Sunnova Energy International Inc

NYSE:NOVA

Earnings Call Analysis

Sunnova's Q3 Performance and Outlook

In Q3 2023, Sunnova delivered robust results, demonstrating growth and financial strength. The company achieved returns of 12%, with expectations to surpass 13% in Q4. Increased prices have aligned with capital costs and focused on profitability. Efficiency measures are expected to reduce operating expenses by 10% by Q4 2024. Customer base grew by over 37,000, reaching 386,000, with solar power under management growing to 2.3 gigawatts. Cash inflows over the next year are expected to hit $645 million, and contracted cash flows now stand at $14.7 billion. Sunnova accessed capital markets effectively, adding nearly $0.5 billion in tax equity funds, and engaged in a $145 million investment tax credit (ITC) sale, with $14.4 million sold already and a forecast of $100 million more in ITC sales. The company maintains strong liquidity, with strategic plans for continued growth, emphasizing a focus on leveraging market conditions favorably.

Strong Performance and Expectation to Surpass Return Targets

The company has displayed a commendable financial performance, marked by a rise in its fully burdened unlevered return on new origination to 11.6% as of September 30, 2023, which is even higher for the quarter at 12%. This growth in returns is primarily attributed to strategic price increases and additional benefits from the IRA adder. Moving forwards, the company aims to exceed these results even further, projecting an increase in the fully burdened unlevered return to over 13% by the year’s end.

Expansions and New Capital Sources Enhancing Liquidity

In terms of capital and liquidity, the company has plans in place to substantially boost its financial flexibility. They anticipate closing more than half a dozen amendments, extensions, and new capital sources before the end of the year, which speaks to the proactive measures being taken to secure additional funding and financial stability.

Slight Increase in Cost of Debt

The company acknowledges a marginal increase in the weighted average cost of debt, now standing at 6.6%. However, they have successfully secured a competitive edge by maintaining their weighted average cost of debt at a significantly lower 5.2% when considering their current balances. They also aim to sustain a 500 basis point spread, by managing the fully burdened unlevered return in comparison to their cost of marginal new debt, which the company estimates to be approximately 7.7%.

2023 and 2024 Financial Projections and Customer Growth

The company has provided a financial guidance indicating robust growth in customer additions, expecting to reach the upper end of their projected range of 135,000 to 145,000 for 2023. They have also set forth strong targets for 2024, with customer additions predicted to be between 185,000 and 195,000, and an adjusted EBITDA forecasted to be within $350 million and $450 million. Furthermore, they project principal proceeds from customer notes receivable and proceeds from investments in solar receivables to range between $210 million and $250 million, alongside interest income from customer notes receivable expected to be between $150 million and $190 million.

Operating Efficiency and Cost Management

With an unwavering commitment to operational efficiency, the company has set a clear strategy focused on reducing operating expenses per customer. They are achieving this by leveraging improved scaling and automation through IT advancements, while still prioritizing their essential collections department to safeguard against potential economic downturns and maintain their impressively low capital loss rate of 25 basis points.

Updated Liquidity Forecast and Corporate Capital Reduction

Continuing the theme of financial prudence, the company revised its liquidity forecast for 2024, eliminating the previously estimated $500 million in corporate capital proceeds. This significant reduction reflects a strategic shift towards higher returns on investment and efficient capital allocation, allowing for focused investments in high-return assets and improving liquidity.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to Sunnova's Third Quarter 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 McMahan, Vice President, Investor Relations at Sunnova.

Thank you. Please go ahead.

[Rodney McMahan, executive]

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 that are described in our slide presentation, earnings press release and our 2022 Form 10-K. 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. On the call today are John Berger, Sunnova's Chairman and Chief Executive Officer; and Robert Lane, Executive Vice President and Chief Financial Officer.

I will now turn the call over to John.

[William Berger, executive]

Good morning, and thank you for joining us. Sunnova remains resilient despite the challenging market dynamics marked by higher interest rates and concerns about overall residential solar growth. Our commitment to develop a sustainable, profitable platform has positioned Sunnova for long-term success in the face of significant macroeconomic challenges as evidenced by increases to our fully burdened unlevered return as we continue to add new customers.

Through our Adaptive Energy platform, we continue to provide our customers with a better energy service at a better price, ensuring system performance and optimized power generation net economics. The steady robust demand for our distinct suite of energy service offerings, coupled with our dealer network and our increasing market share have been instrumental in achieving this performance. Sunnova is focused on liquidity, profitability and cash flow. We continue to act on these focus areas by raising price, reducing working capital needs and reducing operating expenses.

First, our focus on profitability has pushed up our returns to 12% for the third quarter, allowing us to achieve a healthy implied spread even in the higher interest rate environment, and we are expecting to push past 13% during the fourth quarter. Sunnova's ability to continually increase prices, while maintaining its growth is a testament to the value we bring to our customers and the strength of our offerings. By methodically raising prices, we aim to ensure that our returns are in alignment with the current cost of capital. This move is not only a boost for profitability but also underscores our commitment to enhancing shareholder value.

Second, we are committed to reducing working capital, both used and outstanding to our valued dealers and equipment manufacturing partners. This has enabled us to reduce the required amount of corporate capital for 2024 and to further reduce our operating expenses through cutting, working capital interest expense. Sunnova also continues to execute on its capital-light businesses, Sunnova repair services, asset free loans and upselling customer batteries are among these ventures, showcasing our commitment to capital efficient growth.

Additionally, our expansion of energy management services, including virtual power plants is a key approach in our strategy to maximize returns and boost cash generation from our existing asset and customer base. These initiatives represent an essential component of our multifaceted approach to sustainability and profitability with less reliance on capital markets.

