Altus Power, Inc. (NYSE:AMPS) Q4 2023 Earnings Call Transcript

Altus Power, Inc. (NYSE:AMPS) Q4 2023 Earnings Call Transcript March 14, 2024

Altus Power, Inc. misses on earnings expectations. Reported EPS is $-0.17089 EPS, expectations were $-0.02. AMPS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and welcome to Altus Power’s Fourth Quarter and Full Year 2023 Conference Call. As a reminder, today’s call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Chris Shelton, Head of Investor Relations.

Chris Shelton: Good afternoon and welcome to our fourth quarter and full year 2023 earnings call. Joining me on today’s call are Lars Norell, Co-Chief Executive Officer and Dustin Weber, Chief Financial Officer. In addition, Co-Chief Executive Officer, Gregg Felton, will be joining us for Q&A. This afternoon, we issued a press release and a presentation related to matters to be discussed on this call. You can access both documents on our website, www.altuspower.com, in the Investors 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, believe, will, plan, forecast, estimate 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 today with the SEC. During this call, we will also refer to adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures.

We are also introducing a new non-GAAP measure, annual recurring revenue, or ARR, which we will discuss later on in this call. ARR is an estimate that management uses to determine the expected annual revenue potential of our operating asset base at the end of the calendar year. ARR assumes customary weather, production, expenses and other economic market conditions as well as seasonality. We are unable to provide a reconciliation from GAAP to ARR. 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 that 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 measures used by other companies. More detailed information about these measures and a reconciliation from GAAP to adjusted EBITDA and adjusted EBITDA margin is contained in both the press release and the presentation that we issued today. With that, I will now turn the call over to Lars for his prepared remarks.

Lars Norell: Thanks, Chris, and welcome to our call. In a challenging environment, we’re very happy to be speaking to you at the end of a record year for Altus Power. We built Altus to be a clean power company and we architected our platform with the goal to be both resilient and nimble to create value for customers and investors in any market climate and the capacity to take advantage of opportunities when they arise. From the beginning, we have focused on recruiting and retaining what we believe to be the best team in the industry with best-in-class access to capital to deliver value to our customers and shareholders. As highlighted on Page 3 of our presentation, our team continued to execute in 2023. And we notched a number of achievements that are testament to the growth available in our expanding market segment and the strength and momentum of our company.

We became the leader of our markets as the largest owner-operator of commercial solar in the country, and we’re starting to see the benefits that a category leader enjoys. We are a customer-centric company that generates and delivers clean power every day. We grew our enterprise customers by over 50%, and we forecast that our portfolio in operation as of year-end will generate over 1 billion kilowatt hours for those customers this year. We’re also growing our capability to serve those customers faster and better. For example, with Altus IQ, which is our AI-enabled software that, among other things, helps our customers measure their carbon footprint. We also had a record year for asset additions totaling 426 megawatts, of which approximately 74 megawatts were new build assets, an output which we are looking to grow further in 2024.

Our very significant asset growth during the year expressed, as expected, annual recurring revenue, equals $183 million. A new metric, as noted earlier. We’re pleased with the visibility towards 2024’s revenue target that this ARR number provides to market and intend to make use of it as we continue on our mission to educate investors. For details on the revenue and adjusted EBITDA growth during the fourth quarter and for the full year 2023, please turn to Page 4. Dustin will go into more detail in a moment, but we ended the year with $155 million of revenue, GAAP net income of negative $26 million, and $93.1 million of adjusted EBITDA. While that adjusted EBITDA number is a record for Altus, an indicative of significant growth at 59% over the prior year’s number, it’s not where we expect it to be for the full year, and the difference is driven by three factors.

The first and primary driver, we were surprised by the stubbornly bad weather across most parts of the country during the fourth quarter. Recalling that the amount of sunshine we harvested in Q3 was on the light side as well. Based on our 15 years of operating history, it’s rare to see two consecutive quarters below norm, but that happened in Q4 of 2023. Second, the operational downtime of portions of our portfolio was higher in the fourth quarter than our historical norm. Outages can be unpredictable when they happen, but by adding technical staff in the field and building out an active component and inventory of spare parts system, we are cutting repair lead times and bringing operations to normal levels. Third, we experienced delays in the onboarding of assets, those that are new builds as well as those we onboard that are already in operation.

