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spk00: Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will be placed on hold until the conference begins. Again, ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will be placed on hold until the conference begins. Thank you. Thank you. Good day and thank you for standing by. Welcome to the ARR Quarter 3 2021 Financial Results Conference Call and Webcast Conference. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Ms. Flora Woods. Please go ahead.
spk01: Thank you, Francie. And thank you to everyone who's joined us for our Q3 results call. We have a short slide presentation, which is on our website and showing on the webcast. The main purpose of this call is to provide a quarterly forum where we'll have Brian, Ben, and Frank available 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 Gettman, CEO of Great Bay Renewables. Brian's going to speak first, and we'll then hand over to Frank. and you can address questions in the Q&A to any of us. We're using forward-looking statements and have a disclaimer on slide two that'll apply to both the comments we make and any discussion during the Q&A. And with that, I'll hand over to Brian.
spk08: Thank you, Flora. Thank you, everyone, for joining us. Very happy today to update everybody on a very noteworthy quarter. The business continued to execute on the key objectives that it set out at the time of its IPO earlier in the year, and I feel like we're actually tracking well ahead of those targets following this past strong order. New royalties created year-to-date through developer pipeline financing investments included seven projects with a total expected capacity of 1,800 megawatts. This includes an additional 300 megawatt sale, subsequent to quarter end, for which further details will be provided. at a later point. We are also expecting the first of our project royalties created under the developer funding initiative to reach operating status by the end of the year when the 195 megawatt Jayhawk wind project in Kansas commissions. During Q3, we made announcements describing a total of US $108 million in JV level new capital deployment with an apex follow on funding tranche and then two investments covering four projects that are already operational. These investments, representing 465 megawatts of wind and solar capacity, have proven that our royalty financing is not only attractive to development stage projects, but now to the full spectrum of the industry's growing capital requirements. We believe that this has major implications for the size of the addressable market that ARR can participate in as it continues to seek to scale up its portfolio. Frank will have more to add on this in a moment. The strong level of deployment in Q3 has allowed Apollo to complete its earning requirements and become an equal partner in the GBR joint venture. All new investments made from here are therefore expected to be funded equally by the partners. To close, I'd be remiss if I didn't give a big shout out to the GBR team in New Hampshire for their hard work, innovative thinking, and amazing execution thus far. Thank you, team. With that, I'll turn it over to Frank for some high-level remarks before we open the floor to your questions.
spk05: Thanks, Brian. Yes, Q3 was a fantastic quarter on all fronts, deployment, new investments, creation of new royalties from our developers, and internal execution from the team to get all this accomplished. I wanted to first make a few comments about adoption. The short answer on our progress is that the introduction and adoption of royalty financing for renewables is working. Adoption and acceleration is accelerating and we're finding new and innovative ways in which our royalty financing can be used at various points along the lifecycle of renewable energy projects. Between our development partners, TGE and APEX, and our new royalty investments and operating projects, the GBR portfolio is up to 16 royalties totaling over 3,500 megawatts. I love the chart in the presentation showing all the royalties we've created in a very short timeframe. That portfolio is comprised of 72% wind, 28% solar, and less than 1% hydroelectric. It's spread across five different states and four different power pools. We have 1,980 megawatts under royalty in ERCOT, 56% of the current portfolio. We have 1,330 megawatts in PJM, 38% of the portfolio, 195 megawatts or 6% in SPP, and less than 1% in the New England NEPOOL market. So we're well on our way to building a highly attractive, diversified portfolio of renewable energy royalties, which is what we set out to do. We continue to believe this is simply a better way to invest in renewables. As to the change in our total addressable market that Brian mentioned, when we started the business, we were focused on developers and providing early-stage development capital. We've invested $110 million between our two top tier development partners, Apex and TGE, so far, and we're actively looking to add other developers to that program. For new projects, you know, new projects coming online in Q3, we added this to the addressable market, NTP or COD, the long-road deal, $35 million investment is indicative of that new opportunity. And then for existing and operating