Sunnova Energy International Inc (NOVA) Q3 2019 Earnings Call Transcript

Sunnova Energy International Inc (NOVA 2.62%)
Q3 2019 Earnings Call
Oct 31, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Sunnova Energy International's third-quarter 2019 earnings conference call. Today's call is being recorded, and we will -- and we have allotted one hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Rodney McMahan, vice president and investor relations at Sunnova. Thank you.

You may begin.

Rodney McMahan

Thank you, operator, and good morning, everyone. We released our earnings press release earlier today and posted a slide presentation to the Investor Relations portion of our website at investors.sunnova.com, which will be referenced during this call. Joining me today are John Berger, Sunnova chairman and chief executive officer; and Robert Lane, executive vice president and chief financial officer. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These include remarks about future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our final prospectus dated July 26, 2019, and in our subsequent filings with the Securities and Exchange Commission. We do not undertake any duty to update such forward-looking statements.

Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared for in accordance with GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release. I will now turn the call over to John.

John Berger -- Chairman and Chief Executive Officer

Good morning, and thank you for joining us for our third-quarter 2019 earnings call. Starting on Slide 3. We experienced another strong quarter of operating results. Our growth strategy remains intact as we continue to grow our customer base, dealer network and breadth of product offerings.

This has helped drive growth in customer count, contracted customer values, adjusted EBITDA, principal and interest received from our customer loans and adjusted operating cash flow. We continue to acquire customers at a rate faster than the overall market and have visibility to a strong backlog going into next year. This provides us with a clear line of sight into 2020 growth. In Q3 2019 alone, we added over 5,000 new customers, which is a 25% increase quarter over quarter and a 48% increase year over year.

During the third quarter, we grew our dealer base and continue to lock in multiple years of exclusivity with our wholesale dealers in various geographic areas. Our dealer network continues to develop and grow and have doubled in number over the past 12 months. Our model leverages our dealers' knowledge, managerial skills and experience in local markets to attract customers at an accelerating pace. Our dealers continue to have success in attracting and retaining a skilled labor force in this environment of expansive growth.

Our wholesale dealers are attracting and managing sub-dealers to address the increase in demand, while maintaining our stringent quality standards and supporting our efforts to lower our per customer overhead costs and increased scalability. At Sunnova, we count on and encourage the entrepreneurial spirit of our dealers to support our growth and overall success. Another driving force behind our accelerating growth has been our ability to provide customers with a wide range of product offerings. Products are defined as a sales-ready contracted service offering for your geographic region that encompasses technologies and are financed by one of our various financing options.

We are experiencing healthy adoption of new products and attachment rates related to our Sunnova SunSafe solar plus storage products. In fact, we grew our origination battery attachment rates to 15%. With a 2.5% battery penetration rate in our customer base, it is clear there is a large growth opportunity surrounding storage. With the devastation in California caused by wildfires and the resulting blackouts and deliberate power shutdowns across the state, it is clear we are witnessing a critical moment across the energy landscape.

As natural disasters take their toll, the energy stability of the national grids become increasingly less predictable. As a result, we are seeing stronger demand for our storage products as customers look for alternatives that provide energy resiliency and reliability in the face of the effects of climate change. In addition, we have developed strong relationships with several homebuilders and remain focused on continuing to develop within that space. We see this as an opportunity for incremental growth looking forward into 2020 and beyond, and we'll give more specifics as we get into the new year.

Turning to Slide 4. We provide a snapshot of our financial results, which are further expanded on Slide 5. Customer count, adjusted EBITDA and the principal and interest we collect on solar loans were all in line with our previous guidance. Our adjusted operating cash flow was positive in the third quarter and increased year over year.

We exceeded $1.7 billion in estimated gross contracted customer value as of September 30, 2019, an impressive amount even at a conservative 6% discount rate. On Slide 6, we dig deeper into our metrics and reflect both our estimated net and gross contracted customer value over the past three years. Using a discount rate of 4%, as of September 30, 2019, net contracted customer value is $1.1 billion or $13.40 per share. This represents only our existing contracted asset base and excludes any upside potential from renewal value, ability to upsell existing customers or any of our growth prospects.

Regardless of discount rate, our net contracted customer value experienced a significant increase from the prior year. We are confident in our future growth potential and ability to execute to our plan even if the economy slows and moves into a recession. When consumers tighten their belts, an average 20% savings on their electric bill becomes an even more compelling value proposition. At the end of the day, we are focused on building strong long-term relationships with our dealers and customers, which is enabling us to achieve our financial results and growth.

With the emphasis we place on providing the highest level of service to our customers for the entire length of their contract, we, in turn, are able to build strong, recurring, long-term cash flows. Over time, we are confident this will lead to an increased growth, lower default rates and enable more upsell opportunities. A formula for financial success now and in the future. We built Sunnova and our strong dealer network to drive top-line growth and deliver operating leverage.

Our model allows each participant in the value chain to focus on what they do best, which on the dealer side includes providing a localized customer-focused selling and installation process. Together with our dealers, we are generating strong asset level and corporate-level economics. We are proud to be a leader in this industry, not only driving the adoption of solar energy, but using our business strategy to help solve the world's environmental challenges, empower the world for the better. Our success is driven by continuing to build out a world-class dealer network with the best entrepreneurs in the business, increasing battery and new technology attachment rates and having the broadest and most innovative product suite for our customers to choose from.

