Altius Renewable Royalties Corp. (APO) Earnings Call Transcript & Summary

Good morning, and welcome to the Altius event conference call for the closing of the Altius Renewable Royalties strategic relationship with Apollo Infrastructure Funds. I would now like to turn the conference over to Flora Wood, Director of Investor Relations. Please go ahead, Ms. Wood.

Thank you, Ian. Good morning, everybody, and welcome, and thanks for dialing in on short notice, as you saw the announcement earlier this morning. In addition to the webcast and call, you'll be able to access the presentation slides on our website. This presentation and call are focused mainly on the transaction. So for those of you new to Altius or ARR, there are some slides included that are meant as background on both Altius and the renewable transactions that were announced in 2019 and 2020. Speakers today will be Brian Dalton, CEO of Altius Minerals; and Frank Getman, CEO of Great Bay Renewables, our subsidiary, which has formed the strategic relationship with Apollo. The forward-looking statement on Slide 2 applies to everything we say in our formal remarks and during the Q&A session. With that, I'll turn it over first to Brian Dalton, Altius' CEO.

Thank you, Flora. And thank you, everyone, for joining us today. The reason for today's call is to provide our shareholders with an opportunity to learn more about the transaction that was announced this morning. This major global private equity player, Apollo, will make a sizable commitment in becoming Altius Renewable Royalties' new joint venture partner. For these opening remarks, I'd like to take the opportunity to recap the history and progression of the business to help put today's news in proper context. The idea for innovating the royalty business model within the renewable energy natural resource sector was hatched over a month between Frank Getman and I back in March of 2017. Frank was an existing Altius shareholder, who was working in the renewable energy development sector and was also a big fan and student of the royalty business model. At that same time, Altius happened to be grappling with the challenge of surprised policy announcement that was serving to drastically shorten the expected lives of its coal-based power generation royalties. At some point during the deal, a lightbulb popped on for both of us [indiscernible] where our minds buzzing around the new business concept. From that point, several months were spent working between the Altius and Great Bay Renewables teams as we combined our respective expertise to figure out how the royalty model could be tailored to provide a value-add to the renewable sector while generating strong risk-adjusted returns and maximizing future long-term upside optionalities or the [ blue birds ], as Frank likes to call them. Also during this time, Frank and his team reached out relentlessly for opportunities to listen to several industry players about what their needs were while also softly introducing them to our emerging concepts for royalty financing. This proved a critical step that created a recognition of the market hold we were seeking. There clearly was and is a lot of low-cost institutional capital competing for construction-stage projects that have been derisked through the securing of long-term power purchase agreements. But capital is quite scarce and restrictive for those specialist entrepreneurs who are the ones actually generating the new projects needed to meet the sector's increasing demands. With this realization, our focus quickly sharpened. By early 2018, work began to float actual proposals to these developers, and through this interaction, the offering really began to take its form and shape to something that both met our goals for outsized risk-adjusted returns but all sorts of long-term future option value potential and the needs of developers to more align in support of capital, partner-like capital, if you will. The first developer to sign up with us in royalty financing was Texas-based Tri Global Energy in early 2019, and this was followed earlier this year by an investment with Apex Clean Energy based in Virginia. Both of these companies are regularly recognized amongst the most successful new project developers within the United States, and they are wonderful people to work with. We are set to gain numerous individual project royalties offering both regional and technological diversities through these first transactions. Completion of these deals is also well noted within the renewable sector and resulted in GBR's own deal origination work finally beginning to gain a significant inbound component. Concurrent with this growing interest in and adoption of our model, momentum within the renewable sector more broadly has continued to build. The energy transition macro trend is clearly accelerating. These factors led us to a recognition that the scale of the ARR and GBR opportunities are becoming bigger than Altius can continue to back on its own, and so the decision was taken to seek a well-capitalized value-adding partner. Through this effort, Apollo emerged as our clear choice. It obviously offers a certain financial power we were seeking, given that it had more than $400 million or $400 billion, I should say, assets under management and more than $2.75 billion invested in renewables and power assets. Perhaps more importantly, however, is that we found in the people that handle the renewables components of their infrastructure group an incredible amount of like-mindedness in terms of views towards how the renewable sector will continue to evolve both technologically and financially and that prospering within it would require continuous innovation. In fact, it often felt like during various strategic level conversations with the Apollo team that I was listening instead to Frank and his team. We were also very impressed by Apollo's willingness to understand our needs going forward and to incorporate accommodative solutions into the deal structure. Key areas here included the creation of a means of pursuing ancillary opportunities identified for our royalty origination work as well as providing ARR with tremendous flexibility in terms of how it can fund its share of deal going forward, areas where our discussions with others often proved difficult. I won't belabor things by rehashing the deal terms, which are outlined through our press release and the accompanying presentation, but I will leave off by saying that I am confident that the combination of talent and strength that this joint venture represents is exactly what this business needs to move to the next level of scale and relevance and to extend its leads in innovating the creation of a renewable energy royalty sector. I will now turn things over to Frank for his remarks. By way of very brief introduction, Frank and his team are all superstars in my estimation. Whenever I think about what is the secret sauce that will continue to competitively differentiate this business, I always end up smiling when I note that it is actually as simple as a small team in New Hampshire that is made up of some of the smartest, hardworking and honest people I've ever met. I can't wait to see what they achieve and innovate from here, and I know Apollo feels exactly the same way. Please go ahead, Frank.

