Altius Renewable Royalties Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Altius Renewable Royalties Q2 2023 Financial Results Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Wednesday, August 2, 2020 I would now like to turn the conference over to Flora Wood. Please go ahead.

Speaker 1

Thank you, Eric. Good morning, everyone, and welcome to our Q2 2023 call. Our press release and SEDAR Plus 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 This replay along with the presentation slides that have been added to our website in 2 spots at arr.energy. Brian Dalton, CEO of ARR and Frank Gettman, CEO of Great Bay Renewables are our main speakers on the call.

Speaker 1

And in the Q and 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 and A. And with that, I will turn over to Brian.

Speaker 2

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 Wind, Solar and Storage based development projects with portfolio. These span most of the U. S. Power regions.

Speaker 2

This puts us well ahead of where we imagine our progress to be at stage of the company development. Moreover, to the combination of greater awareness of the royalty financing model and more difficult conditions for competing forms of financing such as debt 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 will stand by to take any questions after his remarks. Over to you, Frank.

Speaker 3

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 twenty twenty three was $4,000,000 versus $2,400,000 in 2022.

Speaker 3

Revenues were subject to continued soft merchant prices during Q2. Our revenues are generally back half weighted due to seasonality 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 thirds 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 $45,000,000 investment into Hexagon Energy. We are thrilled to add another world class developer to our portfolio.

Speaker 3

Matt Hansman, 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 standalone storage projects across the U. S. Matt is a former partner of Apex Founder, Sandy Ruyski 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 standalone storage projects as part of the Hexagon deal.

Speaker 3

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 standalone storage. And while this may not be our final structure for standalone 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 standalone storage projects, 1% versus 2.5% on solar and solar plus storage for a shorter period of 7 years, but we have greater revenue visibility and at 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 standalone storage royalties will last for 7 years, we will 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.

Speaker 3

It's important to note that we expect Standalone stores 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 And learning as to the actual operating characteristics of standalone 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 storage development projects in our developer portfolio, which provide a built in growing stream of royalties and revenue to GVR for the foreseeable future. We believe this represents an incredibly and an impressive backlog of new royalties.

Speaker 3

I'd now like to make a few comments about overall market conditions in renewables and the prospects for future capital deployment for Great Bay. I look at current market conditions as almost a tale of 2 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.

Speaker 3

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 timelines for everyone have been pushed to the right. Moreover, the cost of both equity and debt financing has increased materially over the last year.

Speaker 3

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 diluted 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.

Speaker 2

Thank you, Frank. And with that, I guess we can open up the questions.

Speaker 1

Eric, do you want to poll for questions?

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Questions will be taken in the order received. Your first question comes from David Quezada with Raymond James. Please go ahead.

Speaker 4

Thanks. Good morning, everyone. 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 here for this type of developer.

Speaker 3

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 been 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.

Speaker 3

We made it with Declan Flanagan. We made a bit of an exception. It 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 $100,000,000 as part of that initial capital raise that we were part of. So it wasn't as though it was a You guys in a PowerPoint deck trying to start a company.

Speaker 3

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.

Speaker 3

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.

Speaker 4

Absolutely. No, that's great color. Thanks, Frank.

Speaker 3

Appreciate that.

Speaker 4

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.

Speaker 3

Would things get to a

Speaker 4

point for you that like will this manifest So primarily as just an increased pace of capital deployment or do you see maybe even potential to realize higher returns, I guess compared to that, the H4 range that you've communicated in the past, like I guess, does the backdrop affect your return expectations?

Speaker 3

Yes, both. And in fact, we're already if you look at our The 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 house gets louder. We want to make sure we capture the But I think there is some opportunity to we're looking at ways to increase those returns.

Speaker 4

Excellent. Thanks for that. I'll turn it over.

Operator

Thank you. Your next question comes from Nick Boychuck with Cormark Securities. Please go ahead.

