Altius Renewable Royalties Corp.

Good morning, ladies and gentlemen, and welcome to the LTS Renewable Royalties Corp Q2 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 Tuesday, August 6, 2024. I would now like to turn the conference over to Flora Wood. Please go ahead.

Thank you, Ludi, and good morning, everyone. Welcome to our Q2 call. Our press release and filings were released yesterday and are available on our website, both on the homepage and under Investors. This event is being webcast live, and you'll be able to access a replay of the call along with the presentation slides at ARR.energy. Brian Dalton, CEO of ARR, and Frank Gatman, CEO of Great Bay Renewables, are both speakers on the call. In the Q&A, we'll 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 formal remarks and during the Q&A session. And with that, I will turn over to Brian for his opening remarks.

Good morning, everyone. Thank you, Flora. Thank you, everyone, for joining us. The team was very successful in the first half of the year in deploying additional capital, taking full advantage of the continuing weak market sentiment backdrop within the renewable sector. We are steadfast in our belief that this contrarian approach will reap major long-term benefits, especially when we consider that the more important fundamental backdrop, that for power demand, and particularly renewable source power, strengthening at a pace that has not been seen in a generation or more. We've recognized from the outset through this still young business that its imperatives are to generate scale and diversity. That is certainly being achieved now as we approach U.S. $500 million deployed at the joint venture level and hold royalties on dozens of projects across most of the major power regions in the U.S. We also continue to find more and more ways that our royalty-focused capital can serve the needs of the renewable sectors. We still carry meaningful liquidity for additional investments that comes from a combination of cash on hand and our remaining access to debt-based financing. While this is obviously depleting as we steadily execute on attractive opportunities, that is okay and is in fact the point. We want to put it all to work. We continue to view the current public equities markets for the company and indeed the sector as essentially closed, at least on terms that we can accretively grow the business under. That said, we remain busy in cultivating potential sources of new long-term capital to avail of, and in the alternative, are actually quite willing to exhaust our liquidity to the full extent possible rather than incur first-year-based solution of the assets that we have already built, and that will naturally flourish without any further capital requirements from us. So that's me on the high level. I'll gladly now turn it over to Frank to give you a little more detail on the quarter that was. Thank you.

Thank you, Brian. Good morning, everyone. I'm excited to share with you today an update on what was a very busy Q2 and first seven months of 2024. Our royalty portfolio revenue and cash flow continues to ramp with GBR revenue for Q2 2024 coming in at 3.1 million compared to 2 million in Q2 2023, an increase of 55%. Operating cash flow at GBR was 0.9 million for 2024 compared to 1 million for 2023. due to interest paid in Q2 related to our new credit facilities. We reiterate our $13 to $16 million revenue guidance for all of 2024. So far in 2024, GBR has made new investment commitments of approximately $116 million. During Q2, we closed a $30 million royalty investment with Nokomis Energy, a top DG developer with a fantastic track record of success in the Midwest. This investment provides attractive diversification when coupled with our utility-scale developer investments, as DG community solar developers are not subject to the delays and higher costs of interconnection faced by utility-scale projects. We expect this cycle time for GBR to receive cashflow and royalties from NACOMAS to be significantly quicker than our utility-scale development partners. Also during Q2, we closed a $6.1 million interconnection deposit loan with Redstone for two of Redstone's projects in PJM. While not necessarily a large investment, the Redstone loan in PJM and the Hexagon loan in MISO last quarter serve as important test cases for GBR's ability to post interconnection deposits on behalf of third-party developers for fully refundable deposits in PJM and MISO while maintaining agency over those deposits. We are now seeking to attract a larger, lower-cost pool of capital to partner with to expand this program, hopefully later this year. We expect future deals would include a royalty component as part of the commitment to fund these interconnection deposits. Finally, we recently announced a $40 million follow-on investment with Nova Clean Energy. We were one of the founding shareholders of NOVA a little over two years ago. It's been remarkable to watch NOVA assemble a top flight team and develop an attractive 6.5 gigawatt portfolio of wind, solar, and battery storage projects. As part of this new secured loan, Great Bay will receive up to 500 megawatts of additional royalties on NOVA's pipeline of projects. This is in addition to the royalties on 1.5 gigawatts of NOVA projects Great Bay received as part of its initial investment. As for the overall macro environment, I'll just say that market conditions remain highly attractive for alternative sources of capital and future deployment by GBR to do royalty investments. Demand for renewable energy and shovel-ready projects remain strong. PPA prices continue to increase across all markets, with Level 10 recently reporting a year-on-year Q2 2023 to Q2 2024 solar and wind blended PPA price increase of almost 12%. Finally, in closing, I want to thank the GBR team for all their incredible hard work. I'm so proud and appreciative of everyone's positive and supportive attitudes and all that we've accomplished thus far during what has been a busy and intense first half of the year. That's it for my update. I'll turn it back to you, Brad.

