Altius Renewable Royalties Corp

TSX:ARR

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Altius Renewable Royalties’ Q2 2023 Financial Results Conference Call. At this time all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is bring recorded on Wednesday, August 2, 2023.

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

[Flora Wood, VP, IR & Sustainability]

Thank you, Erick. Good morning, everyone, and welcome to our Q2 2023 call. Our press release and SEDAR+ filings were released yesterday after the close and are available on our website under Investor's Reports. This event is being webcast live and you'll be able to access replay along with the presentation slides that have been added to our website in two spots at arr.energy.

Brian Dalton, CEO of ARR and Frank Getman CEO of Great Bay Renewable are our main speakers on the call and in the Q&A we'll also have Ben Lewis, CFO of ARR available for questions.

The forward-looking statement on slide two, applies to everything we say, both in our opening remarks and during the Q&A. And with that, I will turn over the Brian.

[Brian Dalton, Chief Executive Officer, ARR]

Thank you, Flora, and thank you everyone for joining today. The business continues to execute on its goal of adding scale and diversity to its portfolio, having now added more than 15 gigawatts of wind, solar and storage based development projects with portfolio. These span most of the U.S. power regions. This puts us well ahead of where we imagined our progress to be at this stage of the company’s development.

Moreover, to the combination of greater awareness of the royalty financing model and more difficult conditions for competing forms of financing such as debt and equity, we are seeing a strong uptake in deal origination activity.

I'll turn it over to Frank now to explain things in better detail, and to standby to take any questions after his remarks. Over to you Frank.

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

Thank you, Brian. Good morning everyone, I'm excited to share with you today and update on our continued progress in building Great Bay and its broad diversified portfolio of renewable royalties.

Our royalty portfolio revenue and cash flow profile continued to benefit from the addition of operational stage royalties in late 2022. Revenue for the first half of ‘23 was $4 million versus $2.4 million in 2022. Revenues were subject to continued soft merchant prices during Q2.

Our revenues are generally back half weighted due to seasonality, and we've seen an uptake of merchant prices in recent weeks with higher summer temperatures and increased power demand. I’d note that in 2022 two-thirds of Great Bay’s revenue was earned in the second half of the year, and I would expect a similar profile this year.

In Q2 we also announced our most recent developer deal, a $45 million investment into Hexagon Energy. We are thrilled to add another world class developer to our portfolio. Matt Hantzmon, the CEO of Hexagon has a long track record of success as a developer. Over the past seven years Hexagon has built an impressive 5.3 gigwatt pipeline, comprised the 43 Solar, Solar Plus storage and standalone storage projects across the U.S.

Matt as a form of partner of Apex founders is going to be ready and board member at Apex was well aware of the value of Great Bay’s non-dilutive royalty financing for developers, and sought out Great Bay as a partner to help them accelerate and grow Hexagon’s pipeline.

I'm particularly excited to have our first exposure to royalties and standalone storage projects as part of the Hexagon deal. As I've noted previously, we've struggled to find the right structure to align everyone's interest, to provide long-term royalty financing on standalone storage. And while this may not be our final structure for standalone storage, it represents an important first step.

With Hexagon’s assistance, we were able to create a structure where we received a smaller royalty on standalone storage projects, 1% versus 2.5% on Solar and Solar Plus storage, for a shorter period of seven years where we have greater revenue visibility, and that our option have access to a greater share of cash proceeds from the sale of projects to apply towards Great Bay’s IRR threshold.

While our standalone storage royalties will last for seven years, we'll be using a five year period when determining the NPV that gets credited towards Great Bay’s return threshold. So there's some built-in conservatism to help deal with the less predictable revenue streams.

It's important to note that we expect standalone storage to represent less than 5% of our overall return on the Hexagon investment. So this isn't a major part of the deal, but it will give us important exposure and learning as to the actual operating characteristics of standalone storage. We feel this is a smart and measured way to start.

