Altius Renewable Royalties Corp

TSX:ARR

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Altius Renewable Royalties’ Q1 2023 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Also note that this call is being recorded today Monday, May 8, 2023.

And I would like to turn the conference over to Flora Wood. Please go ahead.

[Flora Wood, VP, IR & Sustainability]

Thank you, Sylvia (ph). Good morning, everyone, and thank you for joining our ARR Q1 financial results call. The presentation for this call is on our website at arr.energy, under investors webcast, and there will also be recording and the webcast reply will be live couple of hours after the call end.

With me today is speaker, I’ve Brian Dalton, CEO of ARR; and Frank Getman, CEO of GBR; and Ben Lewis, CFO of ARR will be here and joining us for the Q&A.

And with that, I’d like to open (ph) -- forward-looking statements you will see on Slide 2 of the presentation.

And with that, I'd like to turn over to Brian Dalton.

[Brian Dalton, CEO]

Thank you, Flora. Good day, everyone. I'm on the road today with some potential for weak connectivity, so we'll keep my remarks even briefer than unusual before turning over to Frank.

Our first quarter was a gratifying one, as we began to receive first royalties from several new projects. Projects that will pay our shareholders for many years and decades to come while the natural resources that these are based on never to please

The repowering based optionality that stems from the commissioning of perpetual natural resource projects continues to excite us, and obviously, others as well, as we are noting an uptick in inquiries (ph) around providing royalty financing to repower existing projects.

The opportunity set for new investments for all of the use cases, we have identified for the past couple of years continued to build during the quarter, in fact. There's no doubt that our royalty offering is building in both awareness and acceptance, as increasingly evidenced in our growing list of recognizable counterparties.

In addition, market conditions for the major competing forms of capital to our royalty capital, namely debt and equity have been difficult and this is helping to drive business our way.

So with that lead in, I'll turn things over to Frank for his more detailed observation.

[Frank Getman, CEO, GBR]

Good morning, everyone. I'm excited to share with you today an update on our continued progress in building Great Bay and its broad diversified portfolio of renewable royalties. Q1 included revenue from our two new investments, which we closed late in 2022, mainly our $46 million investment into Titan Solar, that's a 70-megawatt AC solar project in California, owned and operated by Longroad Energy and our approximately $18 million acquisition of a generation base royalty on 658 megawatts of a 1-gigawatt wind project in Hansford County, Texas, owned and operated by a top-tier owner operator.

Q1 also included our first revenue from two new operating projects from our developer investments, a 2.5% royalty on Young Wind, a 500-megawatt wind project in Texas developed by Apex and now owned and operated by NextEra and a 1.5% royalty on Appaloosa Wind, 175-megawatt Texas wind project developed by TGE and now owned and operated by NextEra.

As shown on Slide 8 of today's presentation, Great Bay now has 10 cash flow and royalties on over 2.4 gigawatts of operating renewable royalty projects. We also expect another project developed by Apex to now owned and under construction by JERA, a 300-megawatt El Sauz wind product to come online in the near future. Great Bay's revenue for the quarter was approximately $2 million and ARS revenue was $1.6 million. The reason the ARR's revenue is not exactly 50% of Great Bay is due to higher interest income on the cash balances held by ARR. Revenues in Q1 were affected by lower merchant power prices due to a mild winter resulting low natural gas prices. As many of you know, the marginal price of power is still set by natural gas prices in most regions of the country.

On the other hand, I'd note that contracted PPA prices as recently evidenced by the Level 10 Q1 PPA price index continue to move higher. So there's still strong underlying demand for renewable energy and continued upward pressure on long-term PPA prices, even as near-term merchant prices can be volatile, as we saw on the high side last summer and on the low side this winter. When we provided our revenue guidance for the year, we factored in the low gas prices and forward price curve at that time. Accordingly, we remain comfortable with our revenue forecast for the year of $11.5 million to $13.5 million.