projects, the Northleaf deal where we invested 52 and a half million across the portfolio of three operating projects. So now we've deployed 87 and a half million dollars into operating projects. These projects provide immediate cash flow unlike our developer royalties. This is really significant when you think about our addressable market. Now not only every development stage pre-production project is an opportunity, but every existing operating project is now opened up for Great Bay as a real investment opportunity. So where's the biggest opportunity or what's next? It really is all of the above. We have active conversations in all of these buckets. We're also looking at potentially adding a few folks to our team to be able to execute and capture this larger market opportunity. This leads one to the question, well, why is this happening? Why has there been this uptick in adoption acceptance and what Great Bay is offering, what's changed. And it really comes down to two things. The first is the structure of our royalty financing. It's long-term, flexible, partner-like capital. In every one of our investments to date, the counterparty had something unique to them where we were able to structure or shape our royalty investment to address those specific needs, yet still achieve our investment objectives. This isn't a short-term trade for us. We're looking to build long-term relationships where these counterparties look to Great Bay for their financial needs again and again. For example, the $55 million in follow-on investment we've deployed with both TGE and APEX is indicative of this, and we hope to develop the same type of relationship with all of our partners. I guess the second thing that's caused this change in our addressable market is the ongoing evolution in the renewables market. And there's two ways I'd like to highlight today that the market has changed and evolved in 2021. There's more market-based offtake structures, so more of the offtake from new renewables projects is exposed to market prices. There's acceleration of this trend due to the winter storm last February and ERCOT, and the realization that many of these financial hedges that were supposed to provide safe, reliable cash flows and protect folks from market volatility didn't work. They bought an insurance policy, and when their house burned down, the insurance company said, we didn't anticipate that kind of fire. Sorry, you're not covered. So the owners are saying, I accepted a lower price because of the supposed safety of the cash flows. Why take a price that's in some cases 50% below market if it doesn't give me that protection? Also, $5.50 natural gas and higher power prices make market-based pricing more attractive. Many financing sources were not set up to take merchant price risk. where we're taking a long-term perspective and looking to the cash flows over the length of the project in any extensions, we can get comfortable with market prices. The other thing I'd like to highlight is the developers. What's changing is that developers are seeking to own projects rather than just to develop and flip. This is largely the larger developers. Rather than sell all the projects they develop, some larger developers are starting to seek ways to retain ownership. This provides predictable recurring revenue as opposed to the very unpredictable and lumpy revenue from selling projects. Our royalty financing can help replace part of the project equity they would otherwise be required to fund to allow them to retain ownership. In this case, the non-dilutive nature of royalty financing is very attractive. They can't get more debt in part because of the higher market-based exposure I just mentioned. Our capital helps fill that hole in the capital stack. And finally, I'd like to make a few comments on general market conditions for renewables in the U.S. There remains to be incredibly strong demand for renewables. The demand is insatiable for shovel-ready projects, multiple bidders if a project reaches that stage. There's continued significant demand from commercial industrial buyers of renewable energy, the Amazons and Googles and Facebooks. I guess it's meta now. As everyone is trying to achieve their own ESG goals and mandates, I'd like to talk about the Biden Build Back Better plan. So the proposal includes strong incentives for clean tech and renewables, including an extension of the PTC and the ITC. These incentives were not included in the infrastructure bill that was just passed this weekend and yesterday, but we're still hopeful for some new or expanded support for renewables by the end of the year. It's important to know, however, that our business is not dependent on it, but it would It would be helpful and accelerate the need for new and innovative forms of capital, such as royalty financing. Lastly, I'd note that the global supply chain issues that everyone's facing, those delays are extending the timeline for construction on some projects. But good news is our structure with our development partners protects us from those delays. They don't get credit for a project royalty toward our target return until the project is operational. So if there's delays, They'll simply owe us more royalties. That's it for my update. I'll turn it back to you, Brian.