Thank you, Frank. With that, we'll open the floor to questions.

Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, simply press a star, followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, you may press a star, followed by the number two. One moment, please, for your first question. And your first question comes from the line of Nick Boychuk with Cormark Securities. Please go ahead.

Thanks. Good morning, guys. Good morning.

For the operating portfolio and outlook, can you guys kind of give us a little bit of an update? Frank, I know you said it's still obviously a constructive environment.

What are you guys seeing in terms of conversations right now, or what are you hearing from operators who are looking for capital and potentially those larger types of tickets you could maybe deploy into operating assets? Well, the issues of people wanting to expand or extend or stretch their equity dollars, their project equity dollars into projects, that market continues, you know, unabated. And I think, you know, we have a number of conversations going both, you know, with a number of different counterparties on projects, different technologies, different areas of the country. I guess I don't really think it's appropriate to get into specifics other than just say that there is a – there still remains a significant number of folks looking for – equity dollars into operating projects. The one thing I'll note is that if a project is a perfect project with a 30-year long-term bus bar PPA, they're probably going to, even though debt's more expensive, they're still going to take as much debt as they possibly can. And at some point, we need to look at how much debt are on these projects. And those are perhaps less attractive to us than ones where there's less debt on it. But that would mean that there's something maybe their PPA is shorter or there's maybe some merchant risk or some other component to it, which means that there's more room in the capital stack available for royalty financing, if that makes sense. It does. And should the read-through then be that if there's any additional deployments throughout the year in an operating asset, it might have some of those dynamics? And what would that mean to your risk and return profile, I guess, if you are taking on that risk? Well, I think what we're looking at is, you know, we are – the cost of capital across the board has gone up. So we're looking – and, you know, days like yesterday only, I think, highlight the need for other, you know, attractive sources of capital to be available to folks. The equity markets don't seem like a great option for these renewable players right now. So, I mean, that's a little bit of our conundrum. That's, you know, could be where our capital comes from, but on the other hand, that's what's creating the backdrop for attractive investment conditions. So we're looking to, you know, press the – the limit or press the return threshold. And I think it's fair to say that we've been doing that on all of our more recent investments. We're definitely at the top end, if not above the top end of the range that we've provided previously. Okay. And last on this, just before we move on to the next question, if you're going into a conversation where an operator has either a shorter PPA or more merchant risk, are they more likely to potentially accept or be able to accommodate that royalty?

I'm assuming that if there is that 30-year bus bar, there's probably a dynamic where it would be harder for you to insert that capital. Are you finding it easier to do it in those other situations?