Speaker 5

Thanks. Good morning. Frank, can you talk about how delays in interconnection and construction are impacting your thinking about capital allocation? Like does that make you more We're 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?

Speaker 3

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 our existing investments into both TGE, Mount Enbridge And Hexagon and Hudson, where our capital is continuing to accrue and they definitely have plenty enough projects that we feel confident both even with that delay and the additional amount of OS, 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. It's 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 Hodgson and Hexagon have projects that were Already in the case of PJM, I think we're looking smart right now.

Speaker 3

I don't know if you remember back when we made the Hudson 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 We're patient and continue to persevere through that period now are fitting pretty. And I think your Hassane has some projects in that category.

Speaker 3

So, and Hexagon has some projects that were will be grandfathered in the MISO So from that perspective, we feel great about our portfolio. I don't know that the delays really make a difference as Whether it's something that we'd invest in an operating project or a developer deal, we kind of look at it on a case by case basis.

Speaker 5

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

Speaker 3

you could still do for this year? I

Speaker 2

think

Speaker 3

sure. Yes.

Operator

And then just on the non dilutive

Speaker 2

Capital element, yes. So obviously, as scales 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. 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've said many times before, what we tell Frank and the team is you find the deals and the money will be there.

Speaker 2

So That's the

Speaker 3

end. Okay. As far as the pace of deployment, Nick, I'd just say that the I expect there to be a Not just for Great Bay for 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 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 that 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.

Speaker 5

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 calling for U. S. $11,500,000 to $13,500,000 of GBR level royalty revenue.

Speaker 5

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?

Speaker 3

Can you tell me what the weather is going to be in August in Texas and I'd We'll be able to give you much better indication. I think prices 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'll have a 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. We're just looking at the same dashboard that everyone else can look at that's on the ERCOT website.

Speaker 3

So I don't have any insight yet because we don't know the exact operating characteristics until there's a lag till we get that information. So even though 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 the summer months.

Speaker 5

Got it. Okay. Thanks, Frank. Thanks, Brian.

Speaker 2

I'll add there, Vikt, 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 thirds 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 First half and last year's kind of ratios, we didn't see any real reason to change anything at this point.

Speaker 5

Okay. Thank you.

Operator

Thank you. Your next question comes from Rupert Merer with National Bank. Please go ahead.

Speaker 6

Hi, good morning everyone. So you've talked about the higher activity levels. So Are you able to quantify how your pipeline is evolving and do you have the resources you need to manage activity levels?

Speaker 3

Yes. As far as quantifying, we have a Jack has done a great job organizing this. We have a very The fine funnel now with so many initial calls, follow ups, term sheets and when things are negotiated. So we have it we followed all the way through now. We're doing a much better job of tracking and organizing our significant uptick in activity.

Speaker 3

I think we're fine on the resources, on the execution right now. If anything, we might want The junior analyst or something like that, but I think that 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.

Speaker 6

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

Speaker 3

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

Speaker 6

Okay. That's great. And on the type of investment, it sounds like you're looking more at Well, Advanced Developers and Operating Assets, is there any way to quantify perhaps how the funnel Is it looking relative to the two ends of the barbell? Are you now focused more on operating assets?

Speaker 3

It's a balance of both. I think the operating assets tend to be opportunistic. It tends to be something's happened with it because Look, if a project has a 30 year PPA, busbar PPA, they're likely not going to meet Capital, it's going to be someone who is maybe has much of merchant exposure or is Looking to partially unwind a hedge or to acquire a project or something. So they're very kind of opportunistic or case by case. Versus the developers or there's just a steady pipeline of those.

Speaker 3

I think we'd like to do an operating project, but I can't promise that, that'll be the next investment, but I think it's all very case by case when you get into the operating projects.

Speaker 6

All right, great. And then just finally, you do have the spot exposure, you say PPA prices are moving up. Are there any Opportunities for your off takers to sign contracts on their projects going forward?