With the addition of Hexagon, Great Bay now has over 15 gigawatts of wind, solar storage development projects in our developer portfolio, which provides a built-in growing stream of royalties and revenue to GBR for the foreseeable future. We believe this represents an incredibly exciting and impressive backlog of new royalties.

I'd now like to make a few comments about overall market conditions and renewables and the prospects for future capital deployment for Great Bay. I look at current market conditions as almost a tale of two cities. On one hand there remains robust activity and tailwinds coming on the back of the IRA legislation passed last year.

Overall renewables development activity has accelerated and there's been a number of new entrants to the market. The backlog of new projects across the industry continues to grow. There remains an insatiable demand for renewable energy from corporate buyers, as indicated by the continued March hire of PPA prices nationwide.

The most recent level 10 Q2 PPA price index shows wind and solar PPA prices increasing over 6.5% from Q4, 2022 to Q1, 2023 and over 26% from Q1, 2022 to Q1, 2023. On the other hand however, interconnection backlog continues to worsen, with MISO being the most recent regional transmission organization to announce a moratorium on new applications, as they undertaker restructure and reorganization process similar to what PJM has undergone over the last several years.

Development timelines for everyone have been pushed to the right. Moreover, the cost of both equity and debt financing has increased materially over the last year. The combination of robust activity and demand for renewable, both coupled with delays in higher cost of capital have created an increased demand for alternative sources of capital such as Great Bay’s royalty financing. Needless to say, it's an exciting time for Great Bay.

Finally, I note that we are busy looking at all options, including non-diluted forms of capital, to fund our business moving forward to optimize value for shareholders

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

[Brian Dalton, Chief Executive Officer, ARR]

Thank you, Frank. With that Flora, I guess we can open it up to questions.

[Flora Wood, VP, IR & Sustainability]

Eric, do you want to poll for questions?

[Operator]

Thank you. [Operator Instructions]. Your first question comes from David Quezada with Raymond James. Please go ahead.

[David Quezada, Raymond James]

Thanks. Good morning everyone. My first question here, just I guess related to the Hexagon deal. Just curious what you see as the outlook for other developers of this stage. Like are the industry tailwinds you're seeing causing more of them to crop up or would you still expect in general for investments to follow the barbell approach that you outlined a couple of quarters ago. I’m just interested in any color here for this type of developer.

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

Sure. The thing that I was really excited about Hexagon is they have a very attractive pipeline, existing pipeline and a great team, you know a full team already in place. I mentioned in my remarks that there's a lot of new entrants into the market. Many of these are two and three person shops who are just getting going looking for initial funding. And that doesn't really fit our model that well.

We made it with a Declan Flanagan. We made a bit of an exception in my very early stage, but it was also someone with an incredible track record and he was able to put the band back together pretty quickly and have a substance of team. And he was also raising a $100 million as part of that initial capital raise that we were part of. So it wasn't as though it was a few guys and a PowerPoint that are trying to start a company.

So I think that what Hexagon represents is someone who is further along. I don't know that – I think those folks – I think the interesting dynamic is that even establish developers, even some of the larger developers are all facing these struggles with everything getting pushed to the right, and I think they are becoming more and more open to additional and supplemental sources of capital, even if they had a big partner who they signed up in the last 24 months or something.

So the need for capital is increasing. I don't know that we're going to be doing many early stage developers, but there is a fair number of those outstanding. But I do think there's still opportunities with established players to – for us to invest further. That's a long-winded answer to answer your question David, I’m sorry.

[David Quezada, Raymond James]

Absolutely, no. That's great color. Thanks Frank, I appreciate that. Just one more for me and again, I think just relating to the tailwinds you're seeing just related to the rising cost of capital for developers. What takes it to a point for you that, like will this manifest itself primarily as just an increased pace of capital deployment or do you see maybe even potential to realize higher returns, I guess compared to that AH12 [ph] things that you communicated in the past. I guess does the backdrop affect your return expectations.