Yeah, correct. Yeah. It's not only just – it's less attractive for us, right? We don't want to be sitting behind, you know, a highly levered project that's less attractive for us than to be higher in the capital status. Okay, understood. Can you give us a little bit of an update on how the Hexagon Air Connection Facility has gone so far, specifically any learnings that you guys have and how that might relate to the deployment of other interconnection key facilities and what we should be thinking about from a ramping standpoint? How much should actually be deployed in that and what we should be thinking about the material and function of revenue from that? Our experience has been that this is proving out just as we had hoped it would that it's allowing Hexagon to continue to advance their projects and distinguish themselves in the market from other folks who maybe have less access to capital. And I think that they have a number of conversations ongoing about their projects and sales of their projects. And I think that it's a real advantage for folks to be able to have access to capital that allows them to continue to advance projects where others are maybe having being forced to sell their projects early because your option, when you come up against one of these deadlines is either I have the capital to post an interconnection deposit to continue to advance the project, or I'm going to have to sell it to someone. And those conditions for selling the project are not ideal to get the highest price. So it's, it's been a real advantage to them in the market. And I think, uh, you know, we're looking not only with them, but with others looking to expand the program, as I mentioned in my comments, I think that, um, I think what we're trying to do is find another larger pool of capital. I'll just highlight to folks that right now we're focused on the fully refundable portions of these deposits. So this really truly is a very, very low-risk capital. And I think the return that we're able to get, you know, is on a risk-adjusted basis is highly attractive. And then we're going to add in the future, we're looking to add, and we did this with Redstone, add the option to acquire a royalty alum with providing that loan to fund the intercash and deposit. So the size of the opportunity, if we're able to, you know, secure that larger pool of capital is, you know, it's in the hundreds and hundreds of millions, about billions of dollars of folks looking for capital. So the size of the opportunity is not the issue.

Okay. Got it. Thank you.

And your next question comes from the line of Rupert Marrow with National Bank. Please go ahead.

Hi. Good morning, everyone. We're seeing this great momentum in the power markets in the U.S. today. I'm just wondering how is that translating to visibility on moving some of your developers into construction? When do you anticipate seeing a few more of these projects starting to move to construction?

It's largely the interconnection backlogs. That's the number one factor holding up projects from moving forward. But PJM is – they're behind, but they're moving forward. MISO is behind, but it's moving forward. And ERCOT still is probably one of the most attractive places to be able to bounce projects forward. So we're seeing those projects because you're – able to continue to move those forward. They are not as backlogged. They're able to still continue to move projects forward. They don't do it on a cluster basis, so it allows them to move through more readily. I think we have a couple projects in construction right now. We'll have a number of projects going into construction next year. If you look out beyond that, it's just every year for the next Number of years, we have a number of projects in construction, you know, if everything goes as planned. So the pipeline continues to move through. It's just a process that, you know, it's pushing on a string when it comes to trying to, you know, accelerate projects through the interconnection process.

So looking at those various markets and the dynamics that we're witnessing, has your view changed at all on where you'd like to deploy capital? It does seem like the Texas market growth could accelerate to be faster than some of the other markets, but maybe you have some concentration there. Any color you can give on how your view has changed on where you'd like to deploy capital?

I think our view hasn't changed. We're going to be led by the market, right? The market's going to show us where the best and most attractive places to do business are in the U.S. And I think right now, if you look at our portfolio, Hexagon is has a large PJM portfolio. Hodson has a large PJM portfolio. TGE has, as you know, Panther Grove is the large, you know, phase one and phase two are very large, you know, 400 megawatt wind products. So we have a lot of PJM exposure. So while it looks to everybody, it's like, oh, look at their ERCOT heavy right now, if you actually look, step back, you'll see we're actually pretty broadly diversified. So I'm not concerned about ERCOT exposure or ERCOT concentration. And I think if you look at the load growth in ERCOT, it's just, you know, it's exceptional, you know, across the entire state. So the demand and the need for, you know, additional renewables projects remains unabated.

Great. I'll get back in the queue. Thank you.

And your next question comes from the line of Jan Mould with TD Cowen. Please go ahead.

Hey, good morning, everybody. Maybe just going back to the Redstone deal and, you know, interconnection loan facilities more broadly, I guess, like what at this point is driving a developer like Redstone to, you know, come to you, you know, just given your relative cost of capital of a larger lender? And then I guess secondly, you know, I think this is your first interconnection facility at PJM, I guess. Was that a pretty similar process to MISO, you know, just in terms of getting smart on that? Or, you know, did that require some additional effort on your part? And, you know, how are you thinking about the barriers to entry for this product more broadly?

