Altius Renewable Royalties Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 7 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the Altius Renewable Royalties Q3 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 Tuesday, November 7, 2023. I would now like to turn the call over To Flora Wood, please go ahead.

Speaker 1

Thank you, Jerry. Good morning, everyone, and welcome to our Q3 call. Our press release and filings were released yesterday after the close and are available on our website. Last week, you also saw the announcement of GBR's new credit facility, so the conference call comes at a good time. This event is being webcast live and you'll be able to access a replay of the call along with the presentation slides that has been added to our website on the homepage and also under Investors.

Speaker 1

Brian Dalton, CEO of ARR and Frank Gettman, CEO of Great Bay Renewables are both speakers on the call. And in the Q and A, we'll have Ben Lewis, CFO of ARR are available for questions. The forward looking statement on Slide 2 Applies to everything we say both in the formal remarks and during the Q and A. And with that, I'll turn over to Brian.

Speaker 2

Thanks, Laura, and thanks, everyone, for joining us today. We're happy to report that our business development progress continues on track Despite the headwinds and significantly constrained capital availability in the overall renewable sector, a tremendous amount of change has occurred since we went public in early 2021. However, I feel that we've been adapting well and finding ways to make the most of the opportunities that have resulted from every new challenge. I also understand that for you, our fellow shareholders, that the downward shift in renewable sector equity valuations has been difficult to experience. For sobering background, the TSX Renewables Index is off by 63% since the time of our IPO.

Speaker 2

In many ways, What is currently occurring feels a lot like things did in the mining sector where most of my experience comes from back in 2015 early 2016. That was when strong balance sheets and weak commodities markets led to the near complete exodus of equity and debt capital market participants from that sector. Back then, even the traditionally best and strongest companies were suddenly made very vulnerable. It was a very scary and painful time to be sure, But in hindsight also an amazing opportunity. Nor was this more true than for

Speaker 3

the royalty companies who were able

Speaker 2

to step into the capital void with royalty based financing, you look into the portfolios of most of the established mining royalty companies, you will see that many of their current JUUL assets were acquired during that window. I believe that the same type of contrarian opportunity is now presenting for ARR and GVR within the renewable sector. And it is why I'm so impressed and excited about the incredible achievement that Frank and the team completed last week with the signing of new green credit facilities. This leverages the strength of the existing fully equity finance portfolio and provides liquidity to match the Turing conviction. We believe it will accelerate the goal of adding further long term scale and diversity to your company.

Speaker 2

With that, I will hand over to Frank to dig in deeper on the past quarter and the

Speaker 3

Continued progress in building Great Bay and its broad diversified portfolio of renewable royalties. Our royalty portfolio revenue and cash flow profile was $7,800,000 versus $5,600,000 in 2022. And as we projected last quarter, Q3 Revenue of $3,900,000 benefited from higher merchant pricing due to this warm summer weather and increased power demand in ERCOT. As Brian mentioned, we announced the closing of a $247,000,000 credit facility for Great Bay. The financing includes $123,500,000 initial term facility, dollars 100,000,000 delayed draw term facility And a $23,000,000 letter of credit facility.

Speaker 3

The initial term and delayed draw facility had a 5 year term and a 20 year amortization With a 6.4% interest rate for the 1st 3 years and approximately 6.5% interest rate for the last 2 years, excluding financing closing costs. We hedge 100% of the interest rate risk for the initial 5 year term and approximately 50% thereafter to reduce refinancing risk. This financing represents a truly transformational achievement for Great Bay. Up to this point, we had funded all of our investments with equity. This financing allowed us to reload and provides Great Bay with significant liquidity to continue to grow its business at an attractive cost of capital with no dilution to shareholders.

Speaker 3

It also represents a validation and strong endorsement from 2 sophisticated global lenders of our business model and the value we have created over the last several years. It also comes at an opportune time as the current climate in the renewable sector with industry wide delays and everything being pushed to the right, Higher costs, particularly significantly higher interconnection deposits and costs, higher interest rates and cost of debt And lower equity prices creating an environment where there is strong demand for alternative sources of capital such as Great Bay's Royalty Financing. I'd note that Great Bay's development partners are not immune from the industry wide delays facing the renewable sector. It's important to note, however, that while the timing of projects coming online may get pushed to the right, Great Bay's ultimate return on these developer investments is protected Since our capital continues to accrue and results in Great Bay simply receiving more royalties over time to compensate for any delays. On the origination and new business front, we have an incredibly strong and growing origination pipeline.