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

Yes both, and in fact we are already – if you look our Hodson and Hexagon deals, they are at the high end of that range, but they also have incremental value, whether it's in the form of equity warrants or profit sharing in the case of Hexagon. So we're already above that range and we're continuing to – things to get better, how to [inaudible], we want to make sure we capture the business, but I think there is some opportunity to – we're looking at ways to increase sales returns.

[David Quezada, Raymond James]

Excellent. Thanks for that. I’ll turn it over.

[Operator]

Thank you. Your next question comes from Nick Boychuk with Cormark Securities. Please go ahead.

[Nick Boychuk, Cormark Securities]

Thanks. Good morning. Frank, can you talk about how delays in the interconnection and construction are impacting your thinking about capital allocation? Like does that make you more or less inclined to look at operating projects now or has that improved the potential entry point for you to now work with some of those Hexagon type developer opportunities?

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

I think it's a little bit of both Nick, and I think that one important point is that I'm not aware of another structure out there in renewables that is protected as well as we are from these delays for adjusting investments into what TGE, now Enbridge and Hexagon and Hodson, where are capitals continuing to accrue and they definitely have played enough projects that we feel confident. Well even with the delay in the additional amount they own us, they still have plenty of projects for us to get enough royalties to earn our return. So that's the first point I’d make.

It’s just that our – these delays, we’re protected from these delays on our existing investments and I think that the delays are – one of the things that's interesting is both, Hodson and Hexagon have projects that were already – in the case of PJM I think we're looking smart right now. I don't know if you remember back when we made that the Hodson investment, a lot of folks are running from PJM.

Well PJM is opened up again for business. They've hit their transition date. They are starting to issue ISA's again and folks that kind of were patient and continued to persevere through that period now are sitting pretty and I think that Hodson has some projects in that category. And Hexagon had some projects that were – will be grandfathered in the MISO queue as well.

So from that perspective we feel great about our portfolio. I don't know the delays really make a difference as to whether it's something we've invested in our operating project or the developer deal. We kind of look at that on a case-by-case basis.

[Nick Boychuk, Cormark Securities]

Okay, that makes sense. And then, if you’re thinking about the capital that you have available relative to the commitment that you have outstanding to the prior partnerships, how are you thinking about that need for the non-dilutive capital you mentioned, and how much do you think you could still do for this year?

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

I think – sure.

[Brian Dalton, Chief Executive Officer, ARR]

Yes, and just on the capital element, so obviously as scale is built in the portfolio and the operating profile has started to ramp up, we've been out there talking to banks and other strategic and whatnot about other forms of capital. So that's an ongoing process and it's being I think very well received, both from a traditional debt, green debt, that sort of thing spurs.

I don't think we have some good alternative available to us, but we'll see how that plays out overall. Again, as I said many times before, what we tell Frank and the team is, you find the deals and the money will be there, so that stands.

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

As far as the pace of deployment Nick, I’d just say that the – I expect there to be a – not just for Great Bay, for the whole industry, a flurry of activity in the second half of the year. The first half of the year people were still adjusting to this higher rate environment and this higher cost of capital environment, which actually drove down valuations of some projects and things that were in the market, and there was not as much activity as one might expect, because I think there was a feeling out process between buyers and sellers and investors and to try to figure out what is the new normal. And I think that's getting sorted and I think there's going to be a flurry of activity in renewables in the second half.

[Nick Boychuk, Cormark Securities]

Okay, makes sense. Okay then, just last from me, relative to the guidance that you gave at the start of the year, I think that was calling for U.S. $11.5 million to $13.5 million of GBR level royalty revenue. What has to happen in Q3 in particular from a production and merchant power price dynamics to hit that guidance and how confident are you in that range though?

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

I mean, you probably want to see whether it's going to be in August, it impacts us and I'll be able to give you much better indication. I think prices have definitely picked up in the last few weeks with the heat they've been having down in Texas for the last month actually. So I think we're going to have to just take a look at things headed into after – in September we’ll have a much better idea.

