Sunnova Energy International Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2024

There are 14 speakers on the call.

Operator

Good morning, and welcome to Sunnova's Third Quarter 2024 Earnings Conference Call. Today's call is being recorded, and we have allocated an hour for prepared remarks and Q and A.

Operator

At this time, I would like to turn the conference over to Rodney McMahan, Vice President, Investor Relations at Cenava. Thank you. Please go ahead.

Speaker 1

Thank you, operator. Before we begin, please note that during today's call, we will make forward looking statements that are subject to various risks and uncertainties as described in our slide presentation, earnings press release and our 2023 Form 10 ks. Please see those documents for additional information regarding those factors that may affect these forward looking statements. On the call today are John Berger, Sunnova's Chairman and Chief Executive Officer and Eric Williams, Executive Vice President and Chief Financial Officer. I will now turn the call over to John.

Speaker 1

Good morning, everyone, and thanks for joining us for today's call. I'll begin on Slide 4, speaking to a format that should, by now, look familiar. As we committed previously, increasing cash generation remains a top priority, underpinned by our commitment to work with our exceptional dealer and supplier network to serve our customers. And I am proud of the results our team is delivering related to these commitments. While the slide is familiar, you'll see that we added a commitment to serve our dealers and suppliers who often act as the face of Cinnova to our customers, touching on each commitment.

Speaker 1

We provide a best in class platform to support our partners. The software and services we offer our dealers and the level of service we provide our customers make Cinnova the most attractive platform for both dealers and equipment manufacturers. We remain keenly focused on growing our core adaptive energy customer base as we prioritize profitable growth through higher margins and credit quality of our maximizing customer count. Importantly, we've demonstrated that you can achieve both as through the 1st 9 months of 2024, we added 76,600 customers, of which nearly 80% or approximately 60,000 were solar customers. We are maximizing the asset level capital we generate, demonstrated by our success closing securitizations and tax capital commitments at significantly higher levels compared to last year.

Speaker 1

Tax capital, which includes both traditional tax equity and credit transfer funds, were up 100% year over year. We are successfully increasing our investment tax credit or ITC adder utilization, up significantly as we exited the Q3 and focused on a strong close to the year. Our industry leading decision to work with our dealers to originate all leases and PPAs after September 1 with domestic content is translating into meaningful cash flow, which I will explain in more detail later. And finally, we continue to drive cost efficiencies by rightsizing the organization with an emphasis on using technology and process redesigns. As you'll see in our results, since the end of 2023, we've made significant progress reducing our operations and maintenance expenses, while turning attention to G and A, which is now on a path to significant reductions as we enter the Q4 and position the business for 2025.

Speaker 1

Having recapped our priorities, the next few slides highlight our progress in more detail. Turning to Slide 5, we're mindful that integral to our goal of powering Energy Independence is a large network of dealers dedicated to the same. This network of entrepreneurs is the backbone of who we are and allows us to leverage industry leader expertise, managerial skills and knowledge of local markets to attract new customers. To ensure our dealers have the right tools to succeed, we strive to provide them with the best in class platform with a heavy focus on software and customer service. Giving our dealers the right tools and support helps us win together and allows us to focus on driving faster installations and service activations, which benefits our customers, our dealers and Sunnova.

Speaker 1

Importantly, accelerating the time from origination to placing a system in service is better for our customer and better for our working capital. Additionally, in the immediate term, we've been working with our dealer network to flip the work in progress or flip the width to further capture the domestic content adder on systems originated prior to our September 1 requirement for new originations and that are still pending install. I will discuss Flip the Whip in greater detail shortly. Turning to Slide 6, many of you have been following our industry for some time now and understand its seasonality and how we see the greatest demands on working capital during the Q3 as heavy summer customer originations increase dealer payments ahead of the funding we receive from our warehouse facilities and tax capital funding. This working capital seasonality is the primary driver for the reduction in unrestricted cash in the Q3.

Speaker 1

And even with record originations this summer, I'm pleased that we maintained an unrestricted cash balance of over $200,000,000 We entered the 4th quarter well positioned to return to positive cash generation during the period as we closed within the 1st full week of October a tax capital fund that provided an additional $35,000,000 at closing. We expect to generate at least an additional $69,000,000 of unrestricted cash this year, which will put us at or above our $100,000,000 cash generation target for 2024. Our expanded capital markets team is hard at work progressing additional securitizations and tax capital funds. Mindful of the importance of transitioning in service systems from our warehouse facilities to a long term fixed rate securitization, we closed a 4A2 private securitization this month and I look forward to closing an additional securitization, perhaps even 2, this quarter. Ultimately, several factors moving in tandem give us confidence in affirming our full year unrestricted cash build and the longer term outlook for the same.

Speaker 1

Specifically, these factors include a greater contribution from the domestic content adder, which significantly increased our weighted average ITC rate beginning in September when we instituted our domestic content dealer requirement for all new TPO originations Higher margin systems originated earlier in the year receiving permission to operate. Additional cost savings and efficiencies from our technology platform and scale and less working capital needed as we better align our growth spending with various tax capital and warehouse funding schedules. Affirming our full year and multi year cash guidance positions us well to address our upcoming debt maturities, which as Eric will discuss, we expect to include a combination of opportunistic paydowns and a regular way refinancing of any remaining, both of which we are currently discussing with our banking partners. We've included Slide 7 to underscore the basis of our confidence to achieve our cash generation targets, and we thought it important to highlight the multiyear trend that reflects the success of our stated priorities and action. Here we have focused on the seasonally relevant Q3 of each year and are showing the spread between customer agreements and incentives revenues and the change in unrestricted cash, excluding proceeds from the corporate capital we raised in each of the prior 3rd quarters.

Speaker 1

You can see that the change in unrestricted cash relative to the aforementioned revenue has progressed from a negative 5.8 times in the Q3 just 3 years ago to nearly at parity this quarter and based on our expectations and flexing to a positive net generation as we end the year with multiple levers available to achieve this outcome. Turning to Slide 8. By now you are well aware that a meaningful contributor to our cash generation forecast are the ITC adders, something we have prioritized throughout the year even going back to close tax equity funds to monetize their value retroactively, which sets us apart from others in our space. I'm proud of how our teams work together to stack that cash. And as we look ahead to areas of focus this quarter, I'll highlight 2 key initiatives I mentioned earlier.

Speaker 1

First, we have led the industry by working with our dealers to ensure that all lease and PPA systems originated beginning September 1 meet the eligibility requirements to qualify for domestic content. Doing so has significantly increased our weighted ITC rate on origination by 17% to 42.2% in October versus the average for July August, and we expect further increases as we round out the year, targeting a weighted average of approximately 45% in 20252026. You'll recall that each 1% increase in our weighted average ITC rate on a full year basis generates approximately $50,000,000 of additional cash. 2nd is flipping the WIP, whereby we add domestic content qualifying equipment to systems originated but not yet fully installed prior to our September 1 domestic content requirement. To date, we flipped systems worth $3,000,000 of additional cash to Sunnova.

Speaker 1

Rounding out my highlights of the progress we made towards our key commitments, Slide 9 shows the progress we've made to reduce our O and M and G and A expenses. Reflecting the benefit of scale amplified by our focus on process improvement and use of technology, we've reduced these expenses as a percent of revenue by 48% and 5%, respectively. We have additional reductions in the 4th quarter, some significant related to G and A, made evident on the graphs as you see these reductions increased to 65% 35%, respectively. The team is demonstrating that they can do more with less and I applaud the drive they bring to work each day. Turning to Slide 10 and before I turn the call over to Eric, I'd be remiss if I didn't take a moment to recognize that we're talking only days before an important election, one that has created some uncertainty around our industry, prompting many questions from our investors.

Speaker 1

You have asked me how a new administration on either side of the aisle would impact our current business and outlook. While we all see and feel the polarization, I focus on the reality more than the rhetoric. The reality is powering energy independence through the expansion of solar production enjoys bipartisan support on many levels. Investment in clean, efficient and reliable energy infrastructure that insulates consumers from electricity cost inflation is just one of the many benefits and one of which we can all agree. If we look specifically at the Inflation Reduction Act as a proxy for evaluating both parties' priorities, we see many of its key provisions appeal to both sides, whether it's the jobs it creates, the GDP growth it stimulates, the competition it provides to traditional utilities, its contribution to ever increasing demands for energy and importantly, clean energy, including that needed to power AI and data centers, improving reliability and modernizing our energy grid for the digital age.