While some of these delays relate to overtaxed utility interconnection crews and building departments, an element of it reflects our organization being stretched a little thin from the significant asset growth we’re experiencing. We consider this to be temporary, and we are actively adding to our construction and asset servicing platform to better execute on the growth opportunities available to us. Turning now to Page 5 and looking forward to 2024, taking a range of weather and system performance parameters into account, and for the first time offering a view on revenue, we are projecting that our 2024 revenue will be in the range of $200 million to $222 million. We are further projecting that this will result in 2024 adjusted EBITDA in the range of $115 million to $135 million.

Our cash generation is an important source of funding for Altus, and we expect to take cash from operations and reinvest them into additional customer engagements and solar assets with the intention to drive further growth in these metrics in future years. Importantly, we believe we are positioned to execute our growth plan in 2024 without the issuance of dilutive equity. Our adjusted EBITDA projection for 2024 also includes growing our SG&A budget to reflect our efforts to put in place the capabilities that will continue to set us apart and allow us to retain and expand our market leadership position. On the next slide, Page 6, you will find our growing asset base in operation and pipeline of growth assets that we expect for 2024. We are currently pursuing over 1 gigawatt of new build opportunities and assets in operation, both of which when constructed or closed, would allow us to begin delivering clean power under long-term contracts with our customers.

We relentlessly apply our playbook for large enterprises that are coming to us from CBRE, Blackstone or other channels, and we seek to continuously refine our approach to speed up the client engagement process, but we’re frustrated that some contracting times remain elongated or in the case of community solar that the implementation of announced state programs have gotten delayed. At the same time, we are encouraged with the number and volume of large property owners that are choosing to enter programmatic partnerships with Altus, and we continue to build out our construction platform to have the capability to deliver on that growing new-build flow. In the meantime, we are using that same engineering and construction know-how and horsepower to due diligence and onboard operational assets.

Our sector continues to consolidate and our December acquisition of the Unico platform, pipeline and customer relationships exemplifies Altus’ intention to play a leading role in that consolidation. Further, we continue to see an attractive pipeline of acquisitions of assets in operation. For example, in January, we closed the transaction with Vitol, which adds 20 municipal, school and enterprise clients and another 2,000 community solar customers to our portfolio. As our portfolio approaches 1 gigawatt in size, we are seeing the increased benefits of being a larger platform, including the ability to more efficiently service our customers and assets. Turning now to Page 7 and before handing over to Dustin, I’d like to highlight some themes from our segment to the market and some of the things that we’re focused on for this year.

As we said upfront, we continue to see robust appetite for clean electric power from commercial tenants and strong demand for the associated decarbonization benefits and ancillary income available to landlords. In these market conditions, we are really pleased with the superior unit economics available in commercial solar. Between rate tariffs available to commercial clients and the retail rates that our community solar customers pay, our customers continue to pay a lot for power. As a consequence, Altus continues to be able to deliver meaningful value to our customers while benefiting from very attractive unit economics on our assets. We are starting to observe the benefits of our market leadership position. For example, we enjoy greater brand recognition with tenants and landlords.

We receive more inbound calls from potential channel partners in markets we’ve just entered, and we believe that we are seeing most of the available opportunities in our market. Finally, as Altus Power matures as a public company, we want to continue to refine and improve our market communication. We take seriously the importance of investor education and the additional disclosures that we are presenting today are intended to provide greater clarity into the business. We are also very pleased to announce that our first Investor Day will take place on May 14. We look forward to interacting with market participants at this event and outlining our long-term strategic vision and multi-year growth plan. We will also provide greater details on all the important areas of the Altus platform with a focus on our technical competencies, like our expertise in physical assets as well as our digital capabilities.

With that, I’m happy to hand over to Dustin for details on the numbers. Dustin?

Dustin Weber: Thanks, Lars, and thanks to our investors and analysts for joining the call today. Please join me on Slide 8 as I cover our financial highlights for 2023. Starting with the fourth quarter, our operating revenues grew to $34.2 million compared to $26.8 million in the fourth quarter of 2022, an increase of 28%. For the full year, we achieved a record $155.2 million of operating revenues, up from $101.2 million in 2022, an increase of 53%. Both fourth quarter and full year revenue growth was driven primarily by new additions to our portfolio. Turning to GAAP net income for the quarter, we posted a net loss of $40 million compared to net income of $67.1 million during the fourth quarter of 2022. This variance was primarily the result of a non-cash loss of $17.7 million from the fair value re-measurement of our alignment shares versus a gain of $70.7 million during the fourth quarter of 2022.

