Altius Renewable Royalties Corp

TSX:ARR

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the ARR Quarter 3 2021 Financial Results Conference Call and Webcast Conference. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Flora Wood. Please go ahead.

[Flora Wood]

Thank you, Franzie, and thank you to everyone who's joined us for our Q3 results call. We have a short slide presentation, which is on our website and showing on the webcast. The main purpose of this call is to provide a quarterly forum where we'll have Brian, Ben and Frank available for questions. And for those of you on the webcast, I'll point out that questions can only be asked on the conference call. With me today are Brian Dalton, CEO of ARR; Ben Lewis, CFO of ARR; and Frank Getman, CEO of Great Bay Renewables. Brian is going to speak first and will then hand over to Frank, and you can address questions in the Q&A to any of us. We're using forward-looking statements and have a disclaimer on Slide 2 that will apply to both the comments we make and any discussion during the Q&A. And with that, I'll hand over to Brian.

[Brian Francis Dalton, Chief Executive Officer]

Thank you, Flora. Thank you, everyone, for joining us. Very happy today to update everybody on a very noteworthy quarter. The business continued to execute on the key objectives that's set out at the time of the IPO earlier in the year, and I feel like we're actually tracking well ahead of those targets following this past strong quarter. New royalties created year-to-date through developer pipeline financing investments included 7 projects with a total expected capacity of 1,800 megawatts. This includes an additional 300-megawatt sales subsequent to quarter end, for which further details will be provided at a later point. We are also expecting the first of our project royalties created under the developer funding initiatives to reach operating status by the end of the year when the 195-megawatt Jayhawk Wind project in Kansas commissions. During Q3, we made announcements describing a total of USD 108 million in JV level, new capital deployment, with an Apex follow-on funding tranche and then 2 investments covering 4 projects that are already operational. These investments, representing 465 megawatts of wind and solar capacity, have proven that our royalty financing is not only attractive to development stage projects, but now to the full spectrum of the industry's growing capital requirements. We believe that this has major implications for the size of the addressable market that ARR can participate in, as it continues to seek to scale up its portfolio. Frank will have more to add on this in a moment. The strong level of deployment in Q3 has allowed Apollo to complete its earning requirements and become an equal partner in the GBR joint venture. All new investments made from here are therefore expected to be funded equally by the partners. To close, I'd be remiss if I didn't give a big shout out to the GBR team in New Hampshire for their hard work, innovative thinking and amazing execution thus far. Thank you, team. With that, I'll turn it over to Frank for some high-level remarks before we open the floor to your questions.

[Frank Getman]