Speaker 1

We can all agree these dynamics position Sunnova as part of a solution that both sides desire for our great country. With that, I'll turn it over to Eric. Thanks, John, and good morning, everyone. Having joined the Cinnova team only 4 months ago in June, I can say that I've learned a lot and done so alongside some outstanding professionals. As you reflect on John's comments and the materials we have shared prior to this call, my hope is that you'll see this year's hard work become the foundation of delivering on our outlook.

Speaker 1

Much of the heavy lifting is behind us, reflected in the pace of closing deals and our success capturing ITC adders, which demonstrates our transition is already largely complete. Our expanded and enhanced capital markets team can now execute more quickly and with better structures. It's worth highlighting that we've previously net consumed cash to the tune of approximately $1,000,000,000 each year, even after investing in financing activities. We have now positioned Sunnova to move beyond merely operating as cash neutral, instead providing credible visibility into significant, positive, unrestricted cash generation. I recognize the team's accomplishment is no small thing.

Speaker 1

That is the transition from consuming cash at a significant clip to becoming a cash neutral platform. Taking something that is cash neutral to cash positive often has less resistance. Having completed 10 debt financings this year and 4 tax equity financings with more in the pipeline, we have the tools we need to deliver on our 2025 and 2026 cash goals. You'll recall that last quarter, I affirmed one of my near term priorities is simplifying the way we articulate our business to current and potential stakeholders. A step in that direction, I'm sure you've noticed fewer adjusted GAAP numbers with a greater emphasis on the trends you can observe in our reported results.

Speaker 1

Having joined Cinnova from the oil and gas industry where non GAAP measures are heavily relied upon and where many have existed for decades with many companies harmonizing around their use, I am certainly not opposed to the concept of non GAAP, though I understand the importance of using discretion when defining such a measure. Accordingly, we sunset our use of adjusted EBITDA and adjusted OpEx, and I'll talk more about an alternative measure that I'm tracking as I continue to get thoughts to helpful ways to discuss our results and measure our performance. Before I dive deeper into that topic, I'll start on Slide 12 with a few highlights from our reported results. Starting with revenue, which at $235,000,000 is up nearly $16,000,000 or 7% sequentially and $37,000,000 or 19 percent year over year. Our interest income of nearly $40,000,000 rose 9% and 26% sequentially and year over year respectively.

Speaker 1

With a references on cash generation and debt repayment, we also show principal proceeds of nearly $44,000,000 which while they fell sequentially due to seasonality as customers sometimes use their tax refunds in the Q2 to make prepayments, we see a $3,000,000 or 7% year over year rise. Coming up, I'll mention our full year outlook for principal proceeds and the recent increase in prepayments, which you'll find we expect to be up year over year and trending higher. Not surprisingly, our revenues, interest income and principal payments are all thanks to the addition of 30% more customers and an increase in the gigawatts of solar power and megawatts of energy storage we manage that are up 25% and nearly 60%, respectively, on a year over year basis. As John mentioned earlier, we remain focused on growing our core adaptive energy customers, adding just over 20,000 such customers in the 3rd quarter, bringing our cumulative solar customer count up to 365,000. Factoring in these additions, we now manage 2.9 gigawatts of solar power and 15.56 megawatt hours of energy storage.

Speaker 1

Also quite impressive, we are nearing the 500,000 customer mark with our total customer count at just under 423,000. Finally, taking into consideration our current customer backlog and what we have placed in service in October, we expect the Q4 to see a significant step up in customer addition. As such, we continue to expect total gross customer additions for 2024 to fall within our guidance range of 110,000 to 120,000 customers albeit to the lower end of that range. I'm pleased with this outcome given our team's intentional emphasis on originating business with strong margin underpinned by strong credit quality. Now I'll turn back to my earlier point about revisiting our key performance metrics and our use of non GAAP measures.

Speaker 1

Recognizing that we constructed both adjusted EBITDA plus ITCs and adjusted OpEx to serve as measures that eliminated the value we create for our stakeholders, I felt it appropriate to look for an alternative, less adjusted way to convey the same point. Most importantly, the value we derive from the ITC that are not fully captured on our income statement. For those of you who found the prior performance measures useful, whether in full or in part, we provide in the appendix to our earnings slides all of the components we previously used to calculate both measures, so please use those that are most helpful to you. As a newcomer to the industry, I've sought to understand Cinnova's business relative to other market participants, looking for both similarities and differences. What I found was interesting.

Speaker 1

In simplistic terms, I've come to understand that firms like ours create value for shareholders in 3 ways. 1st, through the origination of financial paper, whether through securitizations or tax capital 2nd, through servicing solar and related assets and third, by retaining equity value in the long term cash generating assets we install and service for our customers. It's the latter that demonstrates John's vision of Sunnova competing with traditional utilities to provide energy independence for our customers. Essentially, ICB is the 3 legs of Sunnova's value proposition. I'm sure you're familiar with how we measure the value we create through originating financial paper, so this too is something I'm reviewing with an eye to enhance, which I'll talk about shortly and is implied as the implied spread between our fully burdened unlevered return less our weighted average cost of debt.

Speaker 1

Regarding the second, I'll share that as I was getting to know John during the interview process, I was struck by his conviction that Synovia is, at its core, a service company and not a financing company. Whether you acquire one of our systems through a lease or through a loan, we are committed to providing you reliable power. John's commitment to service is intrinsically linked to the upcoming third leg of our value story. Our team not only maintains our customer system, we also service systems for others at Cinnober Repair Services or SRS, which generates strong margins and leverages some of the fixed costs associated with retaining a dynamic group of uniquely skilled and talented service professionals. Moving to the 3rd value driver, the equity value we retain in the largely 25 to 35 year assets we install and service for our customers.

Speaker 1

Some peers in the sector choose to build their businesses less around this component as evidenced by their selling a larger portion of the asset's equity through further levering the underlying assets or outright selling their loans. Cenova has taken the approach of using the least expensive form of capital, which for a period was corporate debt, to invest in and retain meaningful ownership of these long term cash generative assets. But if you look at Synova's consolidated statements of redeemable mind controlling interest and equity, you'll see what we've summarized on Slide 13. Over the past 4 years from the Q3 of 2020, shortly after the company's IPO to this quarter, Synova's stockholder equity represented by the dark blue bar is up on absolute terms nearly 150%. And when adjusted for the common shares we've issued over this period of time, our stockholders' equity is up 80% per share from just under $8 to over $14 It's important to recognize that even as we report GAAP net losses through our consolidated statement of operations, something interesting is happening within equity where certain events such as the flip of tax equity partnerships, result in the transfer of value from redeemable non controlling interest, or RNCI, and non controlling interest, or NCI, into Synovus stockholders' equity.

Speaker 1

While for a period of time this long term value sits within the jointly owned tax equity partnerships classified as RNCI or NCI, importantly, Cenova had valuable interest in them as evidenced by the 2 case studies we've included on this slide as examples. In these instances, when the tax equity partnership flipped, Cinnova added a combined $110,000,000 or $0.90 per share to its stockholder equity. Importantly, under GAAP, this $110,000,000 of value transferred to Synovus shareholders as an addition to retained earnings or more specifically as a reduction to accumulated deficit never flows through our consolidated statement of operation. Yet, our accumulated deficit has fallen from approximately $500,000,000 in 2020 to just $1,500,000 as we closed the Q3. If you look at some of our peers in the space, you'll see the direction of travel is not only the inverse, but inverse in a meaningful way.

