operations and then growth initiatives and then capital markets. Okay, operations. Of course, Spruce is not a financing company. We actually make and sell a product and provide services to our customers. We are an operating company, and so our goal is operational excellence. Our company facilitates the solar electricity consumed by about 80,000 households across 18 states. For these families to enjoy zero emission electricity that’s reliable and cost advantaged, our Spruce servicing team delivers best-in-class excellence in its execution…

Thanks, Christian. Before getting to quarterly results, I’d like to quickly address a few housekeeping items that impacted our financial reporting. Consistent with the prior two quarters, legacy XL businesses, Drivetrain and XL Grid, are presented as discontinued operations within our financials. These legacy businesses were divested in the first quarter of 2023, and we do not expect any material expenses going forward related to discontinued operations. Our continuing operating results still reflect certain expenses related to XL Fleet, notably legal expenses related to the previously disclosed SEC inquiry and related shareholder lawsuits. We are working to close these legal matters, but we do expect to incur future associated costs. As we stated in our 10-Q, we believe the allegations in both the SEC inquiry and shareholder suits are without merit. And the company is vigorously defending itself. At this time, we cannot estimate the timing of resolution of these matters nor the impact of any related liabilities. Also, as Christian mentioned, the Spruce Power 4 portfolio acquisition closed in late March and second quarter results fully reflect this investment. However, please recall that GAAP accounting treatment for the Spruce Power 4 portfolio acquisition places the majority of cash flow stream from the portfolio in the cash flows from the investing section of our consolidated payment of cash flows. This item is denoted as proceeds from investment related to SEMTH master lease agreement. However, note that operating costs and interest expenses tied to our senior debt supporting Spruce Power 4 are reflected in the statement of operations. Moving to Q2 financial results, second quarter revenue, which consisted exclusively of Spruce-related revenue was $22.8 million compared to $18.1 million in the first quarter of 2023. Revenue was higher sequentially due to more spent hours across our fleet. That’s just normal seasonality…

[Operator Instructions] Your first question comes from Joseph Osha with Guggenheim. Your line is open.

Hello. This is actually Hilary on for Joe. And I just first wanted to touch on your comments during your prepared remarks on extracting the extra value of the existing systems. Just wondering if you could share any color in terms of how we should kind of expect to see extract any incremental value there?

Sure. Hi Hillary. Thanks for joining. When we think about – and I will call it organic, the organic growth portion of being the owner and operator. So, there is two ways to do it. Of course, one is just to increase revenues. And when we think about increasing revenues from the current portfolio, we have two mechanisms to do that. One of them is pretty active right now, and that is the emergence of additional SREC or environmental commodities markets really around the country. And that is through our Environmental Commodities Markets group, ECM. And that’s what we touched on as being a quarter-on-quarter 10% growth. That – those markets are increasing. It’s added revenue directly from the portfolios that we already own. Then looking on into the future, you can up-sell to customers, added sales and that was the battery that we are starting to see quite a bit of demand out of California. And so the additional sales to the customers would then increase, and that would be thinking of it not as increasing the revenue from like a system, but from – think of it as a portfolio of customers and underlying homeowners that would purchase additional products. That’s the first way. The second way, of course, is simply to manage our costs and to make sure that on an ongoing basis, the per unit cost that we have on servicing or owning the systems continues to go down, and that just increases the net margins. Our intent is to do both the – we are seeing the increase in revenue. And as we increase the size of the service portfolio, that’s where just scale starts to kick in, and we see decreased per unit costs as well.

Great. And then just when you think of building to the 90,000 customer target that you guys have. Just wondering if you could provide an update on kind of the competitive landscape and any color you could share on the pipeline of potential deals?

Yes. As usual, we don’t speak to any specific line items on our pipeline report that we would have internally. We do mention this non-binding LOI, letter of intent that we signed. Clearly by even mentioning on the call, we are signaling a level of confidence that we are nearing a closing in the next couple of weeks. Anything can happen, deals are deals. But that would get us to around 75,000 home solar assets and contracts. We started at around 51,000 or so at the beginning of the year. So, when we talked about going from – let me just do the shorthand here, 50,000 to 90,000, and we are thinking we need to add about 20,000 per year with the large Spruce Power 4 acquisition, largest in our history, record size. That got us like a full year’s growth from 50,000 to 70,000 plus. And so as we look at in Q3, the potential of adding about 2,400 systems and landing at 75,000, we are well on pace to get to 90,000 by the end of the year, I am sure some folks will say, we will want you just go ahead and raise your target and have the team go buy even more price premature for that, though we are just confident because we do have bilateral negotiations going. We have got bids out currently. And so rather than talk about any of them one-by-one, let me just affirm that we are still confident that we have enough runway in time and seeing enough deals to still feel good about that 90,000 target. Hilary, you can kind of asked the second question like competitive landscape for the licensing, I can’t figure out why other folks aren’t buying because the returns that we are getting are so strong for our shareholders and we are really happy with that. And we are just always kind of looking over a solar just saying, who else might jump in. The reality is that buying things is hard. M&A is not an easy business. Integrating is not an easy business. We have spent the last 5 years developing that called, muscle memory of how to bid being a low execution risk counterparty. People know that we are good for our handshake that when we say we are going to do something, we actually have the means and the expertise to do it. We believe that makes us the preferred buyer in M&A especially in residential solar. And so we continue to see things. Yes, there are other folks that are competing, and yes, our scale, our expertise and I would like to think our reputation as counterparties enable us to be the preferred buyer for a lot of potential sellers.

Great. Thank you.

Your next question comes from Jordan Levy with Truist Securities. Your line is open.

Hello. It’s Henry on for Jordan here. Really great to see the inflection, the positive earnings this past quarter, I know you mentioned the recent merger, but any other additional color you can provide on some of the core drivers behind that?

Yes, sure. We saw really strong production from our assets in the quarter. As Christian mentioned in the prepared remarks, our weather-adjusted performance ratio was above 100%. And so our assets are operating really well. That paired with normal seasonality drove the top line. On the cost side, we still have some legacy XL costs coming through mainly legal costs, but all of the integration costs that we saw with the merger, like the people comps, all the back has mostly rolled off. And so we are really excited about this inflection and to continue to build on our improvements on the bottom line.

Awesome. Thanks for that. And then I know you noted you have been active kind of in the share repurchase program in the quarter and then going forward. And so I would love to get any color on the kind of the balance you see with acquisition opportunities, obviously, the buyback and anything else you see kind of going through the end of this year and then into 2024. Thank you.

Sure. Going forward, the repurchase is always going to be part of our chest to drive shareholder value. I don’t see that going away. We do view the program as two-fold. First, it has to offer value. And if that’s happening, then secondly, we also benefit with Spruce acting as an incremental buyer of our own stock. So, I see the repurchase program and the reverse like kind of all working towards that same goal.

And I had just to put numbers on. It was a $50 million program. So, we have still got $46-point-some million of dry powder in that program.

Thank you.

There are no further questions at this time. I will now turn the call back over to Bronson Fleig for closing remarks.

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