We are here to help our customers power energy independence. I will now turn the call over to Rob to walk you through our financial results in greater detail.

Robert Lane -- Executive Vice President and Chief Financial Officer

Thanks, John. Starting on Slide 8, we are pleased with our financial performance for both the three and nine months ended September 30, 2019. We recorded record revenue of $36.6 million for the third-quarter 2019, a year-over-year increase of $6.2 million or 20%, thanks to strong customer growth. Adjusted operating expense, which represents the full recurring cash expenses to operate our current book of business, was $20.7 million for the third quarter.

We experienced an 8% drop in adjusted operating expense per customer quarter over quarter, even with a onetime G&A increase related to ongoing costs we now incur as a public company. We expect to realize continued success in reducing per customer adjusted operating expenses over the next several quarters. Adjusted EBITDA in the quarter was $15.9 million, up from $15.3 million during the same period last year, even with the increase in public company costs. As we stated last quarter, we fully expect that our year-end adjusted EBITDA will significantly exceed that of 2018.

As noted last quarter, adjusted EBITDA has the full operating impact from our leases and PPAs, but only the costs and none of the customer cash inflows from our solar loans. For that, we must look to customer principle, net of those amounts recorded in revenue and interest or P&I payments from solar loans, which were $4.3 million and $3.1 million, respectively, which is more than double the amounts from last year. As a reminder, management and the board look at adjusted EBITDA and P&I together to get a more complete picture of our performance. In addition, we keep our loans on our balance sheet, which we believe provides us a long-term advantage and a clear runway to recurring positive free cash flow, especially as the securitizations we have had in place to finance those loans are paid down over time.

As the market for loan securitizations continues to improve, we will evaluate the benefit of securitization versus loan sales. Adjusted operating cash flow is another key metric for us. We start with GAAP operating cash flow, remove significant onetime costs, such as our non-capitalized IPO expenses and then subtract the cash distributions to our tax equity partners. Doing that basically puts it on par with our debt from a financing perspective.

To that, we add the principal payments received from our customer loans, as those represent ongoing cash flows from existing assets and then back out inventory purchases and other costs that we expect to convert to cash flows from investing over the next 12 months. Adjusted operating cash flow was a positive $1.6 million for the three months ended September 30, 2019, compared to a negative $1.3 million for the same period in 2018. Estimated net contracted customer value as of September 30, 2019, was approximately $846 million, up 30% from $650 million as of September 30, 2018. The customer value discounted at 6% has been an area of focus for many investors, and Sunnova has demonstrated year-over-year growth in both our gross and net contracted customer values.

Our focus as a company is on producing sustainable, predictable and growing cash flows. We believe that our metrics of customer growth, adjusted EBITDA and P&I, adjusted operating cash flow and net contracted customer value give investors a complete and fair look into an industry that continues to evolve and grow. We have been active on the financing front in 2019, as illustrated on Slide 9. We completed our $178 million IPO; closed a private placement program for up to $364 million of asset-backed notes, of which we've used approximately $140 million to date; refinanced and expanded warehouses with commitments of $350 million; paid down $57 million of senior notes; closed a $168 million loan securitization; and just recently closed on $75 million of tax equity and a $100 million tax equity back-leverage facility.

We anticipate closing on an additional $150 million of tax equity commitments early next month, which would give us over $260 million of additional tax equity commitments. Through our year-to-date debt financings, we have generated more than $60 million of additional cash to the corporate level, further bolstering our equity position. By combining these realized refinancing cash flows with our adjusted operating cash flows, we expect to use very little corporate equity outside of working capital. We are focused on upcoming financing opportunities, including the safe harbor facility, new tax equity facilities and additional debt securitizations in the coming months.

To provide an update on safe harbor, we intend to fund the purchase of $100 million to $150 million of inventory in order to safe harbor an estimated $2 billion to $3 billion of origination. A process that will preserve our ability to use the 30% investment tax credit after it decreases at the end of this year. In just a moment, John will introduce our guidance for 2020, including some additional detail on our cash flow for next year. Much of that is predicated on a securitization schedule that we have planned starting in the first quarter.

We have been building a large asset base over the past several quarters and expect that we will free up a significant amount of cash equity with our refinancing proceeds. At this point, we do not believe that we will have to issue any common equity in 2020 in order to maintain a strong and secure corporate balance sheet. I will now turn the call back over to John to go over our outlook and to provide closing remarks.

John Berger -- Chairman and Chief Executive Officer

Thanks, Rob. Turning to Slide 11, you will find our full-year guidance for 2019 and on Slide 12, our expectations for 2020. For 2019, we are reaffirming the guidance targets we established last quarter, which were a customer growth rate of at least 30% or approximately 79,000 customers at year-end. Adjusted EBITDA of $47 million to $49 million.

Customer principal payments received from solar loans, net of amounts recorded in revenue between $17 million and $18 million. Interest payments received from solar loans between $12 million and $13 million. Adjusted operating cash flow of negative $2 million to a positive $1 million. Today, we are introducing 2020 guidance of customer additions of 23,000 to 27,500.

Adjusted EBITDA of $55 million to $60 million. Customer principal payments received from solar loans, net of amounts recorded in revenue between $30 million and $35 million. Interest received from solar loans between $15 million and $20 million. Adjusted operating cash flow of $5 million to $15 million.