Speaker 1

I believe this differentiation made visible in our stockholders' equity demonstrates the investments we've made using a mix of asset level and corporate level debt have added significant long term value for our shareholders. We will realize that value through our retained equity ownership in the cash generating assets, which provides Cenova the opportunity in the future to deliver growth, yield or a mix of both for investors. Accordingly, I believe using the GAAP measure of total stockholders' equity per share is a useful one to highlight the value we create for our investors. As we interact over the coming weeks, I welcome your feedback and I will continue to reflect on this and other performance measures that I believe will help others understand and evaluate our business. I'll add that I'm keen to identify a useful measure focused on margins and our cost discipline, so please stay tuned as we potentially introduce additional measures in the future.

Speaker 1

Moving on to Slide 14. I mentioned earlier that while we saw a slight dip in the quarter over quarter principal proceeds, it's important to remember that the sequential change is affected by a seasonal increase in prepayment as customer use their tax refunds to reduce their loans in the Q2. Importantly, you can see our full year expectations of $190,000,000 exceed the full year of 2023 by 20%. While lease and power purchase agreement customers comprise over 90% of our current originations, as of September 30, 2024, Cenova's largely static loan portfolio exceeded $4,000,000,000 and includes more than $1,000,000,000 of amounts largely related to original issue discount. Catalysts like home sales, debt consolidation using home equity or simple refinancing as interest rates fall collectively unlock meaningful cash flow that reduces our debt.

Speaker 1

On this slide, we've included an illustrated prepayment to demonstrate how they enhance our cash flows, and the line graph highlights that in just the last 2 months, the recent 50 basis point interest rate cut acts as an inflection point where we now see a 20% increase in prepayment versus our forecast. We believe this trend could continue in a positive direction as we close out 2024 and look ahead to 2025. On Slide 15, I'd like to provide a quick update on our fully burdened unlevered return and implied spread. You can see our spread dissipated in the 3rd quarter as some of the tax equity we originated in the quarter priced lower than the last couple and our last couple of securitizations priced higher than those prior. However, you see a sharp improvement as we enter the Q4, thanks to several factors, including closing a private securitization that priced nicely inside of our last public deal, higher contributions from tax capital as we increase average utilization and our work to accelerate in service, as John mentioned earlier.

Speaker 1

Before I turn to guidance and having discussed the three legs of Cinnova's value story underpinned by our heightened emphasis on serving our dealers, customers injecting cash generation, I'd like to lean back to John's comments as they relate to how we're thinking about our 2026 corporate debt maturity. With confidence in our ability to grow our unrestricted cash balance through the drivers we've discussed enhanced by this significant prepayment opportunity, in the coming quarters we expect to use a combination of opportunistic debt repurchases and a regular rate refinancing of any remaining amount to address our upcoming maturities. To this end, having added new senior leaders to my capital markets team and being new to the company myself, we headed to New York last month where we met with our banking partners and began conversations aligned with this strategy. We are in the process of refreshing our corporate model with our 2025 budget and long range plan, and we look forward to working with them to achieve a great outcome. As I round out my prepared remarks, I'll turn to Slide 17, which we added in response to the request that many of you made of us, which we believe provides insight into and sensitivities to the assumptions that underpin our cash generation target.

Speaker 1

So I hope you find this useful. Ultimately, our progress driving ITC adders higher and doing so more quickly than expected, coupled with our high margin core customer focus, price increases and more efficient cost structure, position us to reiterate the cash guidance we shared last quarter, specifically unrestricted cash generation of $100,000,000 in 2024, dollars 350,000,000 in 2025 $400,000,000 in 20.25 $400,000,000 in 2026. On that positive note, I'll turn the call back to John for closing remarks. Thanks, Eric. In addition to everything we discuss today, it is important to remind everyone the current macro environment is prime for Sunnova to take market share and expand its footprint in a very underpenetrated industry.

Speaker 1

Power demand and utility costs are increasing. Equipment costs are declining. And catastrophic weather events, which expose the further abilities of the centralized grid, are driving demand for our energy service solutions. Our team continues to deliver outstanding service to our customer base, while remaining focused on our key priorities, improving to our investors our ability to increase our cash generation. I am confident in our ability to continue to execute on these priorities.

Speaker 1

We have made significant progress in our business, which has only been strengthened by the macroeconomic tailwinds that will bolster Sonova's industry leading adaptive energy services. With that, operator, please open the line for questions.

Operator

Thank And our first question goes to Philip Shen of Roth Capital Partners. Philip, please go ahead.

Speaker 2

First one is on domestic content. When you started to mandate domestic content originations, you also decided to keep all the value. When do you start to pass that domestic content on to or some of it on to some of your dealers and perhaps your homeowner customers as well? Some of the dealers that we've been in touch with have shared with us that they expect this could happen by year end, especially as competitors start to ramp up their domestic content offerings and they're sharing some of that benefit. What's your view of this overall?

Speaker 2

And if you do plan to pass along some of this domestic content value, how much could it be? And is the adder sharing fully factored into your cash generation projections for 2025 and 2006? Thanks.

Speaker 1

Hey, Phil, it's John. Thanks for the question. I think 1st and foremost, the OEMs, the manufacturer, our partners there, they have the 45x and that was part of the IRA that was going directly to set up and compensate for the higher cost of manufacturing in the United States. And to my knowledge, they have not shared that with any other part of the value chain. So I want to point that that's what the purpose of that was.

Speaker 1

And the equipment itself should not be of higher cost. And indeed, what we've seen across the board is increasingly equipment, whether it's domestically manufactured or not, is coming into roughly the same cost and we expect that trend to continue and to be a quite accelerated trend. The direct answer to your question is we focus on pricing to drive a balance between our growth and our cash generation. We like where that balance is right now. That pricing is dependent on multitude of variables, the quality of the customers that each dealer provides us, the local utility rates, as you know, have a big part in this.

Speaker 1

So some areas we may have to lower pricing to essentially gather market share there. I want to point out, I'm not aware that we're in the process of doing any of lowering the price at this point in time, however. And so there's a multitude of reasons that we may engage in so called price cuts. And we do those quite often as we negotiate on those variables. We are not going to focus on whether part of pricing comes out of 1 adder or another or the overall economics or the pricing that we set or anything else, it's all a price.

Speaker 1

And so we're quite focused on that. Then the other part or I think your last part of your question is, do we have that conservatism baked in? We've been very clear, very, very clear that we've had conservatism baked into 20252026. And indeed, you can look at the cash flows, levered cash flows, for instance, in 2024. And then we did not have much baked in, in terms of flipping the whip or prior to 9.1.

Speaker 1

And we've had a great deal of success, as we pointed out, both in achieving the domestic content. Our sales have been good, the best in the company's history over the last few months. And so we feel very comfortable with where we sit right now versus the expectations that we put in or the guidance we put in on cash generation. And in fact, you'll notice the CapEx, we dropped it down pretty meaningfully. The associated leverage cash flows did not drop accordingly or anywhere close to it.

Speaker 1

And we still maintained our cash guidance. So that told you that we had a lot of conservatism built in, we still do. And so it gives us the flexibility should we need it to be able to modify pricing where that makes sense.

Speaker 2

Great. Thanks, John. Appreciate that. Shifting to the next question on market share. At the end of your prepared remarks, you talked about being primed to take share.

Speaker 2

That said, we've written a fair amount about how some of your dealers, mostly small, but not all small dealers, maybe moving away. So some might be moving away from the platform for a variety of reasons, including the mandate to domestic content, meaning it's been tough for some of these guys. And also the elongated payment terms, what's your latest view on this dynamic? I know we've talked about this in the past, but do you think you've adequately and fully accounted for this in your cash outlook? And what is the plan or sorry, what is the risk you could lose more volume than you had planned?

Speaker 2

Thanks.

Speaker 1

Yes, that's always a risk that we have a balance that doesn't balance out the way we want to. That's it's the business itself. And it's something that I'm very used to dealing with as my management team is as well over the last over a decade. And so that's really nothing new. Again, focusing just on one adder and one piece of the investment tax credit, I think is a huge mistake.

Speaker 1

1, regardless of any party or whatever happens on Tuesday, both parties, the only thing they can agree on is domestic manufacturing, right? And so that's going to take place no matter what. And we're seeing where the IRAs actually had very good success with bringing domestic manufacturing into our industry and we're very pleased about that. The fact that we were a little bit ahead of folks and led the industry is nothing new. We lead the industry quite frequently as you know, Phil.