This same remeasurement was also a driver for the full year 2023, resulting in net loss of $26 million compared to net income of $52.2 million for 2022. You should continue to expect a quarterly mark-to-market of our alignment shares, which will largely be dependent on the change in our share price during the period. Moving to adjusted EBITDA, we reported $17.3 million for the fourth quarter of 2023 compared to $16.6 million in fourth quarter of 2022, an increase of 5%. As Lars discussed, fourth quarter weather continued the trend we described during our third quarter call and was the primary driver of kilowatt hours coming in below our 2023 expectations. For the full year, adjusted EBITDA amounted to $93.1 million compared to $58.6 million in 2022, still representing a 60% growth.

Despite headwinds from weather, we continue to drive profitability with adjusted EBITDA margin achieving 60% during 2023, an increase compared to 58% from 2022, driven by the economies of scale benefits from our larger operating portfolio. Please turn to Slide 9 for our 2024 guidance of full year revenues and adjusted EBITDA. In addition, to provide greater visibility into our forward expectations, we’re happy to also be providing year-end ARR metric, which we think will help you understand how management looks at performance of our business. We intend to drill down further into financial metrics during our Investor Day in May, including the composition of our ARR, which is our estimated production measured in kilowatt hours, times an estimated average price that we sell kilowatt hours to our customers.

For our 896 megawatts of assets in operation at year-end 2023, we expect $183 million of annual recurring revenues. We add to that the assets closed in Q1, predominantly those associated with our acquisition of Vitol as well as forecasted revenue growth associated with other assets, we expect to add to our operating portfolio throughout 2024. Altogether, we expect 2024 revenue to fall in the range of $200 million to $222 million, which represents a 36% increase over 2023 at the midpoint; and adjusted EBITDA to fall in the range of $115 million to $135 million, an increase of 34% at the midpoint. We believe this guidance range appropriately incorporates our experience in 2023 and allows for a wider range of variability in key drivers impacting generation; notably, forecasted sunlight hours and system availability.

Turning to Slide 10 which highlights our demonstrated access to capital in the fourth quarter. To start, we closed a $200 million construction facility with Blackstone, which provides significant flexibility as it can be drawn for projects at any phase, whether during development, construction or operating. Next, we announced $163 million upsize of our Blackstone term loan facility, which provided long-term financing for both our Basalt acquisition as well as many of our recently-completed assets. Finally, we welcome Goldman Sachs and Canadian Pension Plan as capital providers with a closing of a new $100 million Holdco financing. We believe this efficient financing positions us to continue increasing our market share and executing on the robust growth opportunities available to us.

Moving to Slide 11 to review our expected funding plan. We continue to have no plans to issue dilutive equity or equity-like securities to finance our growth plan. Our successful execution of multiple financings in the fourth quarter has positioned us with a strong cash position of $219 million to end the year, which allowed us ample flexibility to close the Vitol acquisition in January. We plan to fund our remaining 2024 growth plan with a combination of funds from our Blackstone term funding facility, tax equity partnerships and cash from the balance sheet. As our development and construction activity continues to expand, our working capital needs are able to be funded by the new construction facility as well as our corporate revolving credit facility.

Once these projects are completed and begin delivering clean energy to our customers, we plan to utilize our term loan funding facility, which carries a long-term fixed rate on borrowings at 200 basis points to 250 basis points spread over the prevailing 10-year treasury rate. In summary, we believe the strength of our balance sheet and existing sources of capital position us to take advantage of the robust growth opportunities available to us. Thanks to our industry leading platform which generates significant cash flow and has access to the necessary financing to support our growth. That concludes my review of our financials. And with that, we are ready to take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today is coming from the line of Andrew Percoco with Morgan Stanley. Please proceed with your questions.

Andrew Percoco: Hi, thanks so much. Thanks for taking the question. I guess maybe to start out with the guidance. Thanks for giving this annual recurring revenue number. Can you maybe just help us bridge the gap to the 2024 guidance range, maybe both for revenue but also for adjusted EBITDA? I think last year, you gave us kind of an exit PAR number. Is the right way to kind of maybe think about that is, maybe just apply the 2023 adjusted EBITDA margin against the ARR and then kind of comp that to the 2024 guidance range, and then it still seems like there would be a delta. Can you just maybe give us a sense for what gets you to the middle of the range? Are you still on track for the 150 megawatts that you’re planning to bring online and how much of that will be driven by additional acquisition?