I mean we're not seeing some of the crazy spikes we saw last year, but we are still seeing strong pricing throughout our cut. And we are just looking at the same dashboard that everyone else can look at, that’s on the America website. So I don't have any, I don't have any insight yet, because we don't know the exact operating character until there’s a lag till we get that information.

So even though I see high pricing, I'm not necessarily certain whether our plans are operating in full capacity or not when – even when I'm seeing that pricing. So it's really hard. It's a function of both price and volume to forecast ahead of time when you have this kind of volatility in the summer months.

[Nick Boychuk, Cormark Securities]

Got it. Okay, thanks Frank, thanks Brian.

[Brian Dalton, Chief Executive Officer, ARR]

Kind of, light I would there Nick to is, as Frank mentioned his remarks, just the nature of pricing cycle through the year. Our revenues will be typically backend weighted with a lot of that in these current months. Last year I think Frank mentioned it was two-thirds in the second half. So we'll revisit it as it gets a little further along here. But you just do the quick math on the first half and last year's kind of ratios and we didn't see any real reason to change anything at this point.

[Nick Boychuk, Cormark Securities]

Okay, thank you.

[Operator]

Thank you. Your next question comes from Rupert Merer with National Bank. Please go ahead.

[Rupert Merer, National Bank]

Hi. Good morning, everyone. So, you've talked about the higher activity levels. So, are you able to quantify how your pipeline is evolving and do you have the resources you need to manage activity levels?

[Brian Dalton, Chief Executive Officer, ARR]

So, as far as quantifying and we have a, Jack has done a great job organizing this. We have a very defined funnel now with so many initial calls, follow-ups, term sheets and when things are negotiated. So we have a – we follow it up and to let you know we're still doing a much better job of tracking and organizing our significant uptick in activity.

I think we're fine on the resources, on the execution right now. If anything, we might want to junior inor something like that. But I think by and large we're in good shape. For now, I think we'll see going forward how things evolve, but I think we're okay right now.

[Rupert Merer, National Bank]

So, are you able to quantify how that funnel has grown over the last few quarters?

[Brian Dalton, Chief Executive Officer, ARR]

Well see, it's – I don't have the numbers in front of me. But I would say it's – the activity has, the number of discussions we're having has more than doubled from where we were a number of months ago.

[Rupert Merer, National Bank]

Okay, well that's great. And on the, the type of investment, it sounds like you're looking more at, well advanced developers and operating assets. Is there any way to quantify perhaps how, how the funnel is looking relative to the two ends of the barbell. Are you now focused more on operating assets?

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

It's a balance of both. I think the operating assets tend to be opportunistic. It tends to be something's happened with it, because if a project has a 30 year PPA, bus bar PPA, they are likely not going to meet our capital. It's going to be someone who is maybe, has much submersion, rich in exposure or is looking to partially unwind a hedge or to acquire a project or something. So we’re very kind of opportunistic or case-by-case, versus the developers are just a steady pipeline in those. I think we'd like to do an operating project, but I can't necessarily promise that that will be the next investment, but I think it's all very case-by-case when you get into the operating projects.

[Rupert Merer, National Bank]

All right, great. And then just finally, you do have this spot exposure. You say PPA prices are moving up. Are there any opportunities for your off-takers to sign contracts on their projects going forward?

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

Yes, yes. That's a common strategy among the associated. They unwind the hedge maybe at some point to then that they felt the timing and the price is right, and the deal was right too. Then we contracted, so that's always an option for these folks and I think it's something to probably seriously consider, but I don't have anything to do.

[Rupert Merer, National Bank]

Do they involve you in those discussion?

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

No. We're not – those are – we are price takers from that perspective as far as our royalty goes, but they are economically incentivized I think to do the right thing.

[Rupert Merer, National Bank]

Thank you.