Thanks, Brian. Yes, Q3 was a fantastic quarter on all fronts, deployment, new investments, creation of new royalties from our developers and internal execution from the team to get all this accomplished. I wanted to first make a few comments about adoption. The short answer on our progress is that the introduction and adoption of royalty financing for renewables is working. Adoption acceleration -- is accelerating and we're finding new and innovative ways in which our royalty financing can be used at various points along the life cycle of renewable energy projects. Between our development partners, TGE and Apex and our new royalty investments and operating projects, the GBR portfolio is up to 16 royalties totaling over 3,500 megawatts. I love the chart in the presentation showing all the royalties we've created in a very short time frame. That portfolio is comprised of 72% wind, 28% solar and less than 1% hydroelectric. It's spread across 5 different states and 4 different power pools. We have 1,980 megawatts under royalty in ERCOT at 56% of the current portfolio. We have 130 megawatts in PJM, 38% of the portfolio, 195 megawatts or 6% in SPP and less than 1% in the New England NEPOOL market. So we're well on our way to building a highly attractive, diversified portfolio of renewable energy royalties, which is what we set out to do. We continue to believe this is simply a better way to invest in renewables. As to the change in our total addressable market that Brian mentioned, when we started the business, we were focused on developers and providing early-stage development capital. We've invested $110 million between our 2 top-tier development partners, Apex and TGE so far, and we're actively looking to add other developers to that program for new projects, new projects coming online. In Q3, we added this to the addressable market NTP or COD, the Longroad deal, $35 million investment is indicative of that new opportunity. And then for existing and operating projects, the Northleaf deal, where we invested $52.5 million across the portfolio of 3 operating projects. So now we've deployed $87.5 million into operating projects. These projects provide immediate cash flow unlike our developer royalties. This is really significant when you think about our addressable market. Now not only every development stage preproduction project is an opportunity but every existing operating project that's now opened up for Great Bay is a real investment opportunity. So where is the biggest opportunity? Or what's next? It really is all of the above. We have active conversations in all of these buckets. We're also looking at potentially adding a few folks to our team to be able to execute and capture this larger market opportunity. This leads one to the question, well, why is this happening? What's -- why has there been this uptick in adoption acceptance and what great base offering, what's changed? And it really comes down to 2 things. The first is the structure of our royalty financing. It's long-term, flexible, partner-like capital. In every one of our investments to date, the counterparty had something unique to them where we were able to structure or shape our royalty investment to address those specific needs, yet still achieve our investment objectives. This isn't a short-term trade for us. We're looking to build long-term relationships where these counterparties look to Great Bay for their financing needs again and again. For example, we've -- the $55 million follow-on investment we deployed with both TGE and Apex is indicative of this, and we hope to develop the same type of relationship with all of our partners. I guess the second thing that's caused this change in our addressable market is the ongoing evolution in the renewables market. And there's 2 ways I'd like to highlight today that the market has changed and evolved in the last -- in 2021. There's more market-based offtake structures. So more of the offtake from new renewables projects is exposed to market prices. There's acceleration of this trend due to the winter storm last February and ERCOT, and the realization that many of these financial hedges that were supposed to provide safe, reliable cash flows and protect folks from market volatility didn't work. They bought an insurance policy, and when their house burned down, the insurance company said, "We didn't anticipate that kind of fire, sorry, you're not covered."So the owners are saying, I accepted a lower price because of the supposed safety of the cash flows, why take a price that, in some cases, 50% below market, if it doesn't give me that protection. Also $5.50 natural gas and higher power prices make market-based pricing more attractive. Many financing sources were not set up to take merchant price risk. While we're taking -- where we're taking a long-term perspective and looking to the cash flows over the life of the project and any extensions, we can get comfortable with market prices. The other thing I'd like to highlight is the developers, they're changing, the developers are seeking to own projects rather than just to develop and flip. This is largely the larger developers. Rather than sell all the projects they develop, some larger developers are starting to seek ways to retain ownership. This provides predictable recurring revenue as opposed to the very unpredictable and lumpy revenue from selling projects. Our royalty financing can help replace part of the project equity they would otherwise be required to fund to allow them to retain ownership. In this case, the nondilutive nature of royalty financing is very attractive. They can't get more debt in part because of the higher market-based exposure I just mentioned. Our capital helps fill that hole in the capital stack. And finally, I'd like to make a few comments on general market conditions for renewables in the U.S. There remains to be incredibly strong demand for renewables. The demand for -- is insatiable for shovel-ready projects, multiple bidders on -- if a project reaches that stage. There's continued significant demand from commercial and industrial buyers of renewable energy, the Amazons and Googles and Facebooks. I guess it's Meta now, as everyone is trying to achieve their own ESG goals and mandates. I'd like to talk about the Biden build back better plan. So the proposal includes strong incentives for clean tech and renewables, including an extension of the PTC and the ITC. These incentives were not included in the infrastructure bill that was just passed this weekend and yesterday, but we're still hopeful for some new or expanded support for renewables by the end of the year. It's important to know, however, that our business is not dependent on it. And -- but it would be helpful and accelerate the need for new and innovative forms of capital such as royalty financing.Lastly, I'd note that the global supply chain issues that everyone is facing, those delays are extending the time line for construction on some projects. The good news is our structure with our development partners protects us from those delays. They don't get credit for a project royalty toward our target return until the project is operational. So those delays will simply owe us more royalties. That's it for my update. I'll turn it back to you, Brian.

[Brian Francis Dalton, Chief Executive Officer]

Thank you, Frank. And with that, I guess, we'll turn over to any questions.

