Altius Renewable Royalties Corp.

Good day and thank you for standing by. Welcome to the ARR Q2 2021 Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, Flora Wood, Corporate Secretary. You may begin.

Thank you, Brian, and thank you to all who've joined us for our Q2 results call. We have a short slide presentation, which is on our website and showing on the webcast. The main purpose of this call quarterly is to give you a forum where we'll have Brian, Ben, and Frank available to speak and for questions. And for those of you on the webcast, I'll point out that questions can only be asked on the conference call. With me today are Brian Dalton, CEO of ARR, Ben Lewis, CFO of ARR, and Frank Gatman, CEO of Great Bay Renewables. Brian's going to speak first, and we'll then hand over to Frank, and you can address questions to any of us during the Q&A. We're using forward-looking statements and have a disclaimer on slide two that applies to both the comments we make and any discussion during the Q&A. And with that, I'll hand over to Brian to start.

Thank you, Flora, and thanks, everyone, for joining us today. We are now a half year beyond ARR's IPO. We're very happy to note that this out-of-the-gate period has been characterized by a strong run of execution against two of the critical objectives that we set out to achieve on behalf of our shareholders. Specifically, these were to see the deals we had in place with developers TGE and Apex result in a strong flow of royalties as a result of their sales of pipeline projects to end sponsors and owners, and to deploy the capital available from both the Apollo Earnings Agreement and the IPO at continuing attractive rates of return. As to the first objective, we have seen new royalties created through developer pipeline financing investments relating to six projects with a total expected capacity of 1,295 megawatts during these past six months. These include 745 megawatts of wind projects in Kansas, Indiana, and Texas, and 550 megawatts of solar projects in Indiana. These deals have brought up a list of very strong counterparties and power customers that include Weck Energy, Invenergy, Leeward Energy, an Omer subsidiary, and Facebook. On the second front, we have made announcements describing a total of US$55 million in new capital deployment, arguably putting us quite a bit ahead of schedule against the pace we guided towards during the IPO. The first $20 million deployed was through a follow-on investment with leading developer Apex, whose overall development pipeline continues to grow strongly and is currently estimated at more than 25 gigawatts. We have now been successful in increasing our investment levels with both of the developers we have funding relationships with, which we believe is the ultimate testament to the partner-like nature of our capital and its attractiveness to those that are responsible for sowing the grassroots seeds of the renewable energy transition. More recently, we provided US $35 million in royalty financing to major developer and operator Long Road Energy and its newly built 250 megawatt Prospero II solar project in Texas. This marks the first investment we have made directly into the project financing level capital structure of a renewable energy installation. We feel this has significant implications for the pace of future potential capital deployment that this is obviously the stage within the overall development cycle of the sector in which the vast majority of capital is required. It in no way should be seen as a signal of our abandonment of early stage developer financing, quite the contrary in fact. We see it simply as an exciting additional avenue of potential growth to pursue. With regards to this new investment, there seems to be some confusion as to why we contributed 11 million to it before the Apollo earning commitment has been reached. Our apologies for this. It's essentially normal course structuring for transactions of this type and relates to the fact that Prospero 2 is an operating project, and so we wanted to make the investment in a separate subsidiary, which we call GBR2, separate from our existing development stage investments that are housed within GBR1. Going forward, we would expect to complete any additional operating stage investments within GBR2, and any additional developer investments within GBR1. As part of this structuring, it is worth noting that Apollo has increased its overall earning commitment to $91 million in order to keep the joint venture structure on equal footing going forward, and it's also worth noting that the governance structure for GBR2 mirrors that of GBR1. We hope this clears up any confusion. In concluding my remarks, I believe it is now safe to say that royalty financing has become a real thing within the renewable energy sector and that ARR has been a key driver of this. Looking back over the past two years, Frank and the management team at our GBR joint venture subsidiary have led the origination of U.S. $145 million in funding commitments. This funding has thus far resulted in the creation of royalties covering over 2.5 gigawatts of advanced development to operating stage renewable power projects. and provided further pipeline exposure to almost 30 gigawatts of additional early-stage projects. We've become more enthusiastic about future growth possibilities with each passing week of ongoing business origination work. With that segue, I turn over to Frank for some high-level remarks about the continuing rapid evolution of the sector and how we are fitting in before we then open the floor to your questions. Over to you, Frank.

