AGM 2024

Watch the Skyline Clean Energy Fund Discussion

[00:00:20] Wayne Byrd:

Welcome, valued investors. Thank you for your continued support of our investment strategies, and for tuning in today to get a quick update on Skyline Clean Energy Fund, its portfolio, and strategies.

While the youngest of our Skyline investment funds launched in 2018, Skyline Clean Energy Fund is arguably one of the industry leaders at the forefront of this emerging and expanding industry of sustainable energy and sustainable investments. I’m pleased to be joined today by Rob Stein, President, Skyline Clean Energy Fund, to get his perspective and some highlights from 2023, and the Fund’s strategy going forward, and the emerging trends in the market. Thanks very much, Rob, for joining me.

Let’s jump right into things here and look back on 2023. So, how did Skyline Clean Energy Fund fare last year?

[00:01:06] Rob Stein:

Yeah, 2023 for us was a fantastic year. We sort of stuck to our knitting. We had a plan for the year knowing that there might be some volatility in the market, some volatility with interest rates and inflation. So, we really focused on a couple of core principles. We made sure that we were operating our assets to the best of our ability, that we were surfacing debt where we needed to, and surfacing value in our underlying assets. So, for the Fund, we grew by 40% over the year. We added about $118 million of assets under management. And we’re excited with that stat. [As of] January 1, 2024, our Unit Value was $16.12, which represented just over a 10% return for our Unitholders.

So, great numbers over the year, stuck to our knitting, and really made sure that we were adding accretive assets. We were patient with our acquisitions. So, we worked on for the last probably three years acquiring the Skypower portfolio. So, we finally closed at the end of December 2023, which we worked all year on. And it’s an asset pool that we really were looking for. It sort of fit with our strategy to add accretive assets, assets that have an opportunity to expand, to find additional value through operating efficiencies, through repowering systems. And that was really the goal, is that that portfolio fit perfectly into our greater portfolio. It was co-located where we had other assets. So, we’re able to really find efficiencies in our service portfolio. So, that was really the goal. And these kilowatts as they come online and we stabilize them through 2024, we’ll really be able to surface real value for our Unitholders.

[00:02:38] Wayne Byrd:

So, Rob, shifting over to one of the hot topics of 2023: interest rates. I know a lot of our investors understand how these were managed in the REITs (Real Estate Investment Trust), but let’s hear about the Clean Energy Fund and how 2023 was a big year for the Fund in terms of capital restructuring. Let’s talk about that.

[00:02:55] Rob Stein:

Yeah. Before I get into that, [I] really want to talk the hot reasons why we did interest rate adjustments last year, [which] is we had a whole bunch of more expensive debt. Debt that was in the 6.5-7% interest rate level that had a year or two left on it. We went to Scotiabank, and Scotiabank said, hey, based on the contracts you guys have and the creditworthiness of your assets, we think we can get that debt down to mid-fives coterminous with the length of your FIT (Feed-In Tariff) contract. We said, what does that look like for our Unitholders? So, when we ran the model it surfaced millions of dollars for our Unitholders that we could then reinvest in new assets. So, the team came back and said, hey Rob, this is a no-brainer. We can break some debt. We can put debt on assets that are unleveraged right now at a lower interest rate and for a longer term, that gives us really consistent, good economics to plough that money into new assets. So, that was really the concept of why we did it.

It also fits with our philosophy. Our philosophy when we started the Fund was, we wanted to eliminate as much volatility in our asset class as possible. That’s why we buy assets that have long-term contracts with fixed rate, fixed term. That really works well with us. The add-on to that is we need to make sure our debt is sized to complement that. So, we look for debt that is coterminous with the length of our FIT contract. So, that all added up. We ended up putting about $52 million of debt on a pool of 48 assets last year that, like I said, surfaced millions of dollars for our Unitholders and kicked out our interest rate on those assets coterminous, which is great. It really allows our team to then just focus on operating those assets. We don’t have the volatility of interest rates that restrict the way we sort of plan our strategy. We can really focus on making sure our solar systems are operating when the sun is shining, that our biogas facilities are producing when we receive our waste, and we don’t really get caught up into the volatility of interest rates. So, that was the primary reason we did it.

And, you know, right now our biogas assets are fairly unleveraged. We have about $130 million of enterprise value on our biogas assets, with $20 million of unsecured debt on that. And so really through 2024, as we see interest rates come down again, we will go back to the lenders and see if we can put debt on those assets. As long as that debt’s competitive, it’s debt that’s coterminous with our contract length, we’ll look at doing that. So, those are things that we’re really excited about and things that we’ll be, you know, doing through 2024.

