Spruce Power Holding - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered strong top-line and profitability metrics: revenue rose 48% year over year to $33.2M and Operating EBITDA increased 71% to $24.6M, driven by the NJR portfolio acquisition, higher SREC revenue, and O&M efficiencies.
• Core operating expenses fell 19% YoY to $17.2M; O&M expense declined 52% YoY to $2.1M as process, routing, and vendor management improvements took hold.
• Liquidity remained solid with total cash of $90.5M ($53.5M unrestricted) and non-recourse debt of $717.1M at a 6.1% blended rate; floating-rate exposure is materially hedged into the early 2030s.
• No numeric guidance was issued; management reiterated focus on cost containment and capital-light growth (Spruce PRO, programmatic offtake). SREC monetization in New Jersey via a multi-year forward contract is expected to generate ~$10M through 2029, supporting predictable cash flows.
• Wall Street consensus estimates were not available via S&P Global for EPS and revenue in Q2, limiting beat/miss analysis; results should drive estimate recalibration around higher recurring revenue and lower O&M run-rate [GetEstimates – values from S&P Global]*.

What Went Well and What Went Wrong

What Went Well

• Revenue and EBITDA inflected: “Second quarter results reflect the strength of our business model, with revenue growing 48%... and Operating EBITDA surging 71%” as O&M expense fell 52%.
• Cash-flow visibility improved with SREC hedging: “multi-year agreement to sell… New Jersey SRECs… expected to generate approximately $10,000,000 in fully hedged revenue through 2029,” reinforcing dependable cash generation.
• Operating improvements: sequential reduction in O&M for the second consecutive quarter through improved technology routing, inventory right-sizing, and vendor management; launch of new CRM in June to drive efficiency.

What Went Wrong

• GAAP net loss persisted, albeit improved: net loss attributable to stockholders was $(3.0)M (continuing EPS $(0.16)), reflecting interest expense and swap fair-value changes despite stronger operating performance.
• SG&A remained elevated versus prior year excluding severance; legal and professional fees drove marginal increases and weighed on near-term profitability.
• Limited formal guidance and coverage: no numeric guidance ranges issued; S&P Global consensus data for EPS and revenue unavailable, constraining market beat/miss framing [GetEstimates – values from S&P Global]*.

Transcript

Speaker 2

Hello and thank you for standing by. My name is John and I will be your conference operator today. At this time, I would like to welcome everyone to the Spruce Power Holding Corporation second quarter 2025 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. To withdraw your question, simply press star one again. I would now like to turn the conference over to Scott Kozak, Director of Investor Relations. Please go ahead.

Speaker 0

Thank you, Operator. Good afternoon, everyone, and welcome to Spruce Power Holding Corporation's second quarter 2025 earnings conference call. Joining me today are Chris Hayes, Spruce Power Holding Corporation's Chief Executive Officer, and Thomas J. Cimino, the company's Interim 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 comparable GAAP measures, is included in our earnings release for the second quarter 2025, which has been posted on the Investor Relations page of our corporate website. Our discussion will also include forward-looking statements. These statements are not statements of historical fact, reflect our current expectations, and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed.

There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement except as required by applicable law. Please refer to our earnings release and our other SEC filings for further discussion on Spruce Power Holding Corporation's risk factors and other important information regarding our forward-looking statements. All comments made during today's call are subject to that safe harbor statement. With that, I will turn it over to Chris.

Speaker 2

Thanks, Scott, and hello everyone. Spruce reported a 48% increase in revenue compared to the year earlier period and a 71% year-over-year growth in operating EBITDA. These results primarily reflect the positive impact of the November 2024 acquisition of approximately 9,800 rooftop assets from NJR Resources, as well as a sizable growth in solar renewable energy credits, or SREC revenue. In addition, our core operating expenses, which includes both SG&A and operations and maintenance, or O&M, was $17.2 million in the aggregate, down 19% from the year earlier period. Our balance sheet remains robust with over $90 million in cash, the majority of which is unrestricted. We intend to couple continued growth and scale in our portfolio of solar installations with prudent cost containment to achieve our goal of generating positive free cash flow.

I want to be absolutely clear that there is no objective more important to Spruce Power than quickly reaching positive free cash flow. All our strategic actions support this objective. I will now provide our perspective on the residential solar market. Challenges in the sector, particularly among certain installers, are well known. In addition, recent policy changes in Washington, D.C. are eliminating some residential solar energy tax credits, such as 25D. Further, safe harbor specific to residential solar is being phased out. These changes are expected to negatively impact cash loan deals and larger projects in the residential solar space. We believe that some legacy players will not be able to adapt to this changing environment. Already, some are failing, while others are attempting to transition to a different business model. Fortunately, Spruce's resilient business model is fundamentally different.

