Q2 2023 Altus Power Inc Earnings Call
Our execution during the second quarter positions us to reiterate our 2023 guidance range of 97 to 103 million with an EBITDA margin in the mid to high 50s. Starting now on slide 5, and before we dive into the details behind our financial results, I'm proud to share that all this power has grown to be the country's largest owner of commercial solar arrays.
This is an important milestone for Altus and validates our strategy of owning and operating each of our assets to deliver clean, electric power to our customers in a high-growth market.
Our access to long-term funding will allow us to expand our footprint as well as to develop and deliver additional products and services to our customers.
We also want to detail the benefits of combining programmatic customer engagement in community solar to further fuel our growth.
The property portfolios of our largest customers in many cases include significant numbers of buildings with rooftops spanning more than 100,000 square feet. Each of which enables us to build an array of at least 1 megawatt in size.
High streets, for example, own subpofolio of approximately 140 logistics facilities across the US, and we are pleased to have our exclusive agreement in place with them with multiple assets across several states going into developments and interconnection applications.
Coupled with this programmatic flow of large rooftops, Community Solar has emerged as another important driver of growth, which adds significantly to our total addressable market.
Community solar expands the market opportunity because an asset's size isn't limited by the energy needs of the tenant in the building on top of which the array is constructed. Instead, we can maximize the array to fit the available roof space and sell the excess power to residential subscribers at a discount to their retail rates.
Community solar also plays directly to some of the unique strengths of Altus Power. To mention one, our strategic partners Blackstone and CBRE offer seamless introductions to large enterprises and their significant numbers of customers and employees, all of whom are potential subscribers.
to our clean electric power. Another example is the advantage we have from our growing digital platform in the efficient and scalable customer onboarding and servicing it offers.
These advantages, coupled with our scale, allow us to further grow our brand and brand recognition in this rapidly growing segment of our market.
Moving now to slide 6 for highlights on our new assets.
With the assets added during the second quarter, our portfolio grew to nearly 700 megawatts as of quarter-end. We were pleased to complete our first asset in Maine, bringing our current in-service operations to 25 states across the US.
Adding to this achievement, July marked the opening of our New Jersey Community Solar Program, where we've begun to sign up residents to be Altus Power customers for one of our assets in the final stages of construction.
Most of the 40 megawatts of New Jersey arrays we plan to complete in 2023 will serve community solar customers and we're proud to be investing heavily in the Garden State.
Moving now to the scorecard of our construction activity on slide 7.
As of today, our team has completed construction of 20 megawatts of newly developed assets in 2023.
Demonstrating steady progress towards our expectation of 75 megawatts.
Our timelines continue to anticipate near term completions of our New York and Maryland assets with our in construction assets in New Jersey forecasted to be completed during the 4th quarter. Our confidence in this timing stems from construction activities progressing through our milestones.
with the majority of the equipment on site and in process of being assembled and installed on roofs and in parking lots.
The completion of 75 megawatts in 2023 would represent our largest construction output ever in a calendar year. Which will be another major achievement for our team.
Staying with our pipeline and asset basin operation on slide 8, continuing with development to the right of the slide, we have 23% of that part of our pipeline in construction or pre-construction.
A portion of which we expect to complete later this year with the remainder supporting our growth in 2024.
We expect to see the latter phases of our development pipeline benefiting from the increasing pace at which we are now moving programmatic engagements In channel partner flow through the contracting and construction process.
This increase in cadence supports our expectation that we will double our 75 megawatts on completions from this year to 150 megawatts in 2024.
Our expectation for significant growth in construction output is driven by our increased programmatic engagement with customers, our growing development and construction platform, and our strategy of procuring major system components earlier in the construction process.
Our ramping velocity of new assets across all stages of our pipeline provides additional confidence that we can continue to increase our volume in the upcoming years, provided similar market conditions.
Moving to the left of the slide, our acquisition pipeline remains an additional engine of growth for our business.
Over the past few weeks, we were pleased to announce the closing of approximately 20 megawatts of new solar and storage assets.
which introduced new customer relationships with HP ink and T-site technologies among others.
We are also pleased to have added our largest storage asset to date and we remain firm in our belief that storage will be an important part of our asset base in the future.
Acquisitions have been a staple of ALTA's power strategy over the years and execution on opportunities like these are additive to the development targets I previously discussed.
