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

I second the motion.

Voting is open on your screen and based on the votes received by proxy, it is expected that these resolutions will be approved. A reminder to everyone that most of you have already casted your vote on these motions, and therefore, you do not need to vote again today on your screen. And to vote, please click on the voting icon on the left side of your screen. The polls will now be open for 30 seconds. [Voting]

I ask that TSX Trust now close the votes. I declare the motion to appoint Deloitte LLP Canada, chartered accountants, as the auditor of the corporation at a remuneration to be fixed by the Board is carried. With respect to the election of directors, each nominee has received a majority of yes votes, and I declare them duly elected to act as directors of the corporation until the next annual election of directors or until their successors are elected or appointed subject to the provisions of the Business Corporations Act and the bylaws of the corporation. With respect to the motion approving on a nonbinding advisory basis, the approach to executive compensation, this motion received a majority of favorable votes and I declare it carried. And finally, with respect to the motion approving certain amendments to the legacy option agreements described in the circular, this motion also received a majority of favorable votes. I declare it carried. Are there any questions from the floor? Given that there are no questions, I would ask Ben Lewis to entertain a motion that the formal portion of this meeting be terminated.

I move this meeting be terminated.

I second the motion.

So the formal part of the meeting has now been terminated, and I would like to turn the floor over to Brian Dalton, CEO of ARR; and Frank Getman, CEO of Great Bay Renewables for a corporate update. And now we will begin with a brief corporate update.

Thank you, Earl, and thank you to all of our shareholders for the wonderful support expressed here today. For my opening remarks, today, I want to discuss an important big picture development that has occurred over the past year before then handing over to Frank to put some real meat on the bones for how this business has been emerging and how we see it emerging going forward. Just over a year ago, we marketed the IPO of ARR and we talked about something that we felt was likely to change over time within the broader renewables energy sector and how this could present opportunity for ARR. It was an outsider type prediction that was, in many ways, contrary to the narrative prevailing in the industry at the time, but also felt early similar to something that we had seen previously in the gold mining sector in the early 2000s. I'm referring to our comments last spring about the use of fixed price contracting of future renewable power output and related hedging structures. These have come to be regarded as essential to attracting project finance from the risk averse tax equity, infrastructure and pension type capital providers who had come to dominate capital stacks in recent years. This trend of eliminating power price exposure was also being strongly reinforced by a generally declining price profile for power due to renewable technology advances and very cheap debt capital costs. Fast forward a year or so and a lot has changed. First, the trend of declining power prices has decidedly reversed as various forms of cost inflation have taken hold and overwhelmed the technology-based cost reductions. Key factors here include higher raw material prices and lower availabilities for the equipment, such as windmills and solar panels. More difficult land and grid access, higher fuel costs for competing fossil fuel-based generation and more recently, higher borrowing costs. Also, it turns out that the various forms of hedging being used to supposedly mitigate risk have not worked to promise. The most dramatic example of this came when a simple winter storm went through Texas that curtailed production and caused power prices to sky rocket, leaving many operators facing enormous liabilities. The cumulative result of rising prices and less fate in supposed risk protection products has been an increasing reluctance of developers and operators to fully lock in and hedge price exposures. This has, in turn, reduced the appetite of traditional financiers to fund projects or at least to support the types of leverage ratios that they were previously signing up for. The gold mining industry example I referred to earlier is suddenly looking more and more relevant. In the 1990s, it was very much in vogue to hedge gold prices to attract cheap capital to build mines. In fact, you're essentially seen as an idiot if you didn't do it. By the early 2000s, however, the folly of this began to be exposed. And by mid-decade, any remaining hedgers became total [indiscernible] in the market. This resulted in a gaping hole opening up in the project finance stacks for new gold mining projects and coincides nearly perfectly with a monumental period of growth and mainstreamization for gold royalty companies as they moved into seize the day. Since then, the combined capitalization of gold royalty companies has increased from around $2 billion to more than $70 billion today and hedging is still the dirtiest word in the gold mining industry. A similar hole in capital stacks is opening for renewable projects, and it needs to be filled with something. Whether it be more project equity or as we are aiming to achieve partner like royalty financing that actually embraces price exposure. While there is a record to demonstrate that we broadly foresaw this shift coming in reality, we did not come close to imagining the speed or forced with approaches. Nevertheless, here it is, and we are well positioned to meet it. Frank and the team have been adapting in real time and are now being rewarded with a remarkable opportunity set. So with that, over to you, Frank. Some of our first year as a public company and described what you see unfolding at ground level. Thank you, everyone.