[Brian Dalton, Chief Executive Officer, ARR]

Yes. Just in terms of the dynamic though, it's interesting that this time last year you would have had market prices averaging well above PPA prices, and that sort of shifts itself. You know that – overlaying those two charts, market versus counteracted long-term probably tells you everything you need to know about what most developers are going to do when they go live, right. Its a function of that dynamic and what those spreads are, opportunity costs.

But it is interesting to see the PPA prices moving up, more or less in line with increasing costs and timelines and whatnot and how that impacts models and IRRs for these developers. The people, the in-buyer are actually accepting that the project needs this price in order to go forward if I want that power, while there's much more volatility obviously still in the spot market. So it continues to be incredibly dynamic.

[Operator]

Thank you. Your next question comes from John Mould with TD Cowen. Please go ahead.

[John Mould, TD Cowen]

Thanks. Good morning everybody. You were just following up on the liquidity and capital commitments. I think it has been noted, most of your liquidity is at least spoken for, not allocated yet, but some of it does look like its back weighted, maybe towards later in 2024. But I guess just given the current funding picture, does this nudge you at all towards later stage or operating investments that are immediately cash flowing, and maybe help support that midterm liquidity a little bit, or is it the scale of the potential opportunity that you're looking at over the midterm, such that you're just really focused on the best risk adjusted returns, securing those while ARR maybe advances, it's work on funding in parallel, like how your think about that balance right now?

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

I mean, all things being equal, we – I think we do an operating project today versus another developer yield, but it's not always things are always equal. And so we are I think a little bit more in the latter half, looking at the best risk adjusted return.

I mean, I actually got a developer deal, but it's a fantastic deal and it's a great developer and it was a fantastic team and a fantastic pipeline. And a fantastic – you know a better deal than – maybe our best deal yet. So I don't want to preclude other developer deals, but all things being equal, you know we prefer the more immediate cash. The returns will be less too just to be clear.

[John Mould, TD Cowen]

Yes, yes, no, I hear you on that. Okay, and then I think most of my other questions have been answered. But maybe just circling back to the interconnection challenges out there and Frank you referenced your view on PJ, and how that had played out with the Hodson investment. I'm just wondering, are there any markets where you're hoping to get more of a pipeline, because you got a view that interconnection challenges as they are perceived today might ease or you know as you said in the past, more broadly.

Does it really come down to developers in aggregate are going to make this decision in terms of where they spend their time developing projects and your royalty investments will trend over time with the market as you make further agreements on the developer side.

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

I think the way that it plays out is where there is friction, where there is uncertainty, where there are delays, is oftentimes creating the best opportunity for a capital like ours, which is long term and patient versus a private equity fund, which may have a three year window to try to – or three to five year window to think it's going to get in on its investment.

They look at MISO right now and say, oh my gosh, three to five years. Maybe what they are still willing to be done with this recession. Nobody knows how long it can take or what it's going to look like. And so they may run from that in the short term creating opportunities.

So I don't know that as we – it's not that we take a specific deal about this market or that market, but I think that the market dynamics oftentimes present opportunities, which we then hopefully will be available to take advantage of. So we kind of like let the market play out and then look where the best opportunities are, because of frankly other people's inability or unwillingness to take a longer term perspective on things. I really think that distinguishes us in the market.

[John Mould, TD Cowen]

Okay, thanks. Thanks for that. Maybe just one last one on investments outside of the U.S. I mean, you've discussed this from time-to-time, you know whether those maybe opportunities in Canada and Bluestar has international activities and it's engaged in it as well. You see any opportunities that are interesting outside of the U.S.

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

We've got some leads in Canada. I would note that we haven't had that many in the past. We have some there, we're having some discussions. And then Bluestar has announced a deal in Australia. Now that's – our primary investment is in Nova, the U.S. subsidiary, but we do have some exposure through an equity ownership, 11.7% I think in Bluestar.

I talked to Declan regularly and so you know he's aware of our capital and if and when the opportunity comes for something that Bluestar is working on in Australia or another international market, I think we'll have those conversations, but nothing to speak of yet.