Last, in our continuous pursuit of operational excellence, we are aggressively cutting our operating expenses by harnessing the power of cutting-edge software and artificial intelligence. These technologies enable us to optimize processes, reduce the headcount needed and drive greater efficiency throughout our operations. This strategic move is not just about cost savings, but also about positioning Sunnova as an industry leader in innovation and operational effectiveness.

Adjusted operating expense per customer is expected to decline by 10% of the quarter 2024, and we expect this trend to accelerate as we progress through next year into 2025. Slide 3 showcases the continued strong performance in customer count, solar power generation and energy storage under management, battery attachment rate on origination and expected cash inflow over the next 12 months. During the third quarter, we placed over 37,000 customers into service, which brought our total customer count as of September 30, 2023, to over 386,000 customers and brought our megawatt hours under management to 981 in total solar power generation under management to 2.3 gigawatts.

Rob will discuss our customer and capital expenditure expectations for 2024 later in the call, but our core residential dealer channel has been running at a comfortable pace for the last few months, and we intend to hold this paid setting. The operating leverage of scale gives us economic and strategic advantages. One of these key advantages is our large and growing amount of levered cash flows, and we will discuss these estimates for 2024 and beyond later in the call as well.

Finally, we have updated our customer contract life and expected cash inflows. As of September 30, 2023, the weighted average contract life remaining on our customer contracts equal 22 years and expected cash inflows from those customers over the next 12 months increased to $645 million. Our estimated contracted nominal cumulative cash flows totaled $14.7 billion as of September 30, 2023. We have taken decisive actions to bolster our liquidity and maintain our strong balance sheet. We have raised significant sums in multiple types of capital, including corporate capital in a timely fashion, and we anticipate additional closings of asset level capital in the near future.

We are proud of our current achievements, and we have numerous growth opportunities on the horizon. However, these opportunities will be pursued thoughtfully at the right time and when the market conditions are more favorable.

I will now hand the call over to Rob, who will walk you through our financial highlights.

[Robert Lane, executive]

Thank you, John. Starting on Slide 5, you will see our adjusted EBITDA, together with the principal and interest we collect on solar loans equaled $108 million in the third quarter, which included a $14.4 million contribution to adjusted EBITDA from our first-ever investment tax credit, or ITC sale. Just prior to the end of the third quarter, we entered into a $145 million ITC transaction that included the sale of ITC to a third-party corporate buyer.

Under this agreement, we sold $14.4 million worth of ITCs as of September 30, 2023, and anticipate at least another $100 million of ITC sales in the fourth quarter. When the inflation Reduction Act introduced ITC transferability, it gave us the ability to further diversify our funding sources and introduced another source of liquidity and adjusted EBITDA. While we will continue to focus on growing our long-term recurring contracted cash flow, we have reached a stage that we can better balance our cash inflows from long-term contracted customer contracts with those from activities such as the ITC sales that can generate material tax and adjusted EBITDA in a short period of time.

Slide 6 highlights Sunnova's continued ability to efficiently access the capital markets. Through October 25 of this year, we have added nearly $0.5 billion in additional tax equity funds. While some have indicated difficulty in securing tax equity, we see a market that continues to experience strong interest from investors, but with a strong bias for quality sponsors, such as Sunnova.

Going forward, to best benefit from the taxable attributes of our TPO system, we expect to employ a hybrid approach of conditional tax equity and ITC transfer partnership. Since the beginning of the year, we have expanded our warehouse capacity by $734 million, while procuring amendments to keep pace with our evolving origination. We also entered into over $1 billion in asset-backed securitization, both a $50 million secured revolving credit facility to support selling inventory to dealers, close to $55 million accessory loan facility and is due to our second green bond, which together with a modest equity offering, brought in $466 million in additional capital after fees and expenses.

Included in our more than $1 billion of asset-backed securitization is our first DOE guaranteed loan securitization, which priced last week made very strong demand, the first residential AAA securitization. This program is expected to provide disadvantaged homeowners and communities with increased access to clean, flexible power by indirectly and partly guaranteeing the cash flows associated with consumer loans.

When we announced the SP program, we expected it would allow Sunnova to realize issuance spreads commensurate with the expected credit uplift that comes with the government guarantee. We sought to attract investors its appetite for our long-life, low-risk cash flow. Last week, pricing and book build exceeded our expectation. The blended spread on our first project Hestia securitization was only 197 basis points over the risk-free rate in the BB credit attachment point was 8.5x oversubscribed and introduced 20 new investments to our business.

We estimate the securitization priced as much as 150 basis points in signed a similar full stack loan securitization without a DOE guarantee. Going forward, we plan to make the Steel our primary alone ADS panel, but expect to do legacy non-DOE guaranteed loan issuances were applicable. Our TPO channel will continue unimpacted as planned. In our $759 million of liquidity as of September 30, 2023, are both our restricted and unrestricted cash as well as the available collateralized liquidity we can draw upon from our tax, equity and warehouse credit facilities. Included in our cash or hedge breakage proceeds, which exceeded $45 million year-to-date.

Subject to our available collateral, we had $450 million of additional capacity in our warehouses and open tax equity funds. Combined, these amounts represent $1.2 billion of liquidity available, exclusive of any additional tax equity funds, securitization closures in the money interest rate hedges, further warehouse expansion or other sources of liquidity during the year. In addition, we expect to close half a dozen more amendments extensions and new capital sources by the end of the year.

On Slide 7, you will see our fully burdened unlevered return on new origination increased to 11.6% as of September 30, 2023, based on the trailing 12 months. For the quarter, this return equaled 12%. These increases are primarily driven by our continued implementation of price increases and to a lesser extent, benefit from IRA adder, which will only grow as we moved into 2024. With these factors, we expect our fully burdened unlevered return to push past 13% from current originations by the end of the year.

