Altus Power, Inc.

Good morning and welcome to the Altus Power first quarter 2022 conference call. As a reminder, today's call is being recorded and participants are in a listen-only mode. A question and answer session will follow the formal presentation. At this time, for opening remarks and introductions, I would like to turn the call over to Chris Shelton, Head of Investor Relations. Thank you, sir. You may begin your presentation.

Good morning and welcome to Altus Power's first quarter 2022 earnings call. Speaking on today's call are Greg Felton, Co-Chief Executive Officer of Altus Power, and Dustin Weber, Chief Financial Officer. In addition, Co-Chief Executive Officer Lars Norell will be joining us for Q&A. This morning, we issued a press release and a slide presentation, both of which can be found on our website, www.altuspower.com, in the investor section. It's also available on the SEC's website. As a reminder, our comments on this call may contain forward-looking statements. These statements refer to future events, including Altus Power's future operations and financial performance. When used in this call, the words anticipate, enable, expect, believe, potential, will, should, and similar expressions as they relate to Altus Power are as such a forward-looking statement. These statements are subject to various risks and uncertainties. Actual results could differ materially from those predicted in the forward-looking statements. Altus Power assumes no obligation to update these statements in the future or if circumstances change. For more information, we encourage you to review the risks, uncertainties, and other factors discussed in our SEC filings that could cause our actual results to differ materially from our current expectations. Additional information concerning factors that could cause actual results to differ materially from those discussed during our conference call or in today's press release and slide deck can be found in the company's Form 10-K, filed on March 24, 2022, with the SEC and other documents filed by the company from time to time, including the company's quarterly report on Form 10-Q, filed today. During this call, we will also refer to adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures. Our management team uses these non-GAAP financial measures to plan, monitor, and evaluate our financial performance, and we believe this information may be useful to our investors. These non-GAAP financial measures exclude certain items and should not be considered a substitute for comparable GAAP financial measures. Altus Power's methods of computing these non-GAAP financial measures may differ from similar non-GAAP financial measures used by other companies. More detailed information about these measures and a reconciliation from GAAP net income to adjusted EBITDA is contained in the press release issued today, which is available in the investor section of our website and was furnished on form 8K with the SEC. Finally, for clarity, while our slide deck is meant to provide helpful illustrations for our prepared remarks, neither Greg nor Dustin will reference them directly. And with that, I'm pleased to turn the call over to Greg Felton, Co-Chief Executive Officer of Altus Power.

Thanks, Chris, and a warm welcome to everyone joining our call. I want to begin by thanking the entire Altus team for their tireless hard work. Their continued dedication positions Altus for success each and every day, and we believe is ultimately responsible for driving our long-term growth. Today, I'm pleased to report that our first quarter results position us well to meet our 2022 adjusted EBITDA guidance of $57 to $63 million and achieve our adjusted EBITDA margin in the mid-50% range. We also continue to progress on our over one gigawatt pipeline, and I look forward to offering further detail on our customer engagement and pipeline segmentation in a few minutes. First, let me offer some commentary on first quarter results. Our adjusted EBITDA guidance was designed with quarterly fluctuations in mind, driven by the seasonality of our business. We anticipated first quarter would be our lightest for revenue and EBITDA margin. and that the remaining quarters in 2022 will be characterized by higher revenue and expanded EBITDA margin, which we expect will allow us to achieve our adjusted EBITDA range for the year. Seasonality of our portfolio is attributable to the fact that 51% of our existing megawatts are located in Massachusetts and New Jersey, where winter months have much shorter daylight hours, and therefore, the economics for these projects are weighted toward the second and third quarters. There is also seasonality present in our construction program, where our team shows the highest efficiency during the second and third quarters, resulting in new projects being completed in third and fourth quarters. Finally, as forecasted, our 2022 adjusted EBITDA guidance contemplated a step-up in general and administrative overhead expense, in anticipation of growth opportunities, and we saw the effect of those increased costs during the first quarter. Today, I'm looking forward to addressing topics which are critical to Altus and the strong demand we see for many of our projects. These topics include an update on client engagements, the evolving economic argument for solar, a description of community solar, which we believe is quickly expanding the reach of our projects into the residential segment, and finally, an update on our project pipeline and construction progress. After that, Dustin will take you through our financial highlights, followed, of course, by your questions. Starting on client engagement, in just seven weeks since our fourth quarter call, our origination team has been in continuing discussion with new