Excellent. Thank you, Brian. I first I want to give a huge shout-out to the Great Bay team for an amazing quarter on the execution side. Ray Faust, Josh Levine, and Bill Rogers have worked tirelessly to grow our business and gain adoption for this innovative form of financing and get deals across the finish line. You've got a great job, team, and thank you for your dedication and hard work. Next, I just want to highlight what Brian mentioned and something we mentioned on our first call last quarter, the metrics we're looking at at management and what we think shareholders should be following as well. And that's the continued sell-through, as Brian mentioned, on TGE and APEX projects and new investments and deployment. On the sell-through, as Brian noted, we have six new project sales. And it's important to note we expect both APEX and TGE to close sales, creating new royalties during the remainder of the year. The demand for shovel-ready renewable energy projects remains insatiable. I want to make a few comments on where we stand on our overall portfolio to date. We now have 11 royalties, creating almost 2,500 megawatts in total. It's allocated 53% to wind, 46% to solar, and a little less than 1% to hydroelectric. It's spread across five different states and four different power pools. We have a little over 1,300 megawatts in royalties in the PJM region of the country, about 965 megawatts in ERCOT, Texas, just under 200 megawatts to SPP, and 5 megawatts to NEPUL, Northeast Power Pool, New England Power Pool. So we're well on our way to building a highly attractive diversified portfolio of renewable energy royalties. You'll recall that's what we set out to do and I think it's proven true this is simply a better way to invest in renewables. I wanted to comment on the quality of our partners. TGE, Apex, and Longroad all are recognized as top tier renewable energy developers and operators. They're truly blue chip partners. Obviously, great teams lead to great projects, which leads to great royalties. And announcing deals with blue chip partners also helps with the overall adoption and recognition of this new form of financing in the industry. It's a virtuous cycle as we continue to bring new blue chip partners on board. I want to touch on the new investments in deployment and a few comments about the significance and importance of the $35 million investment we just made with Long Road in their Prospero II solar project. I guess first and foremost, Long Road is a great team. It's a great project. Brian taught me early on when we started this business together that royalties are only as good as the underlying projects in that the structure is fantastic, but a royalty on a lower-class project isn't worth very much. The structure is great, but the key is to have royalties on strong projects, which this one definitely checks that box. And it's our first investment in an operating project, which has a couple of important implications. The first one being that we're going to get near-term cash flows from it in our developer deals. We'll be starting our first royalty revenue will be earned starting January 2022 from the Prospero 2 project. These are generally larger checks because they're part of the capital structure to actually build the project. So we think that's going to lead to larger and quicker deployment of our capital. And it has a huge impact on our total addressable market. It's now increased dramatically when we can add operating projects to our target investments. Replacing project equity in the capital stacks of operating projects with royalty investment is accretive to the underlying sponsor owners or else they wouldn't be doing it and it creates a massive opportunity for us. We're now pursuing both developer deals and operating assets and both are highly attractive and we have a strong demand on both fronts. Wanted to mention a couple of things that we're seeing in the market, a fallout or impact from the Texas deep freeze event that happened back in February. I think two notable impacts on our business. The first one being opportunities for new direct investment where some of these projects incurred significant losses and need capital to recapitalize the projects and to pay off some of the hedge losses. And our passive non-dilutive capital is ideally suited to help in that regard. And there's lots of moving parts in getting those recapitalizations done, but we're hoping to finalize one or more of those types of deals in the coming weeks and months. The second is that unwinding these hedges, which ended up causing these losses when the freeze event occurred in Texas, is these plans as well as the overall market is moving more towards market-based merchant exposure. You may recall when we did the IPO Roadshow, Brian and I talked about our belief that over there was going to be a natural evolution towards more market-based contracts and less reliance on fully locked down, 100% locked down contracted cash flows. And what we're seeing is that this ERCOT event has accelerated that transition, and it's creating a greater need for new and innovative forms of financing that are comfortable with market price risk, which we are. So that opens up as part of this increasing addressable market opportunity for us. And I think, you know, look at Prospero too. It's a great example. 30% of the output is merchant. And I would expect this trend to continue in the overall renewables market. And lastly, I want to give a couple of comments on the general market condition for renewables in the US. As I mentioned earlier, there's incredibly strong demand for renewables and new projects. It's coming from the commercial and industrial buyers who are demanding more renewable energy to satisfy their own ESG goals and mandates. It's the Amazons and Googles and Facebooks of the world that are demanding these projects. So, uh, the demand remains very, very strong. And I guess lastly, the Biden infrastructure plan, you know, there's been a lot that's been on the press a lot recently. There's every proposal we've seen include strong incentives for clean tech and renewables. And that's only going to help accelerate the need for new and innovative forms of capital. such as royalty financing. The details are emerging in real time, but our sources tell us that we should expect a late summer, early fall timeframe for something to be finally enacted. I guess with that, that's the general update on the operating front. So with that, Brian, I'll turn it back to you.