Our weighted average cost of debt also increased slightly to 6.6% as of September 30, 2023, based on the trailing 12 months. On current origination, including the impact of the recently issued green bond, we estimate the marginal cost of debt on new origination to be approximately 7.7%. While interest rates declined materially over the past several quarters, our weighted average cost of debt stands at 5.2% as of September 30, 2023, based on current balances and our yield additionally. We measure our cost of capital on a yielded issue basis rather than an interest rate basis as this more fairly captures the effect of any discounts, fees and tax call purposes.

Our cost of capital is calculated on the full burden of the assets created. Based on our current pricing and the current ABS pricing, we expect to fund well over 90% of the fully burdened capital to the investment-grade portion of the ABS. We also have the flexibility to utilize the combination of corporate capital, high yield and non-rated tranches of the securitization market and the monetization of legacy warehouse hedges. As our legacy securitizations continue to perform, we expect to pay down at least $300 million of existing securitization debt next year.

The implied spreads for the trailing 12 months equaled 5% as of September 30, 2023, which is in line with our long-term target. This was a 50 basis point increase compared to the previous quarter as the increase to our fully burdened return was greater than the increase to our weighted average cost of debt, comparing our current targeted fully burdened on level return of 13%, though our average cost of marginal new debt of 7.7%. We expect to be able to maintain a spread in the 500 basis point range, and we'll continue to adjust our fully burdened unlevered return to maintenance.

Slide 9 reflects the strong growth we have seen on our net contracted customer value or NCCV. At a 6% discount rate, NCCV was $3 billion, an increase of nearly 50% compared to September 30, 2022. Our September 30, 2023, NCCV at this discount rate equates to approximately $7,800 per customer and $24.46 per share. Within our NCCV is approximately $14.7 billion in cumulative locked-in contracted nominal cash flow as of September 30, 2023. Remember, NCCV remains a punitive way to view our blowdown value as the nominal cash flows I referenced exclude anything for renewals, upsell, uppowering, state or national incentive appreciations or other noncontracted upside.

Slides 11 through 13 provide our 2023 guidance, 2024 guidance and liquidity forecast. Given the visibility into our backlog, we expect to arrive at the higher end of our guidance range for 2023 customer additions of 135,000 to 145,000. Additionally, due to the $145 million ITC transfer transaction we entered in the third quarter and the progress we have made on additional ITC sales in the fourth quarter, we are confident we will generate the adjusted EBITDA necessary to fall within our financial guidance ranges. On

Slide 12, you will find our guidance ranges for 2024, which are customer distance between 185,000 and 195,000, adjusted EBITDA between $350 million and $450 million, principal proceeds from customer notes receivable and proceeds from investments in solar receivables between $210 million and $250 million and interest income from customer notes receivable between $150 million and $190 million. As of September 30, 2023, nearly 100% and 75% to the midpoint of our total 2023 and 2024 targeted customer revenue and principal and interest we expect to collect on solar loans was locked in to existing customers as of that same day, respectively.

We have also updated our liquidity forecast for 2024, which can be found on Slide 13. On our previous earnings call, we included in our forecast an estimated raise of $500 million corporate capital in 2024, subject to the needs and market conditions. As John mentioned, we have taken several steps to temper this need, including further raising our prices and fully burdened unlevered return, reducing investments in new systems as a result of the pricing move for actively reducing working capital and reducing our adjusted operating expenses. We are also taking advantage of additional funding, including the BB tranche on our recent FDA transaction. As a result, we have reduced our forecasted 2024 corporate capital proceeds by $500 million to 0.

As John noted earlier, we are focused on reducing operating expense on a per customer basis. We are doing this through improved operating leverage, scale and reducing operating expenses by being more efficient as we automate several processes through various IT improvements. While we've successfully reduced our costs in certain areas, one asset where we have maintained investment is our collections department. Our well SaaS collection team is essential for safe party against potential economic downturn and ensuring we maintain our per annum low capital loss rate, which currently stands at 25 basis points.

We are also updating our estimated embedded leverage cash flow. We now expect our leveraged cash flows from our existing asset base to be approximately $125 million per year for the next 10 years and approximately $185 million for the following 9 plus years. We have allocated some of our corporate capital to the levered cash flow to reflect its investment into assets. As before, this is inclusive of our current capital loss rate and servicing our corporate and convertible bonds, but does not include assets currently not in securitization, excess loans, service revenues and other gain on sale activity or expenses.

I will now turn the call back over to John.

[William Berger, executive]

Thanks, Rob. Sunnova's unwavering commitment to its stakeholders remains at the forefront of our strategy, our pursuit of liquidity, profitability and the steady increase in cash flow is not just a corporate agenda, it's a promise to our investors, employees and customers. We strategically implemented actions that underscore this commitment. By increasing prices, we ensure that the value we provide is reflected in our financial returns. At the same time, our diligent approach to working capital reduction, coupled with the optimization of operational expenses exemplifies our financial responsibility. Our scale and cutting edge, AI and IT advancements have enabled us to achieve unmatched efficiency and to deliver on our commitment to generate robust returns.

As we have discussed in previous calls, it's crucial to see the distinct opportunity presented by the combination of decreasing solar equipment prices and the consistent rise in utility rates. Contrary to expectations of a decline, we have observed a notable increase in utility rate hike requests across various regions of the country, such as a 16.5% increase in Puerto Rico, a 26% increase in California and a nearly 30% increase in Wyoming, just to name a few.

As we confront and market characterized by higher interest rates and uncertainty, our resilience and adaptability is gone. Despite these challenges, we've continued to experience strong demand, and we remain committed to profitable expansion. Our continued successful increase in return to cases our dedication to providing value, not just to our customers but also through our investors. Moreover, even after our corporate capital raise, our marginal cost of debt has remained impressively competitive at just below 8%. The relentless pursuit of profitability and prudent financial management remains central to our strategy. We look forward to regarding a path of sustained success as we remain focused on liquidity, profitability and the continued enhancement of cash flow through strategic pricing, prudent working capital management and streamlined operations.

