Altius Renewable Royalties Corp.

Good morning, ladies and gentlemen, and welcome to the LTS 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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, May 3, 2024. I would now like to turn the conference over to Flora Wood, Investor Relations. Please go ahead, ma'am.

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 or replay 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 Gatman, CEO of Great Bay Renewables are both speakers on the call. And in the Q&A, we also have Ben Lewis, CFO of ARR available for questions. The forward-looking statement on slide two applies to everything we say both in our remarks to start and in the Q&A session. And with that, I will turn over to Brian. Go ahead, Brian.

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 equities. We note that the TSX Renewables Index is now at one-third of the level it was when ARR went public a little over three 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.

Thank you, Brian. Good morning, everyone. I'm excited to share with you today an update in what was a very busy first quarter 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 $4.9 million compared to $2 million in Q1 2023, an increase of 145%. Operating cash flow at GBR was $300,000 for 2024 compared to $1 million for 2023 due to interest paid in Q1 related to our new credit facilities. Included in GBR's first quarter revenues was $1.3 million from the receipt of proceeds from the release of the Titan Solar Transmission Upgrade escrow. as well as $1.4 million from proceeds received by GBR from Hexagon's sale of a 130 megawatt AC solar project in Q1. Under steel at 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, GBR 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 $2.8 million in addition to the $1.4 million 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 Blue Star Energy Capital and Nova Energy, totaling approximately $2.9 million for the quarter. These losses are expected at Blue Star 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 two short years. In Q1, we were pleased to be able to close a $30 million investment with Apex and its 195 megawatt Angelo Solar project, an attractive project with a strong long-term off-take 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 $4.7 million in revenue per year for the first five 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. Some other key milestones in the quarter included closing our first interconnection support facility with our development partner, Hexagon, to fund up to $10.1 million of the refundable portions of certain MISO interconnection deposits for six solar development projects totaling approximately 1.5 gigawatts that Hexagon has selected for advancement in the MISO interconnection queue. These projects are part of Hexagon's approximately seven 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, GBR would seek to receive a royalty or an option to acquire royalty on projects supported by such a facility. 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 GBR's growing portfolio of operating royalties. I'd like to make a few comments on the macro landscape for renewables in Great Bay. The backdrop for Great Bay and renewable royalties deployment remains strong. Some of the headwinds we've previously discussed in the renewables industry are ongoing, namely higher interest rates and costs of both debt and equity capital, interconnection queue backlogs and delays, higher interconnection 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 GBR's royalty financing. Last quarter I commented on the accelerating load growth and demand for renewable energy we were seeing at 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 load 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 of renewables projects and the need for capital. Finally, in closing, I want to recognize a couple of senior management 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 Faust step down from his role as CFO as Ray remains a trusted friend and partner. and has assumed a consulting role with the company. We're in 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. 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.

And I'll turn it over to questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Our first question comes from the line of David Gazzata from Raymond James. Go ahead, please.

Thanks. Morning, everyone. Maybe just to start off, obviously the last 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? Any call you can provide on just

know what what moves you can make uh within your business to try and position for that i think the uh it i i think it's a trend that's it's it's accelerating and not slowing down we're seeing it everywhere it used to you know it originally was an ercot then we saw virginia now we're seeing across the country this this build out and the forecast going up you know 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 renewable developer who's working with one of these, you know, large tech companies who's doing this build-out to provide dedicated renewable resources, you know, and can we provide capital for that? 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, you know, the backlog and the interconnection queue delays and the like that you know, if we can't meet that demand, are they going to start building new natural gas fire plants and kind of, you know, end up going in the other direction here on the energy transition? Because I don't think the tech companies are going to wait.

That's interesting. Thanks for that, Frank. And maybe just switching over to Hexagon, I mean, it sounds like kind of an interesting structure to the deal you have there with the ability to take some proceeds of sales as well as the connection facility. And it kind of feels like maybe a deeper relationship that you have with them 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 that hexagon deals, maybe could we start to see elements like that in some of your future deals?

Yeah, 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, you know, really crushing it, is there a way for us to deepen that relationship and, you know, 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, you know, because it's a lot easier to do a follow-on deal with somebody that you already know and and feel comfortable with and finding a new partner. So we're always looking for ways to back, you know, back our winners. I would say, you know, I just, as a side note, the Nova is, I've been amazed at the, the growth that they've accomplished and, you know, Declan Flanagan and his team, you know, 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, you know, with the momentum they have, it seems like, you know, it's working again. So we feel great about that investment as well.

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

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

Hi. Good morning, everyone. So looking at the environment, bond yields have been higher recently, but they seem to be rolling over here 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?