Speaker 1

And so we see a lot of folks getting on board with domestic content. In fact, over the next 2 weeks, we see a lot of manufacturing equipment that's going to be available to us and we've already had a lot already available to us and our dealers. So we see quite a bit of progress in all this front. So I think that sort of pain point of finding domestic content equipment and so forth that people purport is going to fade very, very quickly here in a matter of days weeks. We're confident in that.

Speaker 1

And we're not really seeing that a lot of problem with getting domestic content equipment. When you look at the overall dealer onboarding, we're very comfortable with where we sit right now. We're always looking for better folks to join us. The best in the industry is a better way of putting it. But we haven't really added any dealers, as you know.

Speaker 1

We're pretty comfortable. Quite candidly, I was very open about a risk of moving here over the last few months on the Q2 call. And we didn't see a lot of the risk come forth in terms of the negative fallout. So we like where we are. If things change, then we'll make changes based on that.

Speaker 1

But again, we've been very conservative in our forecast. So we're comfortable with where we sit. Hey, Phil. This is Aaron. I'd just add.

Speaker 1

One of the reasons that we added that slide about winning together is that if you step back and you look at this more holistically, it really is about the overall value proposition that Cenova provides its dealers. And yes, I had a chance to meet many of those key dealers at the RE Plus and understand the nature of the relationship and the positive way that Michael's team manages that. But we do have a unique platform and offer them a tremendous set of tools and technologies to win in their business. And so it isn't just about price, it really is about the big picture. So hopefully we've eliminated that and I think John hit the nail on the head.

Speaker 1

This is dynamic, we're watching closely by market and we'll respond as we need to.

Speaker 2

Great. Thank you, Eric. Thank you, John. I'll pass it on.

Operator

Thank you. The next question goes to Julien Dumoulin Smith of Jefferies. Julien, please go ahead.

Speaker 3

Hey, good morning team. Thank you guys very much. I appreciate it. Just starting on the cash, cash balance, obviously, you guys spent a bunch of time on this, but let's just talk about the progress year to date here inclusive in 4Q towards that $100,000,000 bogey here for full year. Where do you stand even quarter to date against that given the private placement you guys announced here?

Speaker 3

A, and then B, what kind of sizing do you expect for the future private placement? Just to try to set some bogeys around what we should expect as we see these things in the future. And then ultimately, can you talk about the advantages or merits of pursuing these private deals versus the traditional structures you've been pursuing in terms of coupon terms? What kind of flexibility does it afford you, etcetera?

Speaker 1

Before you to answer that, Eric, just want to Julian, this is John. Just say, look, we're doing private and public. We didn't make it clear either way which type of transactions we would do for the balance of the quarter. But, Eric? Yes.

Speaker 1

No, we've obviously we're off to a really good start in the Q4. You saw that we talked about closing a tax equity fund just after the end. Obviously, I'd love to have had that $35,000,000 sitting on top of the $45,000,000 cash and net cash you used for the quarter because we would have basically been a parody and I think that optic would have been ideal. But I'll tell you that the party that we closed out with is a party that is very interested in building a long building a long term relationship and will provide tremendous capacity. We're already at work on a 2025 fund with that party, which gives us real momentum going into the 4th quarter since we had that first draw closing out the year.

Speaker 1

And we have another fund behind that. But we're not just focused on the tax equity side of the equation. The team, as we mentioned, is working on the next securitization that will be a Puerto Rican only securitization as we close out the facility. That, I think you may have seen the 15 gs go out, and we're still evaluating whether we'll make that private or public just based on getting optimal terms. We're being extremely nimble.

Speaker 1

And part of that, executing on multiple fronts, I mentioned building out the capital markets team, bringing new talent in. They're quickly coming up to speed and not surprisingly hitting a lot of cylinders on a lot of fronts, whether it be tax equity, the securitizations, or looking at the corporate refinance that we talked about. With respect to public or private, one of the reasons that we did the last one private and it was $310,000,000 essentially of value was that we had put over $1,000,000,000 away in the first half of the year into the public space. We're working to expand our distribution so that

Speaker 4

we don't tend to fill up the pockets of those that

Speaker 1

are that have traditionally looked at our deals. But But candidly, we got better pricing, which is a little counterintuitive to go private. That was a reverse inquiry from parties that had looked at our public deals and candidly wanted larger pieces to justify allocating the internal resources. It was we were looking at doing that with a single party and and split it and did it with 2 parties. The nice thing there is that both parties have the opportunity to upsize in a meaningful way as we look at the next deal.

Speaker 1

So we'll have the optionality to go back out public, or we could pivot back to the private and just make sure that we're maximizing the value to us and reducing our cost of capital. So it was great to see that the directionality of the spread tighten as we close out the last securitization. So that hopefully gives you a little bit of color as to how we're positioned heading into the around the year.

Speaker 3

Got it. Okay. Fair enough. And then just regular way refinancing, just to come back to the cap allocation question here. I mean, just how

Speaker 2

what did you intend by

Speaker 3

that comment? Just super quick as a follow-up here, if you don't mind. And what do you want to do about the Convertech? Are you actively standing there?

Speaker 1

Yeah. Well, obviously, we are absolutely looking hard at the best options for 2026. Yeah, it's still I recognize that many feel there's a greater sense of urgency on this. I joined the company 4 months ago building out a team in the midst of a really interesting time for the industry with the adders coming online. The best hand you can play with respect to navigating a pay down or refinance or a combination of the 2 is to demonstrate that you can execute on the plan that you put forward.

Speaker 1

And so we're in the process we have been in the process of refining that, that you've seen in the last two quarters' worth of slides. And in parallel, ramping up conversations with our ordinary course banks. So that was part of the purpose going to New York. We've had that conversation or that dialogue open. We're expanding that to include the banks that know us well and banks you've seen transact in our corporate debt before to make sure that we're thoughtful in the way that we approach it.

Speaker 1

So stepping back, obviously, the best way to begin those conversations is making sure that you have really tight models and tight numbers to demonstrate where we're going. So it may feel like early innings, but in my view, having a year before we're even talking about current and having now 2 quarters of demonstrated ability to tap into these, the adders, the optimized cost structure, the resiliency in our price and maintaining margins all gives us the backdrop that we need to do this in just ordinary course and not need to get creative or punitive to any of our existing holders. And Eric, I would add to that. You made mention about the book value of the equity is looking at metric. And Julian, keep in mind, we have this corporate debt for a reason and that is $18,800,000,000 of nominal contracted cash flow.

Speaker 1

So that's no extension value or anything else. That's why we are allowed to issue the bonds. And as that continues to increase, I think it's over $1,000,000,000 increase from the Q2 call, That gives us more and more and a capability of going back in and having a much easier conversation with the issuances of the new bonds to refinance both the 26s and 28s. So time is on our side with regards to building up that base of cash flow, which quite candidly a lot of folks tend to forget that that was the reason why we were able to issue in the 1st place. It was not necessarily the cash generation that we talk about, the $850,000,000 on the use of adders and cost savings and such.

Speaker 3

Thank you.

Operator

Thank you. The next question goes to Brian Lee of Goldman Sachs. Brian, please go ahead.

Speaker 5

Hey, guys. Good morning. Thanks for taking the questions. I actually wanted to focus a little bit on this key slide you guys provide every quarter, which is great, Slide 17, some of the assumptions here. So I guess, first off, the advance rate here, you're talking about an assumption of 75% in 2025% and 26%, which that seems reasonable.

Speaker 5

But if we look at recent precedent, I think it's been trending more like 70%. And I think on an earlier slide where you Eric showed off some of the OID math and prepayment math, you're also using a 70% baseline. So question would be, how comfortable are you with the 75% like what are you seeing in the marketplace? And then also what would be kind of the delta in terms of cash if it was 70 versus 75? Just trying to kind of stress test how this plays into the cash views here.