Gregg Felton: Sure. Hey, Andrew, let me kick this off. This is Gregg, and perhaps Dustin will chime in as well. So thanks for the question. The first point I think we should make is that we are very focused on increasing the visibility into our business, and we’ve taken deliberate steps to make Altus easier for our investors to understand and model. We think this first idea of producing not only annual revenue guidance, but also introducing annualized recurring revenues, or ARRs, is a very important element in order to facilitate modeling, specifically as we’re also introducing annual expected production of in place operating assets. So that baseline of ARR should feature prominently in the modeling. And of course, that leaves the annual growth wedge.

And in addition to our annual guidance, we’ll be focused on giving you the tools necessary to understand our longer-term opportunity and visibility as it relates to any large acquisitions that we might make. We’re intending to provide disclosure around those as well. And just the final point I’ll make is that on our first Investor Day in May, we intend to cover a number of other areas of our business that haven’t yet been on full display for investors, and we’re looking forward to sharing insights on our technical capabilities and capabilities as it relates to not only physical assets but also the technology. So there’s a lot more disclosure that we’re looking to provide and a lot more visibility we’re looking to provide, specifically to allow you to take that ARR and bridge it forward over the next – not only this year, but beyond.

Dustin, do you want to add anything to that?

Dustin Weber: No, I think you summarized it well, Gregg. I would just add that we think ARR highlights the power of our recurring nature of our long-term customer relationships. And we think it’s informative and it provides visibility and building blocks from 2023 results to our 2024 guidance. Gregg talked about the growth wedge, that can come in a lot of forms for us, where we could add larger amount of megawatts later in the year and kind of fill that growth wedge or we could add a smaller amount earlier in the year that would contribute more meaningful to the ‘24 revenues.

Gregg Felton: And let me maybe just also – you asked about just the texture perhaps of the opportunities that we’re seeing, and there’s a significant flow of opportunities that are available to us, and we fully expect to extend our leadership position in commercial scale solar. So, on the new build side, we do expect to increase our construction cadence in 2024 from what was a record of 74 megawatts last year. And then as it relates to acquisitions of assets in operation, we are seeing a robust flow of consolidation opportunities, which should grow our market share. Of course, we closed on one such acquisition in Q1, and there are more in our pipeline that we are pursuing as well.

Andrew Percoco: Understood. That’s super helpful context. And then maybe as a follow-up to that, can you maybe just give us an update on your return thresholds? Is there an opportunity to increase your returns from here? You kind of talked about brand recognition, the power of the platform in some of the prepared remarks. And I think across the utility scale solar development landscape, we are starting to see some targeted increases in returns from some of the larger players. I’m just curious if that’s the potential read-through to the C&I space.

Gregg Felton: Yes. I think that there is no question that the financing environment, specifically as it relates to higher interest rates, should and is translating into higher return opportunities. So, without question, we are seeing that today, and we expect to see that throughout this year. Maybe I’ll take the opportunity on the back of that to talk about a little bit of just the environment that we’re seeing, Andrew, because it’s no secret that some market participants are experiencing the pitfalls associated with a lack of cash flow generation and capital structures that are also stressed by the current higher interest rate environment. And as you know, that profile translates into dilutive equity issuances, or even worse in some cases, legitimate questions about the viability of a business.

We, on the other hand, benefit from a number of key structural advantages. As a starting point, one of the biggest differences is our business generates cash flow from existing operations, and also, we only invest capital when there are attractive growth opportunities. And to your question, that, of course, means not only attractive growth in terms of things that are in front of us, but they have to meet the return thresholds that make sense in the context of the current environment. We – there are a variety of other things that we can detail and we’ll go into those on Investor Day, but it is critical for me to highlight that we built our business also to have durable access to world-class financing and we’ve consistently shown our ability to efficiently access capital, not only in terms of our ongoing access to the Blackstone funding facilities, but also the very recent and attractively priced financing from our partners at Goldman and Canadian Pension Plan.

So, we’re feeling good about our position. We think that our position is somewhat unique relative to what’s going on in the landscape. And for sure, the current environment should lend itself to higher return opportunities.

Andrew Percoco: Great. Thank you.

Operator: Our next question comes from the line of Justin Clare with ROTH MKM. Please proceed with your question.

Justin Clare: Hi, everyone. Thanks for taking questions here.

Lars Norell: Absolutely. Welcome.

Justin Clare: So, first off, I did want to ask about Q4. Just wondering how much lower was the generation in the quarter versus what you would typically expect historically. What’s the difference between the historical norm? And then, was the issue only really weather-related in terms of the performance of the operating assets or was there any system availability issue as well? And then I guess, finally, on that same point is, how do you consider weather and the generation of the assets in your 2024 guidance? How did you think about that?