We have a high level of comfort in hitting our 2020 targets as the nature of our business provides excellent visibility into future cash flows. This visibility is reflected in the fact that approximately 80% of the midpoint of our 2020 targeted revenue and principal and interest received from solar loans will have been locked in through existing customers as of December 31, 2019. In addition to our more formal guidance, we have also provided at high level 2020 projected cash proceeds broken out on Slide 13. On the left is cash flow from existing operations of $0 to $10 million, which is our adjusted operating cash flow metric, less our corporate capex or our capitalized expenses.

Essentially, we want to capture the cash flows from our existing business, less the cost of operating our business, regardless of how the dollars get spend. On the right are the cash proceeds from growth investments and financings of $15 million to $35 million. This includes all of our EPC cost, including any dealer network bonus payments, work in process and inventory, as well as all asset-level financing. Asset-level financing includes proceeds from tax equity, warehouse draw-downs and repayments, securitization proceeds and debt amortization payments.

Not shown here, our corporate financings or asset sales. As Rob mentioned earlier, we do not expect to issue any common equity next year. Our goal is to maximize cash flow from our existing operations, utilize cash proceeds from growth assets and financings, and if necessary, supplement our cash needs with other cash proceeds, such as asset sales. We anticipate we will be cash flow positive from existing operations and also generate net positive cash from growth investments and financings, given our anticipated securitization schedule for 2020.

To be clear, our focus is to generate cash for and return capital to our investors. Our ability to reach this point of returning capital to investors depends on us continuing to increase our customer growth rate and asset base, controlling SG&A spend; and finally, using the financing market to complete refinancings, term financing and possible opportunistic asset sales. We remain confident in our ability to continue to drive outsize market growth and achieve superior asset level and corporate financial results through our best-in-industry dealer network and our service platform. We target and expect to continue to see in the near future, 10% unlevered returns at the asset level.

Simply put, this is the unlevered IRR of the cost to put an asset into service against the cash flows we receive as payments from the customer. This also includes tax equity proceeds and cash payments, as well as any other state or federal incentives, such as solar renewable energy certificates. In closing, the residential solar and storage service provider industry is incredibly exciting. The solar and storage market in the United States is significantly underpenetrated.

And currently, we see that not only Sunnova, but the entire space is greatly undervalued. As we implied earlier, Sunnova is trading well below our intrinsic value, and we are not alone among our peers. While each public company may have a different business model or focus on different metrics in evaluating their respective performance, we're all striving to create a clean and reliable energy future for the world. With that, operator, please open the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first response is from Paul Coster.

Paul Coster -- Analyst

Yes. Thanks very much for taking my question. I have a couple of questions, actually. Looking at your website, it's obvious there's still a lot of white space in North America.

It looks like you're adding new dealers. Where are you adding them? And can you explain to us the economics of the sub-dealer arrangement? Does that weigh on your margins in any way?

John Berger -- Chairman and Chief Executive Officer

Thanks for the question. This is John. First of all, we see a couple of different opportunities on a couple of new states that we haven't released yet. Actually, when we look at, they'll be relatively small in size.

So we haven't built a lot of growth expectations for next year in those states just yet. But in the following years, we think they'll provide some incremental amount of growth. In terms of the sub-dealer and where we're adding the dealers, we're really adding them all across. I would say that the Southwest, the West and the Southeast are areas where we're adding the most, given our already very heavy concentration in the Northeast and the Mid-Atlantic.

So we are not needing as many folks out there to help us grow in that part of the country. Sub-dealers and a word, do they impact our economics in any way? No, they don't. They are simply an extension in part of the way that our wholesale dealers leverage up. This business model is very common in satellite cable television, home security, etc.

So this is another model that we've been looking at growing and talking about, and it really experienced a lot of growth given that we've signed up our wholesale dealers this year. And we've expanded that as we've mentioned in the comments this quarter. So we expect to see that further augment our growth in the coming quarters, but not to have any impact at all in our economics.

Paul Coster -- Analyst

And a quick follow-up, if I may. What do you expect the mix of loan, PPA and lease to be in 2020? And does the safe-harbor provisions change that mix, at least for that one year?

John Berger -- Chairman and Chief Executive Officer

Right now, we've been running, you can do the calculations on the appendix. But roughly, it's about 72% lease and PPA and about 28% loans. We don't expect that to materially change, but it could as we move into next year, with there being a bit of a preference, if you will, in the economics for lease and PPA given the investment tax credits dropping from 30% to 26%. We're safe harboring, as Rob laid out.

And so there could be a tilt toward lease and PPA next year, but that's remain to be seen. I think, for sure, if there is no extension moving into 2021, there will definitely be a materially change -- material change to lease, PPA away from the loan, given the drop would be from 30% to 22%.

Paul Coster -- Analyst

Great. Thank you, John.

Operator

Thank you. Your next response is from Philip Shen.

Philip Shen -- Analyst

Hey, guys. Thanks for the question. Just as a follow-up on the wholesale dealer program. John, how many do you expect to add next year? And how much of your 2020 customer growth could come from the wholesale dealers?

John Berger -- Chairman and Chief Executive Officer

The next year, when we look at the overall dealer and sub-dealer, we're combining that number, I think that's the most fair way of looking at it, it is quite possible we'll definitely see more than 20% growth, particularly in our sub-dealers, that could be significantly higher than that. Our wholesale dealers, we don't expect too much more growth in that as we've covered most of the country. There are some pockets out there. I don't want to get into exactly where, but that we would like -- that we're taking a look at to see if it makes sense to sign one or two partners up.