Great. Thank you, Brian. As Brian said, I'm going to walk us through some of our progress in the last 12 months. And then as importantly, not more importantly, where we see opportunity moving forward and how we're going to seize that day that Brian mentioned. If you can move the slide, please. This is -- I'll draw your attention to the forward-looking statement. I will be making forward-looking statements and Brian as well. So please pay attention to this slide. Move forward. Brian, I guess, Earl mentioned the structure that how Altius Renewable Royalties fits into the broader corporate structure, the 50% joint venture that they have with Apollo in the company that I run, Great Bay Renewables. So I don't want to belabor that. The only point I would make here is that there's no special rights or preferences provided to Apollo in that 50% joint venture. It's a true heads-up 50-50 JV. And I guess the other thing I know here is that the two bald guys have a deep -- Brian has a lot of experience on the royalty side, and the other bald guy has a lot of experience on the renewable side. So putting those 2 together, we still don't have any here, but we have a lot of -- it's proven to be a very powerful combination. Next slide, please. So on this slide, I guess the point I'd like to make is just that we're past the tipping point for renewable set. When we started this business, there was actually a question of what would the adoption be, not only royalty financing but of the deployment of renewables? And now if you are not choosing to build renewable energy to meet increasing electricity demand, you're no longer making an economic decision. So we passed that tipping point and renewables are exploding. The projections for where we're going to go see 15% in 2019 to 90% in 2050. I think it's going to actually even happen faster than that. The way that we're going to deal with the decarbonization of our economy is electrification of everything. We've done a pretty good job, and we're making progress on the electric generation side. Now transportation is probably the next area that's going to be really accelerated here with the adoption of EVs and then everything from manufacturing to HVAC and -- but it's important to note that we won't get the carbon benefits that we're trying to -- decarbonization benefits that we're trying to achieve, if we don't match the electrification of everything with the rollout and the growth of renewables, that you need those 2 things to go hand in hand to get the true benefits. And I guess the point here is that the dollars being spent on this are going to just be enormous. So then move to next slide, please. When you think about -- so there's this massive trending, this transformation, once in a lifetime, literally transformation underway. We think that investing through the royalty structure is a better way to invest in renewables. For all the reasons that you might be interested or have invested in royalties, whether it be oil and gas or mining, all those benefits of being a top line revenue royalty and not being exposed to capital -- CapEx costs and risks, sustaining capital costs, no operating cost risk. All those things apply here as well. So we really feel that the best way that we found to invest in renewables is through the royalty structure. And when we started, we weren't sure we were going to get adoption. We had this idea that we thought it was a better way and that it was better not only for us as investors, but also for the market participants, but it was unclear. And the market has spoken, and it's -- the adoption is well underway. Next slide, please. So this is maybe one of the more important slides in this deck, and it hits on some of the bluebird or the embedded optionality that you get through the royalty structure. And it's true for all royalties, whether it be in mining or oil and gas. But I feel that all those benefits that embedded optionality that you get in the royalty structure generally are even on steroids here in the renewable sector that Brian has taught me that the #1 factor in determining the embedded optionality value in a royalty -- resource royalty is the resource life and the potential growth and size of that resource, but we're talking about perpetual resource here with the wind and solar. And if they expand these projects were a top line revenue royalty, and they increase the output, we're going to get the benefit of that. And as the revenue goes up, we will earn more revenue from that for free. They extend the life of these projects. If you think about it, once these projects are connected to the grid, it's highly likely in my mind, almost certain that they're going to continue to invest in these locations. It's going to get more and more difficult to cite and permit and build new facilities. So I think it's going to even become more important to continually invest in existing locations, which are already connected to the grid. And we will be the beneficiary of that investment with none of the cost. If they add battery storage and increase revenues from the addition of storage to deal with the intermittent [indiscernible], we will be the beneficiary of that higher electricity prices, as Brian mentioned. We're exposed to that higher prices. If