Dustin Weber: Hey, Justin, this is Dustin. I’ll start in on that one. So yes, 2023, we tackled a number of variables, continued supply chain disruptions, particularly as it relates to transformers and switch gears, continued slowness by utilities on completing interconnections. Gregg referenced the new paradigm of higher interest rate environment. And so there’s some challenges there. I would say, weather is one that – variable that we couldn’t mitigate, and it was the primary driver for our financial results falling short of target in ‘23. The other main contributor was that we expected more revenue contribution from new assets added in Q4. Q4 was one of our best quarters ever in terms of adding new megawatts between new builds and assets in operation.

We added a 175 megawatts, the vast majority of those projects, including the Basalt acquisition, came on very late in December, and therefore, it didn’t contribute much to our Q4 revenue. That said, completing those is huge for us and setting us up for ‘24 and we’re going to get a full year revenue in ‘24 from those. So, overall, I would say those were the two primary drivers. So, we feel very good about how we positioned ourselves for 2024. We do expect more normalized sunlight hours than we got in 2023. And so, we’re feeling good about that.

Justin Clare: Okay, appreciate it. And then, was wondering if you could just also talk about just where you see time lines for projects today. So, from the time you sign a contract, how long would you typically anticipate before you can complete construction? Is that extending? Is it being pulled forward? And then I know you’re talking about expanding your workforce. Do you see an opportunity to kind of bring timelines in as you expand your workforce and the construction capabilities?

Lars Norell: Hey, Justin, this is Lars. So I’ll take that question. Just to start where you ended. Absolutely, the intention with growing our platform is, of course, to use a larger team, whether it’s engineering or design or construction or construction supervision, to overcome whatever challenges exist in the market with respect to building departments or utility interconnection queues or whatever the case might be. So, the answer to the first part is, it varies significantly by market. And it varies, of course, also, if you look at our pipeline, if it’s a self-originated deal where we’ve done all the work ourselves, in normal timelines might be 12, 15 or 18 months. In some markets, we’re able to do better than that right now.

In often case, we’re able to do better if it’s behind the meter solar system so that we don’t have to wait for some utility community solar program to open up in exactly the right way. When it is a community solar program, for example, in some of the states on the East Coast, they have been a little slower to open, and they’ve been a little smaller in terms of their aperture for what system sizes can be submitted into them. And whenever that happens, assets that we’ve already signed leases for with clients, they’re still there, but they just get pushed out to the right. So instead of being able to build those assets and be done with them in, say, October of this year, we might currently predict that we’re going to be done with them in February of next year, or whatever the case might be.

We continue to grow our platform to overcome these challenges. We, like Gregg said, are expecting to build more new-build assets next year than we did this year. The time lines for deals that we take over from channel partners, where they might have done most of the development work, continue to be much shorter. In those cases, we might be looking at sort of a 9 to 12-month construction period instead of 12 to 15. And so, between the different markets and the different sources of deal flow and a growing platform, we feel pretty good about where we are in spite of some of the challenges with timing from utilities and some programs.

Justin Clare: Okay, I appreciate it. Thank you.

Operator: Thank you. Our next question is from the line of Vikram Bagri with Citi. Please proceed with your questions.

Vikram Bagri: Hey, good afternoon, everyone. I wanted to start with ARR and put some numbers around the previous question on the call. If I assume a 60% EBITDA margin on the year-end ARRs that you disclosed about $183 million, it seems like at year-end, the EBITDA run rate was around $110 million. So you added about $31 million of EBITDA in 2023. Did this implies that EBITDA addition was at like $72,000 per megawatt, which seems low relative to what your target has been historically, about $100,000 to $150,000 per megawatt of EBITDA added. I wanted to make sure I understand this right and what the factors behind that are. Couple of things that come to mind is perhaps the SG&A was somewhat understated at the end of year-end 2022.

Perhaps the EBITDA per megawatt added in ‘23 was slightly lower. Maybe you’ve changed the irradiance assumptions that you have in calculation of the EBITDA and/or SREC prices are having an impact on the EBITDA as well. So, wondering like if you can help us understand and help us bridge that gap between EBITDA per megawatt that you add on organic growth and M&A.