We are not dependent on aggressive new customer acquisition strategies, externally financed working capital, or continuous growth in new installations. In contrast to those installers, our fixed costs are low, so we are not hostage to the origination treadmill. Moreover, our business does not depend on IRA tax credits. Spruce's model is designed to maximize the value of existing solar assets through operational efficiencies, maintenance, and superior asset management. Today, we own and manage a portfolio of approximately 85,000 home solar assets and customer contracts. We also provide servicing to roughly 60,000 residential solar systems owned by others. As a third-party owner, we buy systems after installation and after any tax credit has been monetized. The installations we acquire generate stable, long-term contracted cash flows. Simply put, our differentiated model does not bear the same risks as the installer model.

Now, let me offer context on our market penetration and capacity for growth, independent of market conditions. According to a May 2025 analysis from the Solar Energy Industries Association, or SEIA, there are over 5 million solar installations in the United States. 97% of these U.S. solar installations are on residential rooftops. If residential solar installation growth slows meaningfully due to recent policy changes, Spruce Power Holding Corporation still has significant room to grow. Again, we currently have approximately 145,000 systems in contracts. Our portfolio size is small relative to the addressable market, so we can continue to grow whether new installations are growing or not. Some of the old guard industry players become dependent on tax credits and were not ready for this inflection point. We believe more legacy players may fade or exit.

However, others are already operating with revamped business models and should be able to originate new solar installations without the crutch of government subsidies. To be clear, we do not believe the solar industry has peaked. The need for power, especially distributed generation, is significant and increasing in the U.S. Individuals and companies are experiencing higher costs as rates rise, driven by load growth from data centers, the electrification of everything, and reshoring industrials. This underscores the need for an all-of-the-above energy strategy. Spiking power demand, rising utility rates, and a narrowing pathway for viability producing new solar benefits to a third-party owner or TPO channel. We expect an accelerated shift toward leases and PPA anchored by the 48E tax credit through 2027.

With some of the regulatory uncertainty behind us, Spruce Power Holding Corporation is executing a multipronged strategy of scaling through the acquisitions of installed systems, programmatic offtake partnerships, and expanding our Spruce Pro servicing business. The first revenue I will discuss is opportunistic M&A. This is when Spruce Power Holding Corporation acquires portfolios of installed systems, then sells additional services, and leverages strategic partnerships to drive profitable expansion. We can command a higher return on opportunistic acquisitions because of our M&A expertise, cash discipline, relationship with underwriters, and low servicing costs. These advantages, coupled with a limited pool of potential buyers, enable us to be selective and only pursue agreements that meet our deal terms and density objectives. The NJR acquisition that I mentioned earlier is the most recent example of this type of transaction.

We anticipate that this market will continue to reward Spruce Power Holding Corporation as some installers seek to recycle their capital or recognize that they do not have the expertise or resources to efficiently manage all their systems. Indeed, we have seen the bid-ask spread narrow considerably over the course of 2025. In addition, some interesting assets could become distressed as the industry transitions following the elimination of certain IRA tax credits. This could lead to a renewed urgency to complete new TPO deals before the end of 2027. I also want to spotlight how we maximize value from the installations we acquire. The NJR acquisition, for example, included a large number of New Jersey SRECs. Last month, Spruce Power Holding Corporation entered into a multi-year agreement to sell the company's production of SRECs in the state of New Jersey to an energy sector conglomerate.

The transaction is expected to generate approximately $10 million in fully hedged revenue for Spruce Power Holding Corporation through 2029. This partnership is part of a broader Spruce Power Holding Corporation initiative to leverage the company's platform and experience to capture the benefits of our SRECs as a low-cost, low-risk opportunity to generate capital-light, high-margin cash flow for Spruce Power Holding Corporation. This transaction is another example of Spruce Power Holding Corporation's expertise in maximizing value from our assets while hedging against future price movements. The forward contract provides an important ongoing hedged revenue stream and reinforces the dependability of Spruce Power Holding Corporation's cash flow generation. We anticipate similar opportunities may be available to Spruce Power Holding Corporation in certain northeastern states, as well as California, which we are actively pursuing. The second revenue driver is programmatic offtake.

As we work to secure our first programmatic agreement, our expectations for this strategy as a de-risked revenue driver are high. With programmatic offtake, we seek to acquire or potentially service newly installed systems on an ongoing basis as our partners complete them. These partners may include home builders as well as legacy solar originators that are pivoting into TPO ownership, leases, and PPAs. We anticipate that our future programmatic partners will take the risk of getting systems through construction to operational status, and only then will we buy or begin servicing these nearly new installations at an agreed-upon price. Partnership opportunities slowed as many paused for decisions on the budget bill and IRA tax credits. We are seeing re-engagement now. Some originators have been revamping their business model in recent years to eliminate dependency on IRA tax credits and are poised to deliver growth without any government support.