The path ahead for Sunnova is eliminated by the actions we are taking to enhance profitability and efficiency. Our commitment to financial strength and operational excellence positions us to lead in the ever-evolving energy landscape. As we progress to the end of the year, our unwavering commitment to sustained profitability remains the cornerstone of our strategy.

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

[Operator]

Our first question comes from the line of Philip Shen with Roth MKM.

[Philip Shen, analyst]

First one is about OpEx. And you talked about, John, aggressively cutting OpEx. Can you give us some more color on how you're reducing the expenses? I think you touched on software, headcount, greater efficiency in operations. Can you quantify any of that in any way?

[William Berger, executive]

Phil, thanks for the question. We quantified it by saying that on a per customer basis, we see a negative 10% next year and then accelerating towards 2025. So we're looking for more than 10, and I think we'll get it. But how are we going to get it? One, we have a sufficient scale at this point in time. I think we're running at a pace that's very comfortable and having enough scale has always been important. I would say that we're probably in 1 of the 2 levers there in the scale size of things. And so we like where we are. So the first one is scale.

Second is software. We have a lot of these initiatives that are automating, including, yes, AI and machine learning to use some buzzwords, but it's real, and we're able to do a lot more with a lot less. And so we're putting those pieces of software into place, some of which are already in place, much of which is going into Q4 and Q1 and then beyond. So we feel that those investments, which have been quite significant in software and continue to be in the next year, are going to pay some real dividends as far as operating expense and operating leverage increase.

And then there's always better processes, you're selling more to per customer, so that's operating leverage by itself. And just general, the labor market is significantly looser and continues that trend. And so that's helpful as well versus an extremely tight labor market that was highly inflated say, a couple of years ago. So a lot of these savings are starting to bear fruit and come forth, and we expect to continue to push that and to increase the operating leverage, I might add, as we promised in the Q2 call.

[Philip Shen, analyst]

Great. You guys worked through your first tax credit sale, congrats. I know it's the beginning for a lot more to come. I was wondering if you might be able to share some of the economics and the outlook here as well. What kind of buyer was your first partner? How many more borrowers are there? How deep is the market? Additionally, from an economic standpoint for every dollar of tax credit value, how much are you guys netting, what's the buyer discount, that 5% to 10%? How much are you guys paying for insurance transaction fees? My guess is you're netting around $0.85 to $0.88. And then as you think about '24 in your PPO business, how much could come from tax equity versus the tax credit transfer market?

[Robert Lane, executive]

Phil, I'll take that one. I think if I got $0.85 to $0.88, John would have my head. So no, we're actually doing better than that. We're quite pleased with our economics. The partners that we have are -- we've got a number of different partners, both on this first fund as well as on others. So there -- most are corporates and folks that we've been having conversations with for a long time, and it's nice to match them up and with some of our tax equity folks as well. So it's been a market that we've had a long time to develop, and it's just coming together, I would say at a really opportune time.

As far as the amount that we could have here within -- that would be ITC transfer funds versus tax equity funds. We haven't really fully quantified that. I think that the majority of what we'll be doing in the rest of the year will be ITC transfer, and that just has to do with the timing of the funds themselves. But for next year, I fully expect it to be a fairly good combination. And you sort of made an interesting point in there about insurance. I mean this has to work not only for both parties and tax equity has to work for the buyer. It has to work for insurance. It has to work for back leverage. It really takes a lot to make this work.

We're really proud of the work that we've done that our tax team has done that our treasury team has done, our legal team has done together with some of our outside parties in order to make sure that we have something that's successful, would be able sustainable. And it's just -- I think just given the landscape of the IRA, this is going to become more regular way for us and for others who are in this space.

[William Berger, executive]

And Phil, I would add, I think Rob and his team have done a fantastic job, and we planned -- they planned well ahead of time to do a mix of regular way tax equity and ITC sales. So I think it's fair to say we're pretty covered in doc equity to the point where we're going to maybe tell some folks wait until later. So they've done a fantastic job of planning and really thinking ahead, and we have ample amounts of capital there.

[Operator]

Our next question comes from the line of Julian Dumoulin-Smith with Bank of America.

[Unknown Analyst]

It's Alex on for Julien. Congrats on the strong results here. If I may just to kind of kick off, John, you alluded to it, like, listen, there's a lot of growth opportunity out there for you guys. You're looking at it but now may not be the right time. And it sounds like if I'm hearing you, Rob, that, that might be more in sort of the loan book as far as how you want to finance that obviously sort of a bias towards Pecia going forward. I'm curious if you can talk about how that impacts your spread looking forward? Obviously, has to a very oversubscribed spread very, very narrow sort of extra room on the low end of the bench. How do you think about that moving forward? And I guess, can you just confirm that that's sort of where you're high-grading the growth opportunity, if you will, looking forward given the rate environment?

[William Berger, executive]

Alex, this is John. I'll answer part of it and then turn it over to Rob to finish it out. I think that was more of -- we have a lot of opportunities in microgrids, mobility, Europe. We've talked about that. And those are all still there, and we'll still work on those in the backdrop, if you will. But we don't need them right now to do anything close to what we've laid out to be fairly conservative guidance for next year. So those times will wait. I mean to be quite candid, share price is factoring in negative growth and a lot of value is being left on the table. So what's the point? So let's just -- we'll push pause on that.

I think this industry is -- remains -- and if you look at the value edge, where utilities are jacking up rates, even with low gas prices, way gas prices start moving again. who knows when that is, but it's probably sooner rather than later. And you've got falling equipment prices. There's a value wedge. I mean it's pretty straightforward. So the opportunity is there despite increased cost of capital because that value wedge is growing faster than the cost of capital is increasing for the most part, in what has clearly been a historic bare market in bonds.

