Altus Power, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Aldous Power Inc. 3rd Quarter 2024 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Tuesday, November 12, 2024. I would now like to turn the conference over to Alison Sternberg, Head of Investor Relations, please go ahead.

Good afternoon.

Welcome to our third quarter 2024 earnings call. Speaking on today's call are Greg Felton, Chief Executive Officer, and Dustin Weber, Chief Financial Officer. This afternoon, we issued a press release and a presentation related to matters to be discussed on this call. You can access both the press release and the presentation on our website, www.altuspower.com, in the investor section. This information is also available on the SEC's website. As a reminder, our comments on this call may contain forward-looking statements. These forward-looking statements refer to future events including Altus Power's future operations and financial performance. When used in this call, the words expect, anticipate, believe, will, plan, forecast, estimate, outlook, and similar expressions as they relate to Altus Power identify a forward-looking statement. These statements are subject to various risks and uncertainties, which could cause actual results to 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, except as required by law. For more information, we encourage you to review the risks, uncertainties, and other factors discussed in our SEC filings that could impact these forward-looking statements, specifically our 10-K filed with the SEC on March 14, 2024. During this call, We will also refer to adjusted EBITDA, adjusted EBITDA margin, and ARR, or annual recurring revenue, which are non-GAAP financial measures. ARR is an estimate that management uses to determine the expected annual revenue potential of our operating asset base at given points in time. ARR assumes customary weather, production, expenses, and other economic and market conditions, as well as seasonality. Our management team uses all of 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 as 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 to these non-GAAP financial measures is contained in both the press release and the presentation that we issued today. And with that, I'm pleased to turn the call over to Greg Felton, Chief Executive Officer of Altus Power.

Thanks, Alison, and welcome to all our investors and analysts joining our call today. Our third quarter was marked by continued momentum across the business and meaningful progress toward our long-term growth plan. Before turning to specific highlights from the quarter, I wanted to first take a step back to remind everyone why we are incredibly excited about our current market positioning and the opportunity that we see in front of us. As the market leader in the commercial-scale solar industry, as per Wood Mackenzie's total commercial solar ownership rankings as of June 6, 2024, with a nationwide portfolio of operating assets that has surpassed one gigawatt, Altus Power is uniquely positioned to thrive in an increasingly dynamic landscape. We focus on generating clean power directly where that power is being consumed. addressing the pressing energy demands of communities and enterprises and the resulting strain on the grid. Our solutions not only provide much needed additional generation capacity, but importantly, help to alleviate transmission issues given the proximity of our generation to areas of consumption. Turning back to our milestone of reaching one gigawatt of operating assets, it's important to highlight the significant advantages of our incumbency and the benefits we derive from our scale. Our robust and growing portfolio of operating assets is generating power and associated revenue daily across the country. A key aspect of our ownership that may not be fully appreciated is our unique opportunity to continually optimize these assets over time. We view our portfolio not just as an individual projects, but as a collection of long-term infrastructure assets, each strategically positioned for continued value creation. Our large portfolio, which continues to scale with increasing density in markets we serve, not only enhances our operational efficiency, but also solidifies our competitive edge in the commercial-scale solar market. Looking ahead, we expect to grow faster than the overall market over the next few years due to several favorable dynamics. Notably, both federal and state level programs have reshaped our operating environment, expanding our total addressable market by encouraging the reshoring of our domestic supply chain, as well as providing additional incentives intended to expand locations for solar. The declining cost to build solar projects, combined with the secular rise in electricity prices, create a compelling financial landscape for our continued growth. With more and more states eager to adopt supportive policies, we are poised for significant portfolio expansion, positioning us to capture a growing set of opportunities within the clean energy sector. On our last earnings call, I detailed the work we were undertaking to identify areas of strength as well as areas where we have the opportunity to improve and drive efficiencies that support our growth plans. I'm pleased to report that we believe these efforts are already yielding favorable results across our business. One key area of focus has been the renewed go-to-market strategy associated with our early stage development pipeline. You will recall that back in May, I announced my plan to put our development pipeline under review with a focus on execution certainty and increasing the velocity at which these opportunities convert into revenue-generating assets. This resulted in a return to the approach that has been a hallmark of our historical success, a more targeted market-specific approach to client engagement, which reflects the highly localized nature of solar development. While still early, we are already seeing results that show that this approach is working, including our recently announced solar project in San Bernardino, originated in partnership with the Trammell Crow Company, and other exciting projects to be announced within the coming weeks. With a renewed focus on aligning our resources with the most successful parts of our track record, we are energized about our strategy moving forward. which we believe positions us to expand our footprint with new customers while also servicing our existing customers and identifying ways to expand our relationships over time. Another key area of focus has been the growth of our community solar portfolio. Within the quarter, we announced new community solar projects in both Colorado and Maine, bringing our total number of community solar states to nine. with approximately 30,000 customers representing close to 500% growth in our customer base within the last two years. In support of the rapid growth in this area of our business, we recently appointed a new head of community solar to lead our efforts in delivering innovative solutions that unlock the value of our projects while expanding access to the benefits of solar. community solar offering is a critical component of our unique value proposition as it enables us to site projects in favored locations for example a non-developable brownfield and send that power into the local community internally we have rigorously prioritized activities designed to improve revenues and operating efficiency In support of this, we recently announced the restructuring of the investment and structured finance team to better streamline our investment and financing process in support of our expanding opportunity set while also deepening our bench strength. This team takes charge of originating, negotiating, and executing due diligence on Altus Power's project and portfolio opportunities. This team also sources and structures debt and tax equity solutions. helping to ensure that we are well positioned to capitalize on market opportunities. During the quarter, Altus Power successfully structured a new form of tax equity transaction, which highlights our commitment to maximizing market efficiency and competitiveness in renewable energy project financing. This innovative tax equity partnership model allows for the allocation of investment tax credits from our completed solar projects to partners with significant tax capacity. The ability to transfer tax credits to third-party buyers outside of the traditional partnership model unlocks new opportunities for value creation for both our partners and investors. Before turning the call to Dustin to walk through quarterly financial performance, I'd like to end by offering some perspective on our recently announced strategic review. This comprehensive assessment is focused on unlocking shareholder value while enhancing our access to capital, helping to ensure that we are well positioned for long-term success in a growing industry with immense market opportunities. As there is no assurance that the review will result in completion of any particular transaction or outcome, we will refrain from additional comments until the Board has approved a specific transaction. concluded its review process, or otherwise found it necessary to share additional information. That said, I want to emphasize that our team's day-to-day focus on growth and value creation is stronger than ever. With that, let me now hand the call over to our CFO, Dustin Weber, for additional financial highlights.