[John Mould, TD Cowen]

Okay, I'll leave it there. Thank you very much for taking my questions.

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

Yeah.

[Operator]

Thank you. [Operator Instructions] Your next question comes from Jonathan Lamers with Laurentian Bank. Please go ahead.

[Jonathan Lamers, Laurentian Bank]

Good morning. Just a couple of…

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

Good morning Jonathan.

[Jonathan Lamers, Laurentian Bank]

Yes. Hi, Frank. I actually have a couple of project specific questions here. I'm not sure if we have Ben and Frank on the line, but whoever wants to take them can. Just on the Apex, El Sauz wind project, it looks like someone was delayed from a Q2 COD to later this year. Do we know what caused the delay and could you just remind us when the revenue starts accruing and when you would expect the cash accruing to be paid out?

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

Sure. It was – it's delayed. It's in construction. It's in advanced construction. As far as we know it's close to completion, but we don't know the exact nature of what the complications are, what the delays are caused, but we know that it's well along the path to hitting COD.

I think this is – I believe this is TRA’s [ph] first operating project and in the U.S., and I think they are going to do everything they can to make it a successful project there. They are a large player, and I think they'll want to have a long of future in the U.S. So I think they'll do whatever it takes to get this project online.

They are actually just – that’s our best guess. It’s actually – I don’t know that it will be sooner, but it is our case and just saying this, we’ll put something out there a little further in this time, because it seems to keep being delayed and we don't – we'd rather hopefully under promise, we'll see.

As far as when the cast comes in, once it goes operational, we book revenue when they receive cash. So think of it as a two month lag, from when they book revenue to when they actually receive revenue, then is when we would book revenue for our royalty and then it's paid. I think with – or shortly thereafter, I don't know, I'd have to check on whether it's monthly or quarterly on the payments, but we would book revenue when they receive the cash.

[Jonathan Lamers, Laurentian Bank]

Right, thanks. And as an accrual though from Q2 to whenever the project is operational?

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

No, we don't have any visibility into what the final – the exact – what the – you know the project says it’s going to be $200 million, but it cut to being $195 million. So that's why we had this true-up mechanism with their taxes, because – with all our developers, because it's not always exactly as designed. So we want to know exactly what we're getting before we give them credit.

[Jonathan Lamers, Laurentian Bank]

Okay, thanks for going through that. And just on Titan Solar, just because it is a fairly big piece of the annual revenue this year, it looks like the first half royalty revenue contribution was around 20% of the whole year revenue you would expect from that project. Is production tracking in line with expectations and is it just a timing of receipts issue there?

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

Yes, there's also some events later in the year that we resolved some larger revenue chunks coming our way at that project. So, so far it's been a good project and I think it seems to be on track.

[Jonathan Lamers, Laurentian Bank]

Okay. So, I guess with the revenue recognition being based on the timing of receipt, is it fair to say the seasonality for this would be later than the typical seasonality profile for a typical solar production project?

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

I don't know that that's the case. I think it's more that there are some – there were some escrows and things that are being held based on some work that was being done and then that gets released and it gets released. We get our share of that, which would be a little lumpier. So that's part of why you can't just take the first half and multiply it by two and say that's what Titan's going to do for the rest of the year.

[Jonathan Lamers, Laurentian Bank]

Okay, understand. And yes, my other questions were answered. Thank you.

[Operator]

Thank you. [Operator Instructions] At this time, there are no further questions. Please proceed with your closing remarks.

[Flora Wood, VP, IR & Sustainability]

Thank you, Eric and thank you to everybody who joined. It was a great Q-and-A session and we'll look forward to speaking with you after Q3.

[Frank Getman, Chief Executive Officer, Great Bay Renewable]

Thanks, everyone.

[Brian Dalton, Chief Executive Officer, ARR]

Thank you.

[Operator]

This does conclude your conference for today. You may now disconnect your lines.