spk08: Thank you, Frank. And with that, I guess we'll turn over to any questions.
spk00: Thank you. And participants, as a reminder, to ask the question, you will need to press star 1 on your telephone keypad. Again, that's star, then the number 1 on your telephone keypad. To withdraw your question, please press the pound keys. Your first question comes from the line of David Gizada from Raymond James. Your line is now open.
spk02: Thanks. Morning, everyone. My first question here is just on, I guess, broadly the topic of making a royalty investment in an operational or development stage asset. Now that operational assets seem to be quite a bit more significant part of your mix of investments, I'm curious if you have an optimal mix between these two types of royalty investments, or is it just whichever ones come through the pipeline next, you're equally open to both, or would you like to have maybe a bias towards operational ones if you can because they start paying the royalties sooner?
spk08: I think more of everything would be the first easy answer there. Even the development states, investments, they obviously don't result in immediate cash flow, but some of these deals are moving along. We are getting to that point where operations and cash flow result from enough time has passed since those have been made. It doesn't much matter to us really overall. I think both paths work really well. It's obviously nice to feel like we're ahead of track as far as early cash flow development, but The pipeline should get pretty steady from here because enough time has passed from the first development deals that have gone through, but more of everything.
spk05: Okay, Grace. Just a note real quick. I just note that the thing about the development deals that's nice is that once the deal is in place, they just continue to flow, and from a deal execution side, the resources required to continue to get royalties is less than going out and getting a new investment every time and doing all the due diligence and everything. So there's something nice about the built-in nature of our development pipeline. So it's a really healthy mix between the two.
spk02: That's great, Collin. Thank you very much. And then maybe just one more for me. I'm just curious if you've seen any signs so far, just given the great momentum you've had in the business, have you heard any inkling or seen any sign of a competitor in the space emerging?
spk08: There's some talk. I mean, I've heard of groups that have been out trying to raise money to build similar platforms. I don't know how that's gone. I haven't heard of any announcements. I know of an existing private minerals-focused royalty company that says renewables are within its mandate. But I think, Frank, it's probably fair to say we haven't seen a competing royalty financing proposal show up in any of the processes we've been in so far. Not yet, no.
spk02: Okay, excellent.
spk05: Thanks, guys.
spk00: Thank you. Your next question comes from the line of Nick Boishok from Cormark Securities. Your line is now open.
spk06: Thanks. Good morning, guys. I wonder if you can please talk through what's causing the timing delays with the PGM and aircraft development projects.
spk05: It's the interconnection process. It's the system operators are so backed up with requests for new projects to interconnect into the system. And it's a very tedious and complicated process. And in many cases, they're just understaffed and don't have the resources to advance the projects along. When they're looking at a pipeline of interconnection applications, even if the project ahead of you isn't yet built, when they review your application, they have to model the system as though it's already built. So it's a fairly complicated modeling exercise when you, especially, you know, it used to be in the days of regulated utilities that they were controlling what new projects were getting out to the grid. Now it's open to market forces and they just weren't, you know, it's just a, they're not, it's just taking longer than, than anyone hoped.
spk06: Got it.
spk05: And what impact do you guys think that's having on triangle? Oh, sorry. Go ahead. I would say that's the single biggest issue in the industry right now, I would say, is interconnection, applications, delays. And I think that that's, you know, the lead time item for most of these projects. As far as impact on Triglobal and APEX, it just means that, you know, there's a longer period of time before they get operational, and in some cases before they get paid. So, you know, I don't think it doesn't impact us necessarily because, you know, Our capital is just accruing while we're waiting. There's delays. It's just accruing. I think they're having more projects that are sold. We're seeing more and more projects sold that are still awaiting their place in the queue to get approved for interconnection. And I think it's backed them up a bit, but I don't think they're backfilling. I mean, both Apex and TGE continue to grow their pipeline. So the demand is just extraordinary.