But all in all, what we expect to see is continued growth, combined with the sub-dealers out of our wholesale dealers, and we expect that to be well north of 20% of growth for them. In terms of the dealers themselves, that can be a slightly lower number than 20%, but we are still seeing quite a bit of interest in moving over to become a dealer at Sunnova, mainly because of our wide product breadth and of offerings, our service to our customers, and most importantly, how we serve and work with our most important colleagues and folks that we depend on to serve our customers, our dealers. So that relationship focus and importance is really unique in the industry and it's driving many dealers to come in and talk about becoming a partner with Sunnova. With that being said, I would say that even further driving further dealer interest would be that the loans are becoming, as Paul -- in my answer to Paul just pointed out, a bit economically disadvantaged relative to lease and PPA, and so we see further increased interest to drive and become a Sunnova dealer.

Philip Shen -- Analyst

Great. Can you talk through what you're seeing with labor tightness among your dealer partners? To what degree are your dealer installation volumes being limited by labor? Do you see any major issues today or foresee any ahead?

John Berger -- Chairman and Chief Executive Officer

Yes, we don't. I mean a big part of the benefit of having a model where you have the best people as your partners and entrepreneurs in the field is that they know the people in the field and the communities better than anybody else could sitting from one particular city. And that has given us a huge competitive edge. We have not seen the kind of labor constraints that have been mentioned out there.

It doesn't mean that it doesn't take a little bit longer to hire somebody in one particular spot versus others. But overall, we have not been limited by the availability of labor, and we've not heard anything of the sort from our dealers, particularly our larger dealers. So we remain pretty confident in our execution capability and again are pretty confident in our continued growth rate.

Philip Shen -- Analyst

Great. One more, if I may. In terms of storage, you guys increased your attach rates meaningfully, how do you expect that to trend ahead? If you can just give us some more color on that and maybe by state? Or do you see more in the storage and leases, for example, versus loans? And then also, beyond that, as you think about having substantially more storage over time in your asset base, what's your view on grid services and perhaps any sense as to the timing as to when you may be able to develop a suite of services that could generate value for the company?

John Berger -- Chairman and Chief Executive Officer

Sure. We are seeing accelerated storage growth. I would say that it would be fair to say that the headlines, the unfortunate headlines coming out of California have certainly created a lot of interest among customers. Interestingly enough, I think it's also spreading across the rest of the country.

So it's not specific to California. I think that kind of news would understandably become front of mind as people look at other disasters. I would point out that wildfires and the response that the monopoly utilities have had to do in response to those wildfire concerns and/or causing those wildfires is not the only situation that we both faced previously as a company and as a country, but also continue to face, and that is the increasing amount of storms hitting Texas, Florida and I would say that any part of the East Coast, islands and so forth in the Pacific and the Caribbean. So all these climate change events are having an impact on people's minds about maybe there is a better way of getting your power, a better service at a better price.

And indeed, we're seeing that a lot of demand coming in from really all over the country. We are seeing increased uptake in California. We expect to see more of that because I think it makes a lot of economic and good service sense in terms of reliability. And so we're focusing a lot about growing that storage rate, and we see a good amount of storage growth even this month versus last quarter.

To answer your question on grid services, Phil, we are very focused on cash flow and delivering earnings to our equity investors. And I'm going to prioritize that over anything else. We have some work and activity that we're doing to go out there and make sure that we are in the right position on grid services. I absolutely think that that's where the industry is going in terms of integrating up with the wholesale market versus the decentralized market, if you will, or with the decentralized market.

But right now, I don't see a whole lot of revenue and, more importantly, profitability and cash flow from that in the next year or two. And so we were prioritizing our efforts and our focus to drive cash to the shareholder, but we will and are making sure that we have that option and are making sure that we're not left behind in any way. The first and foremost is to make sure that, that storage attachment rate continues to move up and make sure that we have a storage base so that when grid services in that particular locale becomes something that we have assets and customers that have meaningful size to make a difference and again, drive cash to our investors when it's appropriate.

Philip Shen -- Analyst

Great. Thanks, John. I'll pass it on.

Operator

Thank you. Your next response is from Brian Lee. Please go ahead.

Brian Lee -- Analyst

Hey, guys, thanks for taking the questions. I guess going back to the outlook for customer growth in 2020. I appreciate the guidance here, John. And you do have good visibility, as you mentioned.

But when we think about the cadence and sort of linearity through the year, how should we be thinking about that? And the reason I ask is it looks like most of your year-on-year growth this year is coming in the second half. So just wondering how the cadence might look next year, if we should expect some lumpiness like we saw this year?

John Berger -- Chairman and Chief Executive Officer

Yes. Thanks, Brian. First of all, there is seasonality in this industry. We've talked about it last quarter.

I know you know it, but just for everybody else that may not know it. Your Q1 is going to have your lowest revenue and your lowest amount of in-service pace just because of weather, particularly impacting the Northeast and Mid-Atlantic. And then Q4 is going to be your second lowest, again, for time, seasonality purposes, weather. This year, Q4 will obviously be our biggest quarter.