Thank you, Frank. One last item from me. I would like to wholeheartedly thank Ms. Judy Cott, who yesterday resigned from the board of ARR to head up or to become managing director and head of ESG for Onyx Corporation. Judy, in her short time with us, had an amazing contribution, obviously worked through the whole IPO process and the deals that followed that. and had a particularly large role in helping us define our ESG policies as a business going forward. So we certainly wish her every success in her new, very exciting role. And I would also like to welcome Karen Clark-Whistler onto our board, replacing Judy. Karen is equally a powerhouse in the world of ESG and the evolving world of ESG. And I know I'll be a very strong voice on our board and help keep us on all the right paths as we build up this business from here. So thank you, Judy, and welcome, Karen. And with that, I will turn it over to questions.

Ladies and gentlemen, as a reminder, To ask a question, you may do so by pressing star followed by the number one on your telephone keypad. Again, that is star one to ask a question. We now have our first question coming from the line of David Quezada with Raymond James.

Thanks. Morning, everyone. My first question here is just on the general topic of providing royalties to operational assets, which I think is a really exciting new opportunity. I'm wondering if you could just talk a little bit about what kind of renewable players out there do you think will initially be a good fit? I know that you described Long Road as they're obviously a privately owned but large player. Just any commentary on that? you know, how many of these players do you see out there and what kind of characteristics will they typically have?

Sure. So I think that initially what we're seeing is that more and more developers are seeing their projects being sold on to sponsors or sometimes it's intermediary sponsors who then turn around and resell them or flip them at a higher price and, and, They're saying, well, can we retain ownership of these projects? So I think initially the strongest demand for this type of capital will probably come from the originators and developers of these projects who are evolving their business strategy. Longrow now has over 1.5 gigawatts in their fleet of operating assets. You know, I think that's been an evolving transition in their strategy. And I think other developers, large successful developers are looking at as well. And our capital is really well suited to help them fund the project equity that's required in the capital stack for those projects. So that's one opportunity. It applies to every single operating project. And I think there's going to be, as time evolves, I think every single new project is an opportunity for us. But I think to your question of where we might look first, I think that's probably where we'll probably hunt first.

Okay, great. I think I'd add, David, that the other part of that would be, you know, there's a growing, I guess, desire amongst project sponsors to not contract all of their production to satisfy the traditional sources of capital and what their needs have traditionally been. So those who want to be exposed to the growth and demand for renewable energy and potential for... for commodity price appreciation, those groups will find that there's somewhat less appetite amongst the more debt-sided equation in project finance, meaning there's going to be more equity. And again, as Frank mentioned earlier on, our capital, we believe, is an excellent partner-like, non-dilutive substitute for that equity equation. So it's part of the whole market shift towards more market exposure versus extreme contracting levels and hedging and the like.

Okay, excellent. Thank you very much for those comments. My next one here, I guess on a similar vein, Frank, I think you mentioned larger and quicker deployment potentially of capital with this new opportunity. Could you comment on the GBR level? How much deal flow can you manage today? Do you need to scale up at all? Do you see any kind of need there for complement?