Speaker 3

Yes. That's a common strategy among these folks here. They unwind the hedge maybe at some point to that, They felt that the timing and the price was right and the deal was right too then we contract. So that's always an option for these folks. And I think it's something they're probably Seriously considering, but I don't have any

Speaker 6

Do they involve you in those discussions?

Speaker 3

No, we're not those are the way our We are price takers from that perspective as far as our royalty goes. But they're Economically incentivized, I think, to do the right thing.

Speaker 2

Thank you. Yes. Just in terms of the dynamic, though, it's interesting that This time last year, you would have had market prices averaging well above PPA prices and that sort of shifted. So That overlaying those two charts market versus contracted long term probably tells you everything you need to know about what most developers are going to do When they go live, right? It's just a function of that dynamic and what those spreads are, opportunity costs.

Speaker 2

But it is interesting to see the PPA prices moving up More or less in line with increasing costs and timelines and whatnot and how that impacts Models and IRRs for these developers, the people, the end buyer are actually accepting that the This project needs this price in order to go forward if I want that power, while there's much more volatility, obviously, still in the spot market. So it continues to be incredibly dynamic.

Operator

Thank you. Your next question comes from John Mould with TD Cowen. Please go ahead.

Speaker 7

Thanks. Good morning, everybody. Maybe just following up on the liquidity and capital commitments. I think it has been noted most of your liquidity is at least spoken for not allocated yet, but some of it does look like it's back weighted maybe towards later in 2024. But I guess just given the current funding picture, Does this nudge you at all towards later stage or operating investments that are immediately cash flowing and maybe help support that midterm liquidity a little bit or is the scale of the potential opportunity that you're looking at over the mid term such that you're just really focused on The best risk adjusted returns and securing those while ARR maybe advances its work on funding In parallel, like how are you thinking about that balance right now?

Speaker 3

I mean, all things being equal, yes, I think we do an operating project today Another developer deal, but it's not always things aren't always equal. And so we are, I think, a little bit more in the latter camp of looking at the best risk adjusted return. I mean, Hexagon is a developer deal, but it's a fantastic deal and it's a great developer and with a fantastic team and a fantastic pipeline And a fantastic a better deal that maybe our best deal yet. So I don't want to preclude other developer deals, but all things being We prefer the more immediate cash flow. The returns will be less too, just to be clear.

Speaker 4

Yes, yes. No, I hear

Speaker 7

you on that. Okay. And then I think most of my other questions have been answered. But maybe just circling back to the interconnection Challenges out there and Frank you referenced your view on PJM and how that had played out with the Hudson investment. I just wonder, are there any markets where you're hoping to get more of a pipeline because you've got a view that interconnection challenges as they're received today might ease or as you said in the past more broadly, does it really come down to developers in aggregate are going to make Decision in terms of where they spend their time developing projects and your royalty investments will trend over time with the market as you make further agreements on the developer side?

Speaker 3

I think the way that it plays out is where there is friction, where there is uncertainty, where there are delays is oftentimes creating the best opportunity for capital like ours, which is long term and patient versus a private equity fund, which may have a 3 year window to try to 3 to 5 year window, I think it's going to get in and out of investment. They look at MISO right now and say, oh my gosh, 3 to 5 years, maybe will they still be done with this Nobody knows how long it's going to take or what it's going to look like. And so they may run from that in the short term creating opportunities. So I don't know that it's we It's not that we take a specific view about this market or that market, but I think that the market dynamics Oftentimes present opportunities, which we then hopefully will be available to take advantage of. So we kind of like Let the market play out and then look where the best opportunities are because of frankly other people's inability or unwillingness to take a longer term perspective on things.

Speaker 3

I really think that distinguishes us in the market.

Speaker 7

Okay. Thanks for that. Maybe just one last one on investments outside of the U. S. I know you've discussed this from time to time whether there's Maybe opportunities in Canada and BlueStar has international activities and it's engaged in as well.

Speaker 7

Are you seeing any opportunities that are interesting outside of the U. S?