Speaker 3

And now we have the capital The initial term proceeds and the delayed draw to aggressively pursue these opportunities. I'd note that the delayed draw facility Can only be used on cash flowing royalties. So I'd expect we prioritize operating royalties over developer deals in the near term. I also want to make a few comments about the $23,000,000 letter of credit facility. It's obviously a relatively small part of the overall facility, But it was important for us to negotiate to include even a small LC facility to start as the problem that ever growing need by developers for interconnection deposits, Even fully refunded deposits is perhaps the single largest issue facing the industry right now.

Speaker 3

We're hoping to be able to deploy this LC facility to assist developers, Potentially both developers in the Great Bay Royalty Program and 3rd party developers with posting fully refundable interconnection deposits Allowing Great Bay to earn an attractive essentially risk free rate of return while gaining an option to acquire royalties on projects once they become operational on attractive terms. It's early days in figuring out the details of how we might structure an interconnection deposit product, but we're working hard to figure it out. To sum up, Great Bay is incredibly well positioned with almost 2.5 gigawatts of operating royalties, over 15 gigawatts of wind, solar and storage development Projects in our developer portfolio, attractive market conditions for deployment and now a bit of a war chest to seize the significant opportunity. In short, I've never felt better about Great Bay's future. That's it for my update.

Speaker 3

I'll turn it back to you, Brian.

Speaker 2

And I think that concludes the prepared remarks portion. So operator, maybe you can turn it over to questions.

Operator

Thank you. Ladies and gentlemen, we will begin the question and answer session. Please press the star followed by the 1 on your touch tone phones. You'll hear a three tone prompt acknowledging your request and your questions will be polled in the order that they are received. Our first question comes from the line of Nick Boychuk of Cormark.

Operator

Please go ahead.

Speaker 4

Thanks. Good morning, guys. Frank, you kind of mentioned the deployment phase of the new capital. It's going to be focused on the operating side of royalties. Can you kind of walk through what the pace of the both the initial term and the drawdown facility is going to look like?

Speaker 3

Sure. Well, just logistics of how the delayed drought works, we have 3 years To deploy that $100,000,000 and it's a portion of the investment we make and there's a formula in the documents about how much we could Leverage we can put on any particular project and it's tied to the cash flows of that project similar to how they size the original debt. So that's the timing for our ability to use the delayed draw facility. As far as the pace of deployment, we have It's not an overstatement to say that the companies, even companies that may have not even given us the time of day Couple of years ago, everyone's clamoring for capital right now. So we're trying to find the highest and best opportunities where we can earn the best return And the best risk adjusted return and we're moving as quickly as we can.

Speaker 3

So I would I think things should Hopefully continue to progress and be able to play that in hopefully short order.

Speaker 5

Okay, thanks. And then just talking about also some

Speaker 4

of the projects that were moved a little bit

Speaker 3

to the right, can you

Speaker 6

speak at all to The

Speaker 2

sense of commitment that you have from Enbridge right

Speaker 4

now to continue to push forward on the TGE deals that they're responsible for?

Speaker 3

Yes, sure. I mean, we're seeing we still have our quarterly updates with TGE and Enbridge, and they are Pushing aggressively forward. I mean, they are one of the if you look at these issues with capital in the industry, they're one party that's Actually, I think seeing as an opportunity because they seem to be accelerating their pace of deployment in the renewable sector. It's really It's great to see that this wasn't a token investment by oil company to say, oh, now we're renewables to there. They're deploying 100 of 1,000,000 of dollars into Tri Global and acquiring panels, posting these deposits I'm talking about, They're aggressively moving forward their whole pipeline.

Speaker 3

So while there may be some delays with approvals and things but interconnections that I see nothing but strong commitment from Enbridge to support Tri Global.

Speaker 5

Okay. Appreciate the color at this time. Thanks, guys.

Speaker 3

Thank you, Nick.

Operator

Thank you. Our next question comes from the line of David Quezada of Raymond James. Please go ahead.

Speaker 4

Hi, thanks. Good morning, everyone. Good morning, David. Just a quick question on Just in terms of your like strategy going forward now, it feels like there's been kind of a few moving parts. Obviously, the big influx Capital with credit facility is great to see, plus a move lower in valuations across the sector.

Speaker 5

Just wondering if maybe Frank, if

Speaker 4

you could speak high level about if you've made any tweaks to your process, have Like started looking at your target returns, just any change with this kind of dynamic environment that seems to really favor you?