Maybe I'll let Frank talk to the returns. But just on the finding 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 don't really think it's a time to be hoarding our capital. It's a 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... That's the issue on timing. When the window is open, you go to work, and that's what we're seeing today. Maybe, Frank, you might want to touch on what you're seeing in terms of potential returns against the market backdrop.

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. I don't know if this is the peak or if 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. That's for certain. The need for capital right now in the sector is just massive.

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?

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 new clearing 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 claim it. But we've done over, I think, over $100 million. the last two years before that. So I think we can get back into that kind of pace.

And we've been hearing that the M&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 of financing off the table or partners that are looking to develop assets?

I think it's all of the above, really. Like we did, our Titan project was an acquisition with Long Road. So there is, you know, 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 it's people taking money off the table, so to speak. They're looking to extend their equity dollars. So particularly these companies are trying to transition from buy and flip developers into IPPs. that transition is hard and it takes a lot of capital and they're looking to, you know, versus when you sell a project, you get all that revenue up front. Now we're going to invest hundreds of millions and then spread your revenue gets, you know, 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, you know, that's similar to what we did with Apex, what we've done with Long Road. I think those are, those are seen to be, you know, There's a lot of those. Now, there are people who are outselling projects, I think, to try to recycle that capital. But oftentimes, they're selling, like Algonquin, I think they're selling their whole portfolio. So that's not really a good fit for what we're doing. But a minority sell-down would work. 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.

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

Yes, I think so. Great, very good.

I'll leave it there. I wouldn't say we're not. We are looking at some developers as well, though, too. They're strong to me on both sides.

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

Thank you.

Our next question comes from the line of Nick Boychuk from Quantum Securities. Go ahead, please.

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

No, it did not.

Okay. and on the MISO 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.

It's really dependent upon MISO's timing and I think it's going to be I think it's later and 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 you know through the process of their internal process but our capital is it's committed for a year this is really it's important to know this is only for the refundable portions once those deposits you know get converted or turn 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, our traditional developer capital, or bringing some other, their own equity capital or something, but this only solves the refundable portion of those deposits.

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?

Yeah, it's massive. It's hundreds of millions 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 some someone who has a larger balance sheet, and this is, you know, risk-free, you know, 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, you know, they'll get a relationship, you know, I'm thinking like a project finance bank, perhaps, or someone like that, you know, who would want to have that relationship, so when they go on to build the project, they would be the first They already have that relationship to be able to personalize, 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 can expand into that market as well. But we will need a partner to do it because the amount of capital required is just as huge.

Okay, that's interesting. And then last for me, you kind of mentioned a couple 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, you know, even though they're going to be future dated, when some COD dates might start getting floated around?

I think we're still, you know, a year plus away

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 five gigawatt pipeline in two years and that they're just, you know, really executing at a very high level.

Okay, understood. Thanks for the call, I think.

Thank you. Ladies and gentlemen, just a reminder, should you have a question, please press R. followed by the number one on your touchstone, John. We have our next question coming from the line of John Moos from TD Cowan. Go ahead, please.

Hey, good morning, everyone. You know, maybe just circling back on your development partners and just the interconnection question specifically. And, you know, 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, you know, the positioning of their pipelines in, in interconnection queues, just, you know, relative to, you know, 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, and, you know, maybe relative to, how those hopes have evolved today just in terms of 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 what I mean.

Yeah, I think that there's no question that from 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 on the queue, I think – 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 part of the thinking behind what we did with Hexagon, right, is that their projects now, you know, they're established in the queue, become more attractive to potential buyers because people know they have certainty around, or more certainty, I guess, is still ongoing there. questions and delays at the RTOs. That's kind of the thinking, John, is that we can help make those projects more real and more certain, which only gives them a higher likelihood of sales and timing. The specific time is really difficult. 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, but that means that the sales price you would get would be lower in all likelihood, and the salability 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 turning into a little bit of a world of haves and have-nots, and developers who can't fund those deposits are going to think, you know, look at having to sell projects earlier and perhaps not be that excited about the results they get.

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

Yes. I mean, like, you know, One of the reasons that we were excited about Hodson is that they had projects that are in, you know, fast track projects and, you know, projects that are advanced in the queue. And I think those are going to be, you know, 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. 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, you know, the utility scale projects to work their way through the queues. If we had a distributed generation developer, you know, 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.

Okay. That's interesting. And then maybe it's one last one and, you know, they're not tied up. Right. Of course. Yeah. No, no, no worries. And apologies if you, if you covered this in more detail earlier and I missed it, but just on the hexagon return of capital, can you maybe just, you know, walk us through your thinking around, you know, around, around taking that, you know, electing to, to proceed in that direction.

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

Okay, understood. I will leave it there. Thank you very much.

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.

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, one-on-one. So we'll look forward to talking to you again in our Q2 call.

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.