Speaker 1

Yes, it's a good question. And you're right, if you looked back at 24.2%, that one, the advance rate was just south of 75%, but that was an unusual transaction for us and whereas our traditional had been 75% or better. And that was because it had some unique laterals. We closed out some assets that were part of the Helios program that we didn't fit into that securitization so that we included those. But that was I would not consider typical of our deal.

Speaker 1

If you looked at the deal that we just closed privately, that was a 76% advance rate and we actually went got that done on an A and a BBB- as opposed to an A BBB Flat. And so we certainly see this as very achievable as we continue to move forward and think that I have to go back and look at the sensitivities, but that's not one that I'm worried about.

Speaker 3

Okay. Fair enough. We'll follow-up offline. Yeah.

Speaker 1

We the sensitivity is is on the slide. You can actually see the advanced rate sensitivity on the the margin of the slide. That was $35,000,000 for each 1%.

Speaker 5

Okay. Awesome. Awesome. And then, I guess on this, the gross customer additions, I mean, I suppose you maybe provide a range, historically you've always provided a range, but you got this spot 127 ks view here initially. I guess, can you give us a sense of mix that you're assuming on the 127,000 new additions for 2025 and how that compares to the 110 to 120 you have for current guidance on $24,000,000

Speaker 1

Yes, this is John, Brian. Roughly, it's about a 15% increase, if my math is correct, on the year over year of what we expect to do this year and what we expect the $127,000,000 next year. I want to say roughly about 10%, maybe somewhat maybe a little bit north of that is service only customers and then the rest would be some form of solar and such. Please keep in mind that we don't count as we do upsells of batteries and increasingly other equipment to enhance our service offerings or even additional systems, which is something we do now quite frequently. So a single customer would have 2 contracts.

Speaker 1

That still counts as one customer for us. I know that's different for others. And so this is one of the reasons you're seeing the capacity measured in kilowatts per customer and the battery amount the kilowatt hours move up on a per customer basis quite meaningfully. And therefore, the CapEx per customer is moving up quite meaningfully. There are markets, in fact, like such as Florida that we're regularly seeing $60,000 to $70,000 EPC per customer at this point, which is just a single contract, let alone additional upsells.

Speaker 1

So we see quite more of a focus and I think the Street has looked at more of a focus on cash generation and overall CapEx in that trend rather than on account basis. And so we just felt like it would just put a single number, we'll refine it. But more importantly, we still see growth ahead of us. And again, the last few months have been record origination months in the company's history.

Speaker 5

Awesome. Appreciate that color. Last one for me again just on this slide. You alluded to this John in your remarks, but I might have missed the explanation. There's a pretty meaningful step down in the EPC costs, almost like $1,000,000,000 a year versus the assumptions you laid out last quarter for $25,000,000 and $26,000,000 Is that just a reflection of more moderate growth scenario than you were thinking 3 months ago?

Speaker 5

Is that cost optimization? I mean, it looks like the proceeds from that tax equity and recourse debt are also down correspondingly. So it seems like it's more of a growth thing, but could you kind of walk us through the drivers behind the significant reduction there? Thanks.

Speaker 1

Yes. Again, we're optimizing for cash generation. So when we look at where do we all things being equal, we'd love to expand less on CapEx even with corresponding sources of that CapEx and coming in the door. And so we've been working to optimize the cash generation forecast that we laid out. So next year, dollars 350,000,000 for instance.

Speaker 1

And this is where we again, I mentioned earlier in answering Phil's question, we've been very conservative and we still are conservative, but we were able to dial that in a little better and see a better balance. I will also add that less CapEx is less consumption of working capital and that's pretty dear in the marketplace and has been for a while as you know. So this is all in is a good news story.

Speaker 5

All right. Thanks guys. I'll pass it on. Thank you.

Operator

Thank you. The next question goes to Andrew Piccoco of Morgan Stanley. Andrew, please go ahead.

Speaker 6

Great. Thanks so much for taking the question this morning. I wanted to start out with just the cadence of cash flow. Obviously, to get to your full year number for 2024 pretty weighted towards the Q4. I know there's typically seasonality in working capital.

Speaker 6

There's been some seasonality and timing related issues around some of the tax transfer closings. I guess as we look out to 2025, should we be expecting a similar cadence in terms of seasonality to get to the $350,000,000 of cash generation? Or are there things that you're doing internally, either working with dealers or maybe being more consistent with some of your tax partners to smooth out the seasonality and the cadence of cash generation?

Speaker 1

I'll try to answer it and then Eric can correct me. Yes is the answer. You should expect that the same seasonality occurs every year as for 12 years. And then secondly though, this has been that seasonality has been accentuated by the adders. So that would level things out a bit for next year.

Speaker 1

But Eric? Yes. I think it's right. The only other thing I'd say is if you look at the theme this year, it's been a reacceleration of our capital markets team and the work we're doing. We're going to carry that momentum into next year, and we're going to stay not only on time, but we're going to get ahead of ourselves with respect to standing up tax equity funds.

Speaker 1

So that rather than waiting on the fund to open to grab that first tranche, they can be significant working capital. We're going to have funds waiting for those systems to go in that first tranche. That will help to mitigate any of the seasonality noise. So it will always be there. We want to see strong growth in the Q3, but I think we can do better in responding to that.

Speaker 1

And then just keeping a healthy cadence within our securitizations so that the market I think that will improve our pricing if we're thoughtful as to how we're filling the capacity, get cadence there, broaden the distribution and make sure that we are optimizing the size of each to get best pricing. So but ultimately, if we can keep the rhythm right in capital markets, we should be able to do a lot to mitigate some of the seasonality on cash flow.

Speaker 6

Okay. That's super helpful. Appreciate that. And then maybe just to come back to the refinancing point and capital allocation.

Speaker 7

Last quarter, John,

Speaker 6

it sounded like you're pretty firm on wanting to pay down in cash. This quarter seems like a little bit more open to going with some at least the mix of refinancing and paying down in cash. Has something changed either in the market or just internally in terms of how you guys are thinking about that capital allocation?

Speaker 1

I'll answer since that was directed at me and then I'm going to turn it over to the CFO here. The answer is no, nothing's changed, full stop. It's still the same strategy. Let's get our deals done. Let's get the adders in there.

Speaker 1

Let's demonstrate that. And then let's go to our banking partners who we've not engaged anybody, be very clear about it on corporate debt at all. And when you look at what our options are, we're going to tend to go very hard in terms of a trend towards a debt instrument at the corporate level minus whatever we can pay down. So obviously the equity is extremely undervalued from our perspective and Eric laid out another compelling GAAP based metric to show that with book value. And so that's something that we're focused on, but that again is not a change.

Speaker 1

So I think there's some misperceptions maybe previously about some things from some folks out there. But right what we want to do is continue to execute, generate the cash, prove that out, go to market, pay down what we can pay down and have it make sense and do the rest in debt. Meanwhile, again, we've been growing this nominal contracted cash base that the debt holders when they first got in looked at in the 1st place and now it's $18,800,000,000 and it keeps climbing roughly $1,000,000,000 a quarter. So that's my answer on it. Eric, anything I left out?

Speaker 1

Yes. No, it's a great question and one that we should answer a little bit more clearly. If you look at the slide that we've had out there that was a refresh from last quarter where we showed the 3 year cash bill, you know, 313 going to nearly 700,000,000, and then topping out at 1,100,000,000 that that matches our debt stack. Sure. The the idea is to show that if if the optimal path forward was a full pay down, and we chose to to completely remain undelivered, in 2026 on that that piece of the the maturity, we could do that.

Speaker 1

But that would necessitate the debt going current, in a meaningful way, dollars half a $1,000,000,000 ish going current. And I don't think anyone in the market space expects to see that. So what we've said is a point of clarification here is that as we build the cash, rounding out this year and or next year with strong momentum and expecting to build another $350,000,000 plus, then we'll be opportunistic. You've seen the obviously, the debt price higher as people are more confident in that cash build. But if there are opportunities to buy at a price that makes sense to take that number down along the path to the refinance that I think is going to make more sense as we look at the overall cost of capital, then we'll certainly do that.