Gregg Felton: Hey, it’s Gregg. Thank you for the question. And this is definitely the type of detail that we would like to get into with you and make sure that you have an appreciation for how we’re looking at the world. So, the first important point is, yes, we are reinvesting in the platform every year and the SG&A line has been growing. That takes the form of expanding our team in all areas, frankly, but we referenced some on this call. Every technical area of the firm is growing to support our capabilities and to build our business. I think, Dustin, we saw 25% type of growth numbers or more. And so, I think the year-over-year increase in SG&A is one source of the bridge. The other thing to specifically reference as it relates to your question is, not all megawatts are created equal as it relates to the revenue opportunity.

The revenue per system is very much a function of the market that we’re in. So, for example, in the Southeast, where we added the Basalt assets, the revenues associated with those assets are going to be on the margin lower than the revenue of a similarly sized portfolio in the Northeast might be, just because the price per kilowatt hour that we’re charging for every unit of energy that we’re producing is lower. So, we definitely have a desire to walk through that, and we have an intention for something of a math camp in our Investor Day, which is really intended to get into the model. But I’d say, Dustin, I think it is true that on average, the revenue per megawatt hour added or kilowatt hour added in 2023 was probably brought down our average price per kilowatt hour.

It doesn’t mean the returns were any less attractive, to be clear, because we paid less relative to lower revenue. It’s just the mix might change, and that’s going to continue to change, frankly, as we expand our geography across the country. We’re in 25 states and growing, and new markets might come with a different revenue profile depending on where we’re adding assets.

Vikram Bagri: Understood. And then on financing, it appears you clearly indicated no need for equity this year. But longer-term, can you frame how much room do you have to add more megawatts before needing any outside equity? Also, I was wondering if you can share how you look at leverage internally and where you stand on those metrics? Just trying to understand financing needs as we look beyond 2024.

Gregg Felton: Sure. Let me start with that. So, I think that we have been very focused. We are large shareholders of the company, and we are very focused on shareholder experience, and we’ve been pretty consistent in our messaging that we have no desire to issue equity at dilutive prices. So, our business plan has specifically been designed to limit our need for equity capital. We, of course, started 2024 with $219 million of cash on the balance sheet, supplemented by our Blackstone construction facility, which was undrawn at year-end as well as our access to attractively priced long-term financing facilities. So – and then finally, I should mention, because there’s a bit of disruption in the tax equity market, we can talk more about.

But we have excellent and ongoing access to tax equity, which we don’t think everyone else does in the market. So, we feel very good about our financing access. We’re going to be focused on not issuing equity, and we have clearly, we think, demonstrated some avenues to raise capital, specifically the Holdco financing would be the most recent one in 2023. But we have other non-dilutive sources of capital contemplated to allow us to continue to execute on our growth plan, certainly well into the future. That is our current operating plan.

Lars Norell: And perhaps, we should just say a word about the way our investors look at leverage as well. We have a page in the investor presentation that’s online that we should bring out again. And we, of course, like Gregg said, intend to walk through this stuff in math camp on May 14, the Investor Day. But basically, our debt is rated investment grade. We have a significant collateral balance of solar contracts that in many cases are 25 years, in some cases, longer than that. Some assets are brand new, others have been with us for some time, but that collateral balance is a well-diversified portfolio of other investment-grade contracts, which are our customer contracts spread across the country. When you look at our main debt, which is our funding facility with Blackstone, that debt really goes against that collateral balance of solar contracts with customers, and relative to the value of the collateral balance, the debt is sized fairly conservatively.

And so, when we look at the amount of debt service that comes due each year, when we consider leverage ratios, we and others, for example, Goldman Sachs and the Canadian Pension Plan, feel very comfortable about the room we have left in Altus and the cash that we’re generating. And we don’t think that we brought that particular viewpoint, which is to say, look at the main funding facility relative to our asset values. We haven’t brought that forth yet in a way that allows everyone to truly understand that. We’re going to do a better job with that.

Vikram Bagri: Thank you. And one last question, if I can squeeze in one more. Can you talk about what you’re targeting in terms of return for acquisitions? And how competitive is M&A versus organic growth? That’s all I have. Thank you.

Lars Norell: Yes. We think our customer contracts as being fairly similar, whether it’s an asset that we build from scratch or one of our channel partners’ builds having spent 6 or 9 months developing an asset before they come to us or if we’re looking at a portfolio that have a series of assets that have just been completed for a client. In each case, we look at the terms of the contract, is it a 25-year contract, is it a 25-year contract to deliver clean energy, we look at the system itself, has it been built to the specifications that we look for. And once we have done the due diligence and gone through investment committee, we feel relatively comfortable both looking at new build assets and assets in operation as being relatively similar to each other.