Thanks, Greg, and thanks again to everyone joining this call. During the third quarter of 2024, we generated 333 million kilowatt hours of clean electricity from our portfolio. This power was sold to our customers at long-term contracted rates that resulted in 58.7 million of revenue compared to 45.1 million in the third quarter of 2023, an increase of 30% driven by the growth of our portfolio and increased sales of clean electricity to our customers. Gap net income for the quarter was $8.6 million compared to net income of $6.8 million during the third quarter of 2023. The primary drivers for the change relative to last year were an increase in operating revenues, a non-cash gain from the re-measurement of our alignment shares, and an income tax benefit for the quarter, which were partially offset by increased operating expenses and interest expense. Moving to the non-GAAP measure of adjusted EBITDA, we reported 37 million compared to 29.1 million in the third quarter of 2023, amounting to growth of 27%. This increase was driven by the growth of our portfolio, partially offset by increased levels of operating and general and administrative expenses. We are very pleased with the performance in the quarter and our continued traction towards our long-term growth plans. It's worth noting that we think of the ongoing investment in our platform in the context of driving attractive returns for every dollar spent. Specifically, the increases in general and administrative expense represent some targeted investments in our energy optimization team and our data analytics. To put it into context, given our current revenue run rate, every 1% increase in production corresponds to approximately $2 million in net revenue and cash flow. Last quarter, we outlined our progress on the 80 megawatts in construction that we originally disclosed at the onset of 2024. We've announced a lot of activity since then and can confirm that we are on track to complete a majority of these projects by the end of the year, with the remainder to be completed in the first half of 2025. Accordingly, we are reaffirming our previously stated 2024 guidance range of $196 to $201 million of revenue and $111 to $115 million of adjusted EBITDA. Since May, we've refined our approach to early-stage project development, emphasizing market-specific engagement to increase speed and execution certainty. As Greg referenced at the beginning of the call, this shift is already paying off. By focusing on what's worked best, we're better positioned to expand our customer base, deepen existing relationships, and drive sustainable growth. The momentum we are seeing across the business gives us confidence in the achievement of our previously stated three-year guidance of 20 to 30% CAGR on megawatts. Turning to our financing plan, we finished the third quarter with a cash balance of $111 million versus $92 million at the end of Q2. During the quarter, we continued to expand CapEx to support our megawatt growth, and we achieved $23 million in cash proceeds from the transfer of investment tax credits that Greg alluded to earlier. Looking ahead, we believe we remain well-positioned to finance our growth with a combination of cash from operations, our committed construction facility, tax equity partnerships, and long-term financing access. With that, I'll turn the call back to Greg for some final remarks.