I'd like to offer a few comments on our built-in pipeline for new cash flow and royalties, even with no new additional investments over the next several years. In particular, I'd encourage you to look at the list of solar and wind project development -- wind development projects on which we hold royalties on Slides 9 and 10 in the presentation. From our TGE developer investment, we now have approximately 6 gigawatts of development royalties as a result of the sale of TGE to Enbridge. Enbridge is committed to moving these projects forward expeditiously and obviously has the necessary capital to do that. We forecast we'll need royalties on approximately 2.5 gigawatts to 3 gigawatts of these projects for Great Bay to earn its base return on its TGE investment.

Great Bay will then have the option to acquire royalties on the remaining 3-plus gigawatts of projects after they reach COD using the same discount rate we used for our initial investment. This one investment provides Great bay with an attractive pipeline of cash flow and royalties with Enbridge providing all of the required capital for ongoing development. Not to mention the royalties we expect to receive in the future from our investments into Hodson and Bluestar.

In fact, Great Bay's projected revenue once it receives royalties from its existing investments is projected to be over $30 million with ARR receiving its 50% share of those revenues. That's with no new investments. After ARR deploys the remaining uncommitted portion of the cash on its balance sheet into new deals, which I believe is a very conservative assumption, Great Bay's run rate would be over $40 million, the point of all this being that we have strong embedded revenue growth already baked into the business.

Now a few comments about new business. I'll simply say, we currently have the largest and highest quality pipeline, prospective deals that we have ever had. With the addition of Zach and Peter, we now have additional resources to help us process this increased activity. Uncertainty and higher costs in both the credit and equity markets is driving both developers and operators to look for alternative sources of financing, we are definitely one of those sources. The team is incredibly busy moving these deals along, and I'm confident in our ability to deploy capital into high quality developer deals and immediately cash flowing operating project royalties in the coming months.

That's it for my update. I'll turn it back to you, Brian.

[Brian Dalton, CEO]

Thank you, Frank and now, we'd be happy to take any questions.

[Operator]

Thank you. [Operator Instructions] And your first question will be from David Quezada at Raymond James. Please go ahead.

[David Quezada, Raymond James]

Thanks. Good morning, everyone. My first question just on the comments around the momentum you're seeing in new potential investment opportunities. Just wondering if there's any color you can provide on that, whether it's weighted towards the operational asset side or development projects or both maybe? And any comment you could provide maybe on how that's split up in terms of technology or region?

[Frank Getman, CEO, GBR]

Sure. It's really across the board, David. It's both on new developer deals as well as operating projects. I would say, the biggest development -- new development in my mind has been that there's folks now in the mix that we're talking to that I wouldn't have expected would need our capital. So I think that -- I just think the opportunity set for the folks that are looking for at least a piece of their capital stack to have some alternative sources of financing to help them maximize return is a larger group than I would have thought of in the past.

And the other thing I would say is, we're getting to high grade, which is a great position to be in. So we're not going to do every developer deal that comes across the transom now, so we're getting to high grade and say, which team is the best, which pipeline is the best. And as to where there's -- it's really across the country, there's been an exclusion of activity since the IRA was passed last summer.

And folks are definitely looking at, our cut (ph) is still strong because, look, it's one of the biggest economies in the world, and it's growing -- and their load is growing incredibly fast and has a great resource, but we're also seeing West. PJM, new development and PJM is probably a little bit slower just because people look at the backlog in the queue. So I feel great about our position that we're already in the queue with Hodson. But I guess those are some general comments on what we're seeing.

[David Quezada, Raymond James]

That's great color. Thanks, Frank. Appreciate that. And then maybe just staying on that topic, I guess broadly, and I appreciate you already have quite a large opportunity set in the U.S., but do you look at the Canadian market at all now with more activity in certain provinces like, Quebec and Ontario and Alberta? Just wondering if you have any feelers out there as a long-term opportunity?

[Frank Getman, CEO, GBR]

We're seeing -- we've seen a couple of opportunities. I think that -- I think by far, our strongest pipeline is still in the U.S. But we've seen a couple, which we haven't seen any in a while. So there seems to be an uptick, but it's not a huge focus for us right now. We've got one play with the U.S. market.