So I think overall, what we're saying is we'll keep the mix. We've got a nice set of weapons that nobody else has. We have a number of channels that we can grab origination from and we're looking to high-grade all of it. So there's nothing that we're going to pick on. We've got a nice program here with the Department of Energy with Hestia in the loans. We have a nice amount of accessory and service-only business that's capital light to 0 capital. And yes, I like 0 capital. I've liked it. So for those of you who didn't -- I don't care, it's the right thing to do. It's high margin, net margin business, and it's cash.

And the other side is leased in PPA, which is the dominant portion of our business, our core resi dealer, and that's definitely 75%, 80% of our flow and has been all year. And more and more ITC adders are showing up there. So we'll have more and more cash. And so overall, I think we're just going to need as we start moving forward, we're going to continue to push up the unlevered returns, and we're going to look to cut costs to further push the unlevered returns up. And at some point in time, the cost of capital stopped going up Who knows when that is, who knows what point?

And the spread will be no matter what we continue to be very healthy. And if we need to make further choices about what to cut as far as channels and products and so forth, we'll do it in the next year. This is the capital expenditure budget that we've laid out. We're going to stick to it. We like the rate. And we'll keep high-grading as far as pushing up margins to where our shareholders expect them to be. Rob, you have anything to add?

[Robert Lane, executive]

Yes. The only other thing I would add is that just everything that we look at from a standpoint, John is talking about the returns, and we are pushing those returns up. But we also need to make sure that we finance fully through the stack of available capital. We're not looking to do something where it's done on a flyer. Let's just see if it works or not, then we'll address financing later. Anything that we do has to be fully financed really from day 1. And that means that some newer stuff, some exciting stuff. We'll continue to develop, but we're not going to pull a trigger on it unless we know it's something that's going to be corporate capital accretive to Sunnova. So that's really the guiding principle.

[Unknown Analyst]

Got it. Super clear, guys. And if I may just -- listen, there's been a lot of concern out there. To your point, John. I mean you guys are pricing in no growth or negative growth. You can add up in various, I guess, sort of permutations of that. If we look at the bonds out in '26, '28, clearly trading at almost sort of fire sale prices. I'm curious if -- where you sit today, I understand that's a long way off. You're sort of thinking about addressing that, obviously, there's some callability there where you could take down quite a bit of notional value you choose. But just curious how you think about the sort of holdco maturity wall, if you will, out in those years given where they're trading currently?

[William Berger, executive]

Yes. I think first of all, to your point, Alex, it's pretty far out there. And so I think that's first and foremost. But with that said, we've always got the ability to do asset sales. And indeed, I think that we will do some of those next year is our anticipation. And that's going to bring to what Rob just said, focusing on corporate liquidity, right, pulling more cash into the company. So we have that weapon. We have our levered cash flows of our base, which is going to continue to grow quite nicely. And so we'll be able to pile up cash and then be able to take a part of those facilities down at the right time.

And yes, they are trading deeply discounted, and we note that. I'll leave it at that. And there's a number of strategies we couldn't employ, we can refinance. But we have a $14.7 billion of notional cash flow would pile more on every single day. We have a number of financial weapons, whether people want to see them or not, we have it, and we'll take care of that maturity probably well ahead of time. And to underline the point noted where they're trading, it's quite appealing.

[Robert Lane, executive]

Yes. The only other thing I'd say is that we'd rather build up the resources for it, to execute on it in a normal course. I mean, most folks, when they have -- when they see a maturity date, they're executing a year or so before that maturity date. They're not executing 3 years before, especially when the rate on our '26 are 25 bps on the converts and 5.875 on the high yield. I mean, those are still really attractive cost of capital that we had locked in for 5 years, and we're not really in a hurry to go and explain and replace that with more expensive capital today. But we're in a hurry to make sure that we have the resources and everything in place to do so in an efficient manner at the appropriate time.

[Operator]

Our next question comes from James West with Evercore ISI.

[James West, analyst]

So maybe to start off with John. John, how are you thinking about the VPPs or your virtual power plants for [indiscernible] as part of your strategy going forward here, given that it's becoming abundantly clear to everybody in the energy business that we're going to go distributed and utilities are not keeping up. And so how much is that driving kind of your -- any change or any shift or just part of your overall strategy?

[Robert Lane, executive]

Yes, James, it's key. It's -- frankly, it's why I got into this business years ago is I saw that the new energy system, the power system and industry was going to look more like the Internet with a -- instead of a 100% centralized, some combination of decentralized and centralized and different fuels as well. Yes, natural gas will be a part of it, particularly in the centralized side of things. But solar and batteries really are very decentralized technologies and very key to essentially provide more resiliency, reliability at a much cheaper cost to say the least and a lot less friction to say at least as far as getting permitting and installation with regards to transmission distribution line upgrades and all the other stuff. So this is inevitable to your point.

And we're already executing more and more of what we call energy services, others called VPPs. We see this as a key part of the strategy, and frankly, negates a lot of the net metering concerns and so forth. So we'll take an open market that's transparent, open consumer choice basically, let's bring capitalism and consumer choice into play here wide open, and we'll see who wins. And we're seeing more of these type of deals. We didn't announce anything right now, but you'll see those over the coming days and weeks where we're able to essentially aggregate, connect all our customers over our Sentient software platform and be able to sell into the wholesale system and get some more value back to our customers.

