Altius Renewable Royalties Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Altius Renewable Royalties Q1 2024 Conference Call and Webcast. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, May 3, 2024. I would now like to turn the conference over to Flora Wood, Investor Relations.

Operator

Please go ahead, ma'am.

Speaker 1

Thank you, Lara. Good morning, everyone, and welcome to our Q1 2024 call. Our press release and filings came out yesterday after the close and are available on our website under Investors and on the homepage. This event is being webcast live and you'll be able to access a replay of the call along with the presentation slides that have been added to our website again on the homepage and under Investors. Brian Dalton, CEO of ARR and Frank Gattman, CEO of Great Bay Renewables are both speakers on the call.

Speaker 1

And in the Q and A, we 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 remarks to start and in the Q and A session. And with that, I will turn over to Brian. Go ahead, Brian.

Speaker 2

Thank you, Flora. Good morning, everyone. Thanks again for joining us. Before turning things over to Frank, I will quickly repeat some of my comments from the previous quarterly update. The broader market backdrop for Renewables continues to exhibit relatively weak sentiments and capital constraints, particularly with respect to the cost and availability of equity.

Speaker 2

We note that the TSX Renewables Index is now at 1 third of the level it was when ARR went public a little over 3 years ago. This continues to represent a double edged sword for us, however, as while it weighs on our own equity cost of capital, it also continues to drive an increase in demand and the number of uses for our royalty financing offering. This underscores the importance of the debt based financing that was completed at the GBR level last year, which comes at a reasonable cost that we are continuing to find ways to accretively deploy against. The team remains very busy on this objective, which is my segue to turn things over to Frank.

Speaker 3

Thank you, Brian. Good morning, everyone. I'm excited to share with you today an update in what was a very busy Q1 and our continued progress in building Great Bay and its diversified portfolio of renewable royalties. Our royalty portfolio revenue and cash flow continues to grow with GBR revenue for Q1 2024 coming in at $4,900,000 compared to $2,000,000 in Q1 2023, an increase of 145%. Operating cash flow at GVR was $300,000 for 20.24 compared to $1,000,000 for 2023 due to interest paid in Q1 related to our new credit facilities.

Speaker 3

Included in GVR's 1st quarter revenues was $1,300,000 from the receipt proceeds from the release of the Titan solar transmission upgrade escrow as well as $1,400,000 from proceeds received by GVR from Hexagon's sale of 130 Megawatt AC solar project in Q1. Under Steel Hexagon, when Hexagon sells a project, we receive a royalty on projects sold as well as 10% of the project sale proceeds, which amount does not count towards the minimum return threshold. In addition, GVR has the option to elect to receive up to 20% of sales proceeds, which is treated as a return of capital and included in the minimum return threshold calculation, but not included in revenue. In this case, we elected to take the 20% of sales proceeds and received $2,800,000 in addition to the $1,400,000 noted previously. It's also important to note that GBR's results include the proportionate share of non cash losses from GBR's equity investment into BlueStar Energy Capital and Nova Energy, totaling approximately $2,900,000 for the quarter.

Speaker 3

These losses are expected at BlueStar and Nova as they are still in the early days of building what we think will become a highly successful and profitable renewable energy developer. Nova in particular is making great progress in building its U. S.-based portfolio with a pipeline of approximately 5 gigawatts of wind, solar and battery storage projects in just 2 short years. In Q1, we are pleased to be able to close a $30,000,000 investment with APAC and its 195 Megawatt Angelo Solar project, an attractive project with a strong long term offtake contract with Meta that remains on track to achieve commercial operations in Q2 and provide Great Bay with new royalty revenue later this year and approximately 4 $700,000 in revenue per year for the 1st 5 years. It was fantastic to be able to partner again with the incredibly talented team at Apex, one of the preeminent renewable energy companies in the country.

Speaker 3

Some other key milestones in the quarter included closing our first interconnection support facility with our development partner Hexagon to fund up to $10,100,000 of the refundable portions of certain MISO interconnection deposits for 6 solar development projects totaling approximately 1.5 gigawatts that Mexxagon has selected for advancement in the MISO interconnection queue. These projects are part of Hexagon's approximately 7 gigawatt development portfolio from which Great Bay will receive future royalties. Interconnection queues and funding interconnection deposits remains a major industry bottleneck. Now that we've proven that we can complete the agency arrangement with MISO such that Great Bay retains control over refundable deposits, we're seeking a partner with a large balance sheet to expand this program. In the future, GVR would seek to receive a royalty or an option to acquire royalty on projects supported by such a facility.