So the overall structure of the growth trend is more tilted to the back as you may note of. I would say that we see a pretty strong quarter coming up for Q1. But it would not surprise me a least bit that again next year that we'd have a stronger growth period in the Q3, Q4 time frame, just given how fast we are growing. The origination takes roughly about anywhere from four months to six months to get the lion's share, 90-plus percent in service.

And so that, by definition, as we go through and start originating more in the back end of Q1 and Q2, it would start to show up in Q3 and Q4. So I think we will see more of a weighting in Q3 and Q4, particularly in the in-service side of things. But I do expect Q1 and Q2 to grow to some degree against the Q3, Q4 this year.

Brian Lee -- Analyst

OK. That's helpful. Maybe just to clarify, so you think Q1 and Q2 can sequentially be up versus Q3 and Q4 of 2019. I think that was your last comment there.

And then in terms of absolute volumes and new customers, I understand the second half definitely will be stronger than the first half. Are you implying that the actual year-on-year growth rates can also be better in the second half versus the first half? I just want to make sure I'm parsing your comments correctly.

John Berger -- Chairman and Chief Executive Officer

Yes. No, I appreciate that. It is possible. Right now, I'd like to keep the guidance where it is.

And I think that if you're probably doing the math, this is something that we're well on a trajectory that when you look at this range, it looks very achievable, and that is true. And so we're working very hard to figure out how do we continue to increase the growth and year-over-year growth for -- relative Q3 '18 to Q3 '19 was 48% growth. And that's really where it matters in terms of on the operations and what you're looking at trajectory. I think you can look ahead and see that Q4 of '18 to Q4 of '19 is going to be much higher than the 48% year-over-year growth.

So at some point in time, that all numbers catches up with you, but we are seeing continued strong growth and do expect to see that on a year-over-year basis.

Brian Lee -- Analyst

OK, helpful. Maybe a couple more from me, and I'll pass it on. The $15 million to $35 million in cash proceeds, I believe that's a new metric. Can you give us some sense of what that number was in 2019, if there is an apples-to-apples number we can compare it to? And then how should we think about that metric in terms of growth, how you can grow that cash flow metric relative to, let's say, the customer growth target of 30% if you sustain that for a few years here?

Robert Lane -- Executive Vice President and Chief Financial Officer

This is Rob. We're not going to give you full guidance on 2019 only because doing so would really give you a quarter guidance, and we're not doing quarterly guidance. But what I can tell you is it is lower and was negative in 2019 for a couple of reasons. The first was that we started off the year with tax equity terms that weren't as robust as the tax equity that we have right now.

And the second is that we did not do a back half of the year securitization. So we're planning on a very robust securitization schedule next year. And it begins with securitizing a number of assets, we've had both -- some of our more -- some of our newer assets that we've been putting into service in the past couple of quarters, as well as some more seasoned assets that we have yet to put into a securitization. So in all, we -- the numbers will be negative in this year and will be positive next year is how we're taking a look at it.

And there's certainly more room depending on the strength of the securitization market to grow that range that we have for next year. But this year, we just haven't taken full advantage of the securitization market. And that's been deliberate that we were waiting for the first quarter. But as you've seen, the spreads continue to tighten within the securitization market.

So even the incredibly strong securitization we received on our loans at midyear, we would expect to see that tighten even further. And the other thing that's sort of helping in that is that interest rates have been declining. So with the decline in interest rates, we'd expect to lock in -- even with the same spread, we'd expect to lock in a lower long-term interest rate there. And all of that's going to have an effect on what the advance rates that we would be able to receive would be on those assets.

John Berger -- Chairman and Chief Executive Officer

Brian, this is John. What I would also say is that in terms of cash flow from existing operations, that is our cash from -- coming from our proceeds from our customers and delivering to the bottom line. It's effectively our adjusted operating cash flow, plus our corporate capex. So it's basically the spinning of the business.

And I would expect to see -- Rob and I would expect to see that to continue to grow at a fairly rapid rate percentage-wise, but be commensurate with -- not only commensurate with the growth of the customer base, but actually expand a little faster, just given the law of numbers here. So we're very focused on generating that cash flow to the corporate equity. The cash proceeds does include working capital. And so that, as Rob said, as we continue to build up a very large backlog, we're going to come out of the gate in the first of the year, we're going to securitize very quickly and have a fairly large amount to do.

And we have very firm expectations that those proceeds will show up and be able to recycle back into our working capital to continue to escalate our growth rate.

Brian Lee -- Analyst

OK. Yes, it makes sense. And last one from me, and I'll pass it on. Just two regulatory issues, I think you guys have some views on and exposure to.

Can you give us an update on the SREC program in New Jersey, the latest that you're hearing there? And then also the process in Puerto Rico, I think potential for transition charge as part of PREPA's debt restructuring. Any sense of where that process is headed and your exposure there?

John Berger -- Chairman and Chief Executive Officer

Sure, sure. Let's take New Jersey first. New Jersey, I think it's safe to say that given the amount of homeowners, and those are also known as voters in New Jersey, that have the old SRECs, I think I've heard nothing to say anything different that the old program and the current program that's in place that will be old sometime next year will not be touched. It will just be set aside, if you will, and allow it to burn off is probably the best way of saying it.

So we actually feel very -- a high degree of comfort there that nothing will be done to impact that program in any negative way. I think that's very smart leadership of New Jersey. The new program, there's still a lot of debate about what that would look like. However, I think the amount of jobs that are at risk for doing anything that would be substantially lower than the current program is pretty significant, to say the least.