Speaker 3

We've got some leads in Canada. I Note that we haven't had that many in the past. We have some we're having some discussions. And then BlueStar has announced a deal in Australia. Now that's our primary investment is in Nova, the U.

Speaker 3

S. Subsidiary, but we do have some exposure during equity ownership of 11.7 percent, I think, in BlueStar. I talk to Declan regularly and say, he's aware of our capital and even when the opportunity comes for something that BlueStar is working on in Australia or another international market, I think we'll have those conversations, but nothing to speak of debt.

Speaker 7

Okay. I'll leave it there. Thank you very much for taking my questions.

Operator

Thank you. Your next question comes from Jonathan Lemers with with Laurentian Bank. Please go ahead.

Speaker 4

Good morning. Yes. Hi, Frank. I actually have a couple of project specific questions here. I'm not sure if we have Ben or Frank on the line, But whoever wants to take them can.

Speaker 4

Just on the Apex El Sauss wind project, it looks like that one was delayed from you just remind us when the revenue starts accruing and when you would expect the cash accruing to be paid out?

Speaker 3

Sure. It was it's delayed. It's in construction. It's an advanced construction. As far as we know, it's close to completion, but we don't know the exact nature of what the complications are, what the delays are caused.

Speaker 3

But we know that It's well along the path to hitting COD. I think this is I believe this is Tiara's first operating project in the U. S. And I think they're going to do everything they can to make it a successful project there. A large player and I think You want to have a long future in the U.

Speaker 3

S. I think they'll do whatever it takes to get this project online. That's just our that's our best guess. It's actually I don't know if it will be sooner, but it was our case in just saying let's put something out there a little further this time because it seems to keep being delayed and we don't we'd rather Hopefully under promise, we'll see. As far as when the cash comes in, once it goes operational, we Book revenue when they receive cash.

Speaker 3

So think of it as a 2 month lag from when they Book revenue to when they actually receive revenue then is when we would book revenue for our royalty. And then it's paid I think within Shortly thereafter, I don't know, I'd have to check-in whether it's monthly or quarterly on the payments, but we would book revenue when they receive the cash.

Speaker 4

Right. Thanks. And is there an accrual though from Q2 to whenever the project is operational?

Speaker 3

No, we don't have any visibility into what the final the exact What the end of project is going to be 200 megawatt project, but it ends up being 195. So that's why we had this true up mechanism with Apex is because with all our developers because it's not always exactly as designed. So we want to know exactly what we're getting before we give them credit.

Speaker 4

Okay. Thanks for going through that. And just on Titan Solar, just because it is a fairly big piece of the annual revenue this year. It looks like the first half royalty revenue contribution was around 20% of the full year revenue you would expect from that project. And is it just a timing of receipts issue there?

Speaker 3

Yes. There's also some events later in the year that will result in Some larger revenue chunks coming our way at that project. So far it's been a good project. I think it seems to be on track.

Speaker 4

Okay. So I guess with The revenue recognition being based on the timing of receipts, is it fair to say the seasonality So this would be later than the typical seasonality profile for a typical solar production project?

Speaker 3

I don't know that that's the case. I think it's more that the that there are some there were some escrows and things that were being held based on some work that was being done and then that gets released and it gets released.

Speaker 5

We get our share of

Speaker 3

that, which would be a little lumpier. So that's part of why You can't just take the first half and multiply it by 2 and say that's what Titan is going to do for the rest of the year.

Speaker 4

Okay, understood. And yes, my other questions were answered. Thank you.

Speaker 3

Thank

Speaker 4

you.

Operator

At this time, there are no further questions. Please proceed with your closing remarks.

Speaker 1

Thank you, Eric, and thank you to everybody who joined. It was a great Q and A session, And we'll look forward to speaking with you after Q3.

Speaker 2

Thanks everyone. Thank you.

Operator

This does conclude the conference for today. You may now disconnect your lines.

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