Case in point, if you're a customer in Houston, Dallas, this past summer, which the summer seemed to have lasted longer than usual, right? There's a lot of our customers that not only wiped out the remaining power bill they have with the retail electric provider, but they also wiped out our bill and then took them some money. So just think about that. So that's the way Australia works. Japan works, Europe or U.K. works. We've got to get moving here list overhaul and update the power regulations of this country so we can move this country forward instead of having Monopoly's JAK rates up like we talked about in our prepared comments, at a ridiculous pace, which is obviously continuing.

So huge amount of value here, a huge amount of value. We talked about $1 billion over the next few years in the 2030s and cumulative basis. And I stand by that. There's a lot of opportunity here that we can squeeze more out of our asset and customer base and we're doing it.

[James West, analyst]

Right. Right. I totally agree there. And then maybe a quick follow-up a little bit unrelated, but I know you said -- I think you made some comments in the press release about capital needs, but either John or Rob, and it can be literally a one-word answer, but it seems to me you don't need to access the capital markets next year at all to fund the growth that you outlined. Is that fair?

[Robert Lane, executive]

That's fair. Yes.

[Operator]

Our next question comes from Ben Kallo with Baird.

[Ben Kallo, analyst]

Maybe following up on the last question. Just to be clear, and I know you get for said a couple of times, but removing the $500 million corporate capital funding for '24, is it because there's enough growth that was going to be stuff you'd like to have versus stuff you need to have for the growth that you've outlined here? Or are there other factors in removing that $500 million since the last quarter?

[William Berger, executive]

Well, I'll answer first and then turn it over to Rob to give a little more detail. Look, one, it was a forecast pretty far out, really far out. Nobody else does that. Nobody else is going to give '24 guidance at any part of the value chain in this industry other than us on these round of Q3 earnings calls. And so things can change in terms of a forecast that far out. And what we looked at was the market enabled that is tightening up, and I've talked about our pricing power. We've never had more pricing power in the company's history, and we're exercising that. So that's a part of it, raising prices, reducing working capital. Working capital has got expensive to nonexistent in the industry, and we're working with our dealers and reducing that and our OEM partners. And we're reducing operating expenses, and we can. The labor market is moving in our favor. The overall economy is moving in our favor in that regard.

We tend to do better in downturns in the economy than upturns. Go look at the stock price, go look at the business, you can tell. And part of that is we're more like a long-term power company or call it utility, if you will. And so we see -- we saw a lot of opportunity to take advantage of raising price, reducing working capital and reducing operating expenses. And when you're running a large company that we've become very large. And you shave a little bit here, you shape a little bit there. Suddenly, it adds up to real money.

So this is -- we feel comfortable we're going to continue to execute. I'd like to see us even outdo that and continue to pile cash up. And those -- and pile those levered cash flows or grow them over a period of time, next few years like we have been doing, and we see ample opportunity to be able to do that. So we're focused on the liquidity, profitability and cash flow to close the gap and then some, and we've done that already and more to come. Rob, anything you want to add?

[Robert Lane, executive]

No, that covers it.

[Ben Kallo, analyst]

That's a great answer detailed answer. Now just on the ITC sales versus tax equity, Rob, maybe if you could just go into the decision. There's there's like you're giving up something if you do ITC sales versus growing traditional route to tax equity and how you make that decision? And then I have just one follow-up here.

[Robert Lane, executive]

Yes. Yes, because I think there's a bit of a misconception here that if one just sells an ITC credit, there's probably some value being given up, you're not able to take full advantage of all the tax attributes. If an ITC, if a tax equity fund sells the ITC credit, then you really are getting just about all the advantages. There's very little friction. And that's the route we've chosen to take. So we're always going to generate a few tax credits directly, pardon, directly into our balance sheet just because maybe we have some assets that don't fully qualify for some of our tax equity funds, and that just because of concentration limits or whatever, that's a number that's very small. It's less than 0.5% of our total TPO assets.

But the nice thing about the agreement is that we now have a home for that as well, instead of just piling that onto the balance sheet. But the vast majority, over 99% of what we're going to be doing, that is -- those are credits that can be sold out of the tax equity funds. So there's very, very little friction there with regards to the overall liquidity, and in fact, it becomes then accretive on the P&L.

[Ben Kallo, analyst]

Got it. And then just maybe, John, just on working capital efficiency as it relates to your dealers does it impact the relationship with your dealers? And then maybe if you could just talk about the health of dealers just because of the overall economy?

[Robert Lane, executive]

Yes, sure, Ben. Well, look, I think that a lot of our dealers run very good shops in businesses, and some of those businesses are quite large. And all of them are that I can think of are entrepreneurs at started the business. So they know what they're doing and they can run a business through this environment, and we're certainly in this together. And I want to stress that they need something, we'll be there. We need something, they'll be there for us. Is that everybody? No. But our core dealer base is certainly of that ilk.

I would say, look, in terms of payment terms being reduced and so forth, you can certainly navigate it, and frankly, you need to, I mean the cost of money is really high. And it is what it is. We can certainly push pricing up, which is another thing that obviously they're not waiting by the phone like, oh, I'm so glad you called, you're pushing price up again. I said, well, call Chairman Powell. I've got to align into them as well as like stop the spending recess spending from the federal government to push inflation up that was begun by Trump and continue in the Biden administration. So we need -- there's a lot of things that we all can complain about, but we're here. And what are we going to do?

Well, thankfully, we got these utilities and monopolies that just want to push up price no matter what the fuel input costs are. And so we've got a nice price to sell against. And that continues to rise at a faster clip than I think a lot of people really understand, frankly. And then the other side, we're getting a lot more scale globally and the technology is improving in both efficiency and obviously and cost. And so the falling of this.

So all of our dealers can navigate this and some do better than others. Will we lose a few dealers Sure. So that happens. But we're -- nobody is better at making sure that we've been kept hold and manage that risk than us, frankly. And a lot of the industry has adopted the guidelines that we set forth and put in place years ago. So we feel very comfortable about all of our liquidity exposure there and credit exposure, really, sorry.