And the state of New Jersey has done an excellent job of leadership for the entire country. They've built a huge economy that's creating a lot of jobs. They're actually leading the way of becoming a carbon-free energy in their state. And so I don't see that they would do anything to really take and put that at risk and those families at risk.

So we're quite confident that something will get compromised here at the next few months -- weeks and months, and they'll put something in there that structurally makes sense for everybody, most especially the people in New Jersey, and that we'll move forward in a program that will have some different rules, but will probably look not too dissimilar to what we have today in terms of some of the economics. And Puerto Rico, I'm sorry, I forgot Puerto Rico. On Puerto Rico, look, they also just recently passed 100% renewable energy target by 2050. The only way to get there is -- just like the rest of the country is to do residential solar.

And there's been a lot of progress made in Puerto Rico on that. There is a huge amount of support within the legislature and the executive branch in Puerto Rico for renewable energy, specifically solar. And if you think about it, it's probably not a stretch of the imagination that Puerto Rico is very focused on resiliency and reliability. And so we've been public that we've had 100% attachment rate there for a long time with storage.

So it's not just about emission targets and climate change targets, it's also about reliability in providing a real stable life for people in Puerto Rico. And so we don't see really any practical movement within the legislature to limit that growth and success that they've had in any way. In terms of what we see on a forward basis is there's always some proposals just given the bankruptcy issues that the territory is experiencing, but by and large, again, the leadership of Puerto Rico has done the right things very consistently and maintained a very firm focus on growing solar and storage adoption in Puerto Rico.

Brian Lee -- Analyst

Thank you.

Operator

Your next response is from Julien Dumoulin-Smith. Please go ahead.

John Berger -- Chairman and Chief Executive Officer

Hey, good morning to you, Julien.

Julien Dumoulin-Smith -- Analyst

Hey. I just wanted to follow up a little bit on some of the last questions about cash flow. I wanted to emphasize your -- fixate a little bit more on return of cash flow, if that's possible. Can you guys talk a little bit on how you think about that now that we're reaching this inflection point as they clearly don't need equity? But rather let's flip that conversation around and talk about what -- and in what form does any eventual return of cash flow look like from a corporate perspective?

John Berger -- Chairman and Chief Executive Officer

Yes. As you know, we are very focused on that. I think the first thing is that we want to continue to increase that asset base. And these are the contracted cash flows.

And we pointed out that we had a very large increase in that value, up to almost $850 million. And that's on a PV 6. I think a more fair way of looking at it, if you look at our securitization we did way back in June and then some recent securitizations in the marketplace, that cost of capital well to the cost of the entire stack has been 4% or even lower. So I think as you can see, that we feel like a more reasonable discount rate would be a PV 4, and that would be, as we stated in our comments, over $1.1 billion.

As you build that asset base up, that will, in turn, generate cash flow that as you continue to basically balance between the proceeds or in the amount of leverage that you put on the corporate balance sheet through the ABS marketplace that you're going to be able to balance that and effectively generate more and more increasing cash flow to the equity over time. I do feel like it will take some time to do that. I don't have an exact date. I can -- I would certainly give you updates on quarterly calls about our tracking toward that.

And most importantly, when we do big transactions, particularly in the ABS market, we can give you updates about what we're seeing. Right now, we're going to end the year at a cost basis of something around $2 billion cost of assets and then we'll have some additional backlog in there north of $2 billion. I do see that the range, and it's a big range, but just given the market conditions, when you're looking out, it'll be somewhere between the $4 billion and $6.5 billion mark where we could start to talk about return of capital, whether it's a dividend, share buyback or whatever that may be. That's most likely probably something we start addressing over the next couple of years, looking out in the time frame something from 2020 to 2024.

There is that when you -- and I stated this in my comments, Julien, if we can grow even faster than what we've laid out, and we can continue to limit our expenses in terms of the SG&A and the market can continue to be as accommodative as it has been and I would also point out that that's been mostly on the risk-free move in terms of the general interest rate drop. The risk premium in our asset class has not dropped back down to where we executed in November of last year. I do expect that to happen at some point, just given the -- how well these assets are performing, particularly our assets. So I continue to see a lot of big tailwinds in the marketplace that may pull that up some, but we are very focused on looking at ways to return capital to shareholders as soon as possible.

Julien Dumoulin-Smith -- Analyst

Got it. All right, excellent. And then can you talk a little bit more about some of the nuances to the 2020 cash flow that itself? So in this $5 million to $15 million, for instance, can you elaborate a little bit further about the considerations for the ITC safe harbor? Just what are some of the other nuances in there? And even if I could dig it a little bit further, how do you think about the safe harbor, given the continued growth from a customer perspective across the footprint here, too?

Robert Lane -- Executive Vice President and Chief Financial Officer

This is Rob. So I'll try to go ahead and tackle that. So the safe harbor is definitely built in there. What we are doing with the safe harbor this year will be -- is to build up the inventory that we'll be using for the next two years or more to be able to maintain that 30% ITC.

So as we mentioned, the proceeds from that 30% ITC tax equity will be in that $15 million to $35 million. It also includes a scheduled amort that we have and expect to have, given the payment schedule that we have in our securitizations, as well as in our warehouse facilities. And then, of course, it includes the refinancing proceeds when we take the securitizations to market. When we look out at the safe harbor, what we're using right now, we think, is going to be able to help the safe harbor at least for the next two, possibly three years.