potential customers. In many cases, these are bilateral introductions fostered by CBRE with counterparties who want to take advantage of solar without the distraction of their time or commitment of their capital away from their primary business. We believe this is the opportunity that Altus offers, and with Blackstone and CBRE's collaboration, we're now offering solutions to more and larger prospective customers than we have in the past. We look forward to updating you in future quarters as we begin to convert these potential customers. An additional aspect of client engagement I'm pleased to share is that we're seeing signs of Altus's growing brand recognition among commercial customers. In several cases, prospective customers have seen announcements like our partnership with Trammell Crowe and have contacted us directly to inquire whether Altus can offer a similar solution for their portfolios of either existing buildings or development sites. Now, I want to address the current economic argument for solar and why the demand we're seeing for our projects is currently the strongest in our company's history. Our commercial customers are proactively trying to reduce their carbon footprint to achieve their sustainability goals and their drive to decarbonize is now accelerating thanks to rising electricity prices. The U.S. government's 2022 annual energy outlook revised its forecast for electric transmission and distribution rates upward by over 4% versus the 2021 report, and we expect the current inflationary pressures impacting material and labor to exacerbate these projected increases. A more immediate upward pressure on utility rates is the rapid rise of natural gas prices we're witnessing across the U.S. and globally. Natural gas has become a prominent feedstock for electricity generation over the past 5 to 10 years as coal and nuclear plants have been decommissioned. Over the past few months, natural gas prices in the U.S. have exploded higher to levels not seen since 2008. Unless prices fully revert, utilities across the United States will be required to purchase natural gas at elevated levels, which should ultimately get reflected in their customers' electricity bills. We believe the pressure on utility rates will expand the economic advantage of solar. Altus benefits from a unique tailwind associated with these rate pressures due to our variable rate power purchase agreements, or PPAs, which have rates that increase and decrease at a discount to the prevailing utility rate. Our variable rate contracts make up approximately 60% of our current installed portfolio. We're happy to sign either fixed or variable rate contracts, but the long-term expected increase in utility rates is precisely why we prefer these variable rate contracts. We believe the increased revenues of the recent rate increases will take a few quarters to filter into our revenues as utilities gradually pass those costs through on a deferred basis. Turning now to a discussion on our expanding customer base, my remarks to this point have focused on our commercial and industrial customers. Another source of customers is our growing portfolio of community solar. which includes residential customers who sign up as off-takers for our commercial-scale projects. Currently, about 11% of our installed portfolio, or almost 40 megawatts, is powering over 5,000 community solar customers, and we expect to see significant growth in this customer segment over the next few years. Some of our most recent contract wins have been portfolios of community solar projects, many of which are in our construction pipeline. Given the growth we're anticipating from this segment over the next few years, I'd like to provide further detail on these relationships. Community solar is available in utility territories where the Utility Commission has approved a net metering tariff. Eight of the 18 states in our footprint currently have such tariffs in place, with our largest markets including Massachusetts New Jersey, and Minnesota. Community solar customers receive the economic benefits of solar power at essentially a bulk discount since our projects enjoy economies of scale when compared to residential solar rooftop projects. In addition, there's a social benefit by allowing Altus to reach customers who either live in apartment buildings or can't otherwise qualify for a residential rooftop project. Community solar programs socialize the benefits of discounted clean electricity by allowing Altus to service a broad segment of the community. For these reasons, we look forward to more opportunities to serve community solar customers across our footprint, as well as the potential to expand into additional states that enable net metering tariffs. We hope these additional details on our contract types, sensitivity to utility rates, as well as community solar opportunities all provide better understanding of our business. I'd like to give additional details regarding our pipeline and why we remain positive about both the development additions stemming from the strong customer engagement I previously mentioned, as well as a strong flow of both small and large portfolios of operating assets for us to acquire. Here are some additional segmentation of our over one gigawatt pipeline to help investors and analysts track our progress. First, our pipeline is composed of approximately half potential operating acquisitions and half projects under development. With respect to the half of our pipeline, which are operating acquisitions, a quarter is made up of single assets or batches of assets, which we view as ordinary course. and the remaining three quarters is made up of larger operating portfolios, where execution certainty is generally less predictable. That said, these opportunities have the potential