We are far advanced in the partnering process with those pioneers. We believe that when we deploy our programmatic offtake initiative, Spruce will ultimately generate double-digit IRRs as we acquire a steady number of new installations each month. The third and final primary revenue driver is Spruce Pro, our third-party solar servicing platform. For this channel, we leverage the company's decade-plus experience in management of our wholly owned residential solar assets to offer a suite of services that can be tailored for third-party owners of distributed generation assets. Customers are leveraging our experience to maximize productivity, uptime, and efficiency in areas such as financial asset management, billing and collections, asset operations, accounting services, homeowner support, IT support and implementation, and SREC management.

We have a defined and growing pipeline of potential Spruce Pro partners that include traditional residential solar players, large owners of solar installations, developers, private equity, and numerous mid-size and local companies that own residential and commercial and industrial or CNI solar sites. Potential scope ranges from full ROP servicing to contact center piecemeal O&M, billing and collections, harvesting SRECs, or some combination. While each of these third-party agreements will be customized, we are confident the company can source other partnerships like ADT Solar. This is a durable competitive advantage for Spruce, and we are benefiting from investments the company has already made. We are delivering capital-like growth through this initiative and are proud to have generated new wins, including a full-scope deal servicing a group of systems in San Diego that could potentially also include SREC monetization.

Importantly for us and our shareholders, Spruce Pro is unlevered, and there will be no debt financing associated with these agreements. We are talking with asset owners and investors that are concerned about the viability of their current servicing provider, prefer to stick to their core business and recycle capital rather than attempt to service installations, or recently made a purchase and do not yet have a service partner. In addition to becoming a primary service provider, we also see opportunities to provide backup servicing to entities who may not yet need our primary capabilities. Spruce's strong reputation is opening these doors for us. This is a difficult business, and most do not have the platform or experience to service successfully. Our pipeline drove our decision to hire two new professionals to support the Spruce Pro initiative.

While our investments in revenue drivers have weighed on near-term profitability, we are confident that they will position us to cost-effectively participate in the largest and fastest growing parts of the residential solar market. Further, I want to reiterate that the revenue and cash flows generated by the installations we already own and service remain highly predictable regardless of conditions in the residential solar sector or changes to the IRA. We are confident in our ability to identify, structure, and execute new agreements that add shareholder value. Next, let's discuss our second key initiative: cost containment. We are proud to report that our cash burn during the period was reduced, and if not for one-time non-operational expenses, we would have generated cash from operations in the second quarter.

Down the P&L, we drove a sequential decrease in operations and maintenance expenses for the second consecutive quarter, reversing earlier-than-expected O&M that began in 2024. We experienced the benefits of prior investments in technology and revamped our strategy to more efficiently evaluate and route service calls from customers. We right-sized inventory on our trucks and appropriately managed to the customer contracts in the most cost-effective manner possible, both resulting in lower third-party contractor spend. The platform and methodical operational strategy we implemented in late February has produced thoughtful system issues management and is gaining ground. We believe these improvements are sustainable and will continue to levelize O&M expense as 2025 progresses. In addition, we are making operational enhancements through strategic sourcing and procurement and better vendor management. The company also successfully launched a new CRM platform at the end of June.

This tool will help us better manage customer interactions and drive efficiency across the organization. We believe these collective efforts will support cost containment and margin expansion in 2025, transitioning the business toward a more sustainable model with the financial resources and liquidity needed to support our longer-term strategy. Before concluding, I want to highlight that we do not need to refinance any of the non-recourse debt associated with our portfolios in 2025. With that said, the lines of communication are open with creditors, and we continue to receive feedback that we can roll over our first debt maturity associated with our SP1 portfolio due in April 2026 on like-for-like terms if we choose to proceed.

In addition, we have identified additional potential credit options that could be more favorable, although those other options and our ability to roll financing on a like-for-like basis will be subject to ongoing developments in the financing markets. Finally, taking a step back, we are motivated by the progress we are making as we execute our strategy and realize our vision. The revenue opportunities we are pursuing and the operational improvements we are driving will support efforts to deliver a combination of performance flexibility and value that is compelling to customers, partners, creditors, investors, and other key stakeholders. With more certainty in the market, participants can plan accordingly. Customers and partners recognize that Spruce is a mature industry leader and low-cost service provider with an established and highly functioning portfolio management and service offering.

We are well positioned as the market sees more players seeking solar TPO deals, both PPA and lease, as individuals and companies take energy matters into their own hands in the face of escalating rates. Next, I'll pass it over to Tom Cimino, who will provide a detailed review of our financial results and outlook. This will be Tom's first quarter serving as CFO at Spruce. As a brief background, Tom was appointed Interim Chief Financial Officer of Spruce in June. He has significant experience as a senior-level finance executive. Tom's past experiences include serving as Chief Financial Officer at Vantage Drilling International and AEI Services and Executive Vice President of Finance and Administration for Infragen. Earlier in his career, he worked at the U.S. Securities and Exchange Commission, was a director in PricewaterhouseCoopers' Global Capital Markets Group. He began in public accounting with KPMG.