They also offer a similar impact.
In terms of new customer relationships and entry into new markets where we can leverage our growing Altus Power brand and continue to deploy our land and expand strategy.
With that, let me now hand the call over to our CFO , Dustin Weber, for additional financial highlights. Dustin?
Thanks, Lars, and welcome to our call. Please join me on slide 9 as I cover our second quarter financials.
This review will include a discussion of gap and non- GAAP measures , which includes adjusted EBITDA and adjusted EBITDA margins.
During the second quarter, our revenues grew to 46.5 million compared to 24.8 million in the second quarter of 2022, an increase of 88% driven mainly by the additions of our large acquisitions and the smaller impact from new development assets placed into service during this first half.
Turning to gap net income for the quarter, we posted income of 3.4 million compared to net income of 21.6 million During the 2nd quarter of 2022.
This decrease primarily resulted from the fair value remeasurement of our alignment shares during both periods.
As a reminder, these re-measurements are non-cash and are driven by movements in our share price from quarter to quarter.
Shifting the focus to adjusted EBITDA, we reported 30.6 million compared to 13.9 million in second quarter 2022 amounting to growth of 120%.
This increase was primarily fueled by the revenue drivers mentioned earlier and partially offset by increased levels of operating and general administrative expenses.
For the quarter, our adjusted EBITDA margins grew to 66%, up from 56% last year, driven by our revenue growth and economies of scale gained by spreading expenses over a larger number of operating assets.
Please turn to slide 10 as I discuss our outlook for the year.
A strong first half gives us confidence in achieving our 2023 adjusted EBITDA guidance range of 97 to 103 million and adjusted EBITDA margins in the mid to high 50% range.
Our adjusted EBITDA outlook is underpinned by continuing confidence in completing second half additions of 55 megawatts and the additional 20 megawatts of solar and storage assets we acquired in July .
Our outlook for the margins is driven by a strong performance in the first half, with our seasonally strongest third quarter still ahead of us.
To help your quarterly modeling, we currently expect margins for the third quarter to reach similar levels as last year's third quarter, and a fourth quarter margin to be in the low 50% range.
Turning to financing, we continue to require no equity capital to execute our growth plan.
During the second quarter, we received $47 million of cash proceeds from incremental long-term fixed-rate debt drawn from our Blackstone facility, as well as additional tax equity.
These financing, combined with our internal cash generation from operations, were redeployed into over $50 million of new assets under construction.
We expect to utilize additional proceeds from our debt facilities and tax equity sources to support our growth during the remainder of the year.
In summary, we are executing our plan. Our second quarter results put us on track to meet our guidance for the year.
We're well positioned to continue financing our newly completed projects at competitive rates and we expect those projects to add to our cash generation which we will reinvest into our business.
That concludes my review of our financials. I'll now pass the call back to Lars for some closing remarks.
Thanks, Dustin. Before moving on to Q&A, I'd like to highlight our 2nd annual sustainability report, which we issued last month.
Our corporate social responsibility team headed by our chief sustainability officer Sophia Lee continues to enhance the depth of our reporting for all our stakeholders and we believe our business has the ability to create value for our investors, customers, employees in the communities in which they live.
Also, our growing track record of delivering results is demonstrating what we believe are key differentiators for our business.
We continue to grow profitably now as the largest commercial owner of solar arrays in the country.
And through our strategic partnerships with Blackstone and CBRE, all of this power is able to fuel that growth in ways that others can't.
Finally, exemplifying growth drivers that we're focused on, we continue to identify new opportunities to maximize the size and customer base of our assets through community solar initiatives. A market segment that is not seeing any slowdown of activity and instead seeing growth.
both in terms of expansion of existing community solar programs, as well as additional programs arising in new states.
With that, we're now available to take your questions.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
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One moment please while we poll for questions.
Our first question comes from Andrew Paracoco with Morgan Stanley . Please proceed with your questions.
When you look across their portfolio, which I think you said is roughly 18 million square feet of roof space, what percentage of that would be needed for their own power needs and maybe what percentage can be dedicated to community solar? Absolutely. Hi, Andrew. This is Lars. Thanks for your question. And on the way in to discussing community solar, maybe let's let us connect to the last point made in the prepared script or the prepared remarks and just highlight that our segment in community solar obviously is one of them, is really not slowing down in any way, shape or form. We're seeing an acceleration of growth in the Q2 results.
are a testament to that. The specific point about community solar and using High Street as an example, a logistical portfolio, which is what High Street has, in many instances have very, very large rooftops where we could build 4 to 5 megawatt arrays in various states.