And in terms of the return measures, we of course, are mindful that with interest rates higher in the market right now, and frankly, with power prices continuing to be fairly elevated for most of our customers and definitely community solar customers, we are entitled to look for a good return on those. And that’s a significant spread against whatever the benchmark rate is in the market. And that’s on an unlevered basis. And this asset needs to be – able to be active to Altus on an unlevered basis from a unit economic perspective. And then of course, the most effective way for us to hold that asset is in our funding facility that then produces even higher returns.

Vikram Bagri: Thank you.

Operator: Our next question is from the line of Jon Windham with UBS. Please proceed with your question.

Jon Windham: Perfect. Thanks for taking the questions. Looking forward to math camp. Can we start with – you mentioned some delays in state policies, can we get a little specific there on what particular states we should be keeping an eye on?

Lars Norell: Sure. This is Lars and thanks for that question. There is, for example, a very popular state on the East Coast where we own a lot of solar assets and a state that we have been in for more than a decade. They have a community solar program that just started going or got going last year. We were very fortunate. We swept some of the most awards under that program together with Blackstone and their Link portfolio last year, and those assets are now finished through construction and up and running. But the next sleeve was anticipated to basically open up again so that we could submit a number of deals that we already had signed leases for. These leases were signed with CBRE Investment Management. They were signed with clients of CBRE.

There was more assets from Link or Blackstone in there, and all of them were ready to basically go into construction. But for whatever reason, the state decided to limit the size of each new solar system, in this particular go around to 1 megawatts per system. We had a number of assets that were 5 megawatts in size and 6 megawatts in size and 7 megawatts and 8 megawatts in size. And so we had a choice. We could either submit those assets into this limited 1 megawatt size or hold off until the next sleeve opened up, which we are led to believe will happen in June of this year. And so we have made the tactical and strategic decision to actually hold off. We don’t want to send the hard work that we put into these 6 megawatt and 7 megawatt assets into a program sleeve that for the moment is limited to 1 megawatt.

We actually held off on all of that. Those assets are still there, they are with us. We are going to get into construction as soon as they get picked into the program. But at least for the moment, that caused a delay for us.

Jon Windham: Appreciate that. And then, the other thing I wanted to get into a little bit, if you can help us all get a little bit more comfortable with the guidance is, the miss around weather in the fourth quarter. Investors experience with blaming weather from the wind industry has not been good, right? So, like weather this quarter and then weather again, it just turns out that their capacity factor assumptions were too high. Do you have just some idea of how things have tracked to maybe last year by quarter or the last couple of years. in terms of you hitting your targeted production, like how common is this? How far out of the box was the fourth quarter?

Lars Norell: Sure. This is Lars, and I think Dustin will follow-up. So, we are happy because we have a 15-year operating history at Altus. So, we have seen a lot of weather. In the beginning of Altus, most – our history, most of the assets that we built were all in the Northeast, because that’s where we are located, and we knew a lot about the programs in Connecticut, New Jersey and so forth. Then, we tended to see occasionally bad weather throughout the Northeast region during one quarter. But even during those years, we didn’t tended to see it happening two quarters in a row. In 2014, ‘15, ‘16, we started branching out across the country, and we built assets in Hawaii, in California and in other states. And then it became increasingly rare to see even one quarter show a particularly sort of nation-wide bad weather pattern.

And so, in the Q3 and Q4 period of 2023, in spite of having a very well-diversified portfolio, the weather on both coasts turned really bad, and in particular, California, that usually sort of saves us a little bit, had a lot of rain and atmospheric rivers and other things going on. So, based on this 15-year operating history, this was not something that we had seen before. As a consequence, I guess Dustin, we want to make sure that the guidance that we have left for 2024 is understood to incorporate a fair amount of careful analysis going into it.

Dustin Weber: Yes. I think that’s right. I would add that, Jon, one anecdote is December, which was particularly frustrating, was down over 20% from historic norms and forecasts. So, that was certainly a surprise to us. Lars touched on, like how we think about weather as it relates to our forecast. We really want to make sure that we are continuing to diversify our portfolio, which is currently 25 states. That’s one aspect. And we need to make sure our forecasts are right and appropriately allowing for this variability, and we feel good that we have done that for 2024.

Operator: Thank you. Our next question is from the line of Chris Souther with B. Riley. Please proceed with your question.

