Sunnova Energy International Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 16 speakers on the call.

Operator

Good morning, and welcome to Cenova's 4th Quarter and Full Year 2023 Earnings Conference Call. Today's call is being recorded, and we have allocated an hour for prepared remarks and question and answer. At this time, I would like to turn the conference over to Rodney McMann, Vice President, Investor Relations at Cinnova.

Operator

Thank you. Please go ahead.

Speaker 1

Thank you, operator. Before we begin, please note 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. Also, we will reference certain non GAAP measures during today's call. Please refer to the appendix of our presentation as well as the earnings press release for the appropriate GAAP to non GAAP reconciliations and cautionary disclosures.

Speaker 1

On the call today are John Berger, Sunnova's Chairman and Chief Executive Officer and Robert Ling, Executive Vice President and Chief Financial Officer. I will now turn the call over to John. Good morning and thank you for joining us.

Speaker 2

2023 proved to be a formidable test for the residential solar industry. Macroeconomic challenges in a rapidly evolving landscape meant that companies who are unable to adapt and tackle these challenges head on have struggled or exited the market. While this unfortunate reality for some may have caused apprehension and generated negative headlines, it also presents a silver lining of reduced competition for adaptable companies like Cenova. We stand apart in this regard, fortified by our scale, robust balance sheet, agility and forward thinking approach, enabling us to not only weather the storm, but pick up market share and expand margins in the process. The past few weeks, we have seen encouraging signs of improved market dynamics beginning to emerge, Tighter risk premiums reflected in our recent securitizations coupled with an uptick in overall market demand as we transition beyond the seasonally softer period for customer originations, paints a more optimistic picture than many perceive.

Speaker 2

To better position Cinnova for the rest of 2024 and beyond, we have continued to increase our focus on cash generation by pursuing additional margin expansion, exploring potential asset sales and rapidly implementing cost cutting measures. To achieve cost savings, we are continuing to implement a range of initiatives, primarily focused on automation driven efficiencies. This strategic approach will enable Sunnova to sustain growth without expanding its headcount. Additionally, we have initiated an immediate pause in spending related to select growth initiatives such as international expansion. While these initiatives are temporarily on hold, we will remain committed to revisiting them in the future contingent upon improved market conditions and an improved valuation of will result in a decrease of at least 20% in total adjusted operating expense per customer in 2024.

Speaker 2

Slide 3 highlights our growth in customer count, power generation and energy storage under management, battery penetration and expected contracted cash inflows for both 2024 and the remaining life of our customer contracts. During the Q4, we placed over 34,000 customers into service, which brought our total customer count at the end of 2023 to just over 419,000 and our megawatt hours and solar power generation under management, 10.90 megawatt hours and 2.5 Gigawatts, respectively. Turning to Slide 4, you will see, as of December 31, 2023, the expected cumulative nominal contracted cash inflows associated with our customer contracts over a weighted average remaining life of 22 years was $16,000,000,000 In 2024, these same contracts are expected to generate $789,000,000 in contracted cash inflows. These inflows are the sum of all expected cash generated from customer lease, PPA and loan contracts, including those from SRECs and Grid Services in service as of December 31, 2023. Also on this slide, we provide our expectations of levered cash flows, which based only on what was securitized as of December 31, 2023, is expected to be $136,000,000 in $2024,400,000,000 on a cumulative nominal basis.

Speaker 2

Cumulative levered cash flows will continue to grow as new assets are added and will grow on a per annum basis as tax equity flips occur and debt is paid down. I will now hand the call over to Rob, who will walk you through our financial highlights.

Speaker 3

Thank you, John. Starting on Slide 6, you will see our adjusted EBITDA together with interest income and principal proceeds equaled $549,000,000 for the year ended 2023, which included a $207,000,000 contribution from investment tax credit or ITC sales. Excluding ITC sales, 2023 adjusted EBITDA together with interest income and principal proceeds increased by $58,500,000 versus the prior year. Since most expenses flow through adjusted EBITDA, including those that support our loan business, we view adjusted EBITDA together with interest income and principal proceeds as a more complete picture of our financial performance. While 2023 ITC sales were heavily back end weighted due to delayed treasury guidance, we expect a more even contribution of this activity in 2024 as we plan to continue utilizing ITC transferability, primarily from new tax equity partnerships to diversify our funding sources.

Speaker 3

Slide 7 highlights Sonova's continued ability to efficiently access the capital markets. In 2023, we added $957,000,000 in additional tax equity funds, entered into over $1,000,000,000 in asset backed securitizations, closed a $50,000,000 secured revolving credit facility to support procuring and selling inventory to dealers, closed a $65,000,000 accessory loan facility and issued a second green bond, which together with a modest equity offering brought in $466,000,000 in additional capital after fees and expenses. We also expanded our warehouse capacity while securing amendments to keep pace with our origination. Through February 21 this year, we have added another $195,000,000 in tax equity and priced 2 asset securitizations at the tightest spreads we have seen in the past 12 to 18 months. In our $537,000,000 of liquidity as of December 31, 2023, are both our restricted and unrestricted cash and the available collateralized liquidity we could draw upon from our tax equity and warehouse credit facilities.

Speaker 3

Subject to available collateral, we had $835,000,000 of additional capacity in our warehouses and open tax equity funds. Combined, these amounts represent nearly $1,400,000,000 of liquidity available, exclusive of any additional tax equity funds, securitization closures, asset sales, in the money interest rate hedges, further warehouse expansions or other sources of liquidity during the year. On Slide 8, you will find the summary of our unit economics. As of December 31, 2023, on a trailing 12 months basis, our fully burdened unlevered return on new origination increased to 12%, while our weighted average cost of debt decreased to 6.4%, respectively. This resulted in a 5.6% implied spread over the same period, the highest since early 2022.

Speaker 3

Slide 9 provides additional information on our unit economics, which have improved and continue to improve into 2024. We now estimate an implied spread on near term origination of 600 basis points. Overall, our margins have remained stickier than expected considering the declines we have seen in the weighted average cost of debt. However, we maintain that the long term expected spread is 500 basis points. Our weighted average cost of debt life to date remains just over 5% as of December 31, 2023.

Speaker 3

As a reminder, we measure our cost of capital on a yield and issue basis rather than an interest rate basis as this more fairly captures the effects of any discounts, fees and capped call purchases. Slide 10 reflects the strong growth we have seen on our net contracted customer value or NCCV. At a 6% discount rate, NCCV was $3,100,000,000 an increase of 35% compared to December 31, 2022. Our December 31, 2023 NCCV at the discount rate was $25.26 per share. This represents a greater than twofold increase since we announced our triple, double, triple plan.