That's a great question. I think we are fully engaged right now. We are able to handle what we have now, but we are looking at if there's a need to bring in some additional resources. We also have You know, we've at times borrowed folks from Apollo. We have great advisors with CCA and others and, you know, great other support roles that have been helping us, you know, on a project-by-project basis, which really lessens some of the burden on us. But we're monitoring that. I think right now we're okay, but I think it's only going to be natural over time. We're going to have to scale up the business.

Okay. That makes sense. Thank you for that. And maybe just one more for me before I get back on the queue. We hear a lot today about inflation in the renewable sector, and I'm just curious of the, I guess, 11 now assets that you have royalties on, are you able to comment to what degree they are indexed to inflation or those underlying contracts? And is that even an appropriate way to look at it? Would there be any effect at all? I mean, I guess some of those... project completion times are further in the future, but just wondering what, what the exposure could be there.

Well, we're always going to have some, none of them are a hundred percent contracted for the life of the project. So there's always some exposure to market prices. It could be out in the future after the PPA term. So it's more, we'll have defined revenue streams for a period of time, whether it be, you know, five, seven, 10 years, something like that. Or what we're seeing is like with Prospero too, more and more projects are saying, let's not do 100%. So in the case of Prospero 2, it was 70% contracted and 30% exposed to merchant prices where we would expect you would see some of that inflation show up in the price of electricity. And then also sometimes I don't recall off the top of my head which of these contracts have, but sometimes the contracts themselves will have price adjusters And I think more and more folks are looking to add those to PPAs in the future. It's kind of funny. When I started in this business, it was absolutely customary to include a CPI inflator or GDP deflator adjuster for the price of power over time because it was 20-something years ago. Inflation was more of a concern. And then the industry kind of got away from that, and it's coming back now with these contracts. I think more and more are going to include some kind of adjuster for inflation.

And I'd only add, David, just on the topic of inflation, I'm certain it's going to become more topical. You only have to look at the raw material prices. I mean, these things are constructed from steel and concrete and copper, and we all know what's happened with those prices recently. So it's logical to assume that there's underlying cost inflation there. within that sector, not to mention the fact that, you know, access to land and sites doesn't get easier the more projects that get built. So there's an inflationary element there. And I don't say that to be, to sound gloomy, but really just to point out that the royalty model actually loves inflation because it has no share of the cost. but it's a full beneficiary of any resulting price increases that emerge to offset the cost of generation, construction, et cetera. So royalties, inflation, match made in heaven.

That's great colors. Thank you very much, Brian.

Next question, we have John Moore with TD Securities. Your line is open. Thanks. Morning, everyone.

I'd like to start with the long road relationship going forward. Beyond Prospero 2, how are you hoping that relationship will evolve? Is there an opportunity to partner in their development pipeline, or could you see additional investments in high-quality operating projects if you can find the right opportunity that works for both of you?

Yeah. Thanks, John. We would love to work to work further with long road, their top developer, you know, that's one of our goals. Every time we get into one of these relationships is can we, uh, you know, maintain and bring value to the relationship, both, not just in our capital, but otherwise. So if they want to continue the relationship, we've been able to do that with both TGE and apex. And our strong hope would be that we'd find new opportunities to invest with long road. And, um, you know, I think, uh, I think they have, you know, their existing sources that they've, they've been using. And I think this is a new one they've added to their, to their quiver and hopefully we're going to be able to expand the share that we're able to achieve with them. But no promises, there's nothing written or guaranteed, but we just want to be good partners. That's the best thing we can do is do a great job, do what we say we're going to do, add value wherever we can and help them grow their business. That's the best thing we can do.

I think similarly, when I think about the developer deals, so each of those gets sold on to a final sponsor. And we're obviously going to be putting our hands up to be helpful and supportive with those end buyers that they put project finance structures in place as well. So there's good cross pollination both ways. And I see these two channels that we're pursuing right now as being actually very highly complimentary.

And they could be with the same company. We could be the developer partner to help them build the projects, and when they get to the point where they get operational, we could be part of the capital stack if they're looking to retain ownership of those and own them themselves. Exactly.