there's a carbon credit legislation and a new revenue stream from carbon credits becomes available, we will participate in that as a royalty holder. And one way to think about this is that it's as though we have a call option on the future technology of renewables technology as this improves over the next 5, 10, 20, 40, 50 years, we're going to be the beneficiary of these improvements in technology as they get deployed on these locations. Next slide, please. I guess the -- this slide is basically it's working. That when -- as I mentioned, when we started this business, we weren't sure whether the adoption of this royalty structure would take hold in renewables. Well, you can see we have over 3,500 megawatts now under royalty. We have deployed or committed to deploy over $230 million. We have 16 royalties, 9 top-tier sponsors across 5 states, 4 regional transmission organizations. So we're really talking about a very broad and diversified portfolio, and we're really just beginning. Today, we're exposed about 70% wind, 30% solar. I expect the solar portion of that to increase and come closer to parity with wind in the coming probably year or 2 and -- just because it seems that the cost structure for onshore wind dropped before the cost structure for solar. So there was a few years ago, the pipeline was still more with onshore wind projects. Now the cost of solar has come down dramatically, and now you see a lot more solar projects being developed. So I would expect those 2 things to -- they're both going to grow, but I would expect solar to catch up with wind in the coming period of time. Next slide, please. This is a bit of a busy slide, but I love this slide. It shows you all of our 16 royalties, 6 of them are operational. I think it's important to note that at Great Bay, we were cash flow positive in Q1. So we're no longer funding overhead with equity investment. We're funding it from operations, which is -- it's a major, major milestone for a start-up company. And in my mind, we're no longer a start-up company. We're well on our way to be building a broad, diversified portfolio. And the thing I'd like to note here is look at some of the quality of the counterparties that we're working with; NextEra, Leeward, Copenhagen Infrastructure Partners, Longroad, Apex. I mean these are truly our top tier, Tri Global. These are top-tier players in the market. And so not only are we gaining adoption, we're gaining adoption and acceptance from top-tier sponsors and counterparties, which I think is only accelerating the level of our overall growth and deployment. Next slide, please. This slide just shows you on a graph what Brian mentioned in his opening comments that there has been a dramatic increase in prices over the last 12 months, and it's not showing any signs of abating at any time right now and that just he's taught me, royalties love inflation. So this is a strong tailwind to our business in 2 ways. One, on our existing royalties will be the beneficiary of these higher prices through a top line revenue royalty. And two, as Brian mentioned, the sponsors are much less excited about signing a fixed price offtake contract in a rising price environment. So they're leaving more of the offtake to the market. And if they do that, the debt is not willing to provide as much capital. So there's a hole that he mentioned and our capital is ideally suited to fill a part of that hole. So it's opening up a whole new market for us that really didn't exist when we started the business. This is going to allow us to invest directly into operating projects at NTP or COD. So these are fully derisked projects going into operation. That opportunity really wasn't even available when we started this company or even at the time of our idea. We were focused solely on the developer stage royalties, which there's still a very good opportunity there, which I'll talk about in a minute but this has opened up the whole other side of operating projects as addressable market. So literally, every single project in the country right now is a potential target for our royalty financing. Next slide, please. This just shows you that there -- with this massive growth, there have been some growing pains and one of them has been the bottlenecks at interconnection queues in the U.S., really in every almost every jurisdiction in the country and that this is causing some concentration within the industry that these delays are going to create opportunities for [indiscernible] flexible capital. That as time lines get extended, the overhead burn continues and traditional sources of capital tend to back off a little bit, and it's creating an opportunity for us to step forward to help bridge this gap and bridge this time frame until these projects get built. I have very little doubt that these projects will ultimately get built. They're just being delayed because of the massive build-out that these organizations simply weren't staffed and didn't have the resources to handle the number of interconnection applications they received. So they'll work through it, but it's going to take a bit of time, but that time is going to cost money, and it's creating an opportunity for us. So between the merchants -- increase in merchant prices and the desire to have