Speaker 1

That something tells me that when you demonstrate that you can buy it, generally, the price at which the party wants to sell it negates the desire to do that. But we're going to stay open to what creates the most value. But we do believe, for the reason John said, and having had a strong background in IR coming in, I think what I look forward to doing is trying to put together a visual that helps people understand what John's talking about. Having come from the oil and gas business, I think about the proved value of our reserves that are multi year and there's a debt stack associated with it. But you've got tremendous cash flow that are going to come from those wells that ultimately address that.

Speaker 1

And we can illuminate how this all fits together that you've got more than just the outer cash flow coming back. You've got tremendous underlying value in these multi decade systems. So we'll put that together and help crystallize exactly how we're thinking about the upcoming both pay downs opportunistically and in order to, of course, refinance.

Speaker 5

Great. Thanks guys.

Operator

Thank you. The next question go to Pavel Molchanov of Raymond James. Pavel, please go ahead.

Speaker 8

Yes. Thanks for taking the question. When I look at customer deployments, California got back to pre NEM 3.0 levels, almost 7,000. Is California actually back to premium 3.0 levels or is this just a one off quarter?

Speaker 1

Hey Pavel, it's John. Yes, no, it's not a one off quarter. I want to issue a caution that don't take us as for the market because we've been traditionally heavily underweighted in California as you well know. So, but we've experienced the market share pickup that was quite meaningful over the last few months. So we do expect that trend to continue.

Speaker 8

Okay. That's helpful. I mean, you also referenced in your prepared remarks the fact that utility rates keep going up in absorbently, regardless of what happens with natural gas, for example. Are you noticing demand for rooftop solar picking up in states that historically did not have supportive economics because of what utilities were charging there?

Speaker 1

Great question and the answer is yes. So I'll give you a couple of specifics. We're seeing pretty good demand, really, really strong demand in Florida, both on from a rate standpoint, but more on this on the reliability. And then in Texas, as we sit here in Houston, power rates have gone up meaningfully to say the least. And we see that trend 100% guaranteed to continue moving upwards, just giving all the spending that's needed in the growth here.

Speaker 1

So those are Coug II specific markets for you, but the answer to your question is yes.

Speaker 8

Thanks very much.

Operator

Thank you. The next question goes to Dylan Nossono of Wolfe Research. Dylan, please go ahead.

Speaker 1

Yes. Hey, good morning. I just wanted to touch a little bit more on the equipment front.

Speaker 4

Just I

Speaker 1

guess how much of a headwind or tailwind was equipment availability during the quarter to get to the domestic content mandate? Yes, this is John. I'd say that the equipment is more available than I think is discussed in the marketplace. And that meaningfully is the trend has changed to have more availability and lower pricing, I'll add almost weekly over the last really the last 3 months or so. And it's not in a linear fashion, which makes sense, right?

Speaker 1

Manufacturers have plans to put on bring on manufacturing plants and sometimes they don't always go on schedule, be off schedule 15 days, 30 days, 45 days. But we see quite a large amount of supply coming online here again and being delivered really. So it's already online being manufactured, being delivered in the field to our dealers by in the next 2 weeks as I mentioned. And so the outside there is the next 4 weeks. So we're seeing a meaningful pickup of that.

Speaker 1

Some of our suppliers have been there for years, our main supplier on the storage side of things. And so we really haven't seen a whole lot of problems there with regards to what our expectations were. And in fact, I would say, it would be fair to say, we've exceeded our expectations, both in the speed of which the domestic content equipment has gotten into the field. And then secondly, the pricing has not, in terms of moving up, has not moved up as much and certainly has not stuck in terms of the pricing moving back down to a non domestic. So we see the competition in the equipment market intensifying as we move forward and bringing further pressure on the equipment side of things, but also giving further margin to our dealers.

Speaker 1

Got it. Thank you. And then my follow-up is for Eric. So Eric, I noticed that net contracted customer value, that metric didn't really it wasn't really discussed in this discussion around key performance metrics. Just curious, did you identify kind of any inherent disadvantages to using that as a key metric?

Speaker 1

Or are you looking at potentially some other kind of metric to reflect that long term contracted value? No, it's I appreciate the question. I that was just pace of travel and pulling these together. I I hope you see it was a a pretty broad change in the way that we positioned. I love that that metric and and I'm I I should have gotten that in there, because I think it is incredibly valuable and something that we should be highlighting.

Speaker 1

So wise for that to come, we'll be adding some slides during the quarter because we're obviously ramping our debt to get out there and do the same thing on the debt side. And that's incredibly important. So there's tremendous analogy that if you all for those of you familiar with my background, coming from an oil and gas company that had 70,000 wells where asset retirement obligation was the equivalent of our corporate debt stack that sat in the investors' windshield and we get questions, how in the world are you going to address this big obligation? We would point to the value of our net proved reserves after you stripped off taxes, G and A and other and just show that there was compelling value. So I think we can do a lot to show that that NCCV is a compelling part of the story.

Speaker 1

So it was really just a pace issue in not getting that in, but I look forward to illuminating that.

Speaker 5

Thank you. Thank you.

Operator

Thank you. The next question goes to Amit Thakkar of BMO Capital Markets. Amit, please go ahead.

Speaker 9

Good morning. Thanks for sneaking me in. I appreciate, Eric, your comments earlier about, I guess, your decision to kind of either refinance or pay down debt will be kind of determined on kind of debt capital market conditions. But in terms of kind of running the business on a go forward basis, how much unrestricted cash should we kind of think about that you all need to kind of keep on the balance sheet anytime? And then I think the company used to target a debt to asset ratio of about 60%.

Speaker 9

And I don't think we've been down that low for several quarters now. Is the debt capacity

Speaker 4

for the business and you're a little bit higher maybe than it was in the past? And if so, what's the right kind of target range for that? Thanks.

Speaker 1

Yes. I think you're absolutely thinking about the debt to asset ratio correctly. So that's something that we are working towards for sure. Then on the working capital side, just simplistic math, if you think about being in that $3,500,000,000 to $4,000,000,000 origination range, do the math, that works out to around $80,000,000 $75,000,000 $80,000,000 per week. If you want to keep 4 to 5 weeks of just working capital prudently, that would be right around our year end exit rate, our exit level, in that $300,000,000 to $350,000,000 range.

Speaker 1

That's when I think we start getting really comfortable that we've got the excess capacity to start opportunistically looking at those debt buy ins over the course of the balance of the year. And so hopefully that makes clear where I sort of want the watermark to be. Thank you.

Speaker 2

Thank

Operator

you. Thank you. The next question goes to Puneet Satish of Wells Fargo. Puneet, please go ahead.

Speaker 10

Thanks. Good morning. Just maybe touching on O and M expenses, they've declined quite a bit as a percentage of revenue as you show in the slides. I guess 2 part question here. First is, our tax equity investors, are they starting to recognize these cost improvements in their fair market value calculations?

Speaker 10

Or is that yet to come? And then second, given the organizational changes and everything that you've made, what do you see as a sustainable long term O and M structure as a percentage of revenue? I think it's roughly 8% in the slides, but could it go lower than that over time?

Speaker 1

I'd like to stab at that and see if Eric has any other comments. So first of all, we've done, as you pointed out, a very good job of driving down the services cost overall as a percentage of revenue, but really we look at it as a per customer basis, it's gone down meaningfully. We still see meaningful opportunity there to drive the cost down. And again, I think you'll see that and coupled with more G and A cuts this quarter, so when we report the Q4. And then going into next year, I think you'll really like the year over year comparison starting again this quarter, as we move into next year with regards to spending whatever relative metric you want to use it as revenue per customer, etcetera.

Speaker 1

So we see a solid trend there with the expense reductions. In terms of the tax equity funds, that has more to do with the appraisals and such. And so I don't think that necessarily they take a look at other than the fact that they want to make sure that our MSA fees are appropriate for serving the customers and they are. I think we've been the most conservative, maybe coupled with one of our other competitors, most conservative in the industry, and certainly much more conservative than others out there. So it's something that, I think we've done a really good job on and other than that they have not had any questions on.