And so for 140 buildings, if you're lucky enough to be able to build on all of them, that would indicate some sort of size at 1 megawatt each. The buildings in High Street's portfolio, and there's many of those that are in states that currently offer community solar, immediately allow us to upsize to basically fit the entire roof, Andrew, which would be more like 4 to 5 megawatt solar systems. And we would still sell power to the tenant, either in a sort of combined system where some of it is behind the meter going back into the tenant and some is community solar, or we would simply sign up the tenant to be part of the community solar pool.
and sell the whole 5 megawatts into community solar. So, community solar is an enhancer and a strengthener of the corporate relationships that Blackstone and CBRE already brought to us. It also coincidentally allows us to interact with High Street because we can sell community solar power to their employees.
and to their tenant employees, which further increases the connectivity between them and Altus and gives them a sense of more rapid decarbonization.
So community solar to us feels really like a killer app for the kind of commercial solar that we're engaging in and that we're now thankfully the largest in the country.
That's super helpful and if I could just ask one follow up question on that. Can you maybe just remind us if there's a different target IRR for some of those community solar projects? I mean, if I'm just running through the moving pieces, I think it sounds like you're just going to be simply scaling up your asset size to your capital costs on a per watt basis.
I would assume would be fairly consistent with that $2 per watt figure that you stated historically, but I'm assuming your off-taker in community solar is going to be paying a higher price on it on a dollar per kilowatt hour basis than some of your CNI customers, which would lead me to believe it's a substantially higher IRR. Is that a fair way to think about it?
Yeah, this is Greg, Andrew. So from our perspective, we would encourage you to think about the system, the community solar system in a very similar fashion than you might think about a behind the meter system. There are different revenue opportunities as you just described where the revenue in the community solar program may.
be in excess of what the tenant is paying in a traditional behind the meter, that could be the case. Similarly, there are potentially customer acquisition costs associated with identifying the customers. So the way that Altus thinks about that is to appropriately consider the cost and the benefit, give the real estate owner the value associated with the lease that...
substantially similar to us in every instance we're trying to optimize return but we're also providing of course the discounted power to the customer as well as the robust lease payment to the to the landlord. So the combination of those factors we would say would be consistent with a development opportunity across the portfolio regardless of the profile.
And Andrew, perhaps this is Lars again, perhaps we could add to that a little bit. The one differentiator that is around the corner, or now in sight actually, since an email was sent out just last week, in the end of last week, is when the government starts providing us a higher investment tax credit.
of how to return, but maybe most importantly the amount of capital that we have to hold against the community solar asset. We don't know if you run the math, but once the added ITC, the 20% addition on the ITC is in place,
The balance sheet for a community solar deal that's a low and moderate income household one basically has 60 to 65 percent LTV from our debt facility with Blackstone and then 40 percent investment tax credit and so the net equity that we have to hold against those assets goes down to zero.
At that particular moment, there will definitely be a different set of economic upside and value, if you will, created by the community solar assets that we are working hard to be the largest provider of.
That's great context. Thanks so much.
That's great context. Thanks so much.
Thank you. Our next question comes from Justin Clare with Ross MKM. Please proceed with your question.
Yeah, good morning everyone.
Morning.
So, I wanted to start off first with your construction timelines. I was wondering if you just give us an update on where construction timelines are today, how they're trending, and wanted to understand when you need to move assets into that construction bucket in order to have them completed in 2024.
Just trying to think through that 150 megawatt target and the path there. And then we've heard about there's still challenges in the supply chain, some long lead time items like transformers and switch gear. Can you talk about how you're positioned relative to those long lead time items and how you're thinking about it? utilizing digitally automated Wi-Fi updates with the help of Block
Absolutely, this is Lars, Justin. Thanks for the question. So, to stitch together the math maybe first and try to keep it simple, we currently have 115 megawatts in construction and some stage of pre-construction. Some portion of that, call it 55 to 60 megawatts.
will not be completed this year and the remaining 55 of course is going to be completed this year We're scheduled to complete that this year, but the 60 megawatts that's in construction that's going to go into 24 forms the basis of the 150 megawatts that we expect to complete
And about half of the assets that are currently in some stage or late stage of negotiation and contracting is what's going to be put into the construction bucket in the next three to six months.