Speaker 3

We were also excited that Canyon Wind, a 308 Megawatt wind project in ERCOT, achieved commercial operations during the quarter and is now part of GVR's growing portfolio of operating royalties. I'd like to make a few comments on the macro landscape for Renewables and Great Bay. The backdrop for Great Bay and Renewable Royalties deployment remains strong. Some of the headwinds we previously discussed in the renewables industry are ongoing, mainly higher interest rates and costs of both debt and equity capital, interconnection queue backlogs and delays and higher interest connection costs, supply chain constraints that have shifted from solar panels to transformers and switchgear and political uncertainty. But despite these headwinds, the energy transition continues and with it the need for alternative sources of capital such as GVR's royalty financing.

Speaker 3

Last quarter, I commented on the accelerating load growth and demand for renewable energy we were seeing in ERCOT from new data centers to support AI, onshoring of U. S. Manufacturing capacity and generally strong economic activity. The update this quarter is that low growth projections due to the energy transition, electrification of everything and the age of AI are increasing all across the country. Utilities are scrambling to deal with unprecedented load growth forecasts and with that comes ongoing build out renewables projects and the need for capital.

Speaker 3

Finally, in closing, I want to recognize a couple of senior promotions we recently made at Great Bay. Peter Leahy has been appointed Chief Financial Officer and Josh Levine has been appointed Chief Commercial Officer. We were sad to see Ray Pfauz step down from his role as CFO as Ray remains a trusted friend and partner and has assumed a consulting role with the company. Forming fantastic hands with Peter stepping up to fill this important role. Since joining the company in 2022 from Goldman Sachs, Peter has been an absolute rock star.

Speaker 3

We're also excited to recognize Josh's promotion to Chief Commercial Officer. I've worked with Josh for over 15 years and his knowledge and experience in the industry are unsurpassed. I would expect Josh's role to continue to grow in importance as the opportunity set for Great Bay continues to expand. That's it for my update. I'll turn it back to you, Brian.

Speaker 2

And I'll turn it over to questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from the line of David Quezada from Raymond James. Go ahead please.

Speaker 4

Thanks. Good morning everyone. Maybe just to start off like obviously in the past few days there's been a lot of excitement on data center related demand growth. I'm just curious, is there a way that you can position yourself for that if it becomes a more significant trend that just like the general growth in the industry? Are your partners pursuing projects like this?

Speaker 4

Any color you can provide on just what moves you can make within your business to try and position for that?

Speaker 3

I think it's a trend that's accelerating and not slowing down. We're seeing it everywhere. It used to originally it was an ERCOT and we saw Virginia. Now we're seeing across the country this build out and the forecast going up with the utilities. I think one of the things that we're looking at is, is there a behind the meter opportunity where we can work with a renewables developer who's working with 1 of these large tech companies who's doing this build out to provide dedicated renewable resources and can we provide capital for that.

Speaker 3

But the general trend is just that everyone is the push for renewable resources is as high as I've ever seen it. So much so, I'm a little concerned because of the backlog and the interconnection queue delays and the like that. If we can't meet that demand, are they going to start building new natural gas fired plants and kind of put the end up going in the other direction here on the energy transition because I don't think the tech companies are going to wait.

Speaker 4

That's interesting. Thanks for that, Frank. And maybe just switching over to Hexagon, I

Speaker 5

mean, it sounds like it's kind of an

Speaker 4

interesting structure to the deal you have there with the ability to take some proceeds of sales as well as the Internet connection facility. And it kind of feels like maybe a deeper relationship that you have with them with than maybe other cases. Do you see opportunities to deepen the relationships with other companies that you've invested in so far? And do you think that Hexagon deal is maybe could we start to see elements like that in some of your future deals?