We don't want to make a huge bet on what government actions are going to be. So we're designing our safe harbor to be able to be flexible enough that if there is a compromise where the 30% ITC comes back in force that we're able to utilize our safe harbor best to be able to maintain that and take advantage of that, but mostly to be able to take advantage of the market if it does not materialize in the near future.

Julien Dumoulin-Smith -- Analyst

All right, guys. Thank you.

Operator

Thank you. Your next response is from Michael Weinstein. Please go ahead.

Michael Weinstein -- Analyst

Hi, guys. Thanks for taking my questions. A quick one about the creation costs. How are batteries -- how the battery and storage attachment affect creation costs? Can you give us a sense of how that changes?

John Berger -- Chairman and Chief Executive Officer

Yes, Michael, it's John. In terms of battery cost, that is something that obviously doesn't follow any sort of methodology, if you will, on a per-watt basis. I think we've been very clear that we would like to focus on addressing customers, not megawatts in this industry. We serve customers, not megawatts.

And -- but the battery attachment rate is a big exhibit A as to why that we need to get off any sort of per watt metric. And we've -- you can certainly get to the per watt in the appendix information that we've laid out that, I think, is industry-leading in its detail. But you would expect to see those costs continue to increase on a per-customer basis. However, to be clear, when we deploy capital, I made it very clear that we are making a 10 unlevered on an average basis.

And that was true on the batteries as well. So overall, we expect that the attachment rate to improve and enhance our profitability as a business because it enables us to grow even faster, serve our customers better unlike other strategic options, as I mentioned earlier in the question that Phil asked on grid services. That's a big deal, certainly in the future. And who knows what other kind of technologies, demand-side technologies, other generation like generators that we can enable by having some storage and the control electronics that are coming out from the inverter companies to be able to enhance our services and grow our revenue and profitability on a per-customer basis.

So I see the attachment rate being something that, quite candidly, gives us a lot of ability to increase earnings and drive increasing faster cash flow down to the equity, both in the near term and certainly in the long term.

Michael Weinstein -- Analyst

Great. And then also just one last one on safe harbor inventory going forward and how you will use that? What are the dynamics? And how that will be used with dealers in order -- will you be using it to attract new dealers? How does the safe harbor inventory actually get passed down to dealers, if you will? I'm not too sure how that dynamic works.

John Berger -- Chairman and Chief Executive Officer

Sure. Again, we have, obviously, especially with our wholesale dealers, very close relationships in using their sites and being working with them. So that's the lion's shares I made reference to last quarter, and it's roughly still the same, about 80% of our origination is coming from our dealers that are either fully exclusive for multiple years or are in some form of exclusivity to us. We also are -- already have supply chain setup for batteries.

That's been because of the short supply last year and just a bit of a different nature of that component versus others, at least at this time being, we've been used to moving equipment into a dealer network. So this certainly puts that a bit more intensity on that ability to manage the supply chain. We've hired accordingly and putting in the right systems to be able to track the inventory and make sure that we're making the appropriate filings and documentation for the government and our banks. So we're all ready to go.

And will it be something that attracts new dealers? As I mentioned earlier in answering the dealer question, the simple answer there is, yes. I don't think that we will be alone in that for others that are using dealers in the marketplace, which is basically everybody, as you know, Michael. I think that that would also attract folks to them as well. Obviously, we feel like we have a lot more to offer in terms of product offerings, our total focus on the dealers and our growth prospects in many other regions and products and technologies, and we've chosen very good technology partners as well with regards to the batteries in particular.

So we're quite confident that, that will -- this -- as we move forward into 2020, the safe harbor strategy would actually enhance our competitive capabilities or moat, if you will.

Michael Weinstein -- Analyst

Yes, that makes sense. Actually, one last one. I know we discussed the SREC program in New Jersey. What's actually in the 2020 guidance for SRECs, especially given that volumes are declining slightly in New Jersey?

John Berger -- Chairman and Chief Executive Officer

Yes. I would say that in terms of breaking out, let me answer the last question, Michael, first. We have broken out, I think it's unique out there in the marketplace on a state by state, our top 10 states on the in-service. Again, I would say that, that kind of quarter to quarter, you will see variability.

You can see that there is a high degree of increase in quarter-over-quarter in New York, for instance, a bit of a flattening in New Jersey and Puerto Rico and then California jumped up. That may or may not be a consistent trend. I expect, certainly, I wouldn't tell you that New York is going to continue to grow at -- I think it was 250% quarter over quarter or anything of that nature. So there is some variability within the quarter you should expect to see in the region.

So overall, I'm very pleased with the New Jersey growth rate. Obviously, we're trying to continue to increase that growth rate even further from what we've listed here across the board, so that's not any specific state. But in terms of our guidance there, it is appropriately weighted in terms of New Jersey, a little bit more conservative than we had this year. And so we feel pretty comfortable in our New Jersey guidance and with regards to the solar renewable energy certificates for next year.

Michael Weinstein -- Analyst

Thanks very much.

Operator

Thank you. Your next response is from Sophie Karp. Please go ahead.

Sophie Karp -- Analyst

Good morning, guys.

John Berger -- Chairman and Chief Executive Officer

Good morning, Sophie.