Chris Souther: Hey guys. Thanks for taking my questions. So, it sounds like there is still some more headcount and platform investment catch-up here for 2024. I am curious whether you think we will exit 2024 in a place where we get kind of more operating leverage going forward. So, EBITDA growing faster than kind of revenue or if there is just kind of a multi-year continued investment at a similar pace of growth?

Dustin Weber: Yes. Hey, Chris, I will start. This is Dustin. Yes, I think we are proud of our margins. I think we ended at around 60%. And if you would look at 2024 guidance to the midpoint, we are about the same. So, obviously, deciding exactly how and how much we reinvest those dollars into our business is a key decision for us. And so, we are making those decisions. I think like the opportunity that we have in front of us really informs us that we need to keep making those investments into our platform, particularly those tasked with development and on the technical side. I would say second, and on the heels of just growing our asset base by 90% last year, we are also intensely focused on building out our technical operations and maintenance teams that ensure that we are generating as much clean energy as possible out of our systems and that we can sell to customers at a discount.

So, we have had very high margins in the past. We will continue to have high margins and while also building out our platform and bolstering our teams.

Chris Souther: Got it. Okay. And then maybe just the ARR versus the kilowatt hour produced estimate, it seems like the dollar per kilowatt hour that you expect to produce with the current asset base is below the historical average. Is that just a function of new assets throughout this year that were kind of back-end loaded, or are there conservative or changes in your SREC or other assumptions, just wanted to see if we can get some color there and maybe it’s just a math camp question.

Dustin Weber: Yes. Chris, so we will get into it on Investor Day some more. And I like that this math camp name is really taking off. But I think you hit on it, and Gregg covered it a little bit earlier is, not all megawatts are created equal. That’s probably the main theme here. You referenced the portfolio in the Southeast, which comes at lower per KW power prices, which of course corresponds to a lower purchase price for us. So, that’s probably the big driver. But yes, I mean I think the RECs are kind of even, I would say, to maybe, we all know that RECs, a lot of these incentive programs that states put into place years ago are kind of stepping down in a modest fashion over time. And so there might be a little bit of that in there as well. But I would say for the most part, it’s just a function of where we have been growing our portfolio over the course of the last year.

Chris Souther: Got it. Thanks. I will hop back in the queue.

Operator: [Operator Instructions] The next question is a follow-up from the line of Jon Windham with UBS.

Jon Windham: Hey, perfect. Thanks for having me back on. My line dropped while you were answering the question, user error, no doubt. Can we go back to the weather just for a second? You mentioned December. Any comments around since you have monthly data January and February that give you confidence going into this year? Thanks.

Dustin Weber: Yes. Hey Jon. Yes, so, I would say, we are putting out guidance today, and we have accounted for all known matters of variability in that guidance. So, we don’t expect any big changes from weather.

Jon Windham: Perfect. Thank you. And if you will amuse me here for one more, I can’t believe we made it this far into a call without an AI question. I get questions from investors asking about Altus’ exposure to AI data centers. Any comments around that would be appreciated. Thank you very much for taking the questions.

Gregg Felton: Hey Jon. Thanks for the questions. This is Gregg. I think the obvious comment that we think investors should be focused on is, there is a lot being written about the massive demand increase for electricity associated with AI and the data center growth that’s being forecast. Clearly, that’s inflationary from a long-term perspective for power prices, not only in terms of the natural gas consumption, the power side of it, but probably as, if not more importantly, because of the infrastructure and the T&D or transmission distribution spend. So, a core thesis that we have here is, of course, our contracts, as everyone knows, are predominantly or majority floating rate in nature and designed to capture upward pricing from increasing electricity demand. And so that is the way that we think we are at play on that theme.

Jon Windham: Thank you.

Operator: Thank you. At this time, we have reached the end of our question-and-answer session, and I will turn the call back to Lars Norell for concluding remarks.

Lars Norell: Thank you very much, operator and thanks to everyone who has been listening. We look forward to meeting with you on our Investor Day to continue the education. But just in summary, for this particular fourth quarter call and the year, we feel very good. The team feels very good. Altus is profitable. We are the market leader. We are growing revenue and EBITDA in 2023 by 50% to 60% in a very challenging market and we are going to keep growing in 2024 as well. We are working hard to educate investors, and we are not going to leave any stone unturned as it relates to making sure that we bring forth the sort of precursors to revenue that we work with every single day so that you can follow our progress each quarter and throughout the year.

And we feel good about our destination. We are a market leader and we intend to go and take that position to a market dominant position. But we are going to talk more about that in the Investor Day and we look forward to seeing everyone there. Thank you very much.

Operator: This will conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.