At Spruce, Tom will focus on maximizing operational efficiencies and executing growth strategies. Tom, can you please provide our financial summary?

Speaker 3

Thanks, Chris, and good afternoon, everyone. I'm excited to join Spruce's team and leverage my experience to support the creation of shareholder value in these changing times for the market. I will start by providing detail on the company's second quarter financial results and the progress we're making to strengthen our financial position and enhance our operational efficiency. Second quarter revenue was $33.2 million, up from $23.8 million in the first quarter and $22.5 million in the prior year period. The 48% increase from the prior year period is primarily attributable to the NJR acquisition and resulting SREC-related revenue. Second quarter core operating expense, which we define as SG&A and O&M, was $17.2 million in total. This is down from $18 million in the previous quarter and $21.2 million in the prior year period.

We are very pleased but not content with this 19% decline in our core operating expense from the prior year period. Breaking this out, our O&M expense was $2.1 million in the second quarter, down from $3.9 million in the first quarter and $4.5 million in the prior year period. This represents an annual decline of 52%. SG&A expense was $15.1 million in the second quarter, down from $16.7 million in the prior year period. However, when considering a one-time severance cost recorded in the prior year period, SG&A expense increased marginally due to the quarter driven by higher legal and other professional fees. Considering the above, Spruce generated a net loss attributable to stockholders of $3 million compared to a loss of $15.3 million in the previous quarter and a loss of $8.6 million in the prior year period. Moving to operating EBITDA.

As a reminder, we consider operating EBITDA a key metric in evaluating the company's financial performance, which is defined as adjusted EBITDA plus select items that represent material cash inflows from ongoing operations. Operating EBITDA was $24.6 million, up from $12.3 million in the first quarter and 71% higher compared to the $14.4 million in the prior year period. Again, this change was primarily attributable to the NJR acquisition, resulting in both higher lease revenue and higher SREC revenue. Our lower O&M expenses and an increase in PBIs, performance-based incentives, also contributed to the EBITDA increase for the quarter. Turning now to cash flows, we're also pleased with the improvement in our cash flows from operations. For the six-month period, we used $11.5 million in cash from operations.

However, when adjusting for the recurring proceeds from our SEMTA Master Lease Agreement and proceeds from the sale of solar energy systems, as well as a one-time legal settlement paid in the quarter, we generated $6.3 million in adjusted cash flow from operations during the period and $9.5 million for the quarter. While recognizing these improvements that Chris alluded to earlier, we are not content with the result and continue to focus on efficient operations and making cash generation a primary goal. Moving further down the cash flow statement, we generated cash of $8.3 million from investing activities, including the above-mentioned proceeds from the master lease and solar system sales. Regarding our financing activities, we used $15.5 million of cash, including $13.6 million for debt repayment and $1.8 million in share buybacks. Finally, let me close with a brief discussion on our capital and liquidity position.

At the end of the second quarter, total cash inclusive of unrestricted and restricted cash was approximately $90.5 million, $53.5 million of which was unrestricted versus $61.9 million at the end of the first quarter. Total debt principal was $717.1 million at the end of the second quarter, with a blended interest rate of 6.1%, including the impact of hedge instruments. Our debt principal is down from $730.6 million at the end of 2024. All debt consists of project finance loans that are non-recourse to the company itself. Non-recourse debt is incurred at the project level. At the end of the quarter, all of our floating rate debt instruments were materially hedged with interest rate swaps extending into the early 2030s. The hedge arrangements had a net mark-to-market value of approximately $13.9 million at the end of the quarter.

With that, thank you very much, and now let me turn the call back over to the operator.

Speaker 1

Thank you. As a reminder, please press star one on your telephone keypad to ask a question. It seems that we have no further questions. That is all the time that we have today. I will now turn it back over to Chris Hayes for concluding remarks.

Speaker 2

Thank you, Operator. Our focus in 2025 is on containing costs and scaling our platform, thereby driving improved financial performance and progressing toward generating positive cash flow. I hope you can join me as Spruce participates in the Canaccord Genuity Annual Growth Conference tomorrow. This will include a webcast central presentation that listeners can access via our website. The presentation is scheduled for 11:00 A.M. Eastern Time. In addition, on September 9th through 10th, Spruce management will host meetings with analysts and investors at RE Plus Renewable Energy Trade Show in Las Vegas. To schedule a meeting, please contact Spruce's Investor Relations team. Thank you for your interest in Spruce Power and for participating in our call today. We look forward to updating you again next quarter.

Speaker 1

This concludes today's conference. You may now disconnect your lines. Thank you.