spk06: Got it. And do you guys think that that's changing their geographic focus or fuel techniques? Like should we be expecting more projects maybe outside of PJM or ERCOT now as they try and work through this?
spk05: Everybody's faced with the same issue and everyone's looking to wherever they can, you know, these inter-cash issues will get solved. That's a good thing about it. It's not like they're unsolvable problems. It's just going to take time. So I think they're all looking for where they can just, it's a very competitive landscape to find and source projects, to find the land, to secure the land. So I think they just are looking for where the best projects are.
spk06: Got it. Thanks. And then I know you guys mentioned that obviously as time goes on, your capital is just accruing. Can you remind us or give an update on the total capacity you think the two developers are going to have to provide in order to fulfill their obligations that changed since the previous numbers you gave. I think it was in Q1.
spk05: I don't think it's changed materially. I don't have that in front of me.
spk08: We did add to our Apex, but other than that, it would be a modest increase if you did it just by number of megawatts, but we don't really know that number until we value the royalties that it offers. I think you're off just to make that as cold, but adjust to the new capital deployment.
spk06: Got it. Thanks. And then are you able to provide any additional color on new developer relationships for operating asset opportunities, like any color insight into the current pipeline and pace of when you might announce any of those new relationships?
spk05: I think that they just continue to be ongoing. I will think. I would note that I think the Apex announcement that Ares is buying a controlling interest in their company has made developers recognize that their equity, their development company equity has real value, where I think for many years it was just believed that the value was just in the projects themselves, that the equity, the platform didn't necessarily have value. our non-dilutive capital going into these developers where they get to retain ownership of their equity. They don't have to sell that equity in order to continue to develop projects, I think only makes our capital more attractive. So I think that people have taken note of that, which makes our capital more attractive.
spk06: Thanks. Last one for me. Just given the issues in the U.S. jurisdictions that we're seeing backlogs, etc., is expanding into other regions like Canada, Western Europe, a potential next step something that's on the horizon for you guys?
spk08: I guess Canada has sort of been on the radar as well under our active pause that we're looking at here. We haven't been active. in other markets, but largely just because we've been buried with negotiations and providing term sheets in the North American market so far.
spk05: I think it's reasonable to expect that our expansion will follow that of our investment partners. If one of our partners expands into a region, because it's really important, as I've said before, that electricity is a very local market. probably the most local market of any commodity, and the rules and regulations of a particular market and the like. So it's important that when you enter a new jurisdiction, you go into the right partners. And if we were to, you know, follow into a new jurisdiction with someone, a partner, that makes a lot of sense to me. So I guess that's one way that I'm thinking about it.
spk06: Okay, perfect. Yeah, that was great, Colin. Appreciate you guys. Have a good day. Thanks, Nick.
spk00: Your next question comes from the line of John Mould from TD Securities. Your line is now open.
spk07: Thanks. Good morning, everybody. Maybe just starting with the question of equipment cost inflation and project timing. In your conversation with your developer partners, have they given you a sense of whether equipment cost inflation is potentially going to drive some requirements to delay projects or Are they not really seeing that as an issue given their COD timelines? And then maybe on the more directly positive side for you as a royalty holder, are they seeing any issues with passing through some of those higher equipment costs through higher PPA prices in the discussions that they're having with potential counterparties? Or maybe more broadly, what's your sense of how those issues are playing out in the market right now?