[David Quezada, Raymond James]

Perfect. Thank you for that. And maybe one -- just one last one for me, if I could. Just wondering if you're able to quantify the effect of lower power prices maybe look on revenues in the quarter?

[Frank Getman, CEO, GBR]

I don't want -- well, we don't mean to quantify it. I think we break out in our MD&A, at least the major projects, Titan, Prospero, Northleaf, [indiscernible]. So you can look at that in the MD&A. But they were – prices were lower due to the mild winter and hoping we saw the summer this year, we’ll see, I think, significant higher prices in the next couple of months.

[David Quezada, Raymond James]

That’s fair enough. Thanks, Frank. I’ll turn it over.

[Operator]

Thank you. Next question will be from Nick Boychuk at Cormark Securities. Please go ahead.

[Nick Boychuk, Cormark Securities]

Thanks. Good morning. Frank, you guys allocated additional capital this quarter to Hodson. I'm curious if you can comment at all on the sort of interconnection queues that you're seeing and whether or not they're communicating to you that things are starting to pick up a little bit, move a little bit faster?

[Frank Getman, CEO, GBR]

I think that the PJM after they gotten -- well, first off, on the Hodson, did they hit some milestones, which is great news to continue new projects alone and hit our internal milestones that we set that we agreed to upfront, and that's what triggered the access for them to additional capital. So that's all good news. Things are moving forward. And the PJM, I'd say that once PJM, look at they took a vial there to get their plan organized and approved and communicated to the market, but now that they have, we are seeing them PJM's working through and doing what they said they were going to do.

They pushed back the start date for the new interconnection queue reform transition process, but that's in part because they were trying to and they are moving projects forward through that they had already in the system before that date. So we've seen some activity that they're pushing things through that we're kind of grandfathered in, they want to get off their place before they enter into the new transition process. So they seem to be -- they do seem to be doing moving forward and processing applications. So we are seeing activity in PJM coming from the system operator.

[Nick Boychuk, Cormark Securities]

All right. That's a good sense. To your comment about the high grading of the portfolio and the opportunities that you guys are looking at, can you comment at all on the pace of expected capital deployment? I'm assuming that some of these sort of announcements that could have happened, could have been delayed by the IRA or other developers looking to just finalize last details, but any comments on how fast you'll be able to deploy the remaining capital?

[Frank Getman, CEO, GBR]

I think, to be fair and part of it was that we had in closing two deals right literally before the end of the year. We had two -- we were a little bit behind and processing something. So we're getting up to speed now and we're getting -- it's really completing due diligence making sure that we don't -- we still do everything the way we know we should and getting these deals work through our internal processes, our due diligence.

It's also on the developer side, we're digging in because we have -- there's a lot of new development teams out there and just making it could create a great opportunity. But I think this is where our background and experience that developers ourselves is really helping us, like, I think we do an excellent job and looking at the teams, looking at their projects, determining what's a brag a lot, what's a real mega lot and that just takes time.

[Nick Boychuk, Cormark Securities]

And then on the operating side, any comment on the pace of any of those new deals?

[Frank Getman, CEO, GBR]

Yes. We have a number of those in active negotiations. So I think -- on that front, I just it's interesting that the number of folks who were looking for capital has increased dramatically from previously.

[Nick Boychuk, Cormark Securities]

Okay. Excellent. Thanks, Frank.

[Operator]

Thank you. Next question will be from Rupert Merer at National Bank. Please go ahead.

[Rupert Merer, National Bank]

Hi. Good morning, everyone.

[Frank Getman, CEO, GBR]

Good morning, Rupert.

[Rupert Merer, National Bank]

So just a follow-up on next question on the pace of capital deployment. Can you remind us how much uncommitted capital you have right now, either at the LTS level or GBR level? And what's the outlook for needing more capital? Do you think you'll be in a position before the end of this year that you'll be out there looking for more?

[Frank Getman, CEO, GBR]

The -- I think...

[Brian Dalton, CEO]

I'll take that if you want?

[Frank Getman, CEO, GBR]

Sure.