Speaker 3

Yes. No, I think that's a good observation. One of the things the themes that we're talking about is, yes, it's great to bring new developers into the fold, but if someone is really crushing it, is there a way for us to deepen that relationship and back our winners, so to speak? And Hexagon has been doing a fantastic job. So that's why we want to deepen that relationship, support them further, find ways to deploy more capital and we're looking at with our other partners as well, because it's a lot easier to do a follow on deal with somebody that you already know and feel comfortable with than finding a new partner.

Speaker 3

So, we're always looking for ways to back our winners. I would say, just as a side note, the Innova is I've been amazed at the growth that they've accomplished and Deckman Flanagan and his team putting the band back together and they've had a couple a strong track record of success a couple of times, a couple of successful exits and with the momentum they have, it seems like it's working again. So we feel great about that investment as well.

Speaker 4

Great to hear. Thanks, Frank. I'll turn it

Speaker 6

over. Yes.

Operator

Thank you. Our next question comes from the line of Rupert Merer from National Bank Financial. Go ahead please.

Speaker 7

Hi, good morning everyone. So looking at the environment, bond yields have been higher recently, but they seem to be rolling over here in the last few days and stocks in the sector started to rebound over the last couple of days as well. I'm wondering, does this impact your view on how quickly you should deploy your capital? And are returns basically as good as they're going to get right now?

Speaker 2

Maybe I'll let Frank talk about returns. But just on the timing of deployments, there's windows in time in all sectors and this is a good window. So I don't really I said it on the last call, I

Speaker 3

don't really

Speaker 2

think it's a time to be hoarding our capital, it's time to be deploying our capital and to do that until it's exhausted or we find more as long as the window stays open. So that's the issue on timing. When the window is open, you go to work and that's what we're seeing today. But maybe Frank, you might want to touch on what you're seeing in terms of potential returns against the market backdrop?

Speaker 3

Sure. I think we've given that 8% to 12%, I think we're pushing the upper bounds of that and I think we can continue to see strong demand for our capital. And I don't know if this is the peak or it's going to go higher or lower. That's above my pay grade. But I think we're seeing still very strong returns and strong demand.

Speaker 3

That's for certain. The need for capital right now in the sector is just massive.

Speaker 7

Do you have any targets that you can share on the pace of capital deployment that we could see over the next couple of years?

Speaker 3

Well, I think last year things were a little slow because everyone with the spike in interest rates, everyone was kind of frozen and there was kind of a period between buyers and sellers of projects and capital that they weren't sure what the nuclear price for capital was and the interconnection queues were all there was a lack of clarity there. So there was a slowdown for us last year to plan, but we've done over I think over $100,000,000 the last 2 years before that. So I think that's I think we can get back into that kind of pace.

Speaker 7

And we've been hearing that the M and A markets could become quite active this year. And I'm wondering, when you look at your pipeline, how much of it could be related to companies that are buying assets and looking for alternative sources of capital to finance those acquisitions? How would that type of potential partner fit into your pipeline versus perhaps partners that are looking to take a little bit financing off the table or partners that are looking to develop assets?

Speaker 3

I think it's all of the above really. Like we did our tightening project was an acquisition with Long Road. So there is that will definitely that was a great new use case for us and shows we can bring our capital in right at the time of closing and we're looking at those opportunities. I think that it seems to me like the I don't think there's people taking money off the table, so to speak, is looking they're looking to extend their equity dollars. So particularly these companies are trying to transition from buy and flip developers into IPPs.

Speaker 3

That transition is hard and it takes a lot of capital and they're looking to versus when you sell a project, you get all that revenue upfront. Now we're going to invest 100 of 1,000,000 and then spread your revenue, gets spread out over the life of the project. And it just takes this massive upfront capital. And I think they're looking to bring in some like ourselves. And the fact that we're non dilutive and we could that's similar to what we did with Apex, what we've done with Long Road.

Speaker 3

I think those are seem to be the there's a lot of those. Now there are people who are out selling projects, I think, to try to recycle that capital. But oftentimes they're selling like Algonquin, I think, is selling their whole portfolio. So that's not really a good fit for what we're doing. But I know you sell down would work.

Speaker 3

If there's someone who's looking to take our capital instead of a minority sell down, that would be another good use of our capital.

Speaker 7

So fair to say you're spending still more of your time on operating assets rather than development assets these days?