spk08: I can make a sense of that one, John. Look, there's inflation. Inflation is definitely alive and well, renewable as well as it seems like every other part of the economy right now. There's definitely an uptick in prices that's also beginning to be reflected in PPA terms. Now, how much of that is based upon sort of embedded capital cost structures of these projects, particularly versus, say, inflation in fuel costs for competing sources. It's pretty hard to tell at this point. But, yeah, I mean, what we'd expect here is that if there's inflation in the capital structure, in the capital costs, or even in operating costs of these things, it ultimately gets all with the prices. And I'll just remind people that... That's one of the incredible benefits of the royalty model. You are not exposed to that increased cost side, but you're a full beneficiary of any resulting higher prices. But it's definitely a factor. It's a factor everywhere. But again, it's not just renewables, right? It's other competing sources of generation that might be out there. So it's even across the board. And in fact, maybe renewables are gaining an advantage here just because The cost of wind hasn't gone up as far as I know. The gas certainly has.
spk07: Great. Okay. Thanks for that one. And then, Needy, I know we don't know in terms of the next round of US legislation, I know we don't know maybe what's going to come out of it in the end, but we have a sense of what's in the bill currently. How do you think about the impact of long-term extensions of the ITC and PTC and also the direct K portion on appetite for your capital? I guess, Frank, can you go into just a little more detail on how you're thinking about what's at least on the table right now for royalty financing and its impact?
spk05: Yeah, I'd say that we built this business in an environment where those incentives are already in place. So extending them, I think, won't impact the current momentum that we have. What we're seeing is that projects are projects that maybe we're moving because of timeline and delays. We're going to be an 80% project, PTC project, instead of 100% project. If this gets extended and they're now, again, a 100% project, it's going to just accelerate the development of all projects. of all these projects, and there's going to be just a need for capital. I'm thinking, you know, specifically about the investing into new projects in, you know, to help fund the project equity. That opportunity, if this bill passes, where more projects are going to qualify for 100% or more economic, I think it's going to accelerate the need for capital. So I don't really see, it's not, we're really not competing with, you know, tax equity that that's really not. And that's what we're talking about here. So I don't, it would make more projects move forward, which would be great for us, but I don't see it hurting us if for some reason they didn't, you know, I mean, we're, we're doing, we're doing great right now and I don't see any reason I wouldn't continue.
spk07: Okay, great. Thanks for that. And then just to expand a bit on the interconnect question earlier, Do you see these interconnection challenges as delaying project sales, which is really the milestone for you in terms of loyalty, you know, loyalties being created? Or do you think that the appetite is strong enough for projects right now that, you know, there are sponsors that are willing to look through the interconnection challenges in some cases just to get projects in hand?
spk05: Yeah. That's definitely happening. I guess the thing I know is that it doesn't really impact as far as delays on our future earnings and cash flow because they don't get credit. If that project for some reason was permanently delayed or canceled due to some interconnection issue, they would simply need to replace it with more royalties because they don't get credit, even upon a sale. Even if they sell the project before it's operational, which is what Triglobal has been doing, those projects don't count towards a IRR calculation until they're actually operational.
spk07: Yep, absolutely. Okay. No, great. I just wanted to get a sense of that. And then just lastly, one quick financial clarification. I think on the last slide at the bottom, there's a reference to further funding the U.S. $10 million expected for TGE milestones. by the end of the year. So that's about half of what's remaining to go into TGE. Can you confirm that $10 million is at the Great Bay level? So half of that is ARR, is that correct? Correct. That's correct, yeah. Okay, great. Those are all the questions I had. Thanks very much.
spk00: Your next question comes from the line. of Luca Nagy from National Bank. Your line is now open.
spk09: Good morning. Thank you for taking the questions. I'd like to know how you see your future capital needs evolving, and if ever you need more capital, in which form would you prefer to raise it? Would it be more debt in the capital structure or more equity?