Speaker 3

Even with this significant increase, our NTCB per share ended the year lower than expected, primarily due to the timing of tax equity closures and 4th quarter customer additions coming in slightly below our expectations. At this time, we have elected to reaffirm our 2024 full year guidance found on Slide 12. We will reassess our guidance next quarter once our lower cost structure has had more time to operate. We expect to capture approximately 15% of our 2024 adjusted EBITDA together with interest income and principal proceeds in the Q1, increasing to approximately 20% in the 2nd quarter, 30% in the 3rd quarter and 35% in the 4th. Customer additions are expected to be more back end weighted with 15% in the 1st quarter, 25% in the second quarter and the balance evenly distributed over the second half of the year.

Speaker 3

This is mainly due to our new channels as well as growth in accessory and service only sales. Thus, the back end weighting will be more driven by accessory loan and service only customers. As of December 31, 2023, 90% of the midpoint of our total 2024 targeted customer revenue, interest income and principal proceeds was locked in through existing customers as of that same day, respectively. We have updated our liquidity forecast for 2024 and are introducing guidance for 20252026, which can be found on Slide 13. We now expect to generate enough cash in 2024 to provide the working capital needed to hit our growth target for the year, while keeping our cash position relatively flat.

Speaker 3

This will be accomplished through a combination of securitizations and sales, net of operating costs. As we exit 2020 4, we expect to achieve an annual run rate of cash generation between $200,000,000 $500,000,000 This significant increase in cash generation beyond 2024 is a reflection of our pricing changes and can be further enhanced towards the top end of the range through improvements in treasury rates, ever tightening risk premiums and final domestic content guidance. We are electing to sunset our recurring operating cash flow metric in favor of levered cash flows in response to investor inquiries around not just the cash flows from in service and securitized assets, but a desire to see the value and cost of our superior customer service model. Levered cash flows is a sum of expected residuals from all securitized lease TPA and loan contracts, plus all MSA fees, plus expected cash inflows from unpledged SRECs and grid services. As John noted earlier, we have continued to focus on cost reductions.

Speaker 3

However, one area that will continue to retain its investment is our collections department to ensure we are maintaining our low per annum capital loss rate, which is unchanged at approximately 25 basis points. Finally, while we forecast no need for corporate capital through 2026, for good housekeeping purposes, we will be putting in place a modest ATM in the coming weeks and we'll update the market every quarter of any anticipated usage. We have discussed this ATM before and to be clear, we do not intend to utilize the ATM between now and our next earnings call. The best time to put tools like an ATM in place is when they are in fact a luxury and not a necessity. I will now turn the call back over to John.

Speaker 2

Thanks, Rob. Sunnova is committed to delivering a comprehensive, sustainable and streamlined approach to energy financing, servicing and management for our customers. We are an adaptive energy services company that has an unwavering focus on innovative technologies, integrated energy solutions and quality control as evidenced by our investments in our global command center and our adaptive technology center, both designed to optimize our operations and provide our customers with a strong customer experience. In a world where perceptions are manipulated, we know there are people selectively crafting narratives that paint a picture that is far from the truth. But we stand firm in our commitment to focus on transparency and integrity, choosing to focus on the facts.

Speaker 2

For example, on Slide 15, you will see as of December 31, 2023, only 0.6% of our customers had an escalated concern, an improvement from 1.1% at the end of 2022. Moreover, in 2023, we saw an 80% improvement in our service response time as the average age of a closed work order went from 96 days as of December 31, 2022 to 19 days as of December 31, 2023. This marked improvement was driven by our investments in our customer service infrastructure, which enhanced and strengthened our customer service levels and capabilities. 2024 will be a year of continued growth and transformation for Cenova with a continued emphasis on cash generation as a top priority. To accomplish this, in addition to expanding margins and the more aggressive cost reductions we mentioned, we will look to leverage asset sales as a more meaningful source of cash generation coupled with increasing our long term levered cash flows.

Speaker 2

Our commitment to prudent capital management and shareholder value creation remains unchanged. We remain dedicated to evaluating ways to deploy our capital with an emphasis on both maximizing returns on capital and exploring opportunities to make returns of capital. Over time, we will continue to evaluate the optimal allocation of our capital resources and will not hesitate to take advantage of attractive opportunities in the capital markets and in our rapidly changing industry. As we look to the remainder of 2024, we are excited about what we are seeing. While there is no denying that what we are doing is difficult, at the end of the day, we are transforming the energy landscape, challenging the status quo and offering customers greater choice to help meet society's ever increasing energy demands.

Speaker 2

With that, operator, please open the line for questions.

Operator

Thank you. We will now start today's Q and A session. Our first question today comes from Philip Shen from Roth MKM. Your line is now open. Please go ahead.

Speaker 4

Hi, Everyone, thanks for taking my questions. Hey, John, just now you highlighted asset sales a number of times. Can you give some more color on what this means? I know you have a lot of securitized loan assets on balance sheets. My guess is you would not touch any of that.

Speaker 4

Can you talk through your view of what you would do ahead? Are there any current assets available for sale? And additionally, what is the magnitude of asset sales in 2024 and 2025 that is contemplated in your guidance and outlook? Thanks.

Speaker 2

Yes, Phil, thanks. No, I don't we could possibly look at perhaps securitizations that probably will be more on the TPO side of things would be my guess, but and we are exploring some of those. But I think primarily in our plan, it's really the loans, both the Solar Plus loans and the accessory loans that we've looked to see if we could sell those as assets. I think that's pretty clear that we can. And I would expect to see some of those asset sales in the course of this year.

Speaker 2

It's not even close to the majority of the cash generation that we've laid out. That is primarily through our TPO and securitizing well through our asset costs, just given the spread that we're realizing and have been realizing for the last few quarters starting to come into play, so to speak, as we move towards being able to securitize these assets, primarily in the back half of this year, just given the timing. But it's possible they'll have that in the latter part of Q2 Q3. So this is primarily on the cash generation side, securitization proceeds is assumed. Obviously, ITC adders are a part of that.

Speaker 2

And once we get domestic content guidance, those that's why there's a range there. Those cash generation for each securitization could go up meaningfully. We'd have a very conservative tax equity or ITC percentage compared to peers assumed in this. So it could be quite a bit meaningfully higher than the bottom end of that range. And then that could be supplemented with loan and accessory loan sales.

Speaker 2

Rob, anything to add?

Speaker 3

No, I mean that pretty much covers it. Like you said, Phil, we've got some phenomenal long term securitizations with really good pricing locked in at rates that you can't get today and with advanced rates that you can't get today. So it wouldn't make sense to really touch most of what we have in our securitizations already.

Speaker 4

Great. Thanks guys. Shifting over to OpEx, it looks like the adjusted OpEx went up meaningfully in Q4. Clearly, you're seeing the benefit of that in your customer service quality metrics. You talked about lowering this by 20% per customer.

Speaker 4

Can you share what the outlook is specifically for the customer service and sales and marketing line items, which were each quite high on an absolute dollar basis in Q4? Can you talk about how these line items may trend and scale ahead? Thanks.

