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

Good morning, ladies and gentlemen, and welcome to the Altius Renewable Royalties Q1 2023 Financial Results Conference Call. [Operator Instructions] Also note that this call is being recorded today, Monday 8, 2023. And I would like to turn the conference over to Flora Wood. Please go ahead.

Thank you, Sylvie. Good morning, everyone, and thank you for joining our ARR Q1 Financial Results call. The presentation for this call is on our website at arr.energy under Investors Webcast and also the recording and the webcast replay will be live a couple of hours after the call ends. With me today as speakers, I have Brian Dalton, CEO of ARR; and Frank Getman, CEO of GBR; and Ben Lewis, CFO of ARR, will be here and joining us for the Q&A. And with that, I'd like to -- the forward-looking statements, you'll see on Slide 2 of the presentation. And with that, I'd like to turn over to Brian Dalton.

Thank you, Flora. Good day, everyone. I'm on the road today with some potential for weak connectivity, so my remarks will be even briefer than usual before turning over to Frank. Our first quarter was a gratifying one as we began to receive first royalties from several new projects, projects that will pay our shareholders for many years and decades to come while the natural resources that these are based on never to please. The repowering-based optionality that stems from perpetual natural resource projects continues to excite us and obviously, others as well, as we are noting an uptick in inquiries around providing royalty financing to repower existing projects. The opportunity set for new investments for all of the use cases we have identified over the past couple of years continued to build during the quarter, in fact, there is no doubt that our royalty offering is building in awareness and acceptance and increasingly evidenced in our growing list of recognizable counterparties. In addition, market conditions for the major competing forms of capital to our royalty capital, namely debt and equity, have been difficult and this is helping to drive business our way. So with that lead-in, I'll turn things over to Frank for his more detailed observations.

Good morning, everyone. I'm excited to share with you today an update on our continued progress in building Great Bay and its broad diversified portfolio of renewable royalties. Q1 included revenue from our 2 new investments, which we closed late in 2022, mainly our $46 million investment into Titan Solar, that's a 70-megawatt AC solar project in California, owned and operated by Longroad Energy; and our approximately $18 million acquisition of a generation based royalty on 658 megawatts of a 1-gigawatt wind project in Hansford County, Texas, owned and operated by a top-tier owner operator. Q1 also included our first revenue from 2 new operating projects from our developer investments, a 2.5% royalty on Young Wind, a 500-megawatt wind project in Texas developed by Apex and now owned and operated by NextEra and a 1.5% royalty on Appaloosa Wind, 175-megawatt Texas wind project developed by TGE and now owned and operated by NextEra. As shown on Slide 8 of today's presentation, Great Bay now has 10 cash flow and royalties on over 2.4 gigawatts of operating renewable royalty projects. We also expect another project developed by Apex and now own owned and under construction by JERA, a 300-megawatt El Sauz wind product to come online in the near future. Great Bay's revenue for the quarter was approximately $2 million and ARR's revenue was $1.6 million. The reason the ARR's revenue is not exactly 50% of Great Bay is due to higher interest income on the cash balances held by ARR. Revenues in Q1 were affected by lower merchant power prices due to a mild winter resulting in low natural gas prices. As many of you know, the marginal price of power is still set by natural gas prices in most regions of the country. On the other hand, I'd note that contracted PPA prices as recently evidenced by the Level 10 Q1 PPA price index continue to move higher. So there's still strong underlying demand for renewable energy and continued upward pressure on long-term PPA prices, even as near-term merchant prices can be volatile as we saw on the high side last summer and on the low side this winter. When we provided our revenue guidance for the year, we factored in the low gas prices and forward price curve at that time. Accordingly, we remain comfortable with our revenue forecast for the year of $11.5 million to $13.5 million. I'd like to offer a few comments on our built-in pipeline for new cash flow and royalties, even with no new additional investments over the next several years. In particular, I'd encourage you to look at the list of solar and wind project development -- wind development projects on which we hold royalties on Slides 9 and 10 in the presentation. From our TGE developer investment, we now have approximately 6 gigawatts of development royalties as a result of the sale of TGE to Enbridge. Enbridge is committed to moving these projects forward expeditiously and obviously has the necessary capital to do that. We forecast we'll need royalties on approximately 2.5 to 3 gigawatts of these projects for Great Bay to earn its base return on its TGE investment. Great Bay will then have the option to acquire royalties on the remaining 3-plus gigawatts of projects after they reach COD using the same discount rate we used for our initial investment. This one investment provides Great Bay with an attractive pipeline of cash flow and royalties with Enbridge providing all of the required capital for ongoing development, not to mention the royalties we expect to receive in the future from our investments into Hodson and Blue Star. In fact, Great Bay's projected revenue once it receives royalties from its existing investments is projected to be over $30 million with ARR receiving its 50% share of those revenues. That's with no new investments. After ARR deploys the remaining uncommitted portion of the cash on its balance sheet into new deals, which I believe is a very conservative assumption, Great Bay's run rate would be over $40 million, the point of all this being that we have strong embedded revenue growth already baked into the business. Now a few comments about new business. I'll simply say, we currently have the largest and highest quality pipeline of prospective deals that we have ever had. With the addition of Zach and Peter, we now have additional resources to help us process this increased activity. Uncertainty and higher costs in both the credit and equity markets is driving both developers and operators to look for alternative sources of financing. We are definitely one of those sources. The team is incredibly busy moving these deals along, and I'm confident in our ability to deploy capital into high-quality developer deals and immediately cash flowing operating project royalties in the coming months. That's it for my update. I'll turn it back to you, Brian.