In between those two you basically get to 160, 170 megawatts of potential out of which we're looking forward to complete 150 megawatts in 2024. So that's the key then moving that through both the construction bucket and also the late stage of the contracting bucket.
We have not seen any material improvement in permitting timelines and interconnection timelines.
But we are working to basically submit more deals and more applications both in the permitting and interconnection so that the output from those two filters, let's call them, is consistent with the amount of assets that we're looking to complete this year and next year.
And so if you will, we've scaled up, we've obviously hired more people in development and construction. We've talked before, Justin, about buying major components earlier to keep an inventory of those, which is slightly weighing on margins, but something we think is worth doing because we are more focused on the timing than the very last percentage of margin.
And between submitting more deals into interconnection and permitting, being early on the component origination and having a larger platform, we feel good about both getting to 75 this year and 150 next year and then grow beyond that. Okay, great. That's really helpful.
And then maybe shifting to a different topic here, just wanted to see how you're thinking about your acquisition strategy. Given the current higher interest rate environment that we're in, it looks like some in the industry may be having a little bit more difficulty accessing capital. So maybe if you speak to your strategy and then maybe the opportunity set that you're seeing.
and how things are evolving? Yeah, that's a great question. This is Greg.
So there is
clear and visible tightening in the capital markets that I'm sure most everyone on the call is aware of and and that tightening For capital is playing to our advantage In addition to the self-developed opportunities that we've just discussed
We're seeing an increasing flow of opportunities that is coming from our channel partners because many of our channel partners are constrained. These are developers who you know frankly look to us to provide working capital and then long-term financing.
And then similarly to your question on the operating side, there is an increasingly robust pipeline of opportunities coming from existing asset owners that are in some cases well hedged from rate and in other cases not well hedged frankly. So I think we are in a very good spot as a company.
We, I'll remind you that we've hedged interest rates back in January , 250 million dollars of a SOFR hedge, and so we have the benefit of attractive cost of capital not only in terms of the spread at which we're borrowing, but also the fact that we
we hedged rates attractively. And so we're able to be out there but continue to be disciplined, right? So we are looking for the right opportunities to acquire the pipeline of opportunities that we have. It continues to be robust. You see 500 plus megawatts in our operating pipeline and we are optimistic about moving many of the negotiated deals into a closing box.
Appreciate the time. Thank you.
Thank you.
Thank you. Our next question comes from Chris Sother with B. Riley Securities. Please proceed with your question.
Hey, guys, thanks for taking my questions and all the details around the construction pipeline here. Maybe just kind of 1 follow up around that, though, to the 55 to 60 megawatts that are in construction that you expected 2024. Is that a good proxy for the
1st, half of the year opportunities, and we'd be exiting 2024 kind of at that 200 megawatts a year study state. Is that kind of a fair way to think about kind of the cadence of earlier stage stuff?
that'll start to flow into the back app.
Yes, yes, that's not a bad, that's not a bad guesstimate. There are, there are some differences, Chris, between different markets.
It takes longer to build in urban areas. So, if we have a solar system in construction in Brooklyn, for example, that's going to take longer to complete than the solar system in Georgia.
And so it's not one for one to sort of plan to see that 60 megawatts come in the first half.
But we would say that we've gotten better
at lobbying over construction ready assets into development and construction where all the T's have been crossed and I started on the lease with the landlord and the PPA with the tenant and everything else. And when our construction desk or the development and construction desk gets...
an asset that's completely ready to go, and especially if it's in a jurisdiction where permits are a little easier to get, and the utility perhaps is quite a backlog, then you can see that deal coming into construction in Q3 or even Q4 of this year, for example, and still get done in the first half of next year.
So there's some movement between individual deals, both in the current construction bucket and also in the contracting bucket which is going to go into construction and be completed in 24.