Thank you, Brian, and good morning to all of you on the call. As I spoke on in Altius' quarterly call in Q1 2019 when we announced the first TGE transaction, I've met some of you in person or virtually. I can't tell you how excited I am about bringing Apollo on as a joint venture partner. I now feel we have all the pieces in place to seize this incredible opportunity. Altius brings a deep knowledge and expertise in royalties. Our team brings many years of knowledge and experience and relationships in the renewables sector. And now Apollo brings expertise in royalties, renewables and the financial firepower to help ensure we will fully exploit our first-mover status in bringing the royalty investment model to the exploding North American renewables market. In the last decade, the industry has seen massive innovation in the underlying renewable energy technologies. Vast improvements in efficiency in wind turbines, solar panels and now energy storage at a significantly lower cost. This is a powerful combination. We've now reached the tipping point where renewables are the lowest cost form of new electrical capacity on the grid. It's no longer just about government policy and incentives. If you're not choosing to build wind and solar to meet electricity demand, you're not making a wise economic decision. Lower costs, improving efficiencies, the growth of EVs and electrification of transportation and climate concerns has created massive tailwinds for renewable energy in North America. Despite this tremendous improvement in the underlying technologies, there's been very little innovation on the financing front. We're still using the same project finance structures we've used for the last 20 years to finance the construction of renewables despite the deregulation of energy markets and the underlying trends I just mentioned. There's a growing need for new and innovative financial products to help finance the build-out of renewables and to transition to a clean energy future. This is where we believe our royalty financing can play an important role. To date, we've been able to attract 2 top tier developers, Tri Global Energy and Apex Clean Energy, to utilize our innovative royalty financing to help accelerate the development of their project pipeline. Since our initial financing in early 2019, Tri Global has completed 3 project sales that included a Great Bay royalty to sponsor Silverpeak and CIP, Copenhagen Infrastructure Partners. Together, those 3 projects add up to roughly 940 expected megawatts electricity generation from wind and solar in Texas and Illinois. Tri Global continues to make good progress in advancing this pipeline, and the size of this pipeline has, in fact, grown since we closed our initial $30 million financing commitment. In March 2020, we announced a $35 million royalty financing with Apex Clean Energy, one of the largest developers in the U.S. Apex has been busy selling projects that were already underway prior to when we made our royalty investment. You may expect Apex to have worked through its backlog of excluded project and begin selling projects with our royalty attached in the coming months. A number of questions have surfaced concerning what happened during COVID lockdown, how has it impacted the pace of project sales and development overall for both TGE and Apex. There was certainly a drop in overall electricity demand during the COVID lockdown, and there were some COVID-related bottlenecks impacting the delivery of equipment like turbines and solar panels, but both TGE and Apex report that demand for new wind and solar projects remains strong. It seems clear that despite COVID, the march towards a clean energy future continues unabated. We are thrilled to welcome Apollo as our partner and take seriously the trust and confidence Apollo and Altius have placed in our team, including Ray Faust, Josh Levine and Bill Rodgers. With Altius and Apollo as partners and the talent and determination of our team, I sincerely believe we have the pieces in place to build something truly transformational in the industry. It will require hard work and perseverance, but I know we're up to the task. With that, I'll turn it back to Brian to open the floor for questions. Thank you.

