Description

Short Altus Power (AMPS), a SPAC which closed in December 2021. From a fundamental perspective, Altus is a debt-financed roll-up of commercial & industrial (“C&I”) solar projects whose equity deserves to trade 70% lower. From a technical perspective, Altus shares have been temporarily buoyed by flows on post-SPAC close index inclusions. Mow that indiscriminate buying pressure has subsided, and long-time “elite sponsors” Blackstone just punted a boatload of stock, we think shares soon return to a more reasonable valuation. GC borrow is widely available.

Background

Altus is a C&I solar operator with 369 MW of capacity; they own solar panels located on the roof of your local mall, school, carport, etc. For Altus, these assets are primarily located in favorable states i.e., those with community solar programs (install solar, split the savings/credits: 80-90% to AMPS and 10-20% to the end customer) and those which offer solar renewable energy credits (“SRECs”) so that Altus can rake in some of that sweet free government money. The Company makes money in 3 ways:

•  SRECs (39% of 2021 revenues) (i.e., solar incentives)

• Net metering credit agreements (32% of 2021 revenues) (i.e., solar incentives)

• Power purchase agreements (22% of 2021 revenues) (i.e., actual power)

Comparable assets are commonly owned privately or as part of larger groups like AES, Nexamp, Duke Energy, etc. For their part, Altus has raised money primarily from Blackstone to buy up a bunch of these projects. But as it turns out, a lot of people like free government money, so returns tend to get eaten away; AMPS SREC revenue per MWh generated has fallen from $117 in 2019 to $79 in 2021, and it looks like the exit plan was to SPAC it at a nosebleed valuation.

AMPS is a Wildly Overvalued Roll-Up

AMPS talks a big game about their development platform, but most of the Company’s assets were acquired from third parties. We estimate AMPS has acquired 60% of their portfolio at an average price of $1.90 million per MW.

This $1.90 million per MW figure seems in line with comparable transactions. For example:

• In August 2021, Clearway Energy (CWEN) paid $335 million to acquire the remaining 50% of its Utah solar portfolio, which holds 530MW capacity, implying a price of $1.26M per MW.

• In February 2021, Clearway paid $202 million for an additional 35% interest in the Agua Caliente solar project in Arizona, a 290MW project, for an implied price of $1.99 per MW.

• On a consolidated basis, CWEN (which produces positive cash flows) has ~5,000 net MW of wind and solar capacity, and over 2,500 MW of natural gas capacity, implying a valuation of $1.75 million per MW.

• Similarly, on a consolidated basis, we estimate Brookfield Renewable Partners (BEP) trades at an valuation of $1.60 million per MW (including solar, wind, etc.).

• CleanCapital is a private owner which states it has invested over $950 million in “projects and companies” totaling more than 370 MW of capacity across 26 states and one territory. Perhaps not quite apples to apples, but again we get to $2.56 million in invested capital per MW.

These figures are generally also in line with new project completions, which have only gotten cheaper over time alongside panel prices:

Flip all these same assets into a SPAC and tag it ESG, and now AMPS trades at an implied valuation of $4.77 million per MW. At the very same $1.90 million per MW, AMPS shares would trade to $3.06, or 66% downside. So the answer to the question of “what would it take to replicate this business” is “far less than this.”

We could alternatively value AMPS in an NPV/runoff scenario. Napkin math: 19 years of CFs (see disclosures on remaining lives); $54 million in annual cash flows growing 3% per year (seems generous; see below); 4.0% discount rate (AMPS has a term loan fixed at 3.51% and variable rates on construction loans) = shares worth $4.56 (54% downside).

Fundamental Disclocation: Misleading Valuation Narrative & Projections

Fundamentally, Altus shares have been held up by the usual hockey stick SPAC projections: the Company’s SPAC deck called for 2023 Adj. EBITDA of $153 million vs. 2021 Adj. EBITDA of just $41 million. On this basis, AMPS backed its valuation with the claim that it trades at just 10.6x 2023E EBITDA, or “a 65% discount to peers”. Yet the EV in this calculation doesn’t include the hundreds of millions in incremental capital the Company must first deploy in order to actually have a shot at generating this EBITDA. Of course, given the rate picture, financing the next billion in capital is going to be a bit more difficult than the last billion; we doubt it comes at just 3.5%. 2020 through 2024 projections from the Company are below.

So if we look out from 2022 to 2024, Altus – according to their own projections – is going to spend $2.9 billion, which at that point we’re looking at a roughly $4.6 billion EV against $228 million in EBITDA, which means Altus trades at over 20x 2024E EBITDA, not 10.6x 2023E EBITDA. And would you look at that, the massive discount to peers has just disappeared!

There’s also the issue of actual cash flow production vs. AMPS-defined Adj. EBITDA. On the Q2 2022 call, CEO Lars stated “We are focused on profitability at Altus Power and we're proud to have been cash flow positive since 2017.” This may be true on the cash from operations line, but CFO less capex was markedly negative in each of 2019 and 2020, and cumulative FCF from 2019 through Q2 2022 is negative $79 million. Investors would argue that most of the capex is growth/development, but remember that (a) most of the projects have been bought, not self-developed, and (b) even if we assume maintenance capex is just 4% of PP&E (seems reasonable given useful lives), FCF is still negative.