Yeah, good question. I think the devil is in the details. And the larger financial, you know, money center banks, it's really difficult for them to underwrite someone like Redstone and understand that project and underwrite that developer and look at that and understand the process. And the processes at MISO and PGM are not the same. And it took months. We've been at this for over a year now of sitting in their offices, literally in some cases, saying, would this language work? Would this language work? Trying to figure out exactly how you can post a deposit on behalf of a third party. Mitel has a recognized, they have a longer history of recognizing these agency arrangements. PJM is relatively new, so we had to figure out the structure, which I don't want to get into because I think it is a competitive advantage of how we went about doing that. So I think there is an advantage. And I would say that we are the ideal partner for some larger financial institution for we'll be the front end basically doing the underwriting, bringing the deal flow to them, and then using their capital, we'll get some share of the return plus a royalty out of it. That's a really great opportunity for us, and it's something that I don't think that they can necessarily do on their own because these clusters and these rules are very complicated, and the devil is in the details and understanding exactly what has to happen as that project approaches the next phase where it goes from fully refundable to partially refundable, because they actually start to build the interconnection. How do you protect yourself from that? Because the cost of capital for a fully refundable deposit is and should be very different from that of something that's partially or fully non-refundable. So there is a... a lot of work behind this. I'm not saying someone else couldn't figure it out, but I think a lot of banks and financial institutions are not set up to, one, understand the detailed rules of these RTOs, and then also at the same time have the relationships with the developers. Because, you know, think about developers historically have not been going to large financial institutions for their capital. They're more akin going to the Great Bays and to developer loans and to equity and to other types of earlier stage capital. So it's a good fit if we can pull it off.

Okay, thanks for all that detail. Maybe just one clarification on Hodson. I think maybe you had... about 10.6 million of capital contributions reclassified to loans now due in January 2025. Can you provide some context on that change and how you're thinking about the Hodson investment more broadly?

Sure. What's happened there is Hodson, along with everyone else, has faced delays in getting projects through interconnection. So when we set up the tranches and we set up the criteria to unlock the next tranche, those projects, like everyone, were not moving along, and we were faced with a situation where they were not going to achieve project sales, for example, or get interconnection agreements approved, which is one of the criteria that we have, in a timeframe before they needed capital. So we looked at the situation and said, okay, you know, we could just waive that, or what we did instead is we said, how do we We structure this in a way that provides us additional protection from a structure perspective and then also provides us a slightly better return, which is appropriate given the delays. We still feel great about their portfolio, their PJM assets. A number of them are fast lane projects, which I think are going to have a very strong interest in the market. And they're right now in the process of going to market with a basket of projects, which we think will be well received. So it was really a case of looking at the tranche on locks criteria that we set up when we made the investment. No longer really worked when you looked at how the market dynamics have unfolded. So we were, I think, protected in that we weren't forced to provide them capital before they were ready. So we just looked at how we structured it and put it in as a member loan, which gives us greater protection.

Okay. Got it. Thanks. And just maybe one last one on just bigger picture, you know, capital allocation, I guess, how are you, when you look at the opportunity set out there on the developer side versus operating projects, you know, how are you thinking about, I know you, you think about returns and not a rigorous split, but like what's or sorry, a rigid split, I should say, but you know, just how are you thinking about operating and, versus development investments right now, I guess, just given a, you know, we have seen a, you know, kind of continued delays as you, as you just referenced on the interconnection side. And then, you know, I'm mindful of the delayed drive facility is, is, you know, you're, I think prime source of capital at this point. So, so how does that all feed into the projects, the royalty investments you're looking at right now?

I would say that, by and large, we're looking at largely operating investments now. You know, that, you know, the Nokomis opportunity came along on a timeframe and NOVA and timeframes that, you know, you can't necessarily control how these opportunities present themselves in what exact order. But I would say that we're still very much focused on deploying the remaining capital into, you know, cash flowing operating royalties.

Okay, great. I'll get back in the queue. Thank you.

Your next question comes from the line of Devin Schilling with Ventum Financial. Please go ahead.

Hi, good morning all. Just on the L-swap VIN project, I see it's now expected to reach COD in Q3 versus Q2 previously. Maybe if you can provide just some updates or additional color on the status of this project, and is there much left to be done to get this operational?

Thank you. I wish I had more information. What we've been told is that the project is built and constructed. It has to do with the interface between ERCOT and the project and some of that connectivity and that the output, I don't think it has to do with the operation of the project necessarily, but with that interface between ERCOT accepting the megawatts and those megawatts being calculated and tracked in accordance with how ERCOT wants it done. So I think there was you know, some issues on that interface and they're working on that and it's just taken, you know, way longer than anybody hoped to get that done. But the project is up and up or is up and constructed. So it's not a question of like, oh, there was, you know, big construction delays. It has to do with this interface with ERCOT.