[Brian Dalton, CEO]

At the high level, at the CVR level, it's probably fair to think in terms of $100 million, or so cash at ARR that granted there are some ongoing commitments, but don't forget there's also pretty nicely ramping up cash flow. So I kind of look at those as a bit of a wash. So about $100 million to work with today that won't cut it for the deal flow that we're seeing coming in from Frank and the team, assuming they get it, they -- that there's a normal kind of hit rate in terms of conversions here. So obviously, the job here is to continue to scale and build diversities. So we're not sitting on that assumption that we deploy that amount of capital and that's it.

So yeah, we don't really sleep as far as continuing to look at ways to feed capital to these opportunity sets. There's lots happening here, both in terms of early exploration of debt markets, lots of ongoing discussions with potential strategic investors. Obviously, the equity share price is really not constructive at the moment. So we won't be tapping that anytime soon. But yeah, there's lots of other ways, and there's pretty strong interest, we think, in what's developing and happening in this business. Very vague, I suppose, answer, but the message we give -- we sent to the GBR team as you find the good deals, the money will be there.

[Rupert Merer, National Bank]

And as part of your discussion with strategics, would asset recycling enter into the mix potentially?

[Brian Dalton, CEO]

Yeah. Look, there's a real disconnect between what the equities markets are saying about what's happening, I think, in renewables generally, and particularly with respect to this royalty financing and how it's developing, but that happens all the time. So again, if we wanted to sell the business through a strategic interest, we'd have a lineup at how much our valuations, I suspect, in the equities markets are saying. But we -- these things all sort themselves out in time, we'll get this figured out, but there is lots of strategic interest.

[Rupert Merer, National Bank]

Great. And then secondly, if I look at your development properties under royalty in wind and solar, that’s a great number of estimated CODs in 2024. How comfortable are you that the supply chain or interconnection will [indiscernible] be there for these projects and that you'll see them online next year or is there any risk that get pushed out a little further?

[Frank Getman, CEO, GBR]

I guess there's always a risk things get pushed out, but I will say that we know Enbridge is making a major concerted effort to, in fact, accelerate time line on these projects and they have buying power in the market when it comes to panels and things. And I think they're not going to just look at to do. They're looking this as a program and how they can do this on a larger scale than one season, two season along the way. So I think that they're going to exercise some of that power and that will hopefully keep things on track, but there's always a risk things get delayed. And if they do, you remember, it doesn’t affect our ultimate return. It just means that more projects that would have gone towards our return will fall out of that auction bucket, so to speak, that we have an option to acquire after we’ve got enough quality to achieve that return.

[Rupert Merer, National Bank]

Fine. Very good. I’ll leave it there. Thank you.

[Operator]

Thank you. [Operator Instructions] And the next question will be from John Mould at TD Cowen. Please go ahead.

[John Mould, TD Cowen]

Thanks. Good morning, everybody. Brian, maybe just certainly back to Texas a little bit to tackle the -- some of the legislative proposals on power and renewables we are seeing. I mean nothing in law yet, but it looks at least on the face it like another endorsement of your portfolio approach to development royalties. Just wondering, bigger picture, how does the uncertainty in Texas change? How you're evaluating investments with a significant footprint there? And does it potentially create some opportunities for your capital given that it may constrain the ability of other developers to sell the projects versus what they might have been hoping for? Again, I realize a lot of this is up in the air, but would appreciate your thoughts.

[Frank Getman, CEO, GBR]

Sure. Yeah. No, there's something here. We'll see what happens there. I've lived through these cycles and markets. I recall when we were developing large-scale biomass projects and KKR came into the market and at the time, we said we're going to build 12 gigawatts of coal power plants and everybody in the market backed up and went the other way. But we said -- I said, I don't know what's going to happen, but no, that's not going to happen. And we kept moving forward. And when that sure enough that fell away, we were sitting at the front of the line that we were able to have fantastic outcomes because we didn't get caught up. So I do think it's the portfolio approach you're talking about.