more merchant exposure, some of the interconnection backlog, some of the supply chain issues, all of those trends help and support the need for innovative, flexible capital like our royalty financing. Next slide, please. There should be one more. This one last one was the punchline, the barbell slide. Do we see that? I don't see that slide on my screen, but I can just talk to it because people will see it on the website. There is, yes. So this is how we're thinking about the market today and where we're seeing the best opportunities. We're calling it our barbell investment approach. On the one side, at the earlier stage, at the development stage, we're having to move a little bit earlier because we made our initial investments into Tri Global and Apex. And at the time, they needed capital to advance their broad and diverse portfolio of development projects. And they were selling individual projects to the institutional investors. But what happened is those institutional investors, because of the strong demand for projects, went in and are buying their whole pipeline or in some cases, taking control of their whole company like Aries did with Apex. So that has become a very hot area to go in and buy whole companies or whole pipelines with a whole pipeline of projects. So we're looking at moving a little bit earlier and creating the pipelines of tomorrow and supporting those developers to help build out their pipeline so they can feed the beast. The market right now is very much long dollars and short projects. And that was a reflection in our most recent investment with Bluestar Energy Capital where we expect Declan Flanagan's new venture. He's probably one of the most successful entrepreneurs in renewables. He's built several very successful and sold very successful development companies -- renewable development companies. And it was actually sold his most recent one, Lincoln Clean Energy to Orsted and became CEO of Orsted onshore. But he is an entrepreneur at heart and he, being part of a large organization, was not his cup of tea so he set out to build the next great global development platform. And he could have chosen anyone to partner with, and he chose to partner with us because of the flexible nature of our capital because it's non-dilutive and he is doing this -- starting this -- he's a major investor. He has control and he is looking to build significant equity value. So that was what -- in part, what made our capital so attractive that, and we're also very knowledgeable in the market, could help support them in his efforts. And then because it's a little bit earlier stage, we'd also received equity as part of this, a minority equity position. And that in part is we saw the value that Apex and others are selling at these days. And we realized that if we had a piece of that equity when we made our royalty investment into those earlier development stage investments in Tri Global and Apex, we would have done very, very well by that. So we -- it's still at heart, a royalty investment. We're going to get 1.5 gigawatts of royalties out of the Bluestar investment, but there's also an equity kicker so to speak, that if he is as successful as we hope and think he will be, we will participate in that upside as well in addition to just the royalties. So that's kind of the developer side. If you look at the other side of the barbell, that is the opportunity that Brian was referring to when he was saying that there's a hole in the capital structure and an opportunity for us to invest directly into the operating projects, the capital stack of operating projects. We did 2 of those investments last year, one with Longroad Energy and one with Northleaf Capital. And I expect us to be able to do more of those in the future going forward. Those checks will tend to be a little bit larger than the development stage. We're going to -- at developers, you make smaller checks and you scale in over time where in the operating projects, there'll probably be larger checks upfront. And I would expect that the returns we would get would be a bit lower in the 8% to 12% range that we provided to the market. I would expect that the -- at the operating stage, we would be at the lower end of that range. And then at the earlier stage, it would be at the higher end of that range. So it only makes sense because it's an earlier stage. So therefore, you would expect the return to be higher because there is additional risk. But this is a -- we see a massive opportunity here for a very long runway for future deployment. We are very, very busy right now working on deals. And we hope to continue the success we've had. If you look back, it's hard to believe that we just went public back a year ago March and the progress we've made. But I think, looking forward, I feel as though the future is even brighter. So with that, why don't we open it up for questions. So I guess, do any guests or shareholders have any questions that they'd like us to address. I don't see any, Flora. I'm not sure if you can see something that I can't, but...

We have no questions. So we're able to close the meeting.

Okay. Thank you very much.

Thank you, Frank. Thank you, everyone.

Ladies and gentlemen, as the meeting has now concluded, you may now disconnect.