Okay. And I guess just how does that relate to the guidance range for this year? Like how does this project fit into that range?

It's delayed, but we also had Kenan come on a little bit earlier, so net-net will be fine.

Okay. No, that's great. I guess my last question here would be on the NOVA follow-on transaction. Maybe you can just touch on, you know, expected project timelines here and how this additional capital could potentially speed up this process for when royalties come online. Okay.

Yeah, so a couple of things I just want to highlight about this investment. The royalties we get from the NOVA investment, both the 1.5 gigawatts as well as the up to 500 additional megawatts of royalties that we get, these are really highly attractive royalties. They're not counted towards an IRR return like our other developer deals. It's done on a megawatt basis. So these dramatic increases you've seen in PPA prices over the last couple of years, all of that upside, because we're a top line revenue royalty, all of that benefit is flowing through to us. Obviously, they're not operating yet, but ultimately, based on the higher price PPA, when the project comes online, our revenue will be materially higher than we had forecast when we made the original investment. And, you know, unlike in our other developer deals where if there's a higher PPA price sign, that just provides that royalty with a higher NPV value at the time that we give them credit towards the IRR. So we don't necessarily, it doesn't increase our returns because the PPA prices have moved up. So that's one thing I just wanted to point, like why we really like this investment so much. The second thing is that this was really viewed, this is a bridge financing until a larger financing that NOVA is currently undertaking They're in the market with that. This is giving them the firepower they need to get through that process, and if there was any delays in that process, not have their backs up against the wall when they're finalizing that new financing, which will be a much larger facility. We're completely aligned with Blue Star as owners of the business in maximizing the outcome on that financing, as well as being able to continue to advance the projects and a good chunk of this capital is going to be used for interconnection deposits, which will allow them to continue to advance the projects. And to your point, bring them on by quicker. They have, I think, you know, three or four projects that are, I guess we would call mid to late stage. They're not late stage yet, but they're, but they're, when you look at the progress they've made from where they were two years ago, it's, it's really remarkable. So it's being a good partner and continue to support them and, and basically being able to deploy additional capital with our winners.

Okay, I know that's great. Yeah, thanks for the additional color there. I'll jump back in the queue. Thank you.

Thank you. And your next question comes from the line of David Quesada with Raymond James. Please go ahead.

Thanks. Morning, everyone. Maybe just a question for me on your comments around return thresholds and how you're sort of pushing the top end of the range there. Just wondering if you're able to sort of parse out, does that comment also refer to operational stage royalties that you're looking at? And maybe just some comments around what kind of legs do you think that dynamic has? Does it accelerate given uncertainty around the election? Do declining rates offset that? Just curious how you're expecting this trend there.

I think you just said it. It's the pushes and pulls. You've got things, rates are coming down again, but on the other hand, there is this I'm certain around the election, there's still interconnection delays. So you've got different forces pushing different directions. There's not a post-good price for royalty financing on Bloomberg. So we kind of market test every single day out in the market. I would say overall, we're looking at about a 200 basis point increase is what we're currently seeing in the market from where we were a couple of years ago. on both the operating end. Both ends are pushing both on the operating stage and also on the developer stage. It's not a magic formula. To be honest, each project is different. A project, depending on the PPA, depending on basis risk, depending on congestion in the area, depending on the length of the PPA, depending on the counterparty, those things all affect you know, that return threshold that we're seeking to achieve.

Well, for me, just, you know, given the market dynamic with, you know, challenge for great interconnection, I'm curious if any of your operational stage royalties or any of those underlying projects are looking at, you know, expansions or adding storage at this point. Like, have you heard any rumblings of that across your footprint?