Speaker 1

Eric, anything to add? Yes. No, I think you're spot on. I'd point out, I talked a little bit about my background. Part of the reason I was excited to join was I looked at the management team that John had put in place that I'd get to work alongside with.

Speaker 1

And many of you all know Paul Matthews, who's our Chief Operating Officer. His background is UPS. I can't imagine a better individual looking at a cost structure than someone that comes from an organization that is focused on efficiency and running things on time is that. And so you've seen in a very short amount of time with Paul at the helm, a relentless focus on cost. That has rolled forward into the Q4.

Speaker 1

And it's not just we talked about rightsizing the workforce and that's part of it. But that's part of that is reducing where it's not adding the value that it's disproportionate value, but adding where there's pickup. So capital markets is where we put some additional heads. But yes, coming into the Q4, you'll see those efficiencies both from process redesign, leveraging technology and then getting the right bodies in the right place, driving not only O and M lower but G and A lower in a meaningful way. So very excited about the momentum that we have.

Speaker 10

Got it. No, that's helpful. And then maybe shifting gears, in prior calls, you've talked about kind of shifting the dealer payment structure to better align with the activation milestones. Can you help quantify maybe, 1, what percentage of your dealer network has transitioned to the new structure? Or what percent do you expect to transition?

Speaker 10

And then is there any way to quantify what kind of working capital benefit you could get under kind of the new versus the old structure? And then finally, is any of this in the cash generation guide for 2025? Or would this represent potential upside to the guide?

Speaker 1

This is John. I'll try my best to answer it. There's no rule of thumb that we've been able to come up with to say that in terms of the working capital usage drop. But it definitely moves the needle if you think about any point in time we have somewhere $1,500,000,000 to $2,500,000,000 spending on the season time of the year of backlog at cost. So the number is of meaning.

Speaker 1

When you look at 2025, is it baked in there? Probably not, not to the degree that we'll see how many dealers have moved over. We're not quite done with that. We're still working with some of them, but we do expect to move 100% to the changeover there. And again, one thing, this industry, it really I mean, it's very strange.

Speaker 1

Payments usually are on the short end 30 days. And the industry gotten to a point where it's trying to say that they could send money out within hours, which there's no safeguards whatsoever as far as where that money is going and where in terms of where it's getting what are you paying for? Is the job done right or not? So we got we never engaged in that, but we certainly had multiple times a week. That's just crazy.

Speaker 1

And these are jobs that take months, not even days to get done. So when you look at what we've done is really, I talked to other industries, they're quite shocked that they're even talking about paying much less than 30 days. So I just think there needs to be an overall reset here in terms

Speaker 4

of expectations. And we've seen that in the marketplace.

Speaker 1

And to have a industry. And we've certainly seen that our better dealers are all on board. They're like, this makes total sense. It keeps out the riffraff from the industry. So we're seeing good consideration and better capital management, which I know will give confidence to lenders, commercial banks and others to actually start putting more working capital back in the industry, which is this industry needs to, of course, grow and get back on a growth trajectory.

Speaker 1

Yes. And I'd just compliment that by saying, one, I think John is exactly right that this discipline will is working its way into the dealer network as well. That's just going to step up the service that the customer sees and feels. But the reason that we added slide 7 was to go, I think, more philosophically to your point. Like John said, it's difficult to quantify the exact contribution of the 4 priorities that we put on this slide.

Speaker 1

The low the lower right quadrant was the optimizing working capital. But just innocently, in in in all truth, if I were to pick the numbers that are probably the most relevant for this slide, rather than using revenue, I'd use originations because it really is driving to as you're originating business, what's happening to your net cash user generation. And you obviously want to see that even as you're growing, you're managing working capital to keep positive cash flow. But we used revenue because that tied the financials. It was a proxy for the same thing, just making the point as the business has grown, and you see revenue going from $60,000,000 to almost $200,000,000 so nearly triple as high.

Speaker 1

You've seen a tremendous contraction in the net use of of cash over that period of time. And and I asked myself, again, I'm reverse engineering an understanding of of what this engine does. How do we do that? And it wasn't the adders because the adders are new. The adders are helping us inflect to a strong positive position, but those are enhanced by the things that we've already been doing, which is focusing on margin over growth, making sure that we're pricing our business properly, that we're stewarding the resources that we have and managing our cost discipline, and optimizing cash flow, going back and saying, hey, let's do the simple math of making sure that our inflows and outflows are matched up.

Speaker 1

The aggregate of that, you can see is what the whole point of Slide 7 to show that we've done a great job in spite of growing the business and that EPC growth, managing cash in a much more prudent way. Got it. Thanks guys. Appreciate it.

Operator

Thank you. The next question goes to Chris Dendronos of RBC Capital Markets. Chris, please go ahead.

Speaker 7

Yes. Thanks for taking the question. I wanted to start here just on the prepayments and you highlighted that it's trending above forecast here. So maybe looking at 2025, what's the expectation for payment proceeds or I guess prepayments? And then how much I guess upside is that if this trend of prepayments kind of continues?

Speaker 1

Yeah. Thanks for asking. I need to go back and actually pull that specific number. You can see that we're rounding out this year a 20% increase over last year to nearly $200,000,000 I'd say trend to that about the same clip higher with a bias to going higher if we continue to see rate cuts because that will obviously compound the potential growth. But conservatively, we're just over that $200,000,000 mark.

Speaker 1

And we do see this as a tremendous opportunity. If rates stay higher, then you've obviously got tremendous catalysts that continue to keep customers focused on leases, and that comes with a tax added benefit. But if rates trended lower and we saw, even though I think the industry will will will really coalesce around the lease product for for many reasons, this embedded optionality within our loan portfolio unlocks as we see rates go lower. So it's a nice counterbalance. We didn't really factor that into the guidance slide.

Speaker 1

I'd say that's just one of the many conservative levers that John alluded to that we've included in our cash guidance. Yes, this is John. One thing I'll add to it is, remember that the driver of the prepayments is actually the home sale, the transaction. And so regardless of where the mortgage rates may or may not be, if at some point life events happen, you have to move. And we are now completing the 2nd year of a very abysmal existing home sales market.

Speaker 1

So at some point, the market's got to move up regardless of what happens. Maybe that's next year. We're certainly seeing signs of life as you can see because the prepayment rate is going up, but our loan book is actually not increasing very much at all. So that tells us that the overall rate is moving up meaningfully and probably and is highly likely as transactions picked up, maybe home prices come off, for instance, next year, then the prepayment speed will continue its upward trajectory, as Art said.

Speaker 7

Got it. And then maybe as a follow-up here, you highlighted this with the WIP and I think it was maybe $300,000,000 sorry, dollars 3,000,000 so far of proceeds from that. What's left to go? And does that go into next year? Or is this, I guess, maybe a strategy that kind of wraps up, year end just with the timing of originations and when you get those systems online?

Speaker 7

Thanks.

Speaker 1

Yes. We see a meaningful upside. I would say probably the top end is $100,000,000 and even we didn't account for anything. So we're $3,000,000 ahead of where we counted for in our forecasting. Most of that probably will end up this year, but there's a decent chance that some of those systems go in service in Q1 of 2025.

Speaker 5

Got it. Thank you.

Operator

Thanks. Thank you. The next question goes to Corinne Blanchard of Deutsche Bank. Corinne, please go ahead.

Speaker 11

Hey, good morning. Thank you for taking my question. I have two questions. So the first one, could you talk about the attachment rate? I think it has been relatively stable since June.

Speaker 11

Maybe if you can talk about what you've seen in California and the other states? And then the second question would be, did you have you guys run any analysis or like scenario in the case of like a Trump or like a Republican win? Like how much could that impact your cash generation into 2025 and 26 if we see some of those, maybe the others being removed or if we see some of the ITC credit being fading away faster than currently?

Speaker 1

This is John. I'll take the last one first. I don't want to get into speculation of what happens in such in the IRA. I think you all are well equipped just as me to come up with all the different permutations. Again, our comments were that we actually see, particularly in the domestic content, which is the main adder, that both parties actually agree.