And lastly, I would say that my feeling is that we are probably approaching a Q1 trough as far as equipment sales pricing point. It won't be this quarter, it probably will be next quarter. And then I think we can firm things up. Will it always be a more challenging environment on the equipment side globally, just given the amount of competition that's come to fore. Yes, who's going to come out of that? I have some ideas, No, I'm not going to say them publicly.

But I do think that at some point here, like I said, my best guess is in the Q1 time frame, we do see somewhat of a troughing and it may stay at that point for a while as far as equipment goes. But I think the volume in terms of pricing, but I think the volume of the equipment purchase starts to move up at that point in time. So I don't think it's -- just like it doesn't grow to the sky. This is not going to fall through the floor as far as the equipment part of the market. And that's, I think, going to take some folks by surprise. There's a lot of value to be had for consumers, both in price and reliability and I keep pointing to that wedge and the value is there for the taking.

[Operator]

Our next question comes from Pavel Molchanov with Raymond James.

[Pavel Molchanov, analyst]

You've talked a lot about the cost of capital. Maybe talk a little bit about equipment. We look at benchmark kind of module pricing down 30% in the last 6 months, lithium-ion batteries down about sharply. In your specific supply relationships, are you observing the same kind of rate of decline as the benchmarks?

[Robert Lane, executive]

Probably more. But as I just answered a question, Pavel. I think that probably troughed somewhere in the Q1 time frame, would be my best guess, but it's possible in certain of these components like, for instance, batteries and inverters rather than panels. I think we'll start to firm up particularly in some of the larger and more better technology players. And in terms of pricing, it probably stays where it's falling at some point, right? So I think the pricing drops at some point in the Q2 time frame. And I think volume, my best expectation starts troughing where you start to move up volumes in the Q1 time frame.

One thing that's interesting is a lot of people are starting to look at in terms of investors with trepidation to the election. I think all Americans look at with trepidation to the election next year. I certainly do. One thing I'd put out there for people to ponder is it's not going to get any better in terms of tax credits and the IRA credits as it is now, certainly in Q1, when we get the final guidance out of domestic content, hopefully by -- before the end of the year out of the treasury, make a decision on batteries, let's go.

But wouldn't it be -- make more sense is that people start to book and contract ahead of the election so that what are you waiting on? The only thing could happen is it gets somewhat maybe a little bit tiny worse. I don't think the IRA is going to get repealed or anything like that for the reasons we've talked about. But I do think that you would see some, at least incremental pull forward in demand because what are you waiting on.

[Pavel Molchanov, analyst]

Right. Can we get an update on where things stand with your commercial opportunity?

[William Berger, executive]

Yes. That continues to move forward. We've signed a number of deals, some with some high-profile companies. I don't think any of which we've made public, but it's a nice business. It will throw off cash next year. And so again, it falls in the side of we're not going to grow it really crazy where there's an ample amount of opportunity there. There's more opportunity than what we're going to take advantage of, frankly, and that's okay. It's a part of our capital expenditure budget that we've laid out. And I want to make that point. There is, in this industry, from now on, the customer count is on budget and forecast and the capital expenditure budget is another. Are they related? Yes, but they're not going to be one for one. And I think we need to start talking about in terms of capital expenditure budgets and the business market is a part of that capital expenditure budget that we've laid out for you all for next year.

[Operator]

Our next question comes from the line of Sophie Karp with KeyBanc.

[Sophie Karp, analyst]

A question on green bond. So what are your thoughts on using this type of financing going forward given where the relative pricing of that turned out to be when you first time -- first time?

[Robert Lane, executive]

Yes. Sophie, I'll answer that and then turn it over to Rob. This was a continuation in terms of our issuance of that bond, which was very timely, I would add, clearly, have a strategy we've had in place for over 2.5 years. And so having the ability to have your company rated is enjoyed only by us in the sector. And so it gives us, again, another weapon another channel of liquidity that others don't have. And so what that also means is we have other opportunities. We have other channels that other people have as well, such as the nonrated pieces in the ABS marketplace.

So we're always going to do a combination of these. We like where we are right now. I think that the corporate capital forecast is very clear, and it stands where it is. And so the rate that we paid is definitely lower than the rated pieces in the ABS market. So again, it was a nice price. Would we want the fix that we issued the first time 2.5 years ago? Obviously so. But there's a lot of things that we wish. And our pricing was not near as high as it is now as a result.

So we operate on a spread basis. So it's something that someday down the road, but right now, we're comfortable. We'd rather be reducing leverage rather than increasing it no matter whether it's asset level or corporate level. And I think that's a nice part of the strategy, clearly, but it's something that we're not going to be doing next year. Rob, anything you want to add to that?

[William Berger, executive]

No, I think just to say or to reiterate what John said is that it was a good and timely fund. And we're very happy that we were able to execute as well as we did with some very strong demand with a lot of long-time investors coming into that moment. But we are -- that's it for right now. And so we're looking to stay here within what we have created and the amount of corporate capital that we're carrying. And we will look over time through the cash flows that we're able to generate to be able to delever the corporate side of the balance sheet.

[Sophie Karp, analyst]

My other question was with the virtual power plants, right, in the whole -- as a whole distributed model kind of begins to take hold, are you envisioning that utilities might want a piece of this business and we'll try to compete with you in people's homes and distributed generation and virtual power plants, et cetera. Is that a competitive threat?

[William Berger, executive]

I'd love to compete against them. I think it's a great idea to how consumers have choice in an open market, like we do in Houston, Dallas, Australia, Japan, Europe and the U.K. I think the rest of the country needs to get with it and update the regulations and let's see the best company compete for the consumers' business and see who wins. So I think it's a great idea to blow open competition and provide consumers choices and I support it.