Sophie Karp -- Analyst

Congrats on the quarter. Thanks for taking my question. Real quick here. So in your guidance for next year, it seems like your loan -- principal and interest from your loans are growing at a much higher rate than core EBITDA, if you will, and you also discussed that loans would be sort of disadvantaged in this environment.

Could you help me understand what's happening here?

John Berger -- Chairman and Chief Executive Officer

Sophie, this is John. Yes, and I'll answer the question first, and then Rob can finish anything I leave out. But bottom line is this goes to the predictive -- high predictability of the business. And so as I mentioned, that we have over -- about 80% of our revenue, which does include the principal and interest moving into next year basically within 60 days here, from where we're talking today, so at the end of the year.

And what that means is that a lot of those loans are already in our -- either in our in-service customer base or in our backlog. And so we don't see how that would be impacted, obviously, by an ITC change. We are seeing a faster prepayment rate, that has a lot to do with we were very conservative on our pricing and our loans, and we continue to slightly expect, particularly as interest rates have dropped here, and there's a lot more refinancing activity in the mortgage market, as everybody knows, that we continue to see that, that P&I target that we've given, as Rob stated, is probably -- is fairly conservative. So bottom-line answer is that much of that P&I forecast is already either in our customer base or in our backlog.

So we feel pretty confident. And indeed, it may turn out to be a bit conservative. Rob, is there anything you want to add?

Robert Lane -- Executive Vice President and Chief Financial Officer

Yes, the only other thing I'd add there, so if you just keep in mind that adjusted EBITDA has all of the costs of our loans. It really doesn't have the cash inflows from the loans. That's broken out. So as the loans become a bigger part of our portfolio and even with the drop in the ITC, we're still seeing a lot of growth in loans, we would expect to see that there's more costs associated with servicing those loans.

And that will all be captured in the adjusted EBITDA. But then you'd expect them to see a very outsize piece of growth in our P&I. And again, that's why management and the board look at it together. I mean for reasons because of the SEC, we're not allowed to show them together or to add them.

We'll have to leave that up to you if you wish to do that. But internally, that is how we analyze the business is cash flows that we're receiving from our customers versus the cash flows to run the business and service those customers.

Sophie Karp -- Analyst

Got it. Very helpful color. And one more, if I may. So you mentioned that you're looking at pretty active securitization schedule early next year, and maybe it's a little early to talk about that, but can you give us some preview maybe, are you looking to do it on preflip assets? Or what kind of advance rates you may be looking at and the rates compared to your previous deals that you've done? Any color you could share on that?

Robert Lane -- Executive Vice President and Chief Financial Officer

So I don't want to get into the business of predicting where interest rates are going to be in the market. What I can tell you is that I expect that our spreads will continue to narrow. You've seen that happen. If you look at the history of our securitizations, it's right there in Note 7 of our financial statements.

You can see that each successive securitization has been done at a better rate than the prior one. So I would expect that trend generally to continue. We expect to do, I believe, about -- I think our current plan is to do five securitizations next year. And as far as the assets we'd be putting in there, we believe the first securitization would include both pre flip and not post flip, but include assets that we had had in there, that we put together when we -- before we were using tax equity and back leverage to put our assets together.

And you could see that in some of our older facilities. So -- and those are very well-seasoned assets, they have a very strong track record and really, if -- whatever defaults, we're in the early years, those have pretty much been flushed out. So we expect that, that will be pretty darn strong. But again, we're hoping to do about five securitizations next year, and we expect to do the first one within the first quarter.

Sophie Karp -- Analyst

Excellent. Thank you.

Operator

Thank you. Your next response is from Ben Kallo. Please go ahead.

Ben Kallo -- Analyst

Hey, thanks for taking my question. Just again on visibility, maybe, John, could you just talk a little bit about heading into next year, if you have the number of dealers set pretty much for your guide? And then could you just maybe help us contrasting the direct sales force with visibility versus a dealer model? Thank you, guys.

John Berger -- Chairman and Chief Executive Officer

Sure. Hey, Ben, it's John. First, what I would say is that our plan is built on our existing dealer base and sub-dealer base. So any additions, and we do expect to have more additions as I laid out, that the growth would be something that we would -- did not have much in the plan for, to be candid about it.

And we are seeing a lot more interest to become a dealer, and I've laid out all the reasons why with us. And so we do see some potential more opportunities. For instance, the homebuilder markets have made a very -- I've mentioned in my comments, and we'll give more color on as we get into next year, that is not in the plan, as I stated earlier on the last quarter call as well. So there's a fair bit of -- a very fair bit of confidence in our growth period and on profile going into next year that is not predicated on any sort of significant amount of dealer and sub-dealer growth.

I will also point out as an antidote, we had our best sales day ever in the company's history yesterday, both in-service and in net origination. So the growth trend continues. And certainly, we expect to see a lot more dealers and sub-dealers join us over the next few months and help us augment that 2020 growth.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Rodney McMahan

John Berger -- Chairman and Chief Executive Officer

Robert Lane -- Executive Vice President and Chief Financial Officer

Paul Coster -- Analyst

Philip Shen -- Analyst

Brian Lee -- Analyst

Julien Dumoulin-Smith -- Analyst

Michael Weinstein -- Analyst

Sophie Karp -- Analyst

Ben Kallo -- Analyst

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