Speaker 1

So I think some of, again, the rhetoric versus what I see as the reality or we see as a reality is something that needs to be considered heavily. And candidly, it's very obvious that the market is not right now. I mean, people are just absolutely beside themselves with concern about the election And probably doesn't help that today's Halloween too. So when you look at what our response would be, we're going to run the business the same way regardless of who wins on Tuesday And what happens, the utilities keep raising their prices and so that gives us the ability to raise price. It goes back to my point about stop looking at one piece of the value input versus others in the equation.

Speaker 1

The overall, it's very clear utility rates moving up, equipment prices moving down, cost of capital is now worse sideways to moving down. That has created a nice wedge and that wedge continues to expand. So if something were to happen to some of the adders or whatever, we'd raise price. I mean that's full stop. That's what it would be and we feel good about that.

Speaker 1

When you look at storage attachment rates, they've moved up meaningfully this year. You can see that was going back to my earlier point about CapEx per customer has gone up meaningfully and we expect that trend to continue. Part of that is California. We are seeing a pretty good attachment rate there north of 50%, I think north of 60% actually. And then we have a number of important markets like Puerto Rico that have been at 100% for years.

Speaker 1

We see a meaningful attachment rate progress in Florida. I'm starting to see some of that in Texas and that's based off the storm impact most likely. So as storage continues to drop in price and domestically produce storage at that, then we expect that storage attachment rate to continue to trend higher and that enables and unlocks more value for energy services or grid services or VPP, whatever you want to call it. We're seeing more and more revenue coming in the door based on our fleet as well. And it enhances our securitizations because the perception is obviously that when you have storage attached, you have more price elasticity and you also have greater certainty around customer payments.

Speaker 1

So I think that seeing that trend higher is good on all aspects of our business. And I would point back to, as John said, if you look at that slide 10 where we tried to show a lot of purple in the overlap, that graph on the, if you want to call it the Trump side of the slide, that shows that 78% of the economic value created by the jobs sit in those districts. I think that's just really powerful to make the point that the job creation, the bringing the domestic manufacturing home and what it does for the country is just so widely viewed positively by both sides.

Speaker 11

Thank you. And then maybe if you can just talk about the attachment price for the first question.

Speaker 1

Did you say the or do we see that trending higher? Is that was that the question?

Speaker 11

Yes. I mean, yes, it has been kind of flat I think since June. And I just wanted to know like, hey, do you see obviously a higher attachment rate in California? And what are the trends

Speaker 4

like outside of California? Just like high level, Sochi and maybe how

Speaker 11

we think about it into Just like high level, Sochi and maybe how we think about it into 2025? Yes.

Speaker 4

It's moved

Speaker 11

up pretty significantly. So yes, we see that

Speaker 1

moving continue to move higher.

Speaker 11

All right. Thank you.

Operator

Thank you. The next question goes to Kashy Harrison of Piper Sandler. Kashy, please go ahead.

Speaker 12

Good morning, everyone, and thank you for taking my questions. So just curious about competition on the TPO side. Are you still seeing irrational pricing from new entrants in the marketplace? Or has that calmed down a bit? And then also just following up on some of the points you were making on working capital, John, do you see working capital as a limiter on growth rates for the industry in general?

Speaker 12

And does a CPO pivot actually make that working capital limiter more acute? Or are you still seeing aggressive working capital strategies from your competitors' loan or lease? Thank you.

Speaker 1

Yes. So in terms of the competition, competition is great. Quite frankly, the power industry in United States needs more competition, not less. And then yes, I'm speaking of the utilities, the monopolies. So we're a fan now.

Speaker 1

But that said, I expect our team to win the competition, right? So right now, what we're seeing is we have the best platform, we have the best services to our dealers, best service to our customers, and we're winning. And you can see that on our market share increase on Slide 19 as an example of that. So we expect that to continue. I'm here to drive and create shareholder value And so we're going to bounce that off.

Speaker 1

We're certainly not going to go into growth only mode that it doesn't matter how much money we make or don't make, that's not going to happen. And are some of the competitors doing that? Yes. But they have gotten better, in particular, one of them has. So I see overall, it seems that, 1, the market is big enough to have multiple competitors.

Speaker 1

We're not after market share gains or market share gains. We're here to create cash generation as we've laid out very clearly. In the sense of working capital, yes, I've been pounding the table on this for 2.5 years, if not longer, Akshay. And as you know, and I said this is the issue, it's not interest rates, it's working capital decline. The velocity of capital moving in this sector is evidenced by the share prices like look at ours, it continues to decline.

Speaker 1

This is the fact. Now I think it's a lot of the election fears and such that are not well founded fears, but the fact is the velocity of capital continues to decline. Is that bad? That is very bad. And until it picks up, then the growth of the industry is going to continue to be under pressure.

Speaker 1

When will it pick up? I don't know. It could pick up next week when the election is over. It could do that because what's going to drive more capital in this industry? More cash generation, better unit economics, which we have the best unit economics we've ever seen as an industry.

Speaker 1

Whether you're looking at a contract or one of our dealers are looking at us, we've got really good economics and those economics are improving. Why are they improving? Utility rates moving down, equipment prices moving down utility rates moving up, sorry, and equipment prices moving down. It's creating that value edge. So, is it exacerbated in terms of the working capital by the movement to TPO?

Speaker 1

Yes. Each one of these funds, tax capital funds are need to be closed and be tied off and that is very different than just having a warehouse sitting there with loans and having loans just come through on an assembly line. It is much more difficult to do. This is why you're seeing a lot of players going back to the aforementioned competitors really struggle with it. It looks a lot easier than it actually is.

Speaker 1

And the current climate in terms of concerns and checking things off and the new adders and all this other stuff just adds more complexity to it. So yes, that wasn't helpful, isn't helpful, but at the same time, overall it accretes to the benefit of the so called big players like ourselves obviously with really just really 2 in the space. It accretes to the benefit of the

Speaker 5

platform that we have, the experience we have, again the top Thank you.

Operator

Thank you. And the last question goes to Maheep Mandloi of Mizuho. Maheep, please go ahead.

Speaker 13

Hey, thanks for squeezing me and two quick ones. Just first on if you're seeing any shortages on batteries maybe for Tesla, like we've been hearing somewhat around that and if that's impacting Q4 or Q1 here. And secondly, on the service customers you talked about for next year, 10% of that 127, So is that all organic or you're assuming any acquisitions from any of the installers or dealers who went bankrupt yet? Thanks.

Speaker 1

I'll answer the last one, Maheep. No, that's all organic. I don't actually, we wouldn't acquire customers from bankrupt dealers and such. But these are customers that are coming to us that may have had a bad experience with somebody else, a competitor, direct competitor or somebody who got talked into cash only type of transaction or loan with no service at all, which is most unfortunate. But other than that, these organic.

Speaker 1

In the sense of your first question, can you remind me exactly what you're looking for there on the first question?

Speaker 13

Yes. I just saw some checks suggesting the shortage of Tesla batteries in the ecosystem here. So I'm sure you or your installers have inventory on hand. So just wanted to understand if those shortages are impacting Q4 or Q1 for you

Speaker 5

guys? Okay.

Speaker 1

So in terms of we don't normally comment on a specific and that's what I was trying to figure out if it was more specific. But we do have a very good relationship with Tesla. I think everybody is well aware of that. And we bought a lot of those little batteries over the years and we bought a lot this year. We'll buy a lot in the Q4 and we don't anticipate problems.

Speaker 1

They've been a good partner to work with. Others, again, the equipment market is amply supplied and getting more so quite quickly on the domestic side, domestic manufacturing. So we got a number of valued partners there that make great equipment and new products are coming out all the time. But we don't we haven't seen any equipment availability issues that we didn't anticipate.

Speaker 3

Okay. Thank you.

Speaker 5

Thanks.

Operator

Thank you. We have no further questions. I'll hand back to John Berger for any closing comments.

Speaker 1

Thank you. It is all about execution. Execution on flipping the whip, execution on in service, execution on asset level capital closings, execution on efficiency, all coming together to drive execution on cash generation to pay down corporate debt. Thank you for joining us and happy Halloween.

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Earnings Conference Call
Sunnova Energy International Q3 2024
00:00 / 00:00