Speaker 2

Phil, so some of this is and we've attempted to give more visibility by breaking out direct sales and that is some of the a good portion of the sales increase. That's still a small minority of our origination, but it does stand out as far as the sales and marketing growth. On the service side, I've talked over the last few quarters about catching up on the service levels that we promised our customers. We've done that now and then some. And so we'll be able to once we've cleared that backlog, which we've done, we'll be we're seeing a cost reduction on a per customer basis that's pretty meaningful.

Speaker 2

And so you'll see that, as I said, peak in Q4 outside some bonus payments. We paid bonuses to employees in Q1. We are already seeing some pretty meaningful cost reductions this quarter, the last few months. I expect that to continue to accelerate in Q2 and beyond, but it's too high. There's no question about it and we're bringing it down meaningfully and slowing the growth.

Speaker 2

Clearly, you can see that in the capital budgets we've laid out for 2024, 2025 and 2026. That helps to meaningfully cut costs as well. And then bringing in the automation, that's been something that we've invested in as part of the spending, a big part of the spending. And I expect to start realizing some of those efficiencies or a lot of those efficiencies as soon as this quarter.

Speaker 4

Great. Thanks, John. One last one here. You talked about the potential for a modest $100,000,000 ATM. On the one hand, you're saying you don't need corporate capital, but then you have this announcement.

Speaker 4

Can you share more on your thinking in terms of the rationale and timing? And also how you plan to address the upcoming 26 convert maturity? Thanks.

Speaker 3

Yes. So like we said in the prepared comments, really, this is just good housekeeping, Phil. We've been talking about this publicly since at least the Q2 of last year. We plan to update the Street on our intended use, but we're putting it in place now because we don't intend to use it now. And we practically we wish we'd have done it a long time ago, so it wouldn't be an issue, but it is.

Speaker 3

So we're just making sure to get it done. The second thing on the converts, our plan on the converts is still to be able to refinance both the converge and the high yield bond and then to use the excess cash generation that we're planning on getting over the next 2 years to pay down. So first is use cash to pay down and second is to refinance the second part of it. So between those two, we expect to be able to refinance and lower our overall amount of debt that we have on the balance sheet pro form a for that. I think it was brought up with some of our peers as well.

Speaker 3

The cost of capital that we have is still really, really low. And the timeframe that we have, this is paper that's not due until 2026. The right time to be addressing it and refinancing it is in 2025, but the right time to start preparing for it is now. And that's what we're doing with looking at the cash generation and with other things that we'll look to do along the way to try to decrease that burden as we get closer to the maturity dates.

Speaker 2

So Phil, this is John. I just wanted to highlight 2 things. We have the ability to generate levered cash flows off the existing assets. We did not lever all the way through the asset and so that's providing meaningful cash flow that frankly no one else has. And then we're also generating through securitizations and asset sales in my answer to your first question, additional cash.

Speaker 2

And so we have 2 ways to generate the cash to pay down the debt and that's what we're focused on is doing just that.

Speaker 4

John, Rob, thanks very much for all the color. I'll pass it

Operator

Our next question comes from Praneeth Mitesh from Wells Fargo. Your line is now open. Please go ahead.

Speaker 5

Thanks. Good morning, guys. Just wondering if you could maybe comment at a high level impacting your strategy in any way? Yes. Impacting your strategy in any way?

Speaker 2

Yes, this is John. We are seeing some of that. It doesn't last very long. I think there's maybe 1 player or 2 in particular that is doing that. But the market, I'm surprised, been around the market for a while, a long time.

Speaker 2

And I got to say the stickiness on the price increases that we and our peers have been able to put forth has surprised me in a positive way. So I think that the market is clearly very healthy and we always have 1 or 2 folks that want to come into the market and then decide to buy market share. We certainly see that now. That always ends in a trail of tears. And there's no reason why that, that would be any different here.

Speaker 2

But on the margin, clearly, we're taking share. We continue to. We're projecting that out, although slowing growth, really to generate the cash. But and so I don't really see it's impacting our operations much at all. We continue to see a surprising amount of pricing power.

Speaker 5

Got it. And then I wanted to get your general view of how spreads could trend over the course of 2024. You had a roughly 6% implied spread now, but you'll probably continue to enjoy tailwinds from declining equipment costs and tax credits. So I guess just holding interest rates constant, would you expect the spread to widen over the next 12 months? Or are there other puts and takes we should consider?

Speaker 2

No, I think it's quite likely it will. And so if you hold the rate constant, we're seeing some reduction in the risk premium. I think that does continue to come in from what has been historically a really high spread, that materialized in 2022 and 2023. And even without that though, I think hanging in on the 6% plus or minus and may go a little bit northward for a couple of quarters or so this year. But again, the pricing power has been pretty sticky and I'd expect that to continue.

Speaker 2

Got it. Thank you.

Operator

Our next question comes from Julien Dumoulin Smith from Bank of America. Your line is now open. Please go ahead.

Speaker 6

Hi, good morning. This is Tanner on for Julian. I just wanted to ask you a quick question about the EBITDA guide. Is there portfolio monetization? Or is this pure upside in terms of the stated guide?

Speaker 6

And do you expect this opportunity to be predictable in the sense that as we progress through 2024, you could begin to provide a target for asset sales or monetization in the year over a certain period of time? Thanks.

Speaker 3

Yes. That's really upside. I think that as we get more visibility into the market and market appetite, we'll be able to get more information. You could do it really in 2 ways. You can do it lumpy or you can do it through programmatic forward flow type of programs.

Speaker 3

And I think that as we enter into those programs, that disclosure will help season that guide a little bit.

Operator

Our next question comes from Brian Lee from Goldman Sachs. Your line is now open. Please go ahead.

Speaker 7

Hey, guys. Good morning. Thanks for taking the questions. Maybe just a follow-up on the asset sales. If I look at slide, what is this one, 13, you've got the $200,000,000 and then $300,000,000 of cash generation in 2025 and 2026.

Speaker 7

No asset sales are being embedded in those forecasts, correct?

Speaker 2

Correct. Very little. But on the margin, if you look at some of the loans, there could be something on the margin there, but very little that's primarily, if not wholly, securitized, as well as the leverage cash flows.

Speaker 7

Okay, great. So John, if you are base casing no asset sales, it sounds like it'd be opportunistic. If you do start to kind of more programmatically sell down assets and monetize them, would you first, I guess, include it in the cash generation metric? And then 2, how additive could it be? Are we talking like 100 of 1,000,000 of dollars a year?

Speaker 7

What kind of upside to the $200,000,000 to $300,000,000 figures on this slide could we be talking about if those asset sales started to show up?