Speaker 3

Sure. Happy to you, David. I guess there's 2 things that come to mind. 1, The calls are definitely coming inbound. We are Literally flooded with opportunities and people reaching out to us and saying, let us learn more.

Speaker 3

So I think that we're now having to prioritize and, As I said, kind of high grade those opportunities and figure out which what's the right opportunities for us in the near term. I wouldn't expect us to do another developer deal. As I mentioned in my remarks right immediately, I think that The highest and best opportunity for us right now is probably into operating projects. That being said, if it's a perfect Project with a 20 year PPA and it's been levered 90%, that's probably not a great opportunity for us. That's really not what we're talking about.

Speaker 3

We're looking for opportunities where we think we can earn an outsized return for the risk that we're taking. And So I would say, yes, we are there's not a posted price for royalty financing. What's the clearing price on Bloomberg? So we're trying to Test the market a bit and push our returns, which I think is appropriate given the conditions that we face. So yes, we're looking to Try to achieve the best risk adjusted return we can for our shareholders while still able to deploy capital to high quality deals.

Speaker 3

And that's another thing too. We can look at the quality of the counterparties. There's a couple of different ways that you can look at Risk adjusted returns, 1 is the quality of the projects, quality of the team, quality of the counterparties and then obviously just The returns from the expected cash flows from the project, and we're trying to look at all those factors as we move forward.

Speaker 4

That's great color. Thanks, Frank. Appreciate it. And then maybe one more for me. Just on Nova, it sounds like the development pipeline is advancing well there.

Speaker 4

Just Wondering if there's any color you can provide on how those individual projects are advancing and just how you see that developing going forward here?

Speaker 3

Yes. We have I sit on the Board of BlueStar and to see what they've been able to achieve in About a year and a half to build out a 2, 2.5 gigawatt pipeline. And that's a project that they have site control. I mean, they have even a broader pipeline of where they haven't Secured site control for other projects. It's really it's been amazing to watch and see and I feel Very positive about their progress.

Speaker 3

I don't it's not appropriate for me to get into specific projects or areas as I think they're a private company and they do that as Commercially sensitive information, but I can just share with you that these guys are pros and they're hitting on all cylinders right now.

Speaker 4

That's great to hear. Thanks for that, Frank. I'll turn it over.

Operator

Our next question comes from the line of Jonathan Lammas of Laurentian Bank Securities. Please go ahead.

Speaker 3

Yes. Good morning, Frank.

Speaker 4

Hi, Sean. Just on your comments on the letter of credit I thought those were interesting. Can you expand on why the opportunity you see on the interconnection deposits is essentially risk free For GBR and ALR?

Speaker 3

Sure. Because it's the way it works is when you put a deposit to secure your place in line, It's fully refundable until such point as they start doing work and they start deploying the capital and start building out the infrastructure. At that point, it becomes either in part or fully non refundable. There's usually a 9 to 12 month period where these Deposits are being held to secure your place in line, and it's fully refundable. So that's why I use the words risk free.

Speaker 3

And but the mechanism of how that works, everyone MISO just came out with Google's. PGM has adjusted its model and It's an interconnection process. And the numbers, the sheer dollar amount that's being required has gotten so large That a number of developers simply just don't have the capital and they're faced with having to use equity capital to fund Fully refundable deposits, which isn't a great use of capital, it ties up capital. So the opportunity for us is we negotiated with the banks to have this So, I'd note that it's at a cost of capital to us that is well below the 6.5 on the debt because we can only use it on fully refundable Deposits, so it is secured to the bank as well. But that because the process is complicated, there's not enough capital in the market, I think we can earn a nice Spread on that capital and then ultimately, right, we're a royalty company.

Speaker 3

So ultimately, our objective is to Get options on these projects as they move forward, that as they go forward, we'd have an option to acquire royalty at an attractive price. In some ways, we borrowed the concept that emerged from the Enbridge acquisition, where we have that Option to be able to acquire royalties that aren't needed to hit our return, LDX should be in the pool. We have an option to acquire those at an attractive discount rate. We borrowed that concept. I love that concept.

Speaker 3

So we borrowed it in trying to apply it into the interconnection world. And I think We haven't done one yet, but we frankly didn't have the capital to do one yet. So Zach is working hard on it. He's been out to MISO. He's been out sat in their offices.

Speaker 3

And The devil truly is in the details in this interconnection world. And I think we understand it as well as anybody right now, and we're trying Leverage that knowledge and now the capital to be able to support these developers in posting these deposits.