Thank you, Dustin. With more than one gigawatt in operating assets, Altus Power is strategically positioned to continue our market leadership in commercial-scale solar, addressing rising energy demands while mitigating the strain on the grid by generating power where it's needed. Our scale and portfolio approach enhances our efficiency and strengthens our competitive edge. We have a large market opportunity in front of us, and a refined go-to-market strategy has improved our prospects for development pipeline execution, allowing us to deepen customer relationships and maximize revenue potential. We believe Altus Power's strong market position enables us to continue to seize emerging opportunities while our recent internal restructuring maximizes operational efficiency and aligns resources for sustainable growth. These efforts, coupled with a focus on market innovation and customer engagement, solidify our leadership in the renewable energy sector. The Altus team remains unwaveringly focused on executing our day-to-day business and powering the growth that keeps our business thriving. Thank you for your time today, and we look forward to taking your questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. And if you are using a speakerphone, please lift the handset before pressing any keys. Our first question comes from the line of Justin Clare from Roth Capital Partners. Your line is open.

Hey, guys. Good afternoon. Afternoon. Hey, Justin. Hey.

So I wanted to start out here. I think, Dustin, you mentioned that you expect to complete the majority of the 80 megawatts that you had talked about that was under construction earlier in the year. You expect to complete it in 2024. So just trying to do some math here, it looks like maybe you could install an additional, you know, 40 megawatts plus in Q4 in order to get you there. Wondering if that's in the right ballpark, you know, so should we be anticipating a number of completions, you know, before now in year end?

Yeah, hi, Justin. Yeah, we have a lot of construction activity going on, and I think we announced not too long ago some recent additions as well in Maine. And so, you know, between now and the end of the year, we do expect to add additional capacity. And I referenced on our prior call the 80 megawatts that we began the year with that were in construction. And we still do expect to have a majority of those for the full year. And I think I said it in the earlier remarks, but the other, the rest of those 80 megawatts are also in active construction, but will likely get finalized in the first half of 2025.

Okay. Got it. Got it. And then just on the guidance, wondering, you know, given where we are in the year, you know, what enables you to achieve the high end of the guide versus the low end? Is it really a matter of just the operational performance of the assets at this point and the weather conditions in Q4? Or do you need, you know, some of those projects to be completed and contribute to the revenue in Q4 in order to kind of get you to the high end of the range?

Sure. Yeah. And as you know, Justin, The contribution to a megawatt here in mid-November is pretty limited as it relates to the current year's revenue impact. And so I think you hit on it. The biggest factors that can influence where we end up within the range will be the in-place portfolio and the operating performance there, as well as, of course, weather plays a factor as well. Right, right. Okay.

And then, you know, One question just on the new administration that we're going to have, new president heading into next year. It does look like it's possible that we could get some changes to the incentives in the IRA. So I was just wondering if you could comment on how the value proposition for community solar or commercial solar might be impacted if we get an earlier phase down of the ITC. And, you know, would you anticipate potentially increased state-level incentives, or, you know, how do you see the path going forward here?

Sure. Thanks for the question. So, let me start by saying we were not particularly surprised by the outcome, and we remain very optimistic about the operating environment, as well as our ability to execute on our three-year plan. I think that's the headline. We would note that other businesses may have greater sensitivities to some of the provisions of the Inflation Reduction Act, whereas, as we've said before, we see certain of the provisions that are most in focus as more sources of upside for the business as opposed to risks. And all that being said, we don't anticipate that the new administration would materially alter the provisions of the IRA which are most relevant to our business.

Okay. Got it. That's helpful. All right. Thank you.

Sure.

Our next question comes from the line of Jeffrey Campbell from Seaport Research Partners. Your line is open.