[Operator]

[Operator Instructions] Your first question comes from the line of David Quezada from Raymond James.

[David Quezada, Vice President & Equity Research Analyst]

My first question here is just on, I guess, broadly, the topic of making royalty investment in an operational or development stage asset. Now that operational assets seem to be quite a bit more significant part of your mix in investments, I'm curious if you have an optimal mix between these 2 types of royalty investments? Or is it just whichever ones come through the pipeline next, you're equally open to both? Or would you like to have maybe a bias towards operational ones, if you can, because they start paying the royalties sooner?

[Brian Francis Dalton, Chief Executive Officer]

I think more of everything would be the first easy answer there. Even the development investments, they obviously don't result in immediate cash flow. But some of these deals that are moving along, we are getting to that point where operations and cash flow result from -- enough time has passed until those have been made. So it doesn't much matter to us, really, overall. I think both paths work really well. It's obviously nice to feel like we're ahead of track as far as early cash flow development, but the pipeline should get pretty steady from here because of autonomous paths from those -- the first development deals that have gone through, but more of everything.

[David Quezada, Vice President & Equity Research Analyst]

Okay...

[Frank Getman]

Note real quick, I'd just note that the thing about the development deals that's nice is that once the deal is in place, they just continue to flow, and there's not -- from a deal execution side, the resources required to continue to get royalties is less than going out and getting a new investment every time in doing all the due diligence and everything. So there's something nice about the built-in nature of our development pipeline. So it's a really healthy mix between the 2.

[David Quezada, Vice President & Equity Research Analyst]

That's great color. And then maybe just one more from me. Just curious if you've seen any signs so far just given the great momentum you've had in the business. Have you heard any inkling or seen any sign of a competitor in the space emerging?

[Brian Francis Dalton, Chief Executive Officer]

There's some talk. I mean I've heard of groups that have been out trying to raise money to build similar platforms. I don't know how that's gone. I haven't heard of any announcements. I know of an existing private minerals-focused royalty company that says renewables are within its mandate. But I think, Frank, it's probably fair to say we haven't seen a competing royalty financing proposal show off in any of the processes we've been in so far.

[Frank Getman]

Not yet, no.

[Brian Francis Dalton, Chief Executive Officer]

They will come.

[Operator]

Your next question comes from the line of Nick Boychuk from Cormark Securities.

[Nicholas Boychuk, Associate of Institutional Equity Research]

Wonder if you can please talk through what's causing the timing delays with the PJM and ERCOT development projects.

[Frank Getman]

It's the interconnection process. It's the -- the system operators are so backed up with request to -- for new projects to interconnect into the system. And it's a very tedious and complicated process. And in many cases, they're just understaffed until they have the resources to advance the projects along. When they're looking at a pipeline of interconnection applications, even if the project ahead of you isn't yet built, when they review your application, they have to model the system as though it's already built. So it's a fairly complicated modeling exercise when you -- especially it used to be in the days of regulated utilities that they were controlling what new projects are getting out to the grid. Now it's open to market forces. And they just weren't -- it's just -- they're not -- it's just taking longer than anyone hoped.

[Nicholas Boychuk, Associate of Institutional Equity Research]

Got it. And what impact do you guys think that's having on Tri Global -- sorry, go ahead.

[Frank Getman]

I would just say that's the single biggest issue in the industry right now, I would say, is interconnection applications, delays. And I think that, that's the lead time item for most of these projects. As far as impact on Tri Global and Apex, it just means that there's a longer period of time before they get operational in some cases before they get paid. So I don't think it -- it doesn't impact us necessarily because our capital is just accruing while we're waiting, there's delays, it's just accruing. I think it's just they're having more projects that are sold, we're seeing more and more projects sold that are still awaiting that they're placed in the queue to get approved for interconnection. And I think it gets back them up a bit, but I don't think they're backfilling. I mean, both Apex and TGE continue to grow their pipeline. So the demand is just extraordinary.