Thank you, Frank. Yes, we're ready for questions.

[Operator Instructions] Your first question comes from the line of Jacques Wortman of Laurentian Bank. Your next question comes from the line of Carey MacRury of Canaccord Gen.

Congrats on the transaction. Yes. So maybe first question just on expected timing of Apollo to deploy their $80 million. It's getting out quickly. The market is growing. Any sense on how long do you think that would take?

Can't tell you exactly other than to say that just the strategic partner search generally was largely driven by the fact that there's a lot of deal flow that's emerging out there. I mean if I sort of answered the question more directly, I've probably been talking a little bit out of school. But yes, we've got a lot of opportunities right now before us to work on. But when they close and how they close and in what order, it's even harder to call. But it's a good pipeline, Carey. Really coming together.

And then maybe just on the royalty economics. I know when you did the TGE deal, you were talking about USD 3 million to USD 4 million based on that $30 million investment. Is that still sort of the guidance we should be using for?

Yes, certainly for those transactions. And for the -- I think when you talk about deals we're doing with developers generally, that would still be the base type of guidance before you start to factor in future option value realization. Now if we begin to get involved with more advanced-stage projects, different types of structures, that could move around a little bit. But for what you have before you now, that guidance is same.

Okay. And then maybe just one last one for me. Just you mentioned the first-mover advantage. Are you seeing any other players looking to get in this business? Or is it still pretty much you're the only seat at the table?

We're hearing whispers. Some of the people that we've been talking to have been getting inbounds from others who are probing around trying to find out what it is that we're doing. But I'm sure competitors will emerge, but we're really well positioned for that right now.

Your next question comes from the line of Brian MacArthur of Raymond James.

I just want to explore a little bit more how the $80 million from Apollo goes in. Does that go in on day 1? And secondly, how do they claim their 50% from TGE and Apex? Is that kind of an earn-in as we go along? Or do they just start collecting? I realize you won't be collecting right away, but do they just start collecting day 1? So that even if they didn't put any money in and I get it, the intention is that they'll put money in, but if they didn't put any money in, would they still just claim 50% of TGE and Apex going forward? Or is it kind of an earn-in as we go along?

It's largely an earn-in structure, Brian. So basically, they'll fund the next deals as they arise. And yes, so it's meant to be incremental, but they earn in to the 50%, following which we then equally fund new opportunities going forward after that.

And then maybe following on Carey's question, do you see now that you have access to more capital? I mean, is $35 million sort of the size of deals? Or are we talking about being able to do much bigger like $60 million and $70 million chunks that generate $15 million or $20 million, i.e., as you can go bigger, you can get better rates of return? Is that kind of how you see the market developing? Or am I thinking about that incorrectly?

And again, without getting too detailed on the pipeline, there's a range of transaction sizes, some bigger than what we've talked about or what we've completed to date and only in that range. I don't necessarily think that there's impact as far as return expectations go there. But yes, there's a whole range of things. And I mean, to be fully honest, the scale of the transactions that have been completed to date, particularly when you think about a group the size of Apex, were a function in many ways of Altius' capital constraints. Again, these things are falling away, so you'll start to see some shifts on deal size at Apex.

So that kind of leads to my next question. Once the next $80 million goes in and we get to the $100 million and -- you know, I don't know what magic, that $200 million that Apollo has agreed to, but then there's another $120 million from them, which theoretically is another $120 million for Altius. Just as you think about that -- I know we're getting ahead of ourselves. As you think of that going forward, how -- I mean, not so much -- that's still a pretty big chunk of money for Altius, quite frankly, to fund going forward.

Yes. And we'll start to turn our attention to that now that we've completed this step. One of the real nice things about this transaction with Apollo is the amazing amount of flexibility they were willing to entertain in terms of how Altius Renewable Royalties can fund itself going forward. So there's -- all options are on the table. $80 million is a significant investment. So we certainly bought some time here to figure out how we best want to tackle that going forward. But yes, we're not -- give us a moment to breathe and sigh on this transaction. And when we start talking to the Altius Board, we'll be looking hard at all of our options to make sure that we're well positioned when the earn-in is complete and we're funding it in.

Sure. And maybe one last question. You made a comment about ancillary opportunities. Are you -- would that just be different structures within renewables? Or were you just talking about other opportunities even outside renewables potentially with Apollo?