Good afternoon and congratulations on a solid quarter. Thank you. I wanted to begin by asking, you mentioned in the last call that you had a community solar installation in Westchester that was waiting on a utility connection. So, at the higher level, I wondered if you're seeing any improvement with utilities on that end, or conversely, are you using this as a potential gating item for new community solar projects to be undertaken?

Yeah, so I think that it's fair to say interconnection delays are an element of our business, and it's something that we have historically always had to manage through, and we'll continue to do that. there's no real material update I would say from our prior call as a general matter as it relates to the Morgan Stanley site that project is still not yet operational and it's extremely frustrating I think I highlighted pretty detailed on the last call that you know, we have an agreed upon schedule with the utility for them to do their work and that work is not yet complete. And so we're continuing to manage through that as best we can. And, you know, we do hope and expect that that project will be placed in service in the near future.

And let me just sort of provide a little bit of broader commentary as well. I think that in general, there's While there is a sort of general industry dynamic around interconnection that Dustin just referenced, it is absolutely a utility by utility, location by location. So as you've also heard, we have a number of sites that are being operationalized and coming online. Very much the solution to this particular problem is to have a robust pipeline of deals that we are converting on. And so you should look at the pipeline of opportunity, generally speaking, as one that we have a lot of enthusiasm in terms of the conversion pipeline.

Well, not to put words in anybody's mouth, but I would essentially argue that the difficulty on the community solar side is a positive for the commercial solar side, because The commercial solar installations are avoiding the utility. Yeah. So, one. Yeah. One-size-fits-all, there's opportunity.

Yeah, I want to make sure that we don't create a perception that community solar is writ large a challenge. It is not. We have a number of community solar sites that are coming online around the country in Maryland, in Maine, and elsewhere. The deals that Dustin referenced in Maine are all community solar projects, and we are having success in terms of interconnection there. The point being that the particular read-through as it relates to community solar would probably be more what utility you're dealing with and how responsive that particular utility might be to an interconnection requirement. So, yeah.

Yeah, that's good, Colin. I appreciate that. And my last one is just you've highlighted how you're, I'm paraphrasing, you're returned to focusing on what you control. is working really well. I wonder how the CBRE side is doing on trying to promote solar within their ESG portfolio.

Yeah, no, it's a great question, and CBRE has actually made some public announcements about their leaning into advisory, advising clients on ESG and sustainability objectives, and certainly Altus will feature prominently in those discussions. So CBRE, as you know, has excellent connectivity with the Fortune 500, and their ability to be in the room and provide consultative services, which are really needed, and offer up the solar solutions that Altus can provide in the context of those discussions is definitely something that is an opportunity for us.

Thank you. Thank you.

Our next question comes from the line of Tim Moore from Clear Street. Their line is open.

Thanks, and good execution on your profitability in the quarter. That was nice to see. I just wanted to touch up on a thread that was mentioned earlier in the opening remarks about the conversion timing on new projects. Do you mind elaborating on the operational improvements or the enhancements you might have put in place the last six months to really narrow the lead times of sales cycle timing and increase that velocity? Does a lot of it have to do with maybe less emphasis on appeasing national enterprise customers and if you can talk about anything else.

Yeah, thanks for the question. So our specific focus has been on new build opportunities that we source from real estate owners, sometimes together with channel partners. And our focus was resource allocation. And Specific to the pipeline ensuring both execution certainty as well as increasing the velocity at which these opportunities move through the pipeline and Therefore can convert into operating assets generating revenue and cash flow and so we are pursuing a much more targeted approach and a market specific approach with a focus on markets that offer the most attractive economics and for solar, as well as focusing on decision makers who are looking to execute. So to your point, that might not be a national enterprise opportunity. It may instead be a market-specific opportunity, albeit perhaps with a national player, right? So the nature of the market is You know, we're in 25 states. There are states that are much more lucrative and in focus for us. And to some degree, we'd call it a back to basics model. We are focusing on activities and go to market strategy that has worked well for us historically. And as you heard in the prepared remarks, the early results are encouraging and we are seeing significant deal flow and actionable opportunity.

And that's helpful, especially as you concentrate maybe more in the Northeast. The only other question I had was just, you know, if you can kind of maybe elaborate or rank, you know, your priorities for capital allocation. I mean, you do IRR and ROI hurdles. I'm just wondering, you know, how community solar stacks up against redevelopment projects you're seeing in the pipeline versus new projects, if you can kind of talk through that and how you go about picking which one, you know, in the near term.