[00:05:24] Wayne Byrd:

Thanks, Rob. Those are incredible strategies just from the capital stack debt structuring that just coincides well with your operation focus. Interest rates aside now, what other current economic conditions are impacting the Clean Energy Fund and what are you doing in the Fund this year?

[00:05:39] Rob Stein:

The strategy for this year, I said at the beginning, is really stick to our knitting. We just acquired this large portfolio of operating solar PV (photovoltaic) assets, and the developer that originally developed and operated those assets hadn’t really made any improvements to those systems over the last 12 years. And so, we bought that asset saying, hey, we can take a 70-watt module and put a 600-watt module on it. And so [we will] really increase generation on those assets and make sure that, you know, that’s accretive for our Unit Value. So, through 2024, as money comes in through our Unitholders, we will be deploying that into existing assets we already own.

So, the general theme for this year is organic growth. How do we take the portfolio we have today and make it more efficient. And we’re really just yield chasing. So, if an asset right now is generating a 10% yield – I’ll give you an example. So, in Lethbridge (Alberta), we did our de-pack (de-packaging) facility last year. It was a $5 million capex (capital expenditure) project. With that $5 million capex, we just started receiving waste. And with that, we’ll receive an increased generation of about $2 million a year. So, that’s a 40% return on that single capex project.

So, we’re really targeting those type of projects, not only in biogas, but in our solar portfolio. So, with the Skypower transaction, we have around 70 megawatts of operating solar PV right now. Can we double that capacity? Based on our math, we think we’ll see about a 40% IRR (internal rate of return) year over year on that capex project. So really, it’s a nice position to be in as an asset manager, where we can take our asset pool that we currently have and really look internally at how we make it more efficient, just to grow that yield through organic growth: really surfacing value from the assets we already own. So that’s part of the strategy we have for this year.

Secondly is through 2023, we worked on the engineering of an expansion in our Elmira (Ontario) biogas facility. So right now, we have the ability to process about 110,000 tons of waste. But there’s a huge need in Ontario right now to take more waste. But the barrier of entry – it takes you 5 to 7 years to build a new facility. So, with what we have in Elmira, we have 15 acres of land that’s being unused right now, unutilized. And we’re grandfathered through the permitting to expand the capacity we’re able to accept in Elmira. So, through 2024 into 2025, we’ll start the expansion project in Elmira. We’ll take that facility from 110,000 ton capacity to about 250,000 ton capacity. So, we’re excited with that project. We have to pair that with capital coming in. But our Unitholders are excited about what we’re doing and that’s being paired really, really well with these new opportunities.

Last thing I’ll talk about is something called an RNG (renewable natural gas) expansion. So, in Elmira right now, we’ve been operating on a FIT contract that we take all that waste, we turn it into a gas, and we run a CHP (Combined Heat & Power) engine that generates electricity, on a FIT contract. We’re at the point right now where we can sign a 20-year contract with a renewable natural gas company, like a FortisBC or an Enbridge, where they’ll take our gas for the next 20 years. And so, we’re actually proposing right now changing this facility from generating electricity to renewable natural gas. And we’ll see an excess IRR of about 20% right off the bat. And so, we’re working on an RNG upgrader right now in Elmira. So, just lots of great things, but the general theme is organic growth: take the portfolio we have and make it more efficient to grow our yields for Unitholders.

[00:09:00] Wayne Byrd:

Appreciate that. And then the focus on organic growth and investing capital within the Fund – it makes a lot of economic sense. Absolutely.

And for our investors, I know that they reach out to you, they reach out to us. They want an understanding of these FIT contract terms, and the life, and what does that mean? Is there risk during the contract term? What are your plans post-contract? So, let’s spend some time and talk about just the FIT contract term and what does that mean.

[00:09:26] Rob Stein:

Yeah, I’ll start with the strength of the contract. It’s probably the question we get asked most from our Unitholders. The strength of the contract is very good. Our contract’s been reviewed by all our lenders, all our insurers, all our underwriters. It’s a bankable contract, and it’s backed by Ontario government covenants. And so, you know, amongst solar contracts and renewable natural gas contracts in the world, they are some of the best in the world. And we’re really lucky on that. That’s why we built the foundation of the Fund off these feed-in tariff, these Ontario government contracts – because they are so solid.