Okay, that's really helpful. And then maybe just on the guidance for this year, can you give any breakdown on the visibility based on the projects that are already in the portfolio versus the contribution you're expecting from those projects that are coming on in the second half? I'm just...
doing quick math on a seasonally stronger 3Q and then you know the implies sequential decline for the fourth quarter so wanted to get a sense you know where we are on that visibility you know it's kind of an exit par question but not quite
Yeah, hey, Chris, this is Dustin. I can take that 1. so so yeah, we're very pleased with where we sit after the 1st, half of the years completed. We put out guidance to start the year at 97 to 103M of adjusted EBITDA.
So that's a 71 percent growth over the midpoint. So we feel very good about that. And I would say where we sit today is where we expected to sit today. We're driving growth through all channels because of the unique solutions that we're able to offer our commercial and community solar customers.
And property owners are even more focused on that rental income and carbon reduction. Same is true for community solar. Demand is as strong as ever. And our portfolio of operating assets is humming, which is evidenced by us just announcing our most profitable quarter ever. So.
We're very pleased with where we sit here halfway through the year and will continue to execute the second half.
Okay. That's helpful. I'll put the queue. Thanks.
Our next question comes from Rickram Barghi with Citi. Please proceed with your question.
Hi, thanks for taking the questions. Just going back to the megawatts expected in construction for this year, on the interconnection process, could you give us some insight just historically what's been your conversion rate on those applications?
Has that changed meaningfully? And does the 55 megawatts to those all have
Interconnection permits already approved and through the system.
Hey, this is Lars. Thanks for your question. Yes, this is a good moment to highlight some of our interconnection.
processes at Altus and the logic around commercial interconnection or commercial solar interconnection, which is quite different from utility scale interconnection. And just to take the first thing you said, our yield on interconnection applications is close to 100%.
We very rarely send in an interconnection application in some sort of speculative fashion where the utility might or might not allow us to interconnect behind the meter solar system.
The the most likely sort of curve ball coming back from the utility might be something as follows Altice you applied for a three megawatt interconnection if you want to build a three megawatt system We have to upgrade the you know substation next to that factory
and we're going to charge you $2 million in interconnection expenses. And the deal might or might not support a $2 million interconnection, but the utility will say, if you just reduce the system size to 2.5 megawatts, we'll let you interconnect for $600,000.
And so that ends up being a business decision that we will ultimately make. But it's almost unheard of for the utility to come back and say, we don't want you to put a solar system on that roof or in that parking lot.
And so from a timing perspective We are we are lucky in commercial solar because it's rare that an interconnection takes longer than say 10 to 12 weeks three to four months and All the deals that are in the 55 megawatt bucket that we're busy building right now. They all have their interconnection approvals for a long time
Many of the deals that are in the rest of the construction bucket, if not all, also have their interconnection approval. And the deals that are in the contracting bucket, those are the ones going into interconnection now so that they can then be moved into construction.
The last point to make is that once construction is complete for us, so in the case of the assets that we're going to complete for 2023, the 7 megawatts in Maryland, the 38 in New Jersey, and the 10 in New York, many of those assets are effectively completed from all to this construction perspective.
that deal to already be up and running because it looks like everything is complete but what indeed is left to be done is for the utility to add some of their switch gear and interconnection features that allow the system to start exporting power back into that building.
And so that could take a couple of weeks or a few months. But the 55 megawatts is in very late stages of construction or indeed complete awaiting the utility to finish their work so that we can then turn the systems on.
I see. That's very helpful. And just one follow-up question. On the full year EVID Talk Guide, could you give us a sense for what are going to be the key drivers for either hitting the low or high end of that range? What's kind of going to move the needle around those ends?
I can take that.
So, we're halfway through the year, as I said a few minutes ago, we feel very good about where we're at. We have 55 megawatts of new developed assets that are gonna be coming on at some point this year. Most of that we expect to be late in the year. So...
not a large contribution to what will be our realized EBITDA for 2023, but position us really well going into next year where we're going to realize a full year of cash flows from those assets. But I think
the main driver is really just executing our business. As I said, our operating portfolio is performing well. We're managing our costs well, which is evidenced through our high margins. So I think it's just continuing to execute and get those assets.
the exit par concept as a means to provide a bit of an annualized view into the asset base and we thought that was important because to your question as you heard in Dustin's response timing plays a big factor in terms of calendar realized cash flow. So the exit par you know hopefully is a meaningful metric to allow investors and analysts to understand.
how the company is performing on a run rate basis.
run rate basis. I see. Thank you.
Thank you.
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ison moran.