Sure. It's a multifaceted question to some degree, and let me just make sure that I try to break it down. First off, as you know, we are very focused on driving revenue and driving revenue with attractive return on investment. So everything that we're doing is focused on making sure that we're being very efficient and thoughtful with respect to the returns that are available to us. So if you were to ask, how does community solar stack up relative to other opportunities, the way that we think about our business and the way we describe our business, we are the market leader in commercial scale solar. That is roughly 1 to 20 megawatt solar sites. That is the common denominator as it relates to the sites that we develop. And the offtake varies. The offtake is sometimes a behind-the-meter solution with a tenant in the building. It's sometimes a remote offtake, which could be a community solar customer, which, of course, would naturally make a lot of sense if you're building on a large industrial rooftop without a lot of in-building demand, or if you want to build on a brownfield where there's no captive demand right there, but just around the corner in the community, there is demand. From our vantage point, we look at those deals and we've been in the community solar market for now 10 years. And the key ingredient to a successful community solar program is making sure you understand the customer acquisition dynamics, how you're actually going to both service those customers, the cost associated with servicing, et cetera. So the return opportunity away from the IRA question, where people have, I think, disproportionately focused on community solar adders, there is an opportunity for low- and moderate-income customers upside if you have the right offtake. But candidly, our approach is to underwrite those deals with a base case offtake assumption and look for upside to the extent that that's available in the market. So that's really how we think about community solar as compared with any other asset. Now, in terms of your question about optimization or redevelopment, that is a whole other category that is worthy of just a couple of minutes of explanation. We have an opportunity to optimize or constantly create more value out of our portfolio. Our portfolio represents projects that we own across the country that are strategically located in areas of high power consumption. And everybody should now appreciate that increasing demand for power and associated higher power prices, particularly in those areas where our assets are located, that's a huge opportunity. Our floating rate contracts allow us to participate in higher power prices. And we also think there's an opportunity over time to increase capacity at our site. So that's the redevelopment opportunity. That's taking a site that might have been built five years ago or 10 years ago and actually increasing the capacity of that site, creating more power and not only participating in higher power prices, but a greater volume of energy or greater volume of power that you're able to sell. Big opportunity, obviously a big opportunity associated with our large operating base and something that we probably should spend some more time elucidating.

That's terrific. Thanks for those helpful insights and giving those details.

That's it for my questions. Thank you.

Again, as a reminder, if you wish to ask a question, please press star followed by one. Thank you. Our next question comes from the line of Andrew Percoco from Morgan Stanley. Your line is open.

Thanks. Good evening, guys, and thanks for taking the question. I just want to come back to the election piece for a second. You know, Greg, you've mentioned over the past few months and quarters about how, you know, there's just some natural friction with some customers, depending on their portfolio of projects or the portfolio of of real estate and how that fits into the unit economics of solar. And I'm just kind of curious, I know we're only a week past the election, but I'm sure you continue to have conversations with prospective customers. Has just the added level of uncertainty around the IRA further inhibited those conversations? I totally take your point and we agree with your view around how solar is really not the aim of the new administration, it would seem. But is that creating more friction in just the natural selling process? when you're sitting at the table with some of these prospective customers?

Yeah, we're not seeing that at all. Thanks for the question, by the way. We're not seeing that at all at the customer level or in those conversations. I think the noise around this and the uncertainty is predominantly an investor comment or question. And, you know, understandably, people want to take the time to understand what it might mean and which businesses are impacted. So I think different businesses have different sensitivities as it relates to the Inflation Reduction Act and potential changes. I think our business and the natural position that we find ourselves in, which is engaging on new site development or opportunities to essentially expand our portfolio, that ultimately really is how much can we pay for a lease if we're going to rent a piece of land or a rooftop. It comes down to ultimately the basics of our business as it relates to the production that's available, which is obviously not influenced. And then just the foundational points associated with the IRA, which include just codifying a 30% ITC. A lot of the other adders and elements around domestic content, around upside associated with the offtake profile, those from our perspective are not foundational to our business. So we're really not particularly focused on it, nor are we seeing that play a role in the dialogues that we're having with our customers.

Great. Thanks so much, guys. I'll take the rest offline. Appreciate it. Thank you.

If there are no further questions at this time, please continue.

Thanks, everyone, for the time today, and we look forward to following up with you one-on-one.

Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation. You may now disconnect.