[Operator]

Our next question comes from Brian Lee with Goldman Sachs.

[Unknown Analyst]

This is Grace on for Brian. I guess, first question, just a follow-up to the previous questions on the liquidity forecast or corporate capital needs. You mentioned there are different levers that you can pull, such as like increasing prices, improving working capital, reducing OpEx to help your 24 corporate capital need down to 0 from 500. Just wondering if you can quantify those major levers and help us purge the gap here a bit more? And I have a follow-up.

[Robert Lane, executive]

Grace, this is John. I think we've been very clear. And these are -- we've been giving a guidance forecast as far as liquidity that's far out than anybody else has. We've been very clear about the levers that we continue to pull. I'd point to things like look at the inventory line on our balance sheet. It dropped by 23% quarter-over-quarter. So I think if you dig and just look at the numbers that we put out, which frankly are huge volumes of data metrics and numbers that nobody else puts out, I think you'll be able to put all the pieces together, it all makes sense to you.

[Unknown Analyst]

Okay. Fair. And I guess, the second question on the EBITDA guide. Sorry, if I missed that. How much of the ITC sales are embedded in your 24% EBITDA number?

[Robert Lane, executive]

We haven't quantified that, but right now, it looks like it's about 15% to 20%. Now that number could rise depending on how we move forward on the mix, but -- and how some of our tax equity partners want to move forward on the mix. But right now, it's a pretty modest part of the guide.

[Operator]

Our next question comes from Praneeth Satish with Wells Fargo.

[Praneeth Satish, analyst]

I wanted to start by just clarifying one thing on the corporate capital. So recognizing it's 0 for '24. I guess I'm just asking about the longer-term strategy there. Has there been kind of a shift in the strategy to basically minimize corporate capital, keep it close to 0, focus on kind of higher-margin customers? Or is this more just a near-term event tied to lower tied to operating cost savings?

[William Berger, executive]

Yes. I think I answered that question earlier. We have the ability to go issue corporate capital and issuing corporate capital doesn't is an asset and the ability to do it as an asset that no one else has. And when I'm speaking of the corporate capital, obviously, everybody can issue equity, but I'm speaking of the corporate debt side. So it's easy to criticize something or to make it into something when you don't have the ability to do it. We have the ability to do it. We retain that ability to do it. We have this flexibility.

We know that we laid out a plan. We know what the resources and the sources of capital that are at least cost where they are. And we've, again, increasing price, reducing the working capital and reducing operating expenses, and we're going to continue to do that. Our flexibility as far as what we can do in 2025 and beyond is pretty wide. We have a number of weapons, both in channels, but also in sources of capital and liquidity, and we're going to continue to build more and more of those case in point, the ITC sales that we did the industry's first transaction on, that's another great point. The Hestia deal that Rob has done is another great point and an example.

So we're going to continue to build those different channels and levers and opportunities to provide more and more liquidity and cheaper capital, and nobody does it better than us.

[Praneeth Satish, analyst]

Okay. No, that makes sense. And then I'm just curious if you could talk about the process that you went through to get the -- that ITC transferability deal done since you guys were one of the first, I guess, how onerous was this process? Does the infrastructure -- is it in place across the industry to kind of scale this much higher in the coming years? And I guess, how would you compare the complexity of this deal versus of ITC transfers versus tax equity?

[William Berger, executive]

I must say one comment because Rob won't do this, he's modest, but we were the first. There's only one first. We were the first and he did it. Rob, you want to finish answering the question.

[Robert Lane, executive]

Yes. It was hard. And like I said, you got to get a lot of folks to come to the table, a lot of folks to agree to the process. I'd say that we -- the buyer who we partner with, though was a wonderful partner. And what you always end up doing is you end up having 4 or 5 law firms involved. And every one of them is trying to protect their clients. And but not every one of them is familiar with tax equity or with the IRA. And so you end up with a lot of different folks trying to get a lot of different points in, but we had a great buyer, and they had a really good counsel that was -- that could see the clear path of the finish line and everything that was required. That's not -- I don't think that's necessarily common.

But I think that what is good is that we now have the blueprint. We now have the model for exactly how it works. And so being able to go to subsequent buyers with that same blueprint with that same model is incredibly valuable. It's just one more piece of a corporate secret sauce, if you will, that we intend to continue leveraging.

[William Berger, executive]

One thing I would add is that service is a key part, and we've talked about this. We are a service company, and that is not prevalent outside maybe 1 or 2 other competitors in our space. So that's something that somebody is going to have to really build that will be interesting. That is a massive heavy lift that takes years, lots of capital and lots of great talent. And so that's another competitive edge and really being able to offer leases, PPAs and so forth.

[Operator]

We have time for one more question. So our final question comes from the line of Jordan Levy with Truist.

[Jordan Levy, analyst]

I appreciate you just wanted to touch briefly on the Service segment for next year. It seems like sort of overall customer growth is kind of the main lever that you can move around here. But just curious after another good quarter in that segment, how you're thinking about that into 2024?

[Robert Lane, executive]

Yes, Jordan, the opportunity there is immense. This industry is not done in what I feel is a good job of taking care of the customers. I think that we can do a lot better. We can do a lot better as a company, and we will improve -- continue to improve. I promise you that. But there is an enormous amount and that is also a very modest forecast.

[Operator]

Those are all the questions we have time for today. So I'll turn the call back over to John for closing remarks.

[William Berger, executive]

We are focused on liquidity, profitability and cash flow. We're going to thin to execute by raising prices, reducing working capital and reducing operating expenses. We clearly see a growing value edge, driven by monopolies raising prices and falling equipment prices. I look forward to speaking with you again in the new year when we can further discuss our continued execution. Thank you.

[Operator]

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.