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

Good morning, ladies and gentlemen, and welcome to the Altius Renewable Royalties Q2 2023 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Wednesday, August 2, 2023. I would now like to turn the conference over to Flora Wood. Please go ahead.

Thank you, Eric. Good morning, everyone, and welcome to our Q2 2023 call. Our press release and SEDAR+ filings were released yesterday after the close and are available on our website under Investors reports. This event is being webcast live, and you'll be able to access replay, along with the presentation slides that have been added to our website in two spots at arr.energy. Brian Dalton, CEO of ARR; and Frank Getman, CEO of Great Bay Renewables, are our main speakers on the call. And in the Q&A, we'll also have Ben Lewis, CFO of ARR, available for questions. The forward-looking statement on Slide 2 applies to everything we say both in our opening remarks and during the Q&A. And with that, I will turn over to Brian.

Thank you, Flora, and thank you, everyone, for joining today. The business continues to execute on its goal of adding scale and diversity to its portfolio, having now added more than 15 gigawatts of wind, solar and storage-based development projects to its portfolio. This span most of the U.S. power regions. This puts us well ahead of where we imagine our progress to be at this stage of the company's development. Moreover, through the combination of greater awareness of the royalty financing model, and more difficult conditions for competing forms of financing, such as debt and equity, we are seeing a strong uptick in deal origination activity. I'll turn it over to Frank now to explain things in better detail and we stand by to take any questions after his remarks. Over to you, Frank.

Thank you, Brian. 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. Our royalty portfolio revenue and cash flow profile continue to benefit from the addition of operational stage royalties in late 2022. Revenue for the first half of '23 was $4 million versus $2.4 million in 2022. Revenues were subject to continued soft merchant prices during Q2. Our revenues are generally back-half weighted due to seasonality, and we've seen an uptick in merchant prices in recent weeks with higher summer temperatures and increased power demand. I'd note that in 2022, 2/3 of Great Bay's revenue was earned in the second half of the year, and I would expect a similar profile this year. In Q2, we also announced our most recent developer deal, a $45 million investment into Hexagon Energy. We are thrilled to add another world-class developer to our portfolio. Matt Hantzmon, the CEO of Hexagon, has a long track record of success as a developer. Over the past 7 years, Hexagon has built an impressive 5.3-gigawatt pipeline, comprised of 43 solar, solar-plus storage and stand-alone storage projects across the U.S. Matt, as a former partner of Apex; founder, Sandy Reisky, and Board member at Apex, was well aware of the value of Great Bay's non-dilutive royalty financing for developers and sought out Great Bay as a partner to help them accelerate and grow Hexagon's pipeline. I'm particularly excited to have our first exposure to royalties on stand-alone storage projects as part of the Hexagon deal. As I've noted previously, we've struggled to find the right structure to align everyone's interest to provide long-term royalty financing on stand-alone storage. And while this may not be our final structure or stand-alone storage, it represents an important first step. With Hexagon's assistance, we were able to create a structure where we received a smaller royalty of stand-alone storage projects, 1% versus 2.5% on solar and solar-plus storage for a shorter period of 7 years, where we have greater revenue visibility. And that our option have access to a greater share of cash proceeds from the sale of projects to apply towards Great Bay's IRR threshold. While our stand-alone storage royalties will last for 7 years, we'll be using a 5-year period when determining the NPV that gets credited towards Great Bay's return threshold. So there is some built-in conservatism to help deal with the less predictable revenue streams. It's important to note that we expect stand-alone storage to represent less than 5% of our overall return on the Hexagon investment. So this isn't a major part of the deal, but it will give us important exposure and learning as to the actual operating characteristics of stand-alone storage. We feel this is a smart and measured way to start. With the addition of Hexagon, Great Bay now has over 15 gigawatts of wind, solar and storage development projects in our developer portfolio, which provides a built-in growing stream of royalties and revenue to GBR for the foreseeable future. We believe this represents an incredibly exciting and impressive backlog of new royalties. I'd now like to make a few comments about overall market conditions and renewables and the prospects for future capital deployment for Great Bay. I look at current market conditions as almost a tale of two cities. On one hand, there remains robust activity and tailwinds coming on the back of the IRA legislation passed last year. Overall, renewables development activity has accelerated, and there's been a number of new entrants to the market. The backlog of new projects across the industry continues to grow. There remains an insatiable demand for renewable energy from corporate buyers, as indicated by the continued march higher of PPA prices nationwide. The most recent Level 10 Q2 PPA price index shows wind and solar PPA prices increasing over 6.5% from Q4 2022 to Q1 2023 and over 26% from Q1 2022 to Q1 2023. On the other hand, however, interconnection backlogs continue to worsen, with MISO being the most recent regional transmission organization to announce a moratorium on new applications as they undertake a restructuring and reorganization process similar to what PJM has undergone over the last several years. Development time lines for everyone have been pushed to the right. Moreover, the cost of both equity and debt financing has increased materially over the last year. The combination of robust activity and demand for renewables, coupled with delays in higher cost of capital, have created an increased demand for alternative sources of capital, such as Great Bay's royalty financing. Needless to say, it's an exciting time for Great Bay. Finally, I note that we are busy looking at all options, including non-dilutive forms of capital, to fund our business moving forward to optimize value for shareholders. That's it for my update. I'll turn it back to you, Brian.

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

Eric, do you want to poll for questions?

[Operator Instructions] Your first question comes from David Quezada with Raymond James.