Speaker 2

Yes. So if you look at the cash flows that we've laid out, I think for the first time on Slide 4, that shows pretty meaningful as you move forward in time as we've been talking about the last several earnings calls, cash generation after paying all the debt service off, right, and tax equity. So there's a meaningful amount. I mean, the cumulative nominal levered cash flow is almost $5,000,000,000 So there's quite a bit there that we could do. And that's another avenue of if we wanted to do it, it made sense to essentially pay down the corporate debt, whether that's the converts or the bonds down the road.

Speaker 2

So it gives us again, having these contracted cash flows gives us an enormous amount of optionality. I think if there was anything meaningful, Rob, you can correct me, I think we would break it out for you all to show that, but

Speaker 3

Yes. And that would be the reason. If we did see something that was a material amount, we want to go ahead and call that out for you.

Speaker 7

All right. Yes, fair enough. We'll stay tuned. And the second question I had was, again, on this slide, you've got the investment in systems, it's growing kind of like 10% to 15% in 2025 based on these numbers. What sort of growth are you embedding in that forecast for investment?

Speaker 7

It just seems like there's a lot of cost deflation that we know about happening right now. So the growth in investment seems fairly meaningful unless you're implying either significant growth into 2025 next next or maybe there's a mix element in there too. Just any color there would be helpful on what assumptions are baked into that? Thanks guys. Yes.

Speaker 2

If you look at it, the CapEx, which includes all of our spending, anything that we spend on IT CapEx, our software to deliver our service, our service costs, our overhead, G and A and sales costs, that's all in those numbers. And so when you look at it, it's roughly about $4,200,000,000 $4,800,000 $4,800,000 $4,800,000 dollars And so you're looking at very little, to your point, 10%, 15% growth from 24% to 25%. So we are in and flat from 25%, 26%. We are meaning intentionally slowing the CapEx growth. I've said before in the last earnings call, I like where we were in that $4,000,000,000 to $5,000,000,000 CapEx range.

Speaker 2

And I just want to sit here and generate some cash at this point, particularly given where our debt is trading, corporate debt is trading and where the equity is trading. So I like where we are and we're just going to focus on how do we cut cost, expand margins and generate the cash.

Speaker 7

Yes, John, I guess, I was talking more on like the customer growth side. So you're doing 185,000 to 195,000 new customer adds this year on that $4,200,000,000 $4,300,000,000 base of investment. Presumably $4,800,000,000 next year would go a lot further given some of the cost reductions you're making and as well as cost deflation you're seeing on the hardware side. So trying to get a sense, is 10% to 15% growth modest in investment? What does that kind of translate to in your growth assumptions for new customers or however you're quantifying it?

Speaker 2

Yes. Okay. So we haven't given out obviously customer growth guidance that far out just for this year. So roughly about 190 came in roughly at about 142 just a little north of that for last year. And so you can obviously the simple math there, roughly about 31% customer growth.

Speaker 2

The CapEx is roughly about 20% customer growth. And so I do feel like because of our different channels, the strong uptake in battery only sales, up sales and load manager sales, EV charger, etcetera, and these different channels that we now have, I think that will continue to have our customer count grow a little faster than our CapEx growth. And in the other side of that or the reason for that is what you're pointing out is declining equipment costs, declining EPC, you basically get more for your buck per customer. That's also going to contribute to having a little bit higher customer growth than CapEx growth.

Speaker 7

Okay, fair enough. Makes sense. I'll pass it on. Thanks guys.

Speaker 3

Thanks.

Operator

Our next question today comes from Ben Kallo from Baird. Your line is now open. Please go ahead.

Speaker 8

Hey, good morning. Thank you, guys. Just real quickly on the asset sales, just one just what are you seeing, John and Rob, in the private markets? And how does that impact your decision on sales, just valuations? Can you talk a little bit about that?

Speaker 3

Yes. So we look at the private market pricing, we look at 3rd party buyers and we look at the securitization market. We put them 1 up next to the other. And what we see is that they have different expectations that can make the pricing of certain loans more attractive for securitization and others more attractive for sale. So really it's an optimization game for us.

Speaker 3

And then the other thing that is an impact for us is the Hestia channel and that allows us to be able to securitize certain loans that might be flat if we were to sell them, but then can bring cash if we elect to securitize them instead. So it really is an optimization game and we spend a lot of time, my finance team, the pricing team, the marketing team spend a lot of time together to try to make sure that we're pricing optimally and then we're tranching optimally for the right outcome.

Speaker 8

Thank you. John, you mentioned in your prepared remarks just the carnage in the marketplace, I don't know if that's the right word. But how has that affected you positively and negatively? I mean, there has to be some negative impact too, I imagine. But could you just talk about the health of the industry and impacts you?

Speaker 2

Yes. I don't think I used that term, Ben, but yes, it's been, I think, a challenging year. Look, obviously, we executed everybody last year across the value chain and delivered the numbers. And I think that kudos goes to all the folks at Cinnova and our dealers for really just a great year. Now we want to focus even more about how do you get a lot more efficient, stay in this range of CapEx of $4,000,000,000 to $5,000,000,000 and generate the cash just given where again where our corporate debt securities and equity is trading.

Speaker 2

And that gets into that there's an overall clearly negative cloud over the industry, whether it's from the debt markets, credit markets or the equity markets or sometimes in the media, we've seen that. So I think that's overall just an unfortunate cloud that at some point will blow away. And because the reality, even when you look at The numbers, when you run the numbers, make a lot of sense. Why? Because the utilities jacked up rates like crazy in the last 12 months and we're continuing to see that across the country.

Speaker 2

So you're selling into an industry that is increasing rates despite natural gas prices plummeting to historic lows at in orders of 50%, 19%. Just in the last week alone, 3 major utilities announced rate increases 15% and greater. So selling into that kind of market where you've got despite fuel prices dropping or at least going sideways in the case of oil is pretty interesting to do. And the other side of this, you've got stabilization of cost of capital, kind of in the worst side of things, if you will, maybe improvement and you have equipment pricing that's clearly declining. And then you've got additional incentives through the IRA that are yet to be employed, specifically the domestic content at ITC adder.

Speaker 2

So all this is, if you look at the numbers and you look at what's going on, yes, it's difficult to move when you have a NIM change that's as abrupt and as significant as what California did. And that causes a lot of pain because people need to change in their behavior. And then now you have to sell a battery, how do you do that? That just doesn't happen like a light switch. Some people adapt faster than others.

Speaker 2

And so I think overall, the fundamentals are really good across the industry. And but the ability to see that through the headlines, negative headlines is very challenging. What that means for those that continue to execute like Cinnova, this is a great time. This is the kind of time where you can really gain market share. It's not just us.

Speaker 2

Obviously, there's another peer doing it as well and pick up good business and generate a lot of cash that frankly couldn't do in the heyday when everybody was happy, which seems like a long time ago, but 3 years ago or so, 2, 3 years ago. So great time fundamentally, and this too shall pass. But we'll come out at the other end of this much, much stronger with new technologies, cheaper storage and better customer service.