[Nicholas Boychuk, Associate of Institutional Equity Research]

Got it. And do you guys think that's changing their geographic focus or fuel focus? Should we be expecting more projects maybe outside of PJM or ERCOT now as they try and work through this?

[Frank Getman]

Everybody's faced with the same mission and everyone's looking to wherever they can -- these interconnections will get solved. That's a good thing. It's not like that they're insolvable problems. It's just going to take time. So I think they're all looking for where they can just -- it's a very competitive landscape to find and source projects, to find the land, to secure the land. So I think they just are looking for where the best projects are.

[Nicholas Boychuk, Associate of Institutional Equity Research]

Got it. And then I know you guys mentioned that, obviously, as time goes on, your capital is just accruing. Can you remind us or give an update on the total capacity you think the 2 developers are going to have to provide in order to fulfill their obligations? Has that changed since the previous numbers you gave, I think, it was in Q1?

[Frank Getman]

I don't think it's changed materially. I don't have that in front of me.

[Brian Francis Dalton, Chief Executive Officer]

We did add [indiscernible] Apex, but other than that, it would be a modest increase if you did it just by number of megawatts, but we don't really know that number until we value the royalties and that offering. I think you ought to make that call, but adjust for the new capital deployment.

[Nicholas Boychuk, Associate of Institutional Equity Research]

Got it. And then are you able to provide any additional color on new developer relationships or operating asset opportunities? Like any color or insight into the current pipeline and pace of when you might announce any of those new relationships?

[Frank Getman]

I think that they just continue to be ongoing. I will think I would note that I think the Apex announcement that Ares is buying a controlling interest in their company has made developers recognize that their equity -- their development company equity has real value, where I think for many years, it was just believed that the value was just in the projects themselves. That the equity, the platform didn't necessarily have value. So our non-dilutive capital going into that -- into these developers where they get to retain ownership of their equity and they don't have to sell down equity in order to continue to develop projects, I think, only makes our capital more attractive. So I think that's -- people have taken note of that, which makes our capital more attractive.

[Nicholas Boychuk, Associate of Institutional Equity Research]

Got it. And last one from me. Just given the issues in the U.S. jurisdictions that we're seeing backlogs, et cetera, is expanding into other regions like Canada, Western Europe a potential next step, something that's on the horizon for you guys?

[Brian Francis Dalton, Chief Executive Officer]

I guess Canada has sort of been on the radar as well under our active pass that we're looking at here. We haven't been active in other markets, but largely just because we've been buried with the negotiations and providing term sheets in the North American market so far.

[Frank Getman]

I think it's reasonable to expect that our expansion will follow that of our investment partners, like if one of our partners expands into a region. Because it's really important, as I've said before, that electricity is a very local market, probably the most local market of any commodity, and the rules and regulations of a particular market and the like. So it's important that when you enter a new jurisdiction, you go in with the right partners. And if we were to follow into a new jurisdiction with someone, a partner that makes a lot of sense to me. So I guess that's one way that I'm thinking about it.

[Operator]

Your next question comes from the line of John Mould from TD Securities.

[John Mould, Research Analyst]

Maybe just starting with the question of equipment cost inflation and project timing. In your conversation with your developer partners, have they given you a sense of whether equipment cost inflation is potentially going to drive some requirements to delay projects, or are they not really seeing that as an issue given their COD time lines? And then maybe on the more directly positive side for you as a royalty holder, are they seeing any issues of passing through some of those higher equipment costs through higher PPA prices in the discussions that they're having with potential counterparties? Or maybe more broadly, what's your sense of how those issues are playing out in the market right now?

[Brian Francis Dalton, Chief Executive Officer]

I can tackle, give you a sense with that one, John. Look, there's inflation. Inflation is definitely alive and well in renewables and levels that seems like every other part of the economy right now. There's definitely an uptick in prices that's also beginning to be reflected in PPA terms. Now how much of that is based upon embedded capital cost structures of these projects, particularly versus, say, inflation in fuel costs for competing sources, it's pretty hard to tell at this point. But yes, I mean, what we'd expect here is that if there's inflation in the capital structure and the capital costs, or even in the operating cost of these things, that ultimately get solved with the prices. And I'll just remind people that it's one of the incredible benefits of the royalty model. You are not exposed to that increased cost side, but you're a full beneficiary of any resulting higher prices. But it's definitely a factor. Like it's a factor everywhere. But again, it's not just renewables, right? It's other competing sources of generation that might be out there. So it's even across the board. And in fact, maybe renewables are gaining an advantage here just because the cost of wind hasn't gone off as far as [ every one ]. Gas certainly had.