Speaker 4

Okay. That's great commentary. Just if I can follow-up on the 2023 guide, That was reiterated in the royalty press release. Merchant power prices appear to have been pretty favorable in the last Few weeks versus prior year, how are you feeling about merchant power prices and your ability to deliver on the revenue guide for 2023?

Speaker 3

Well, we still think that range we're comfortable with that range. We had a great summer. Actually, the early fall was really strong as well. We're seeing pockets. You don't need a whole lot of Megawatt hours, if you're talking $1,000 a megawatt hour or whatever it might be to make up the revenue in a hurry.

Speaker 3

Going forward, your guess is as good as mine as to exactly where merchant prices are going to be. But I will tell you that They're going to be tied at least for the foreseeable future to natural gas prices. And we're seeing natural gas prices appear to a bottom. They move back up over $3 now. So they're starting there's an interesting dynamic in the natural gas market where Natural gas companies are trying to price off of price LNG off of where the gas is going and not The Henry Hub price of where it's being generated and supplied and they're having some success, which I think over time would create upward pressure on natural gas prices, which would be great for Power prices as well.

Speaker 4

Okay, thanks. And there was a note also that achieving the guide Depends partly on a local transmission upgrade at Titan Solar and the release of an ex escrow in Q4. Do you have any visibility as to whether That will be completed or is it something you'll just kind of find out once it happens?

Speaker 3

The work is yes, no, at least We're confident it should happen. We should get that. That should be released because the work to our understanding has been completed. And it's really a Question of demobilizing and energizing the line and get it going. It looks like all the work has been done.

Speaker 3

We actually I expected it to have been done by now and I think so did Long Road. And I think that we have every reason to think it's going to get done and released by the end of the year, That is it's about $1,000,000 So it would be if we didn't have that, then it would we would fall short. But I think we have every reason To expect that it will be released.

Speaker 4

Okay. I'll pass the line. Thanks for the comments.

Speaker 5

Yes.

Operator

Our next question comes from the line of John Mould of TD Securities. Please go ahead.

Speaker 6

Thanks. Good morning. Maybe just on your pipeline and focus on royalties in the operating side. You're clearly confident on what that pipeline looks like given that you moved ahead with the secured facility. What catalysts are you seeing right now for operators to want Royalty financing, is it still carving out more merchant exposure?

Speaker 6

Is it funding for repowering? Is it Bespoke reasons in every case, what dynamics are you seeing right now driving DSO for operating royalties?

Speaker 3

Yes. It's kind of all of the above and it's in every case it's something bespoke to that project usually and or the operator Where the operator maybe has upgrades or things it wants to do that it can't fund because it really can't access the debt or equity markets right now. So it's looking for new sources of capital. It could be someone who has a hole in their capital budget next year because current market conditions have changed as they want to continue Progress so we'd be able to provide them capital in exchange for a royalty on an operating project. I mean, like it may not be It doesn't necessarily well could be, but it doesn't necessarily have to be that our dollars are tied to that project, so long as we Get a royalty on an operating project, if you follow what I'm saying.

Speaker 3

So that's something a more corporate level Financing that but then in exchange we get operating royalties is something that the current debt and equity markets Kind of create an opportunity for that, which I would say that opportunity really wasn't there 12 months ago. And then on the merchant side, people saw what happened in the summer. I think there is a desire For some exposure to merchant pricing to market prices. I also think there's still some Storm Yuri project They haven't really fully settled up and recognized the extent of the losses and how they might restructure it move forward. That was a great opportunity for us with Northleaf.

Speaker 3

There's still a few projects that haven't figured that out yet. So it's kind of all of the above. And So but it won't I think like I did mention that we've looked at several now where there was like A perfect project that had a long term 20 or 30 year PPA, busbar PPA, they're going to be still be able to access the debt markets. So I don't think Those aren't great opportunities for us and I actually frankly don't want to sit behind a bunch of debt as a royalty holder even on an operating project.

Speaker 6

Okay. Thanks for that context. And then just in terms of scale and when you think a little bit about How much capital you're willing to put into one investment? What's the range of checks you're hoping to be able to write With this financing secured for operating investments, just in terms of size?

Speaker 3

Yes. Well, I think We'd like to be able to deploy all of it, right, because it's operating or a healthy portion of it into operating projects, Particularly if there has been any kind of delay in our developer deals, which there has been in those coming online, near term cash flow that bridges to those projects coming online makes a lot of sense. So that's something that we're looking at. And as far as the check size, it's very deal specific. So it's really hard to say in any single one.