Speaker 8

If I could sneak one in too, just thank you for that. Just coming into election year, I know we're still early. How are you judging risk or assessing risk and headed into election year? If you could just talk about that and what your policy people are talking to you about?

Speaker 2

I'm going to try to stay away from the politics. I'm not going to say who would we prefer and so forth. Look, I think what's interesting is for the first time that I've ever seen this and being as long as I've been in this industry, we don't really need anything. We don't. We just need what the IRA has provided to stay intact largely.

Speaker 2

And when you look at the amount of investment in manufacturing plants and even customer growth in the so called red stage, it's pretty phenomenal. And I don't think that you can listen to some of the message points, if you will, from some parts of the political spectrum. But at the end of the day, I just don't think that this is going to go away in terms of the IRA and its provisions. If anything, just being located in Houston, I will say that there's more activity on the hydrogen and carbon sequestration and in our area than I've ever seen by multiples and very large companies, so called conventional energy, oil and gas, conventional and power are now fully engaged in the IRA. So I think it I think we're in we certainly have energy policy that's in place and I don't think regardless of the election outcome that that's going to change.

Speaker 9

Thank you.

Operator

Our next question comes from Joseph Osha from Guggenheim Partners. Your line is now open. Please go ahead.

Speaker 10

Thanks and good morning folks. Two questions. First, I'm wondering if we could drill down maybe a little bit more on D2 converts, which are trading at we know the levels that they're trading at. Is the plan really to just sort of pick away at them now with free cash and take the majority of them out when you refi? Or I'm just wondering if I can

Speaker 11

get a better sense as to what your plan

Speaker 10

might be for taking advantage of the sense as to what your plan might be for taking advantage of the prices that those two instruments are trading at? And then I have one other question.

Speaker 2

Thanks, Joe. This is John. Yes, I mean, we have a lot of optionality. We have delivered cash flows and we expect to generate more cash as we securitize and lever through the cost of the asset with the ITC adders, etcetera. So how would we go about doing this?

Speaker 2

And obviously, as you pointed out, the converts are trading at a very attractive level. It is entirely possible that we do look at buying some of those in. Those what I want to do is we want to execute over the next few weeks and then look to see what our options are, look to see where the market is and then make decisions accordingly. But we do have a number of options including as we've answered a couple of questions on this call already, the ability to sell some of those levered cash flow assets that have been paid down debt because they've been in place those securitization have been in place for years. So we've got a number of weapons, but it's not lost on us that the debt is trading at a very attractive level.

Speaker 2

And my primary focus is to make to generate the cash to pay that debt down. And then whatever is left, if it makes sense, we can refinance it, as Rob said earlier. Rob, anything you want to add to that?

Speaker 3

No, I'll maybe. We just want to be responsible stewards of capital and at some point that's going to be repurchasing in the open market and another part that's going to be making sure that we continue to just build up the cash. But we will we've got optionality between now and later in 2025, which will be the prudent time to go ahead and refinance those notes.

Speaker 10

Okay. Thank you. And then my other question, one of your folks said to me at one point talking about dealers and making working capital available to dealers. He said, yes, we are not a bank. I'm curious as you look at your customer adds this year, how it breaks down in terms of new dealers coming onto the platform or existing dealers expanding their footprint just in the context of some of the pressure that the financial pressure that exists on dealers out there and your emphasis on preserving working capital and cash?

Speaker 2

Yes, Joe. There's been a couple of stumbles on some dealers. Quite candidly, we saw those coming because what we have in terms of processing systems experience, for instance, duration holdbacks is something that Sunnova implemented years years ago. It's now become an industry standard given the last couple of years. I think it's clear that we know how to manage that risk better than anybody else, period, full stop.

Speaker 2

And we're going to continue to do that. And when you look at where our growth is, yes, we have a lot of new dealers coming on board. They are scrubbed a lot very closely on the financial side of things. So we fail quite a few of them. And has that failure rate gone up over the last year?

Speaker 2

Yes, it has. So we do have, if you will, high graded the dealer versus the entire marketplace or industry and we're going to continue to do that. But we see very large demand coming from competitors and so forth for dealers to come on board with us. And we easily replaced any of those that we lost, I mean, very easily replaced. So we feel like we're in a good spot financially.

Speaker 2

We understand the risks. We're managing it and we're seeing the growth and we're high grading our partners as you would expect.

Speaker 10

Thank you.

Speaker 9

Thank you.

Operator

Our next question comes from Mark Strouse from JPMorgan. Your line is now open. Please go ahead.

Speaker 6

Yes, good morning. Thanks for taking our questions. Just a couple of quick ones, I think for Rob. So fully appreciate the greater than 20% reduction that you're targeting in pro form a OpEx. In 4Q though, the pro form a OpEx was a bit higher than what I think was implied in the guide.

Speaker 6

Can you just kind of talk about what drove that? And then the quick second question is just the ITC sales in your 2024 EBITDA. I think you said on the last call that was going to be about 15% to 20%. Correct me if I'm wrong, but just looking for an update there. Thank you.

Speaker 3

Yes. No, absolutely. So we did the breakout of our adjusted OpEx and you could see that in the back of our deck. One of the drivers, some of the increase of that adjusted OpEx was the increase in direct sales and that's really a driver in the second half of the year. There were other drivers as well, but some of that had to do with part of the year end push that we had.

Speaker 3

Part of it as well had to do with some technological improvements and part of it had to do with what we were doing internally to help move along some WIP and just some stuff that we have to expense ourselves and don't actually put into EPC that helps to get more systems up built in the service. So a combination of those things. And then if you look at the guide, I think we were talking about 20% give or take as a combination of the adjusted EBITDA plus the P and I. I think that we're still looking at that base case that we have calls for somewhere of around $35,000,000 to $40,000,000 of ITC sales per quarter on a go forward basis. We could certainly exceed that and that is going to be a function of partially how quickly we're able to deploy our leases and PPAs and especially as we're getting later on into the year, what type of ITC and tax equity partners we're bringing along.

Speaker 3

The transferability has really opened up this universe to a lot of folks, but what we tend to find is that a lot of them like the economics of ITC transferability. They make a few pennies on the dollar to do the transfer, but then they look at the economics of tax equity and becomes much more attractive to them. And so our goal is to continue to try to convert ITC buyers into tax equity partners on a go forward basis.

Speaker 6

Got it. Thank you, Rob.

Operator

Our next question comes from Kashy Harrison from Piper Sandler. Your line is now open. Please go ahead.

Speaker 12

Good morning and thank you for taking my questions. So my first one is on the liquidity forecast slide. Does this chart assume a 7% cost of debt? And then can you guys give us a sensitivity framework for changes in the cost of debt to the net change in cash forecast?