to provide tremendous synergies and scale to our portfolio. Our origination team continues to devote time to both sets of opportunities. because of our track record of successfully identifying commercial and industrial projects and portfolios where our specific expertise, structuring creativity, and efficient cost of capital can produce solid returns with the added benefit of a shorter runway to generating cash flow. And while we remain highly selective with respect to these opportunities, we expect to close on a number of operating acquisitions each year which would result in adjusted EBITDA and cash flow generation, which we covet. I do want to take a moment to comment on the recent rapid rise in interest rates. Rising rates are clearly pressuring asset values in the public markets, and we believe higher borrowing costs will impact asset values in the private market as well. While this type of repricing can slow the pace of activity in the short term, as sellers are forced to reset price expectations, we believe Altus is relatively well positioned for the current environment. We believe we'll continue to have ample access to debt at attractive spreads and also a significant cash position available to deploy into attractive opportunities. Turning now to the half of our pipeline made up of development projects, We're providing some buckets to help investors understand the cadence of when our projects will reach commercial operation. Approximately 20% of these projects are currently in construction or pre-construction. Another 20% are in contract or under negotiation. And the final 60% represent projects from our customer engagements, which are progressing toward an agreement in principle. Two points to emphasize on our development pipeline. First, much of our new customer engagement outlined earlier is not yet included in these numbers. As we emphasized with our Trammell Crow announcement last quarter, megawatts are only included in our development pipeline once we've reached basic agreement on specific projects. Our origination team continues to advance a large pool of new clients and remains focused on advancing all of them into our pipeline in the coming quarters. The other factor reflected in our pipeline is our shift to larger customers with multiple potential projects. In other words, the more programmatic origination opportunities which we previously outlined. While these larger development portfolios have a longer development cycle, we believe that focusing on these larger relationships will ultimately allow us to scale our portfolio more rapidly and profitably. One consequence of this approach is that we're consciously spending less time engaging customers with individual projects, and we've therefore removed some of these individual projects from our pipeline in favor of newer multi-project opportunities as we've described. We hope these details on our pipeline help to provide better insight into our business. Let me now also offer our historic view on the time required to bring projects into operation. Projects originated by our channel partners, which we then develop, engineer, and construct, benefit from a shorter time from agreed terms to revenues, typically six to nine months based on our historical experience. Projects we're originating ourselves and self-developing, such as those with a lead from CBRE or Blackstone, would historically take 12 to 15 months from agreed terms to bring to commercial operation. You'll recall we highlighted delays to interconnection and permitting on our fourth quarter call. We forecast that these delays have added three to six months to complete our projects currently under construction. While these projects have a longer path to revenues, they also come with higher returns driven by the minimal sales and marketing costs, as well as potential for scale benefits as we originate customers with portfolios of projects. Moving to an update on construction, permitting, interconnection, and supply chain issues remain a challenge for our sector. The recent Department of Commerce decision to take up the anti-circumvention case against modules traveling from Southeast Asia is further challenging the supply chain and is injecting significant uncertainty into our industry, both in terms of cost and availability of solar modules. This unfortunate risk is precisely why we struck an agreement with a North American supplier named Helene. We have modules in our inventory as well as purchase agreements in place that give us confidence on both our supply and pricing of modules for the remainder of 2022 and into early 2023. Regarding our projects under construction, while some of our projects continue to be stifled by the pace of permitting, utility impact studies, and upgrades for interconnection, as well as the availability of medium voltage equipment, we're pleased to see physical construction has commenced on some of our delayed projects. We look forward to updating you on further progress of our construction program. In closing, I hope my comments have helped provide greater visibility into our opportunity set. our client engagement is growing due to the flow of our partners and an increasing recognition of the Altus brand. Second, an increased demand for solar driven by our customers need to decarbonize and the immense pressure building on the utility rates is adding to our opportunities for client engagement. Third, the growing appetite for community solar is offering a broader opportunity to expand further into the residential segment. And finally, We're pleased to present our pipeline segmentation, which reflects our confidence that our programmatic shift to multi-project opportunities will bear fruit. Now, I'll turn it over to Dustin, who will detail our first quarter results. Dustin?