We’ve gone through a couple government changes in my life in the last 15 years of renewables. And these contracts are really as solid as they get. And so we’re comfortable in that and we’re really building a larger foundation off of those contracts. What we try and do in these contracts is really surface as much value as we can get. And so, for example, today the power price to run these lights is between $0.15 and $0.20 a kilowatt hour (kWh). We think by the time these contracts are expired, the price of power is only going up. The need for power is only going up. We have 500,000 new immigrants coming a year. There’s adoption of electric vehicles. One vehicle is probably 4 or 5 homes worth of power. There’s just a substantial amount of power that’s needed. And so what we’re doing as a Fund is we’re making sure we’re maximizing these contracts. We’re providing central electricity and renewable natural gas to the grid, and that is going to be needed for the long term.

What we do on our contracts that a lot of people don’t understand is -yes, I’ve been using the word “contract” a lot – we own the contract. We also own the equipment that depreciates over time, and we’ll put better equipment on as technology gets better. But what they don’t realize we own is the connection point. And that connection point is the most valuable thing we have. That allows us to generate electricity or renewable natural gas at that location in perpetuity. Forever. And so, our strategy as a Fund is to make sure we have long-term leases, that we can generate power at that location. And at our large locations, we own the land, which is really important.

And so, you know, as the contracts get close to renewal, we’ll discuss with the government, because they want our power. We’ll discuss, you know, contracting an expansion or an addition to our contracts right now. So that’s ongoing conversations we’re having right now. We’re also talking to private businesses, like the [Skyline] REITs and other large vendors, the banks of the world, that 1) need power, and 2) they want a fixed idea what that power is going to cost them. And so, [who] they’re talking to is funds like us, saying, can we buy your power at a fixed term, at a fixed rate for 20 years, and we’ll underwrite it? We’ll say, we like your covenants. We like the creditworthiness of your product. Yes, we have power. Can we make money for our Unitholders doing that?

And so, you know, I tried to dull down my excitement, but I’m probably most excited about the post-contract value because I understand we’re going to realize a reasonable rate of return in the contracted life. But post-contract is really when our yields get frothy, and when guys like me get excited because there’s just so much potential to our assets.

[00:12:28] Wayne Byrd:

Yeah, I think it’s great for our investors to hear that, to hear what it is post-contract, that the value really is in that connection point, and that it isn’t just seven years left on the one round and maybe up to 14 years on another round. It’s what is set forth and what’s available in the future is really impressive.

So, Rob, you talked about the REITs as potentially being an off taker in the future. I think that Skyline Clean Energy Fund is an impressive integrated loop in the Skyline investment funds’ economic ecosystem. You talked about and touched upon immigration. So, increased immigration [and] population growth in Canada increases demand on housing – Apartment REIT – increases demand on grocers and retail – Retail REIT – which then also increases demand on logistics – the Industrial REIT – and obviously therefore increases demand on power consumption and the need for power generation.

So, you know, let’s talk to that with our investors. What do they have to look forward to within investing in the Fund for 2024 and beyond?

[00:13:30] Rob Stein:

Yeah, I’m really excited about all the Skyline products right now and how they mesh. They really are, you know, adding value to the communities in which we operate, and power is one of them. What we do in simple terms is we generate electricity and renewable natural gas. That’s what we do and that’s essential.

And as we see, you know, these 500,000 new immigrants that come in and honestly just society’s general need for more, we’re consuming more and more stuff. And more and more stuff needs more and more power to generate that stuff, to build the stuff. And so, you know, we really have a product right now that we’ve built that is such a needed commodity. And so, we really just need to figure out how to maximize that.

And so, we’re going to stick to our knitting. That was the theme through 2024. We’re going to make sure we’re surfacing new value for the assets we already own, you know, repower them, put better technology on them, increase generation on them. Our de-pack facility: make sure we’re, you know, doing contracts with really like-minded businesses that will support us over the next, you know, transition of our business there.

So, 2024 is something to get excited for. We’re going to see Unit Value growth through maximizing and really gaining value for our existing portfolio there. As well as, you know, the trend towards more power demand allows us to look at new opportunities. Can we build some assets that add new generation to the market? Can we expand our biogas facilities right now? Can we help solve a waste problem right now? These are all things that really, really complement the assets we own in the Fund and really bode well for our Unit Value growth over the next 25 years.

[00:15:05] Wayne Byrd:

I think our investors that have spoken to you in person or through this can really get a sense of the passion you have in the clean energy space, in the power generation, and the future of our Fund, [which] is quite impressive. Again, Rob, thank you very much for the insight and the outlook.

And investors, thank you all for joining us today. You can reach out to your Skyline Wealth Advisor or anyone for that matter on the Wealth Management team. As always, we appreciate your continued support of our investment strategies and mandates. Thank you.

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