[John Mould, Research Analyst]

Great. Okay. And then maybe, I know we don't know in terms of the next round of U.S. legislation. I know we don't know maybe what's going to come out of it in the end. But we have a sense of what's in the bill currently. If you're -- how do you think about the impact of long-term extensions of the ITC and PTC and also the direct portion on appetite for your capital, I guess, Frank. Can you go into just a little more detail on how you're thinking about what's at least on the table right now for royalty financing and its impact?

[Frank Getman]

Yes. I'd say that we built this business in an environment where we're -- those incentives are already in place. So extending them, I think, won't impact the current momentum that we have. What we're seeing is that projects are -- projects that maybe were moving because of time line and delays were going to be 80% project, PTC project instead of 100% project. If this gets extended and they're now again 100% project, it's going to just accelerate the development of all these projects, and there's going to be just a need for capital. And I'm thinking specifically about the investing into new projects in -- to help fund the project equity. That opportunity, if this bill passes, where more projects are going to qualify for 100% or more economic is I think it's going to accelerate the need for capital. So I don't really see -- it's not -- we're really not competing with tax equity. That's really not -- and that's what we're talking about here. So I don't -- it would make more projects move forward, which would be great for us, but I don't see it hurting us if for some reason they didn't. I mean we're doing great right now, and I don't see any reason that wouldn't continue.

[John Mould, Research Analyst]

Okay. Great. And then just to expand a bit on the interconnect question earlier. Do you see these interconnection challenges as delaying project sales, which is really the milestone for you in terms of royalties being created? Or do you think that the appetite is strong enough for progress right now that there are sponsors that are willing to look through the interconnection challenges in some cases just to get projects in hand?

[Frank Getman]

Yes. That's definitely happening. I guess the thing I note is that it doesn't really impact us because as far as delays on our future earnings and cash flow because they don't get credit. If that project for some reason was permanently delayed or canceled due to some interconnection issue, they would simply need to replace it with more royalties because they don't get credit, even upon a sale, even if they sell the project before it's operational, which is what Tri Global has been doing. Those projects don't count towards our IRR calculation until they're actually operational.

[John Mould, Research Analyst]

Yes, absolutely. Okay. No, great. And I just wanted to get a sense of that. And then just lastly, 1 quick financial clarification. I think on the last slide at the bottom, there's a reference to a further funding of USD 10 million expected through TGE milestones by the end of the year. So that's about half of I think what's remaining to go into TGE. Is that -- can you confirm that $10 million is at the Great Bay level. So half of that is ARR? Is that correct?

[Frank Getman]

Correct.

[Brian Francis Dalton, Chief Executive Officer]

That's correct. Yes.

[Operator]

Your next question comes from the line of Louka Nadeau from National Bank.

[Louka Nadeau, Associate]

I'd like to know how you see your future capital needs evolving. And if ever you need more capital, in which form would you prefer to raise it, so would it be more debt in the capital structure or more equity?

[Brian Francis Dalton, Chief Executive Officer]

Yes, thanks, definitely a timely question, and we are, the Board and management, working through a whole host of options here for what we'll -- how we'll -- what type of capital we'll use for future deployment. Obviously, our going assumption here is that we'll continue with strong deployment and that we will need additional capital, potentially even over the course of the next year here. So one thing I'll point out is that the addition of these new operating stage assets and the sort of earlier-than-expected buildup of cash flows has added new tools to the toolbox. I know Ben is working on revolver type structuring and those sorts of things that perhaps we wouldn't have thought would have been in the mix this early on previously. But there's other pretty innovative ideas being put to us and that we're developing. So it's an active discussion right now amongst the Board, and lots of things to weigh and balance out here, but we've got some time with that. Perhaps at the next quarterly update, we'll have more clarity for you.