Speaker 3

Yes. So what I'd say is that this is assuming the current cost of debt environment. We're not assuming any improvement in the risk free or any improvement in risk premium, although we are seeing risk premium improvement. It does take into account the cost cuts that John highlighted and it does take into account our current pricing as well. So if we're able to take advantage of better pricing, that certainly accretes to those numbers.

Speaker 3

Generally speaking, I would say that if you look at this capital budget, about every point of additional advance that we would get on our debt would give us somewhere around $45,000,000 to $50,000,000 of additional liquidity. And then if you look at advance rates, I would say that you're probably talking about 7 points of advance for each point of interest expense sorry, each point of interest rate improvement or degradation. So right now, the risk free came back up to about a 4.3. It's come back down. Since then, there's still the belief that it goes down further in the year.

Speaker 3

If you were to see a one point improvement in the risk free without anything else changing, we would equate that to about 6 or 7 points of improvement in advanced rate, and that would translate into another at about $45,000,000 to $50,000,000 you could extrapolate that to another $300,000,000 of cash generation, assuming that pricing held steady.

Speaker 2

One thing, cash, this is John. I would add that the assumption of the ITC adders in this is very conservative relative to others. I would say low 30s all the way across. So any sort of upside potential there with domestic content is going to move that these numbers up quite meaningfully.

Speaker 12

Appreciate that. Well, since you brought it up, can you give us the sensitivity on the IPC as well?

Speaker 2

I mean, somewhere with 32 to 40 would be our kind of maximum. That may be too conservative given some other commentary, but I would say we haven't considered anything north of 40%.

Speaker 3

Yes. I mean most of this is running at about 32%. So if you got up to 40%, you would call that a 25% increase in the tax equity proceeds and pretty much everything else, your debt my debt proceeds would go down maybe a little bit on that. So call that a net 15% increase that we'd expect to get on the total tax equity less any change in the recourse debt. So it's not a lot, but to be call it $225,000,000 to $250,000,000 in this capital in this plan.

Speaker 3

Now there could be other additional guidance and it depends on where we end up deploying. But one thing that's been very gratifying to us is that there does appear to be a really strong push for building domestic content and there tends to be an appetite for people to want to use domestic content. We just need to get the final rules and to make sure that the rules actually allow us to fully utilize it. So at this point, domestic content is really not even in this plan. This is really a reflection of energy communities more than anything else based on where we are, where we're building and where we're targeting.

Speaker 12

Appreciate all that color. And then just my quick follow-up question.

Speaker 3

Spreads

Speaker 12

are they're back to 600 basis points, which I think is pretty close to where you guys were prior to the Fed beginning to hike. And presumably other experienced players in the market are benefiting as well from wider spreads. How do you think about the upper limit? Specifically, I'm wondering what do you think that point is at which the spreads become so wide that competition comes in and then we're back to that 600 range? Is it 800?

Speaker 12

Is it 900? Is it 1000? Just trying to understand when competition comes in and

Speaker 10

pushes it back to like a normalized level? Thank you.

Speaker 2

Yes, this is John. I would say, we've been consistent on saying that and stated again in our prepared remarks that we believe that the long term spread is 500 basis points, and that's 500 basis points on an unlevered basis. So you obviously lever these assets up and that can be quite meaningful spread. And when you look at our history, we've topped out something closer to 700 for maybe 1 quarter. It was above 2 or 3 quarters, 600 and above.

Speaker 2

And so I think somewhere in that 600 to 700 range is probably the peak. And again, we've laid out for years that we felt like it'd be 500 to be a long term average. And that I don't see any reason why that wouldn't be the case. Now, the only reason why it wouldn't be the case is if more competition drops out of the market for at least a period of time, it could expand further, especially if you get a pretty big decline in the risk free and more importantly the risk premiums quite suddenly, maybe brought on by a recession or something of that nature. And given our strong paper performance, we have seen investors want to flock to it versus some of the other paper markets.

Speaker 2

And that could widen it out further than what I've ever seen. But I think right now where we are maybe a little bit north towards 700 is probably what I would consider to be peak.

Operator

Our next question comes from Sophie Karp from KeyBanc. Your line is now open. Please go ahead.

Speaker 13

Hi, good morning guys. Thank you for taking my question. I was wondering the highest growth geographically and which ones are kind of do you consider unsellable right now and for the foreseeable future?

Speaker 2

Hi, Sophie, this is John. We're seeing pretty strong growth across the board with the exception of California. That's probably I'm certain it's more about us. Most of our the vast majority of our California business is our new homes channel. We do have plans to improve that region.

Speaker 2

And we're so small in that region on the retrofit market that it'd be pretty easy to increase market share there. The rest of we're seeing pretty strong growth in the islands. Those markets have continued to mature. We've been building out and started those markets like Puerto Rico, for instance, over a decade ago. The Northeast, Mid Atlantic seems to be doing pretty well.

Speaker 2

I would say, general trend growth, solid growth. And but what we're seeing is a lot of growth in the South and then some of these other states that we've historically never have had much of anything in. Some of that is going to be enabled by our Home Depot relationship and some of the other dealers that we've been able to bring on. So it's something that we certainly have been a bit surprised about. And the market, I think, went decidedly from loan to TPO fairly quickly and just continued to gain traction.

Speaker 2

And so there's just not that many folks out there, as you know, with a lease or PPA.

Speaker 13

Got it, got it. Just helpful. And then maybe along those lines on the partnership with Home Depot and other channels that you guys have, have you given any thought to addressing the structural sales costs, customer acquisition costs, I guess, in your markets. It's the knock on the economics of the U. S.

Speaker 13

Versus solar has been higher customer acquisition costs that kind of eat into that. So I was wondering if you guys have given us any thoughts and strategically how can you address that at some point in the future?

Speaker 2

Yes. Actually with retail, we have addressed it. We do have a fundamentally different model. Again, this company is very focused on its dealers and that is what we've built the company on. And we're going to continue to have that focus on that business model.

Speaker 2

And then going into the retail channels, and specifically, you asked me about Home Depot, that is dealer driven. And so we have a very different perspective and model than what others have done and are doing in the retail channel. It's been very successful for us financially, for our dealers financially and for our partner retail partners financially. So we have changed that model up and it is working.

Operator

Our next question comes from Pavel Molchanov from Raymond James. Your line is now open. Please go ahead.

Speaker 14

Thanks for taking the question. At the risk of delving a bit into politics, so to speak, You obviously had the letter from the congressional committee about Hestia that was several months ago. Can we just get an update on that whole situation?

Speaker 2

Sure, Pavel. Yes, most unfortunate. It's very clear politics are at play. But to be clear that letter was directed at the Department of Energy and the Loan Program Office, not us. Obviously, we're mentioned, but we're not subject to any investigation at this point in time.