Okay, great. That's helpful. And then on the question of operating and developing projects, how are you thinking about the idea of balance in terms of the capital you have remaining line of sight on uh to deploy you know between those two uh slices of investments i mean there's no question so far about whether you know the overall returns you've been able to achieve are consistent but they've got different cash flow profiles operating projects require more capital but also come with more certainty and or you know typically a lot more immediate so just how are you thinking about the you know the various puts and takes in in those options

I think for context, at the time of the IPO, one of the main things that we hopefully got across is that our objective is to scale this business as rapidly as we possibly can. Both avenues work very well for us. They've got similar return profiles. Frank and his team are

very capable in terms of the due diligence and risk management on on both fronts so it'll be more market driven and what comes at us but uh give us lots of each okay fair enough and then and maybe just uh frank following up a bit on your comments about about texas and and um you know the consequences of the storm um you know i'm just wondering if you can get a bit more color on I guess how those potential discussions are going and, and just maybe directionally, you know, whether, whether you're more or less optimistic than you were last quarter on, on the potential for royalty financing, you know, finding a place in, in those recapitalizations that may occur.

Yeah. I think it's, it's the answer is twofold. The first one is that it's proven more difficult than maybe we fully appreciated for, you know, these sponsors to herd the cats of all the different moving parts between the You know, you have, okay, they got to settle up with the hedge provider. They have tax equity and they have to get them on board. They have their debt providers. You got to get them on board. They get their own internal approvals and things to how they want to move forward. So, you know, and then, and then figuring out what is the strategy going forward? You know, you don't want to, it makes no sense to recapitalize one of these projects and still have the same risk that just puts you in the soup to begin with, right? You want to fix the problem. I guess that's taken a little longer than I expected, but I think my feeling about the opportunity for us to be able to deploy capital to help in those situations has probably increased, but we're pushing on a string a little bit in that there's a lot of moving pieces that have to come together to restructure and recapitalize these projects, and we're just one piece of it.

Okay, great. I'll leave there for now and get back in the queue. Thanks very much.

Next question, we have the line of Nicholas Boychik with Cormark Securities.

Hey, good morning, everybody. I'm wondering if we can stick on the Prospera 2 just for a moment. If you could walk us through the difference in the 330 megawatt of DC versus 250 AC. It just seems like that's a big gap, and I was wondering if If that's because the PPA customers are taking power behind the meter, I'm just looking to understand how that revenue and payment mechanism works.

It's just the conversion. I don't know exactly the details about why the conversion is what it is, but it's a 250. At the end of the day, we had this conversation. I think it's to keep apples to apples. When projects are AC, I think we should think of this as a 250 megawatt project for purposes of uh, our royalty.

Okay. Perfect. Thanks. Um, and then, and then going back to the Texas opportunity, I'm wondering if you're able to comment on the magnitude or size of the opportunity, um, just cognizant of the fact that I think the Paul has got 32 million left in terms of their buy-in. So would you see an opportunity there? Like, like the long road opportunity, but a 35 million larger, smaller, any, any color there would be a little helpful.

I think it's fair to say that they follow that each case, you know, some, some, some of these projects lost hundreds of millions of dollars, but in those cases, there's probably not much to salvage on our capitalism can save the day for them. Right. And you've seen some people right off the, right off these projects, but we're looking at ones where I can, you know, check size in that range is, is, is what's needed to, you know, to allow the projects to get themselves cleaned up and move forward. So I think that's, this feels, you know, the, 25 to $50 million range feels kind of like where these, these projects are the ones at least make sense. Cause you know, we, we looked at some and we're like, you know, we're sorry, we can't help you. Our capital is not going to help you. You know, so I think it's that, that feels like a reasonable estimate. Okay.

Okay. Thank you. And then last one for me on the tri-global relationship, I'm just wondering if there's any update you can provide on the additional $20 million commitment that's unfunded any sense from them when they're going to want to draw that how their pipeline is developing.

Yeah, they're, they're, they're doing fantastic. So, you know, they continue to move through projects. I think they want to probably, uh, get one of the projects to, um, you know, NTP or, or, you know, committed to start construction and that unlocks some of these other additional tranches, but we would expect that to happen later this year. And, uh, they're just gonna, I think the program with them is working exactly as designed. they're taking the capital as they need as they move through the projects. They've been very successful in selling projects and they have a lot of great projects remaining in their pipeline and active discussions on those projects. So I would think, you know, they would probably unlock some of the additional tranches later this year and keep going forward into next year. Okay, that's great. Really appreciate everyone's time. Thanks.