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

Sure. The thing that I was really excited about Hexagon is they have a very attractive pipeline -- existing pipeline and a great team, a full team already in place. There's -- I mentioned in my remarks that there's a lot of new entrants into the market. Many of these are 2- and 3-person shops who are just getting going, looking for initial funding. And that doesn't really fit our model that well. We made a -- with Declan Flanagan, we made a bit of an exception, went very early stage, but it was also someone with an incredible track record. And he was able to put the band back together pretty quickly and have a substantive team. And he was also raising $100 million as part of that initial capital raise that we were a part of. So it wasn't as though it was a few guys in a PowerPoint that's trying to start a company. So I think that what Hexagon represents is someone who is further along. I don't know that I think those folks -- I think the interesting dynamic is that even established developers -- even some of the larger developers are all facing these struggles with everything getting pushed to the right. And I think they're becoming more and more open to additional and supplemental sources of capital, even if they had a big partner who they signed up in the last 24 months or something. So the need for capital is increasing. I don't know that we're going to be doing many early-stage developers, which there's a fair number of those outstanding, but I do think there's still opportunities with established players to -- for us to invest further. That's a long-winded answer. Did it answer your question, David. I'm sorry.

Absolutely. No, that's great color. Just one more for me. And again, I think just relating to the tailwinds you're seeing, just related to rising cost of capital for developers. Would things get to a point for you that like will this manifest itself primarily as just an increased pace of capital deployment? Or do you see maybe even potential to realize higher returns, I guess, compared to the expo you communicated in the past? I guess does the backdrop affect your return expectations?

Yes, both. And in fact, we're already -- if you look at our Hodson and Hexagon deals, they're at the high end of that range, but they also have incremental value, whether it's in the form of equity warrants or profit sharing, in the case of Hexagon. So we're already above that range. And we're continuing to "pigs get fat and hogs get slaughtered." We want to make sure we capture the business. But I think there is some opportunity to -- we're looking at ways to increase those returns.

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

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

I think it's a little bit of both, Nick. And I think that one important point is that I'm not aware of another structure out there in renewables that is protected as well as we are from these delays for existing investments into both TGE, now Enbridge and Hexagon and Hodson, where our capital is continuing to accrue. And they definitely have plenty enough projects that we feel confident, but even with that delay and the additional amount all over, they still have plenty of projects for us to get enough royalties to earn our return. So that's the first point I'd make, is just that these delays were protected from these delays on our existing investments. And I think that the delays are -- one of the things that's interesting is both Hodson and Hexagon have projects that were already in -- in the case of PJM, I think we're looking smart right now. I don't know if you remember back when we made the Hodson investment, a lot of folks are running from PJM. Well, PJM has opened up again for business. They've hit their transition date. They're starting to issue ISAs again. And folks that kind of were patient and continue to persevere through that period now are sitting pretty. And I think Hodson have some projects in that category. So -- and Hexagon had some projects that were -- will be grandfathered in the MISO queue as well. So from that perspective, we feel great about our portfolio. I don't know that the delay is really -- makes a difference as to whether it's something we've invested in an operating project or the developer deal. We kind of look at it on a case-by-case basis.

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

I think -- sure.

Yes. And just on the capital element. So obviously, as scale and built in the portfolio and the operating profile has started to ramp up. We've been out there talking to banks and other strategics and whatnot about other forms of capital. So that's an ongoing process. And it's being, I think, very well received, both on from traditional debt, green debt, that sort of thing. So there's -- I don't think we have some good alternatives available to us, but we'll see how that plays out overall. But again, as I said many times before, what we tell Frank and the team is, you find the deals, and the money will be there. So that stands.

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

Okay. Makes sense. And then just last for me. Relative to the guidance that you gave at the start of the year, I think that was coming for $11.5 million to $13.5 million of GBR level royalty revenue. What has to happen in Q3, in particular, from a production and merchant power price dynamic to hit that guidance? And how confident are you in that range still?

[indiscernible] it impacts us and I will be able to give you much better indication. I think purchase have definitely picked up in the last few weeks with the heat they've been having down in Texas for the last month actually. So I think we're going to have to just take a look at things heading into after. In September, we will have much better idea. I mean, we're not seeing some of the crazy spikes we saw last year, but we are still seeing strong pricing throughout ERCOT. And we're just looking at the same dashboard that everyone else can look at. That's on the ERCOT website. So I don't have any -- I don't have any insight yet because we don't know the exact operating characteristics until there's a lag until we get that information. So even though if I see high pricing, I'm not necessarily certain whether our plants are operating at full capacity or not even when I'm seeing that pricing. So it's really hard. It's a function of both price and volume to forecast ahead of time when you have this kind of volatility in summer months.

And I'll add there, Nick, through which Frank mentioned in his remarks, just the nature of pricing cycle through the year, our revenues will be typically back-end weighted, but a lot of that in these current months. Last year, I think Frank mentioned it was 2/3 in the second half. So we'll revisit it as we get a little further along here. But you just do the quick math on the first half and last year's kind of ratios, we didn't see any real reason to change anything at this point.

Your next question comes from Rupert Merer with National Bank.

So you've talked about the higher activity levels. Are you able to quantify how your pipeline is evolving? And do you have the resources you need to manage activity levels?

Yes. As far as quantifying, we have -- Jack has done a great job organizing us. We have a very defined funnel now, with so many initial calls, follow-ups, term sheets when things are negotiated. So we have -- we followed all the way through now. We're still doing a much better job of tracking and organizing our significant uptick in activity. I think we're fine on the resources, on the execution right now. If anything, we might want a junior analyst or something like that, but I think, by and large, we're in good shape. For now, I think we'll see going forward how things evolve, but I think we're okay right now.

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

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

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