Speaker 3

Yes, I think so.

Speaker 7

Greg, I

Speaker 3

wouldn't say we're not we are looking at some developers as well though too. There's strong demand on both sides.

Speaker 7

Thanks for the color. I'll leave it there.

Operator

Thank you. Our next question comes from the line of Nick Boychuck from Quorum Securities. Go ahead please.

Speaker 5

Thanks. Good morning guys. First thing, if you could just confirm the guidance that you've given reiterated at $13,000,000 to $16,000,000 GBR level. Does that include the revenue that you're expecting from the Hexagon, MISO partnership?

Speaker 3

No, it did not.

Speaker 5

Okay. And on the meso partnership, so they've deployed or called 3.6. Do you have any sense on how fast they'd have to call the remaining capital and how far that would get them? Basically asking if they would potentially need another follow on facility like this for more projects in their pipeline?

Speaker 3

It's really dependent upon MISO's timing. And I think it's going to be I think it's later I think in the later this year, they'll need the rest of the capital for the next tranche. And then it's going to be a question of how quickly MISO can go through the process of their journal process. But our capital is it's committed for a year. This is really it's important to note this is only for the refundable portions.

Speaker 3

Once those deposits get converted or turned into hard capital because they're going forward, this capital is returned to us and they have to come up with other solutions. It might be taking our traditional capital or traditional developer capital or bringing others some others either own equity capital or something, but this only solves the refundable portion of those deposits.

Speaker 5

Right. Got it. You mentioned though that that opportunity for these refundable deposits is quite large and you could be looking for a partner who could potentially fund that. Is there any way to quantify how large that opportunity set could be and what it could do for bringing new opportunities to you?

Speaker 3

Yes, it's massive. It's 100 of 1,000,000 of dollars needed. And so we're looking to talk to big financial institutions. I mean, the cost of capital for Apollo or AR, that's not a great fit. It's going to be someone who has a larger balance sheet.

Speaker 3

And this is risk free relatively since it's fully refundable, it's risk free capital. So we need to find someone with deep pockets who we can earn a decent return and in exchange, they'll get a relationship. I'm thinking like a project finance bank perhaps or someone like that, who would want to have that relationship. So when they go on to build the project, they would be the first that already have that relationship to be able to in person line to provide the capital for the construction. That would be, I think, the type of entity we're talking about, but the size of the opportunity is huge because both MISO and now PJM, we're now in the process of also trying to prove this up in PJM so we could expand into that market as well.

Speaker 3

But we will need a partner to do it because the amount of capital required is just is huge.

Speaker 5

Okay. That's interesting. And then last for me, you kind of mentioned a couple of times and in the prepared remarks that Nova appears to be progressing exceptionally well. Do you have a sense from then when we could start to kind of hear about individual projects that they're working on and when even though they're going to be future dated, when some COD dates might start getting floated around?

Speaker 3

I think we're still a year plus till they start selling projects or looking to sell projects, but just I guess I was referring more to just that the quality of the team and the fact that they built up a 5 gigawatt pipeline in 2 years and that they're just really executing at a very high level.

Operator

We have our next question coming from the line of John Muir from TD Cowen. Go ahead please.

Speaker 6

Hey, good morning everyone. Maybe just circling back on your development partners and just the interconnection question specifically. I know you can't get into like too much specific detail, but I guess just broadly across your developer portfolio, what's your comfort level with the positioning of their pipelines in interconnection queues just relative to what I guess what you were hoping to see in terms of development project progress when you first made some of those more recent investments and maybe relative to how those hopes have evolved today just in terms of like what realistic pace of development is and how close those projects could be to an FID and moving along? Maybe an FID is the wrong way to put it, but putting where someone would take a look at them and projects are for sale. I think you know

Speaker 5

what I mean.

Speaker 3

Yes. I think that no question that from when back when we made the original investments to now there's been delays. So that's been across the whole industry and obviously we're protected from that in our return to our structure. I think one of the things that we're looking at is how our capital in a facility like we did with Hexagon could be a competitive advantage for our partners and their projects because being able to continue to advance your projects in the queue, I think once you establish your place, your project becomes much more saleable and more attractive. And I think if we can help our partners do that, I think that's a that's part of the thinking behind what we did with Hexagon, right, is that their projects now their steps in the queue become more attractive potential buyers that people know they have certainty around or more certainty.