No. Within renewables. It's just that when you start to talk to these groups, developers, operators, whomever you wish, we're obviously there looking to find ways to deploy capital from a royalty financing perspective. So you get an older group as well. You're obviously getting other capital structures as well, and you begin to see other opportunities to invest beyond just pure royalty investment. So you're doing the work anyway. And again, we are very much primarily focused on royalty investing. But if other opportunities to invest in other parts of the capital structure emerge, this deal has been put together in a way that allows those investments to be undertaken in sidecar structures. And why it's been done that way is so a party, Altius or Apollo, could choose to fund those other investments if it wished. But if it chose not to, well, then it doesn't result in dilution of the pure royalty interest that each holds. So it creates a mechanism for one party to fund or partly fund without causing dilution of the core business asset. And it also has been done in a way that allows for almost an active manager model to work, so that if those sidecar investments are undertaken, there would be a means for management fee-type income to flow back to GBR, which is still going to be held equally by Altius and Apollo. So that becomes a bit irrespective of whether or not they have participated fully in the actual sidecar investments.

Brian, if I can just add? A clear point is that part of the 2 is that we understand the capital structure as it exists today, but the PTC and ITC are scheduled to roll off over the next several years. And that capital structure is going to have to change. And we don't know what's going to fill those holes. I mean, hopefully, royalty financing will be a big part of it, but there may be other opportunities. And I think this structure gives us that flexibility where we're going to be on the front lines, having conversations with these folks to bring other new and innovative structures to the market.

Frank, can you just talk to PTC and ITC?

The production tax credit and the investment tax credit. It's basically the tax incentives in the U.S. that are provided to allow tax equity to invest, which is a huge part of the capital structure today, and that will be rolling off. And someone's going to have to fill tax equity's shoes.

Great. Once again, congratulations on the deal.

Thank you, Brian.

Your next question comes from the line of Craig Hutchison of TD Securities.

You mentioned in your presentation the opportunities in both the U.S. and Canada. Are you seeing opportunities now currently in Canada? And I guess maybe a follow-on question. If you guys were to take this business model and maybe go internationally, does the agreement you have with Apollo allow them some kind of ROFO or ROFR to do further investments in kind of other jurisdictions?

I'll start with the second part. There are no restrictions on where we go. The focus right now is going to be in North America. But basically, this is forward-governed business but equal representation, and who knows where opportunities will take us. But no, we don't -- it's not specifically restricted or it's just that the focus today is on the opportunity that we see in North America. Most of the opportunities that we've encountered so far are in the U.S., but there have been some opportunities in Canada as well, but it would be smaller at this point, for sure, than the U.S. base. But we're certainly open-minded to other jurisdictions.

And you guys have talked in the past about the potential for an IPO as it makes sense based on multiples, et cetera. Any more thoughts on that? And sort of what size of deployment you need to kind of get to where you'd go back and consider that as an opportunity to bring in new sources of capital for royalties?

Yes. I mean that's one of the options, I guess, that I spoke about to one of the earlier questions. So we've got flexibility to raise capital publicly, privately, continue to fund as we have to date using Altius Minerals, the parent, and its cash flow and other sources of liquidity. But again, we haven't gotten that far yet as to decide what the best path forward will be for funding ARR once it's in a funding position again. And there was a lot of factors to consider there, including the pace of the deal flow that's before us right now and once the deal gets executed. And then any number of the election outcomes to broader market conditions. It's obviously a -- the top of all-time of -- the short answer is that, that call hasn't been made yet. It's one that will come up soon enough at the Altius Board level. For now, again, we have breathing room, and all of our options on the table. Stay tuned, I guess.

Congrats again on the transaction.

Thanks, Craig.

Your next question comes from the line of Scott Taylor of Pembroke Management.

I wondered if I could just ask about how exclusive the arrangements are with Apollo, that until they're fully invested not only with the $80 million but perhaps down to the $200 million level, that any opportunities they see will be brought first to this joint venture company.

There isn't a full-blown exclusivity provision here. And you can imagine [ how ] range and breadth of bonds and the different ways that invest it, that would have been pretty much an impossible criteria to impose across that whole business. So what I can say is that as far as royalty investments go, very much focused on bringing assets forward and lending relationships to this opportunity and this business. And I think they recognize that this is a platform with the expertise and now the capital spend to best execute on those deals. So no, they aren't exclusive to the renewables business through this cycle.