Okay, next question we have Nishita Mehta with LBL.

Hi, good morning. Congratulations on your second quarterly results. So I see post-Prosperous funding ARR's cash position stands at US$65 million. So my question here is how comfortable is the company regarding the current cash position and is there a timing to raise more dollars for capital deployment?

We're okay at this point. Obviously, if the pace continues, sourcing additional capital will be on us probably sooner than we would have suggested back at the time of the IPO. But you have to remember, still funding required under the Apollo earn-in. We have significant capital, and any investments that we make post-earn-in will be on a $50 percent basis. So there's, you know, it's not, uh, it's not an urgent item at this point. And I'd also point out that as far as tools in the toolbox go from a capital, uh, raising perspective, um, Jay Hawk is approaching, uh, construction completion towards the end of the year, obviously Prospero is immediately cash flowing. So it probably starts to open doors for us around, uh, other forms, bank-type debt financing, as a potential tool, I'm not saying that that's the way it would go, but as a potential tool, that seems to be one that's emerging a little quicker for us than we would have guessed based upon developer timeline. We're not going to be raising money this afternoon, that I can promise you. We're in good shape for what we have immediately ahead of us, and we do have some growing

um a growing toolbox if you will thank you that's helpful okay as a reminder again to ask a question You may do so by pressing star followed by the number one on your telephone keypad. Again, the star wants to ask a question. We have the line of Luca Naudo with National Bank.

Hi. Good morning. I have two quick questions for you. The first one is relating to Long Road. So did you disclose any details on the royalty rates related to the investments?

We haven't put out the actual royalty rates, but accompanying the press release, there is a material change filing that was provided that gives sort of expected revenue ranges at the different stages as the royalty rates adjust. So there's certain, obviously, sensitivities around disclosing the actual royalty rates, but I feel confident that what we have provided here provides a close enough range that you should be able to model what we've done pretty closely here. I direct you to that material change report for that additional disclosure and certainly feel free to follow up with us if that's not clear.

Perfect. Thank you very much. Another one is regarding TGE. So a few of the CODs in their development pipeline have been pushed back a little. And I was wondering, for the other projects in their development pipelines, if CODs have been pushed back a little, does that affect the returns you get on the cash that has not been yet funded to them?

No. I mean, so it's not accruing until it gets invested. But one of the great things about the structure as far as the protection mechanism is that even the capital we have funded, it's accruing at that base rate. So if there's delays in projects reaching COD, it just means they'll have to provide more royalties for us to achieve that return. So we're protected from any delays.

Okay, perfect. So essentially the capital that is provided upfront for APEX starts accruing as soon as it's provided. And for TGE, it accrues as it's requested by the company. Exactly. Good, thank you very much. I'll jump back in the queue.

Again, if you wish to ask a question, you may do so by pressing star, followed by the number one on your telephone keypad. Okay, again, we have the line of Lou Canedo with National Bank.

I might be able to just slide one more in if there are no more questions. I wanted to know how the royalty payments would be distributed before Apollo reaches its 50% earning for JBR. Will they be retroactively distributed when they reach it or distributed as per the current ownership of each partner at the time they were earned?

I was like, it might be one for you, Ben.

We're not distributing the royalties, right?

Yeah, I think that's a decision. Well, first of all, it's a decision at the GBR level when they decide to distribute royalty revenues. It's in our likelihood it'll be held to fund future growth for a little while anyway until it builds up to a meaningful amount. And the other thing to point out is that I think your question may be fluid anyway because Apollo is most likely going to earn in the very near future before revenue hits a meaningful number. I hope that answers your question.

Yeah, good. Thank you very much. That's it for me. Okay.

Okay, and there are no further questions. Presenters, do you have any remarks?

Okay, so I'd like to thank everybody for joining, and thanks again for, similar to Q1, a great Q&A session. We'll look forward to speaking to everybody on the Q3 call.

Thanks, everyone. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.