Speaker 3

We are also looking at other ways that we can Structure the deals to protect ourselves, maybe we front end load cash flow. There's different things we're looking at that we might consider For a specific project or they had merchant exposure and things like that. So it's all kind of very Deal by deal specific.

Speaker 6

Okay, great. Thank you. I'll those are my questions. I'll leave it there.

Operator

Our next question comes from the line of Eli Rotimi of National Bank. Please go ahead.

Speaker 5

Good morning, everyone. Just filling in for Rupert here. You mentioned a Big backlog of investment opportunities. Any market look good in particular as far as ISOs and anything getting close to the strike So outside of the U. S?

Speaker 3

I think it's across the board as far as the different All regions are very, very active. So it's I'd say we're seeing activity across the U. S. The as far as outside the U. S, I think we've had some conversations with some projects in Canada.

Speaker 3

So I think that's probably It would be the most near term thing that we think about as far as projects outside the U. S. We do have exposure Through our equity ownership in BlueStar, I know that they've BlueStar has done one deal in Australia and that they've set up So we have exposure to the Australian market through our equity investment in BlueStar, not directly as a royalty holder, but that's something that Frankly, Declan and I discussed that at some point in the appropriate time, it might make sense for Great Bay To look to providing royalty capital directly to one of their projects and that was something that made sense for both parties.

Speaker 5

Right. Okay. And then on TGE, you mentioned that they're one of the few that continues to press For viewing the sort of tight financing environment as an opportunity, but you also mentioned that operating assets are the main focus right now. So in your view, How much more investment could you see in the TGE pipeline? And what would the timing of that look like?

Speaker 3

Yes, this is an important point for folks to recognize is that we had no further funding obligations to TGE. The 100 of 1,000,000 of dollars that Enbridge is spending On their portfolio to advance their entire portfolio, we're benefiting from that, but we have no further funding obligation. So we won't be putting any more money into Tri Global. Yes, we're going to get the benefit of them advancing their pipeline. And the first projects that come out, we We'll be credited towards our return threshold.

Speaker 3

And once that return threshold is hit, then we will have an option to acquire And it's roughly a 6 gigawatt portfolio that we have royalties on. So right now we're projecting about half of it will be needed for Hitting our return, but the other half is future deployment into cash flowing deals, Well, we wouldn't have to exercise that option until COD, until they're operational and we're using the same return. We're using the discount rate and valuing those and what we're going to pay. We're using the same return threshold that we have for our underlying deal, Which was used at the development stage. So it's an attractive discount rate.

Speaker 3

And so we think that that's a fantastic Opportunity and it would be look, it would be perfect. If we haven't utilized this delay draw by then that would be a perfect situation to use. The delay draw would be to use that capital Acquire those projects, although probably that won't happen within the timeframe, the 3 year timeframe.

Speaker 5

That's perfect. So I guess to summarize, taking a bit of a wait and see approach after The gigawatts that come on to meet your targeted return based on invested capital today? Yes, it's a we have

Speaker 3

an option, It's not an obligation to acquire those projects. So we'll look at it at the time. If interest rates have gone to 15% and the price of The price our option price isn't attractive and we wouldn't exercise it. But if they are where they are today or lower, then it would be very much Attractive and we would likely exercise that option.

Speaker 5

Great. That's all for me. I'll jump back in the queue.

Operator

And our next question comes from the line of Devin Schilling of TL Financial. Please go ahead.

Speaker 4

Hi, guys. Good morning. Most of my questions have been an answer here, but maybe just on your current G and A, are you guys happy with current staffing levels or do you think you may need to add some bodies here, I guess to meet your capital deployment target over the next couple of years?

Speaker 3

Yes. We're looking at to bring A controller type person to handle some of the back office and accounting functions. We get support today From ARR and that would continue, but even on our side, there's a fair amount of work that needs to be done before we deliver the financials up to ARR. And I think a lot of that falls on Ray right now and that's not the highest and best use of his talent. So we're trying to Back to there and get a controller in here.

Speaker 3

And then we also think investment analysts or someone could help Support the deal flow, a more junior associate would make sense as well, but that's largely it.

Speaker 4

Okay. Yes. No, that's helpful. Thank you so much.

Operator

And there are no further questions at this time. So I'll hand the call back to Flora Wood. Please go ahead.

Speaker 1

Thank you, Jerry, and thank you to everybody for those questions. They were excellent questions. Thank you all for listening in, And we'll look forward to speaking with you again at year end.

Speaker 4

Thank you.

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