Speaker 2

And look, what I would say is I'm just going to focus on having us do a better and better job serving customers. There's always ways that we can improve our customer service. There's always ways that we can improve our quality control, our consumer protection. We've got plans that we put out put forth about how to improve consumer protection, mandating service. I think the states and the federal government ought to mandate service with creditworthy company, service companies like ourselves.

Speaker 2

We've been calling for that for years. So we're going to focus on doing a better, better job for our customer. And again, there's always something we can improve on and we're going to focus on doing that. And we're going to leave the noise, shall we say, to others to deal with.

Speaker 14

Okay, fair enough. Can I just follow-up on M and A? You've been asked a lot about sort of selling assets. I'm curious if in the current industry conditions there are any corporate M and A opportunities for Sunnova as a company, particularly when it comes to entering new geographies?

Speaker 2

That's a good question. We do see some attractive asset purchases that we're taking a look at. We haven't executed on anything yet, but we have seen that. We see more of it, particularly in the business market side of things, that may be pretty interesting to do. In terms of the corporate M and A, obviously, we can't comment anything specifically.

Speaker 2

But right now, I think it's really we have all the growth we need. We need to make sure that the growth comes in at the highest possible cash generation possible. So I'm not really looking to do anything at this point in time. We don't need to. Candidly, that was one of the reasons just shutting down the international and some of the other moves is we don't need to do it to get the growth that we need to generate the cash.

Speaker 2

So we just need to we need to stay focused on generating the cash rather than doing some of these other things. And they'll be there down the road because nobody else is able to really expand and exploit those opportunities right now either. So I don't see anything on the horizon, but there's always a possibility.

Speaker 14

Thanks very much.

Speaker 11

Thanks.

Operator

Our next question comes from William Grippin from UBS. Your line is now open. Please go ahead.

Speaker 15

Great. Good morning and thanks for squeezing me in here. My first one, just was wondering if you could touch on O and M costs and how you're seeing those trend relative to what's embedded in your customer value assumptions, particularly in light of your enhancements in response time and service levels that you discussed here?

Speaker 2

Yes, this is John. We see the cost per customer coming down rather quickly. We have been putting a lot of IT in place, new processes. We clearly had new leadership brought in over a year ago, and that's been a tremendous improvement. So, the way I'd put it is, we wanted to get effective, the best in the industry at service.

Speaker 2

I think we have done that now. It doesn't mean that we can't improve to go into that question I just answered from another gentleman. But we see a lot of opportunity to improve our cost structure on the service side of things and we're realizing that. So we expect quite a bit, quite large decreases in even greater than the 20% on the service cost per customer as we're moving forward really from here on out. And I'm quite confident we'll achieve those.

Speaker 15

Perfect. And just the last one for me here. You gave a pretty wide range on the cash generation guidance exiting 2024. Could you walk us through some of the puts and takes that would get you to the higher end versus lower end of that range? And then is that going to be more cost of capital driven or more a function of growth?

Speaker 3

There's a couple of things that will get us there. One is better ITC guidance. If we get the domestic content, there's a significant uplift. We would assume we could get there. The second is if we could continue to see the contraction of the risk free sorry, the risk premium.

Speaker 3

We've seen risk premium come back down, but it's still much, much wider than it was even 3, 4 years ago when this was still a pretty nascent industry and was enjoying very tight margins on the risk premium. And then the third obviously is the risk free. If that comes in, that's a benefit. And then finally, I would say it depends on the magnitude of asset sales. If we can accelerate some asset sales, then that would end up being accretive to that cash number as well.

Speaker 3

We could we could blow through the target too. I mean there's nothing that's really keeping it artificially at that number, but we're not trying to be irrationally aspirational with that range.

Speaker 15

Got it. Appreciate the time. Thanks very much.

Operator

Our next question comes from Donovan Shafer from Northland Capital Markets. Your line is now open. Please go ahead.

Speaker 11

Hey, guys. I want to follow-up with I forget who it was, but someone else asked about customer acquisition costs. And with the Home Depot and the way you approach that, it sounds like you have proactive actions and measures and things that you take to address it. But I'm curious if you can talk more generally about the overall kind of industry trends there right now. So I think one parallel that comes to mind and it just kind of raises this question and makes you kind of contemplate, but you guys are probably the best ones to have an answer.

Speaker 11

In the EV, in the market for commercial or sorry, for consumer EVs, there has been this sort of slower growth than maybe people were initially thinking. The idea that while you had the early adopters and then maybe some kind of intermediate wave of adopters and then a 3rd or a 4th wave is getting is somehow a bit more difficult somehow. And so I'm wondering if there's anything that you guys have seen at all in that and if that has had impacts on customer acquisition costs, just any kind of commentary around there would be helpful.

Speaker 2

Certainly. I think when you look at our overall strategy being an adaptive energy services company where you're selling multiple energy and services to customers, that's been a huge benefit to us in terms of profitable growth and we expect that to continue. And so specifically as storage pricing, as battery pricing continues to plummet downwards, that is enabling us to go back and upsell our existing customer base quite a bit. And you can see that over the years that we've done that better than anybody, frankly. And then, we have additional items like EV charging, load management that's really coming to bear.

Speaker 2

It's pretty interesting. And the other items that we offer in roofing and generators and all of that has really got a pretty strong uptake. So I think, 1, just how do you get margin stack and think about expanding the EBITDA per customer, the cash generated per customer, we've been doing that. That goes to our services per customer metric. And so we see a lot of opportunity to really drop our customer acquisition costs by just mining our current customer base and delivering them better and better services as products come on the market that are better and cheaper, frankly.

Speaker 2

On the overall organic growth outside adding new customers, that continues to be where we're taking market share. And I think some big portion of that is our product set is the widest and the best in the industry, we feel. We hear that a lot from our dealers and more people that more dealers that want to come on board and be our dealer. And so I think it's really about the products that we offer, the service. Service has become something that nobody but us talked about to now everybody's talking about it.

Speaker 2

And how do you have great service? How do you get that power to flow, not just for the 1st few weeks after the install, the 1st 6 months of the contract life, if you will, but how do you do that for 25 plus years? And having the best service and then being able to sell service only even is expanding the marketplace quite nicely. So we focus on service, we focus on delivering these new products, our OEM partners focus on delivering better products, hardware cheaper, then I think the market will continue to expand and the cost of acquisition will continue to go down. And we're seeing some of that in some of the southern states and the middle part of the country states.

Speaker 2

And so again, there's a lot more good things happening in the marketplace than I think obviously that most speak up today with regards into the capital markets.

Speaker 11

Okay, that's helpful. And then just as a follow-up, if we you guys have always stood out as for the presence in Puerto Rico, some other islands and even kind of maybe more southern markets and less so, say, California compared to some other peers. So I'm wondering, in terms of the LMI adder for the tax credits and the IRA and the energy communities adders, Are you finding like you kind of like luck of the draw, like you're finding out in hindsight, gee whiz. Like I look at California. In California, you're probably not going to have quite so many low or middle income homeowners.