And from a Altius point of view, are you exclusive to bring your ideas to this vehicle?

Yes.

Your next question comes from the line of Jacques Wortman of Laurentian Bank.

Sorry earlier, the technical issue. Congratulations first and foremost, but my questions have actually been answered. So congratulations, and I'll turn it over to the next question.

Thank you, Jacques.

Your next question comes from the line of [ Matthew Schroeder ], who is a private investor.

Brian, this is Matthew Schroeder. I'm a 15-year shareholder in Altius. I'm actually calling in from Seoul, South Korea, where it's after midnight. But I saw the news release even in my time, and having been a shareholder for so long, recognize that it's a landmark transaction. So first and foremost, I wanted to congratulate you and the team on it. That was first. And then secondly, I just have a small question. I think a lot of the previous questions were related to the structure of the deal. And having -- knowing that Altius has structured some very innovative transactions before, I noticed that the investment is at the Great Bay Renewables level. And I believe probably from previous conference calls, a lot of people were looking at a potential strategic investment at the ARR level. So my question is, are there other subsidiaries in ARR? Or what is your kind of vision for ARR exclusive of Great Bay Renewables?

Well, first and foremost, thank you very much for the kind words and for staying up late and talking to us from the other side of the world today and tell you how much that's appreciated. So Great Bay Renewables is the -- essentially the operating subsidiary. So ARR is incorporated in Canada. So obviously, we're domiciled while Great Bay with the U.S.A. that we essentially acquired or merged in, if you will, when we joined forces with Frank and his team. So all the assets and deals today will be put through that vehicle. So it just made a lot of sense from the restructuring with Apollo to have them come in at that level. So basically, what you've got now is that up on earn-in, each of Altius and Apollo will own 50% of GBR. And Altius' role there will be to manage and hold that 50% interest, to approve transactions that get brought forward by the GBR team. So there will be a Board at the GBR level made up equally of Altius and Apollo representatives. And really -- yes, that is the entity. So Altius Renewable Royalties business endeavors will be all through Great Bay Renewables going forward. There could be new subsidiaries set up at the GBR level as we are in other types of deals and whatnot. But GBR was the right structural level for this entry.

Okay. And so that's to say that 100% of the business of ARR will go through GBR. Is that correct? Is that a correct understanding?

Correct. So Frank and his team will lead and run GBR. They'll be representing to the Board that's made up of Altius and Apollo. And yes, so there won't be flow the other way. GBR will be putting deals together and presenting them to the shareholders for approval.

And once again, congratulations. Fantastic transaction.

Well, thank you very much again.

[Operator Instructions] Your next question comes from the line of Brian MacArthur of Raymond James.

Sorry, I think you might have just answered this question with the last one. Are there any changes in tax consequences as a result of this structure you're putting in place to JV? It doesn't sound like it.

Frank, over to you.

I don't think -- I mean, the U.S. company is still going to be -- it's the same as it was before. You're just bringing in a new investor into GBR. So from an Altius perspective, I don't see how there'd be any changes to the tax, but I don't profess to be a tax expert, though.

Great. And my second question, just as a follow-up, Brian, maybe over to you. One of the things, obviously, you're doing here is making this a much cleaner company. And you've already been able to do enough deals to replace the coal. But can you give us any update you can on the coal situation as far as the litigation goes? Or any progress there on going forward?

Yes. So obviously, one of the features, to me anyway, of this deal is that it really nails home our own transition from fossil fuels to renewable energy. This is -- this doesn't market, I don't know [indiscernible]. And sorry, what was the second part of that question?

So as you said, you're diluting down the coal, but is there any update on the litigation or the progress there?

Litigation, yes. Slow and steady. We'd like it to be further along than it is right now, but due to COVID, there have been delays in the process. So just the ability for [indiscernible] whatnot have slowed down. We were quite willing to proceed with a more virtual format, but the Canadian and Alberta governments declined. They seem to want to see this dragged out as long as it can.

Brian, just got to confirm, Ben just confirmed that there is no tax event because it's not a sale, it's a dilution.

Thank you.

There are no further questions over the phone lines at this time. I turn the call back over to Ms. Wood.

Okay. Thanks, Ian, and I want to thank everybody for joining. I'm sure we'll have lots to talk about in the coming weeks. Thank you.

This concludes today's conference call. You may now disconnect.