Not adding storage that wasn't already planned. I haven't heard that, but I think an interesting dynamic in the market is look what Nextera is doing. Obviously they had a lot of Greenfield projects, but look what they're doing with their NEP division. And that they've said, we're not doing any more Greenfield or running new projects. We're looking at repowering. Well, this is way sooner than I think anybody, way sooner than I expected to see a major player in the market say, we see that as a real opportunity to go back in because interconnection is so hard. Because developing new projects and getting interconnected and doing everything it takes to get a new project aligned is so hard right now. It's economic for us to go back and look at our existing portfolio, which isn't terribly old, and start repowering projects. And think about, from our perspective, every royalty we have has that upside potential. I think that's an exciting development in the market. I guess that's one indicator I've seen of how different people are reacting to these delays.

Thanks. Thanks for that, Culler. I will turn it over.

Thank you. And your next question comes from the line of Rupert Merrer with National Bank. Please go ahead.

Hi. Thanks. So, Nicoma is wondering, talk to us about how you think about The diversification you're getting through NACOMAS, you're talking about counterparty risk. How different will that risk profile be? Who will be the counterparties for NACOMAS?

It's largely programmatic, like there's programs in Minnesota and Wisconsin where you're accepted into the program, and there's set PPA prices as part of the program. The utility commission in that region has set So that's how many of the community solar programs are set. So you're actually quite secure on the counterparty side. And the price is generally significantly higher than what you might get on a bilateral PPA, but they're just much smaller. These are five and 10 megawatt projects. So they tend to be juicier. They tend to have higher profit margins. The PPA prices tend to be higher. But the cycle times, as I mentioned in my opening comments, are much quicker. You're talking 12 to 24 months to get a project through the process and into construction versus three, four, five years for a utility scale. I would say three is not even reasonable anymore. I'd say it's four or five years. So we would expect to see more smaller, higher priced royalties coming through this investment.

Do you think you could put more capital to work in that market in the future?

We're looking at that. I think those are really, really local. You have to really understand the details of that particular Minnesota program, the Wisconsin program. They're very regional, and so There isn't, like I'm trying to think if I know of a nationwide community solar operator. So stepping out from your regional market is something that is not necessarily as easy and requires, these projects still require a fair amount of boots on the ground. So the people required and the local knowledge required, I think to do that is a challenge. But you may be able to find, and we've talked to some other regional players in different regions of the country. But I think we're going to look at it kind of region by region rather than saying, oh, we'll support Nokomis to, you know, they're going to look at some step outs. In fact, Wisconsin is a little bit of a step out for them. They've had some success there. There's lots of good reasons why they'll have success there. But, you know, to say that they're going to come to New England, for example, or something, I'm not sure that's really how that market works.

All right, very good. I'll leave it there. Thank you very much. Yeah.

And your next question and a follow-up question from Nick Boychuk with Cormark Securities. Please go ahead.

Thanks. Last one here, guys. Angelo Solar, you've got that in the updated MDNA. It's starting potentially October of 2024. Can you just kind of run through again what the expectations are for revenue recognition for this calendar year? Sure. Oh, for this calendar year, I don't have – I know it's – I think we're looking at $4.7 million a year for the first five years. I don't know. I don't have, I don't know, Ben, if we provided that information about what it would be for this calendar year. But I know that we're still on track for the first five years to $4.7 million, approximately $4.7 million a year for the first five years. And I would say that delay to October, Nick, I don't mean to cut you off, but just That was purposeful. It's not like, oh, we purposely put in a bit of a cushion from when we expected to COD to when our royalty kicks in. Because if there was delays, say it got delayed one or two months, and we had a royalty, we had forecasted for that royalty to come online then, that's lost revenue that actually does affect our return. This way it gives us a cushion so it gets any startup issues get handled before our royalty actually kicks in. So we think it's a smart way to structure these things, and that's why there's a delay between COD and when the actual royalty cash flow starts to kick in. Right, right. That makes sense.

But I guess what I was trying to figure out was if, kind of like Titan Solar, there could be a potential delay where there's like an interconnection holdback or anything, like you're not expecting a scenario like that where you won't be able to recognize revenue as soon as it turns on. No. Okay. Thank you. No.

All right, thank you. And there are no further questions at this time. I would like to turn it back to Flora Wood for closing remarks.

Thank you, Ludi, and thank you, everybody, on the call. It was really a great set of questions, and we'll look forward to talking to you for our Q3 recording.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.