[Louka Nadeau, Associate]

All right...

[Brian Francis Dalton, Chief Executive Officer]

Things are moving faster than we expected, but we're working at the pace we need to make sure we don't [indiscernible]. And last point I'll make is don't forget the backing here. So you've got Altius Minerals, you've got Apollo and other relationships here. Yes, there's probably more depth from a capital-raising perspective in this company relative to its size than you would normally expect.

[Louka Nadeau, Associate]

Perfect. And a follow-up on an earlier question of the expansion to new markets. But my question is more, would you be looking at partners that develop different types of technologies? So like green hydrogen project developers or offshore or wind project developers regardless of the markets in which they are?

[Frank Getman]

We've talked to -- I guess our mandate is renewables, and we include battery storage as renewables in our charter or how we think about our market opportunity. We've talked to some hydrogen companies and they're still just -- we have not found 1 yet that is -- we are not out to take technology risk. So when that technology is prudent and it's more of a case of execution and deployment of a new technology, then I think we will definitely include that in our mix. We haven't seen yet a hydrogen technology that was fully proven with a clear understanding of how we're going to get paid for the technology and what the revenue stream would be and the like. So I guess that's how we think about it is that we're not going to -- we're not trying to choose which technologies are going to evolve and win. But when it's clear that a proven technology is gaining market adoption and acceptance and we can get our head around it from a proven perspective, then it's definitely an area we'd invest in.

[Louka Nadeau, Associate]

You can probably speak a little...

[Brian Francis Dalton, Chief Executive Officer]

To that as well, like we do know that in the case of some of the projects that we're exposed to on royalties, some of those groups are actually getting interest from potential hydrogen producers about securing that renewable energy to produce green hydrogen, but it's a little bit removed from us directly. But I think it's conceptually possible that some of our revenue before long is ultimately flowing from buyers who are using the power to produce hydrogen. But yes, Frank is right. We're not -- we just haven't seen actual projects where revenue would come from the sale of hydrogen that have met our testing hurdles yet.

[Operator]

Your next question comes from the line of Justin Strong from Scotiabank.

[Justin Strong, Associate Analyst]

Just wanted to talk quickly on the bill, the infrastructure bill that did get passed. I know there was a chunk of money in there for transmission projects. Just want to get some maybe inside baseball on whether you think that's going to impact kind of development pace going forward?

[Brian Francis Dalton, Chief Executive Officer]

From my understanding, I think any -- like our transmission system in the U.S. has been underinvested for decades. And I think my understanding of that was it was more to upgrade and solidify and protect from weather events and things like that, the transmission system as much as -- I don't think it was as much to say how do we address the interconnection delays with renewable projects. That's my understanding, but we don't have a lot by strengthening actively involved.

[Justin Strong, Associate Analyst]

That's great. I guess, and then just 1 quick question on the deferred tax liability is pretty large this quarter. Maybe if you could just kind of give us a little bit of color on the background of that.

[Benjamin Gerard Lewis, Chief Financial Officer]

Yes. This is Ben. Basically, tax accounting, like accounting, is a little conservative. So we have to book the liability at the subsidiary level where we're seeing revaluations and therefore, gains in -- or deferred tax liabilities, but we don't get to book the tax asset at the parent level until there's basically a history of income and we can recover those tax assets. So it will -- basically, it will correct itself in time.

[Operator]

[Operator Instructions] We don't have any questions over the phone. I would like to turn the call back to Flora Wood. Please continue.

[Flora Wood]

Thank you, Franzie, and thank you, everybody, for great questions. It's always the case that very few of them are actually about the quarter, but those are great Q&A sessions, and we'll look forward to speaking to you after year-end results.

[Brian Francis Dalton, Chief Executive Officer]

Thank you.

[Benjamin Gerard Lewis, Chief Financial Officer]

Thank you.

[Frank Getman]

Thanks, everyone.

[Operator]

And ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.