Management also isn’t above the usual promotional deal announcements, such as the August 2022 announcement with CBRE, which was characterized by Co-CEO Felton as follows:

“They just announced that for 600 buildings, mostly in Europe and the United States, they're going to work with us on about 200 million square feet of rooftop, which translates roughly into 2 gigawatts worth of solar. That type of engagement, obviously, is a multiyear effort.”

2 gigawatts seems like really a lot of watts, but the agreement doesn’t actually call for any firm commitments to develop any number of solar projects, it only calls for the groups to work to develop solar projects “where viable” across CBRE’s portfolio. We think the scope of “viability” is far less than Altus would like to let on, given the Company relies heavily on SREC programs which are only present in a handful of states. We anticipate AMPS could have some trouble finding viable deployments. To that end, the Company has already guided 2022 EBITDA down from the $83 million originally called for to just $60 million.

Technical Disclocation: Price Insensitive Buyers

Altus shares have been buoyed by buying from price insensitive buyers in the form of both solar/ESG-type and small cap investors. The SPAC closed in December 2021, and shares traded to lows of $4.26 per share in May 2022, perhaps reflecting some level of market efficiency.

However, on June 17, 2022, AMPS joined the MAC Global Solar Energy Stock Index, and on June 24, 2022, AMPS joined the Russell 2000 Index. We estimate roughly 20% of the float was thus bought up by indiscriminate/ETF holders over the ensuing weeks (see TAN, PBW, VTI, QCLN, etc.).

Shares then traded to a high of $14.72 on September 28, 2022, when after hours, Altus announced that Blackstone and the underwriters would secondary (no proceeds to the Company) a total of 8.05 million shares at $11.50 per share, punting $93 million in stock. We think this is an effective ceiling and shares continue lower. 

The People Running the Show

Altus Co-Founder and CEO Gregg Felton was previously CEO of Full Circle Capital (FULL) from November 2013 to its November 2016 merger with Great Elm Capital Corp (GECC). Notably he concurrently ran Altus. Felton stayed on at GECC as a consultant until at least year-end 2018, per GECC’s later disclosures. His record here doesn’t appear to be all that great; FULL was a BDC which traded from ~$8 to ~$3 under his tenure, and GECC shares are down another 80% or so since November 2016.

Co-CEO Lars Norell previously worked directly under Chris Ricciardi at Cohen & Co (COHN). Ricciardi was dubbed “the grandfather of CDOs”, while Norell was one of the largest single individual holders of COHN before it blew up in the financial crisis. Shares are down 99% since then. Lars Norell is still involved with Ricciardi at another outside venture, EDLY Inc., a platform to securitize students future income as an alternative to loans.

Board member Richard Peretz was also on the board of Electric Last Mile Solutions (ELMS) – the first of the SPAC bubble to declare bankruptcy. Fuzzy Panda Research accused ELMS of passing off its Chinese imports as “Made in America” and booking fake revenues. Relatedly, Altus makes various ESG claims, but their solar panels have historically been imported from China:

“Since we purchase most of the solar PV panels we use from China, we are particularly exposed to exchange rate risk from increases in the value of the Chinese Renminbi.”

On the Q1 2022 call, Felton was probed, but wouldn’t disclose what portion of panels the Company sources from China. Altus is now getting away from this supply issue by signing on Heliene, which itself is reverse merging into a TSXV shell. Despite the optics of reverse merging into a TSXV shell, Heliene does appear to in fact be a Real Company.

Altus CFO Dustin Weber is not an accountant nor does he have a CPA license. He joined Altus in 2013 and was previously an energy analyst at a trading firm. He has a BS in Business from Ferris State University.

Other Concerns

Altus held material weaknesses in controls as of year-end 2021, which has continued through Q2 2022. Altus clearly has a bunch of subsidiaries and VIEs (see references to these entities in credit agreements) and roughly half of the assets are in VIEs, yet the disclosed list of subsidiaries simply says “none.” Finally, Altus doesn’t file the audited consolidated financials of APA Finance LLC (“APAF”), its borrowing arm.

CVI Investments also appears on the shareholder register (September 2022) with 1.5 million shares. CVI is an outfit which routinely involves itself at some pretty crappy companies, and you’d likely have done well shorting anything they touch. Here’s a list of the stocks where CVI Investments was mentioned the most in SEC filings over the past 5 years, as well as current prices vs. 52-week highs. Sure, markets are broadly down, but this is still pretty horrific. A handful of these have also earned SEC charges.

Kira Savino (now married as Kira Henderson) is the daughter of Tony Savino. She is also a Vice President at Altus and an AMPS shareholder through the Savino family trust. This familial relationship doesn't look to be disclosed anywhere in the Company’s filings, which also seems problematic.

Finally, Altus has also paid related party construction companies for work, then folded these companies in. See disclosures around Sound Solar Systems, LLC and Park Avenue Solar Solutions, LLC. Here are drawings for an Altus solar array in Massachusetts which name both Sound and Park Avenue.

Kira Savino/Henderson was also employed at each Altus, Sound, and PASS. In 2018, an Instagram post says Kira was at Sound Solar “for over 6 years helping to found the company from the ground up … She also has a part time role for a solar finance operation (Altus Power Management). Every day she drives over 2 hours to Greenwich (from Clinton and 2 hours home) to do the work she is passionate about and extremely talented at.” Then in 2019, Kira wrote a letter to local Connecticut government and cited that she works at Park Avenue. These entities are disclosed by AMPS, but still look to us like an avenue that insiders could have used to effectively double dip - or triple dip - on historical projects.

Catalyst

time, results