spk08: Yeah, thanks. It's definitely a timely question, and we are, as a board and management, working through a whole host of options here for what type of capital we'll use for future deployment. Obviously, our assumption here is that we'll continue with strong deployment and that we will need additional capital, potentially even over the course of the next year here. So one thing I'll point out is that the addition of these new operating stage assets and the sort of, you know, earlier than expected buildup of cash flows has added new tools to the toolbox. So I know Ben is working on all the type structures and those sorts of things that perhaps we wouldn't have thought would have been in the mix this early on previously, but there's other pretty innovative, uh, ideas being put to us and that we're developing. So it's an active discussion right now amongst the board and lots of things to weigh and balance out here. But we've got some time with that. Perhaps at the next quarterly update, we'll have more clarity for you. All right. Thank you. We've got a good problem. Things are moving faster than we expected, but we're working at the pace we need to to make sure we don't get caught up.
spk09: Mm-hmm.
spk08: Don't forget the backing here. So you've got Altius Minerals, you've got Apollo and other related. There's probably more depth from a capital raising perspective behind this company relative to its size than you would normally expect. Perfect.
spk09: And a follow-up on an earlier question of the expansion to new markets, but my question is more, would you be looking at partners that develop different types of technologies, so like green hydrogen project developers or offshore wind project developers, regardless of the markets in which they are?
spk05: We've talked to, I guess our mandate is renewables, and we include battery storage as renewables, you know, the elements. in in our in our charter or how we think about our market opportunity we've talked to some hydrogen companies and they're still just we have not found one yet that is uh you know we don't we are not out to take technology risk so when that technology is proven and uh you know it's more of a case of execution deployment of a new technology then i think we will definitely include that in our uh in our mix we haven't seen yet a hydrogen technology that was fully proven with a clear understanding of how you were going to get paid for the technology and what the revenue stream would be and the like. So I guess that's how we think about it, is that we're not trying to choose which technologies are going to evolve and when, but when it's clear that a proven technology is gaining market adoption and acceptance and we can get our head around it, from a proven perspective, then it's definitely an area we've invested.
spk08: We do know that in the case of some of the projects that we're exposed to on royalties, some of those groups are actually getting interest from potential hydrogen producers about securing that renewable energy to produce green hydrogen, but It's a little bit removed from us directly, but I think it's conceptually possible that some of our revenue before long is ultimately flowing from buyers who are using the power to produce hydrogen. But yeah, Frank is right. We just haven't seen actual projects where revenue would come from the sale of hydrogen that have met our tests and hurdles yet.
spk09: Awesome.
spk08: Thank you very much.
spk00: Your next question comes from the line of Justin Strong from Scotiabank. Your line is now open.
spk04: Hey, morning team. Just wanted to talk quickly on the bill, the infrastructure bill that did get passed. I know there was a chunk of money in there for transmission projects. Just... One to get some maybe inside baseball on whether you think that's going to impact development pace going forward.
spk05: From my understanding, I think our transmission system in the U.S. has been underinvested in it for decades. And I think my understanding of that was it was more to upgrade and solidify and protect from weather events than You know, and things like that the transmission system as much as I don't think it was as much to say how do we address the interconnection delays with renewable projects, but that's my understanding, but But we don't have a lobbyist or anything actively involved.
spk04: That's great, I guess. And then just one quick question on the deferred tax. Liability is pretty large this quarter. Maybe if you could just kind of give us a little bit of color on the background of that.
spk03: Yeah, this is Dan. Basically, tax accounting, like all accounting, is a little conservative, so we... We have to book the liability at the subsidiary level where we're seeing revaluations and therefore gains or deferred tax liabilities, but we don't yet book the tax asset at the parent level until there's basically a history of income and we can recover those tax assets. Basically, it will correct itself in time. Great. Thanks.
spk00: Again, participants, if you would like to ask a question, you may press star, then the number one on your telephone keypad. Again, that's star, then the number one on your telephone keypad. We don't have any questions over the phone. I would like to turn the call back to Flora Woods. Please continue.
spk01: Thank you, Francie, and thank you, everybody, for great questions. It's always the case that very few of them are actually about the quarter, but those are great Q&A sessions. And we'll look forward to speaking to you after your end results.
spk03: Thank you. Thank you. Thanks, everyone.
spk00: And ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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