So I think that’s overall just a unfortunate and cloud that at some point will blow away, and because the reality even when you look at California, which were not big in California that made that point over and over, but just looking at California. I think they’re surprising strength there. I know, there is — the numbers when you run the numbers make a lot of sense, why? Because utilities jacked up rates like crazy in the last 12 months, and we’re continuing to see that across the country. So you’re selling into a industry that is increasing rates despite natural gas prices plummeting to historic lows and orders of 50%, 19%. Just in the last week alone, three 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, it 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 a declining and then you’ve got additional incentives through the IRA that are yet to be employed, specifically, the domestic content ITCR. So all of this is, if you look at the numbers you look at what’s going on, yeah, it’s difficult to move when you have a name change that is brought in as significant as what California did, and that causes a lot of pain because people need to change innovator. And now you have to sell a battery. How do you do that — that just doesn’t happen like a light, switch people, some people adapt faster than others. And so I think overall the fundamentals are really good across the industry and the — the ability to see that through the headlines, negative headlines is very challenging.
What that means for those that continue to execute like Sunnova, this is a great time. This is the kind of time where you can really gain market share. It’s not just us. Obviously, there’s another peer doing it as well and pick up a 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 three years ago, or so two three years ago. So, a great time fundamentally and this too shall pass, but we’ll come out the other end of this much, much stronger, with new technologies, cheap cheaper storage and better customer service.
Q – Ben Kallo: And if I could sneak one in just Bob, thank you for that. You saw coming into election year. I know we’re still early, but how are you judging risk or assessing risk and you had an election year, if you could just talk about that and what your policy before IRA [ph].
John Berger: I’m just trying to stay away from politics. I’m not going to say, you know, 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 been as long as I’ve been in this industry, we don’t really need anything. We don’t. We just need what the IRA is provided to stay intact largely and when you look at the amount of investment in manufacturing plants, and even customer growth in the so-called red states, 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 his provisions.
If anything just being located in Houston, I will say that there’s more activity on the hydrogen and carbon sequestration in our area, than I’ve ever seen by multiples and very large companies so-called conventional energy, oil and gas, conventional power are now fully engaged in IRA. So I think it’s — I think we’re in a — we are certainly have energy policy. It’s in place. And I don’t think regardless of the election outcome that that’s going to change.
Q – Ben Kallo: Thank you.
Operator: Our next question comes from Joseph Osha from Guggenheim Partners. Your line is now open. Please go ahead.
Q – Joseph Osha: Yes, thanks and good morning folks. Two, questions. First, I’m wondering if we could drill down maybe a little bit more on the two converts with they are trading at the levels that they’re trading at is the plan are 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 could get a better 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.
John Berger: Thanks, Joe. This 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 lumber through the cost of the asset with the ITCs et cetera. So — how do we go about doing this and obviously, 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 of 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 and 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 the securitizations in place for years.
So, we’ve got a number of weapons, but it’s not lost on us that the debt’s trading at a very attractive level and my primary focus is to make — generate the cash to pay that debt down and then whatever’s left as it makes sense we can refinance it as Rob said earlier, Rob anything you want to add to that?
Robert Lane: Sure — We just want to be responsible stewards of capital. And at some point, that’s going to mean repurchasing in the open market and another for parts is going to — making sure that we continue to just build up cash but we will, we’ve got optionality between now and later in 2025 which would be the prudent time to go ahead and refinance does note.
Joseph Osha : Okay. Thank you. And then my other question, I wondered one of your folks said to me at one point talking about the dealers in making working capital available to dealers that he said 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?
John Berger: 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 and years ago. It’s now become an industry standard given the last couple of years. I think it’s a clear that we know how to manage that risk better than anybody else, period, full stop. 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 failed quite a few of them. And has that failure rate gone up over the last year? 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 onboard 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. 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.
Joseph Osha: Thank you.
Operator: Thank you. Our next question comes from Mark Strouse from JPMorgan. Your line is now open. Please go ahead.
Mark Strouse : Yes, good morning. Thanks for taking my questions. Just a couple of quick ones, I think, for Rob. So I fully appreciate the greater than 20% reduction that you’re targeting in pro forma OpEx. In 4Q, though the pro forma OpEx was a bit higher than what I think was implied in the guide. Can you just kind of talk about what drove that? And then the 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.
Robert Lane : 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 increases 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. 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 into service. So a combination of those things. And if you look at the guide, I think, we’re talking about 20%, give or take, as a combination of the adjusted EBITDA plus the P&I.
And I think that we’re still looking at that the base case that we have calls for somewhere around 35 million to 40 million 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. The transferability has really opened up this universe to a lot of folks, but 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 that becomes much more attractive to them. And so our goal is to continue to trade to convert ITC buyers into tax equity partners on a go-forward basis.
Mark Strouse : Got it. Thank you, Rob.
Operator: Our next question comes from Kashy Harrison from Piper Sandler. Your line is now open. Please go ahead.
Kashy Harrison: Yes, good morning and thank you for taking my questions. So my first one is on the liquidity forecast slide. Does this charter 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?
Robert Lane: Yes. So what I’d say is that this is assuming the current cost of debt environment. We’re not we’re not assuming any improvement in the risk-free or any improvement in risk premium, although, we are seeing risk — 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 we’re able to take advantage of better pricing. That’s certainly accretive to those numbers. 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 million to $50 million of additional liquidity. And then if you look at advanced rates I would say that you’re probably talking about seven points of advance for each point of interest expense.
So at each point — each point of interest rate improvement or degradation. So right now the risk-free came back up to about a book of 4.3. It’s come back down since then there’s still the belief that it goes down further in the year. If you were to see a one point improvement in the risk free with that anything else changing, we would equate that to about six or seven points of improvement in advance rate and that would translate into another at about $45 million to $50 million. You could extrapolate out to another 300 million of cash generation whole assuming that pricing held steady.
John Berger: One thing, Kashy, it’s John I would add that the assumption of the ITC adders. And 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.
Kashy Harrison: Appreciate that. Yes, well since you brought it up can you give us a sensitivity on the ITC as well?
John Berger: I mean somewhere it was 32 to 40 would be our kind of maximum. It may be too conservative given some other commentary that I would say we haven’t considered anything north of 40?
Robert Lane: Yes. I mean most 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 the any change in the recourse debt. So it’s not a lot going to be call it 225 to 250 in this capital in this plan. 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 done tends to be an appetite for people to want to use domestic content.
We just need to get the final rules and the nature of that 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. We’re building what we’re targeting.
Kashy Harrison: Appreciate all that color and then just my quick follow up question. Spreads 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 why that competition comes in and then we’re back to that 600 range with that 800 to the 900 to 1000. Just trying to understand when competition comes in and pushes it back to normal like a normalized level?