I also think that even if they pass this legislation, there's still -- the renewables movement in Texas is the gene is out of the box -- out of the bottle because it's cheaper. So even economics will drive this continued growth in renewables going forward. So could slow down a bit? Perhaps, but that we're protected in our current structures. And I think that even just our existing pipeline today with Hodson doesn't have very much exposure to ERCOT. So we had their whole pipeline. That's [indiscernible] looking at these things at Bluestar and trying to factor those things to where they look -- they're trying to look and go with it. The [indiscernible] is going to be not where it is today, and they're looking at different markets to things.

So I think it's a -- I think we'll be fine, but I also wouldn't put -- it's easy to get caught up in this area of today. And I think longer term, the drive towards renewables is going to continue. And I think we're going to be well situated.

[John Mould, TD Cowen]

Okay. Thanks for that. And maybe just -- you mentioned both your developer partners. So I know you can't get into specifics project deals for details, excuse me, for what Hodson and Bluestar are up to. But can you speak more broadly just to how those pipelines are progressing relative to your original expectations when you made -- when you made those investments?

[Frank Getman, CEO, GBR]

I think the -- on the development side, they're both doing great. I think that definitely continues to build up as a very incredibly strong greenfield team and is making great progress in building out their pipeline. Again, it's a private company, so I can't get into specifics there, but they continue to make great progress.

On Hodson, they're continuing to expand their portfolio and advance the ones buildout their term to advance the projects already. I mean we're seeing our capital work. Again, like the idea of that, we can go into some of an established pipeline to help them accelerate their whole pipeline, it's what we did with TGE, it's what we did with Apex and we're seeing it happen again with Hodson. So I feel really great about those investments. The -- was there another part of your question? I'm trying to think what was the...

[John Mould, TD Cowen]

No, just how it was progressing relative to your expectations and I think you...

[Frank Getman, CEO, GBR]

Yes, you remember the one other point I wanted to make was just that when I think that also and [indiscernible] Bluestar also is hoping to acquiring development projects from sub-developers are looking at and that market still remains very frothy, which is fantastic for their greenfield development and Hodson projects. But I think he's been very disciplined about value and it's prices are still -- do have an attractive development project or pipeline, the prices for those are still quite high. I think he may have liked to have been able to acquire some projects. So he's sticking to his knitting and just focusing on the greenfield now in the U.S.

[John Mould, TD Cowen]

Okay. Great. Thanks. Maybe just – just one last one on the IRA and tax credit transferability. There's been some reporting on a market for tax credit tranfers deals starting to take shape. Are you seeing this enter into the picture and the deal flow that you're seeing at all or is it still really nascent and not so much of a factor in what you're seeing?

[Frank Getman, CEO, GBR]

No. People are starting to actively discuss it. We've not been involved with the transaction that's used to get, but I think what's happening is there's -- do you have just a good project with a great PPA, face a bus bar PPA, you're going to go your traditional route and use traditional tax equity, you're going to get one of the major tax equity players to step up. But if there's anything unusual about your project or it's a repowering or something you have some merchant exposure or something, then I think that there's -- I think the shortage of tax equity is an issue in the market that the interconnection of probably two things are slowing down, progress the most.

So I think that those folks are looking at -- there's still, I think, believe some additional guidance that's going to come out. But people are actively looking at that for repowering projects or things where they may not just be a plain vanilla project. I think people are taking the transferability very seriously. And then obviously, other technologies, whether it be hydrogen or whatever they're looking at as well, but we haven't been active out in those today.

[John Mould, TD Cowen]

Okay. Great. All right. Those are my questions. Thank you very much.

[Frank Getman, CEO, GBR]

Yeah.

[Operator]

Thank you. And at this time, it appears we have no further questions. Please proceed with closing remarks.

[Flora Wood, VP, IR & Sustainability]

Thank you, Sylvie, and thank you, everybody for dialing in today to the conference call. Rupert, I'll call you or send an email because we do have to answer your question-and-answer. And look forward to speaking to everyone [indiscernible].

[Frank Getman, CEO, GBR]

Thank you, everybody.

[Operator]

Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.