Speaker 11

You're going to have a lot of low middle income residents in the state, but property, house prices are so high. It's not as often you're going to get an overlap between homeownership and somebody's sort of position in a socioeconomic sense, whereas maybe somewhere like Puerto Rico or parts of Texas or other island nations and markets you've been in, in the past. And similar thing with the energy communities. I'm just curious if I think of oil and gas companies that had so much acreage held by production and then the whole shale revolution happened and it was like, oh my gosh, they're sitting on a gold mine. They didn't know it.

Speaker 11

Are you seeing anything like that from your own geography just when you look at like Alamai and Energy Communities?

Speaker 2

Yes, that's an insightful question. The answer is yes, you're right.

Speaker 11

Okay. Thank you. Well, I appreciate it. I'll take the rest of my questions offline.

Speaker 9

You bet. Thank you.

Operator

Our next question comes from Maheep Mandloi from Mizuho. Your line is now open. Please go ahead.

Speaker 9

Hey, thanks for squeezing me in. Just a question on asset sales versus ATM. And you said none of those are planned into the guidance for 2025, 2016. But in your talks today or what you're seeing, which look more attractive here? And how should we think about asset sale pricing?

Speaker 9

We keep hearing lowtomidteens for high yield tranches from some of the asset managers. But just curious how you're thinking about pricing here? Thanks.

Speaker 3

So we think about pricing holistically, we think about whole stack pricing and where does it make sense to sell assets thinking through the entire stack versus the fully burdened unlevered return. And it's not really an either or when we're looking at the ATM and the asset sales. The asset sales are function of what's more attractive to us, what's going to yield a better cash return and better liquidity? Is it an asset sale or is it a full stack securitization or is it a securitization with monetizing the residual? The ATM, like we said, that's housekeeping.

Speaker 3

That's not meant to be in there. That's not something we're looking at to be using. This is something that we just said, have been saying for a while. It has been a request from the Board for much longer than that that we go ahead and put into place an ATM. And again, good housekeeping and the best time to do it when you don't need to do it.

Speaker 11

Got it.

Speaker 9

And then just a question on the guidance here. And in the prepared remarks, you kind of talked about not changing at this stage and maybe on the next quarter, you'll revisit it. So what's the upside there? Like it's mostly on the OpEx cut or anything else we should look for? And how much of tax credit transferability is in the EBITDA guidance at this stage?

Speaker 9

Thanks.

Speaker 3

Sure. Like I said on the EBITDA guidance, we've got about $30,000,000 to $40,000,000 of ITC sales per quarter in there. So fairly modest and less than what we had produced this year. We could certainly do much better than that. But it's not a big part of the guidance.

Speaker 3

And then we have gone through the budget process, but part of what we want to make sure is to see how this market starts to develop, to see how we do with lease and PPA growth versus loan growth, as well as making sure that we can roll through and grind out a lot of the cost cuts that we've been doing and see what see if we can get some additional impact and uplift there. So we don't necessarily expect guidance to change, but admittedly, it's pretty wide range out there. So we're hoping to be able to maybe tighten that up a little bit and get a bit more granular there.

Speaker 9

Okay. Appreciate that. Thank you.

Operator

Our next question comes from Dylan Nissano from Wolfe Research. Your line is now open. Please go ahead.

Speaker 6

Hey, good morning. Thanks for your time. I know we're running a bit long here. So just one quick question for me. So you said on the prepared remarks that you may update 2024 guidance once you see how cost cutting is playing out.

Speaker 6

You've laid out some upside cases for EBITDA, but I'm also wondering, is there a scenario where customer additions may be a bit lower as you reduce the growth initiatives? Any elaboration on that comment would be appreciated. Thank you.

Speaker 2

Yes, this is John. Possibly, but I think we feel pretty good about where this range is. I would say that we had as we cut our CapEx down from the Q3 call for this year, we clearly had customer additions north of this range in our plan. And so I think we're just coming back into plan. So we feel pretty good about where we are.

Speaker 2

Again, we have the ability with the accessory channels and the other services to be able to sell more or grow customers faster, as I mentioned earlier, than our CapEx growth. So right now, we feel pretty good about our trend here. We are seeing more and more pickup on growth as the quarter goes on. So that's quite nice to see for obviously us, but also the industry as well. And so I think we're going to have a better year overall as an industry than people think.

Speaker 2

And certainly, we're on track to what we feel like is going to be yet another record year for us.

Operator

We have time for just one more question from Amit Thakkar from BMO Capital Markets. Your line is now open. Please go ahead.

Speaker 6

Hey, thanks for squeezing me in. I think in the past you guys kind of targeted a 60% debt to cap ratio and we've been a little bit north of that the last couple of years. I was just wondering if maybe that ratio you've got more ability to kind of add more leverage given the increase in size of the overall entity? Or are the asset sales going to be designed to kind of bring you back towards that 50% and that's kind of what we're kind of

Speaker 2

trying to drive towards? Yes, you're right. So we've been targeting that 55% to 60% and we're about 68% and then pegging there for the last few quarters. Our long term target is to bring that down in the 55 to 60. So again, primarily focused on generating cash and paying down debt.

Speaker 2

So even with selling of assets and monetizing, I would expect to see that to be a net reduction of debt or wouldn't necessarily make that much sense to do. So we're going to bring that down. I think that's a good call out and it's something that clearly it's my top focus.

Speaker 6

Okay. And then within kind of like the loan portfolio, you guys talked about kind of what sorts of assets would be more, I guess, makes more sense for you to kind of potentially look at monetizing. Can you just give us a sense for like how like what's kind of the notional value of that, whether it's loans or TPOs?

Speaker 2

On the marginal origination, that which has not been securitized yet? Yes.

Speaker 3

We probably got not quite a 1,000,000,000 dollars within in service and within the warehouses right now on loans. Probably won't generate another, call it, dollars 1,000,000,000 of net origination over the course of the next 12 months. So that's your pool of existing assets that we could go after, absent a pickup in loan origination.

Speaker 6

Great. Thanks. Thanks for your time.

Speaker 9

Thank you.

Operator

That concludes the Q and A portion of today's call. I will now hand back over to John Berger for any final remarks.

Speaker 2

Thank you. We are going to continue aggressively pursue cost cuts to improve our operating leverage. We're going to continue to expand our margins. And most importantly, we're reaching scale and we're prioritizing cash generation. We look forward to updating you on our execution as we work to deliver excellent energy services to a growing number of customers around the country and to deliver returns to our shareholders.

Speaker 2

Thank you for joining us.

Operator

That concludes today's Cinnova 4th quarter full year 2023 earnings conference call. You may now disconnect your line.

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Earnings Conference Call
Sunnova Energy International Q4 2023
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