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

[Operator Instructions] And your first question will be from David Quezada at Raymond James.

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

Sure. It's really across the board, David. It's both on new developer deals as well as operating projects. I would say, the biggest development -- new development in my mind has been that there's folks now in the mix that we're talking to that I wouldn't have expected would need our capital. So I think that -- I just think the opportunity set for the folks that are looking for at least a piece of their capital stack to have some alternative sources of financing to help them maximize return is a larger group than I would have thought of in the past. And the other thing I would say is we're getting to high grade, which is a great position to be in. So we're not going to do every developer deal that comes across the transom now, so we're getting to high grade and say, which team is the best, which pipeline is the best. And as to where there's -- it's really across the country, there's been an explosion of activity since the IRA was passed last summer. And folks are definitely looking at -- our [indiscernible] is still strong because, look, it's one of the biggest economies in the world, and it's growing -- and their load is growing incredibly fast and has a great resource, but we're also seeing West. PJM. New development in PJM is probably a little bit slower just because people look at the backlog in the queue. So I feel great about our position that we're already in the queue with Hodson. But I guess those are some general comments on what we're seeing.

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

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

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

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

Next question will be from Nick Boychuk at Cormark Securities.

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

I think that the PJM after they gotten -- well, first off, on the Hodson, they hit some milestones which is great news to continue new projects alone, they hit our internal milestones that we set, that we agreed to upfront and that's what triggered the access for them to additional capital. So that's all good news. Things are moving forward. And the PJM, I'd say that once PJM -- look they took a violator to get their plan organized and approved and communicated to the market, but now that they have, we are seeing that PJM is working through and doing what they said they were going to do. They pushed back the start date for the new interconnection queue reform transition process, but that's in part because they were trying to and they are moving projects forward through that they had already in the system before that date. So we've seen some activity that they're pushing things through that we're kind of grandfathered in, they want to get off their place before they enter into the new transition process. So they seem to be -- they do seem to be moving forward and processing applications. So we are seeing activity in PJM coming from the system operator.

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

I think, to be fair, in part of that we had in closing 2 deals right literally before the end of the year, we had to -- we were a little bit behind processing something. So we're getting up to speed now and we're getting -- it's really completing the due diligence, making sure that we don't -- we still do everything the way we know we should and getting these deals work through our internal processes, our due diligence. It's also on the developer side, we're digging in because we have -- there's a lot of new development teams out there and just making that -- it could create a great opportunity. But I think this is where our background and experience as developers ourselves is really helping us. Like I think we do an excellent job and looking at the teams, looking at their projects, determining what's a bragawatt, what's a real megawatt, and that just takes time.

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

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

Next question will be from Rupert Merer at National Bank.

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