Speaker 3

I guess there's still ongoing questions and delays at the RTOs. But I guess that's kind of the thinking, John, is that we can help make that those projects more real and more certain, which only gives them a higher likelihood of sales and timing. But the specific time is really that's difficult. And there's this question too of if the other option would be to sell them sooner before you let someone else fund the interconnection deposits and but that means that the sales price you would get would be lower than all likelihood And the saleability might be more uncertain whether you have a successful sale or not. So it's a really interesting dynamic in the market because it's kind of it's turning into a little bit of a world of haves and have nots and developers who can't fund those deposits are going to look at having to sell projects earlier and perhaps not be that excited about the results they get.

Speaker 6

Yes. And maybe at the risk of getting too into the weeds here, how are you thinking about when you look at your developer partners and maybe other ones out there, that dynamic of some of these interconnection queue reforms that are going on, which have a real maybe potential to accelerate the pace of those projects moving forward over the midterm, maybe might better than what you might have thought over 1 or 2 years ago. But at the same time, those markets, some markets anyways, like PJM is a good example, not accepting new projects that you or delaying those cycles? Like is there an opportunity for you to provide value with that tension of work?

Speaker 3

Yes. I mean like one of the reasons that we were excited about Hodson is that they had projects that are in fast track projects and projects that are advanced in the queue. And I think those are going to be potentially more attractive. So I think that's one thing. The other thing we're doing is as far as looking at potential new developers is we're also talking to some DG developers, folks where the interconnection queue is not an issue.

Speaker 3

Now they're smaller projects, but they cycle them through faster and that could result in us getting royalties quicker and it might be a nice piece of business for us while we're waiting for some of these the utility scale projects to work their way through the queues. If we had distributed generation developer in the works, that might be a nice complement to what we have with our pipeline of utilities. So that's one of the things we're considering as well.

Speaker 6

Okay. That's interesting. And then maybe just one last one and Paul They're not tied up.

Speaker 3

Right, of course. No, just

Speaker 6

go ahead. Yes, no worries. And apologies if you covered this in more detail earlier and I missed it. But just on the Hexagon return of capital, can you maybe just walk us through your thinking around taking that, electing to proceed in that direction? Yes.

Speaker 3

So I think the thinking was a big part of it was that we have the option in our arrangement with Hexagon to put an additional $10,000,000 in the future at any time. We can just put additional into the program. So we thought let's take the proceeds now upfront. And if things continue to progress and we really like the investment, we can always put in $10,000,000 more at some point in the future. But why not take the certainty of the cash upfront, particularly with some of these questions around delays and the like.

Speaker 3

So that was really the logic.

Operator

Thank you. There seems to be no further questions at this time. I'd now like to turn the call back over to Ms. Wood for final closing comments.

Speaker 1

Thank you, Lara, and thank you to everyone who joined us. Those were great questions and we're around if you have follow ups today 1 on 1. So we'll look forward to talking to you again in our Q2 call.

Operator

Thank you, ma'am. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.

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Key Takeaways

  • Great Bay’s Q1 2024 royalty revenue jumped 145% year-over-year to $4.9 million, although operating cash flow fell to $0.3 million from $1 million in Q1 2023 due to interest on new credit facilities.
  • In Q1, Great Bay received $1.3 million from the Titan solar transmission escrow release and $1.4 million from Hexagon’s sale of a 130 MW AC solar project, then elected a 20% return of capital option to reinvest an additional $2.8 million.
  • The company recognized ~$2.9 million of non-cash equity losses in BlueStar and Nova as those developers build their early-stage pipelines, with Nova now holding roughly 5 GW of U.S. wind, solar, and storage projects.
  • Great Bay closed a $30 million investment in the 195 MW Angelo Solar project with Meta offtake, slated for Q2 commercial operations and expected to generate about $4.7 million in annual royalties for the first five years.
  • Great Bay launched its first interconnection support facility with Hexagon to fund up to $10.1 million of refundable MISO deposits for 1.5 GW of solar projects and is seeking larger partners to expand this financing model.
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Altius Renewable Royalties Q1 2024
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