Mar 7, 2024
Operator
Good morning, ladies and gentlemen, and welcome to the Altius Renewable Royalties Q4 and Year-End 2023 Financial Results Conference Call. At this time, all lines are in a listen-only mode.
Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, March 7, 2024.
I would now like to turn the conference over to Flora Wood, Investor Relations. Please go ahead.
Flora Wood
Thank you, Joanna. Good morning, everyone, and welcome to our Q4 and year-end 2023 call and webcast.
Our press release and filings were released yesterday after the close including the annuals and AIF, and are available on our website 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 that have also been added to the website on the Home page and under Investors.
Brian Dalton, CEO of ARR; and Frank Getman, CEO of Great Bay Renewables will both be 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 2 applies to everything we say in our formal remarks and during the Q&A.
And with that, I'll turn it over to Brian for his opening remarks.
Brian Dalton
Thank you, Flora, and thank you everyone for joining us today. We just passed the three-year anniversary of becoming a publicly traded company.
To describe this period within the renewable sector as dynamic would certainly be an understatement. To put things in context, the TSX Renewable index has fallen to around one-third of the levels it was when we were marketing the IPO, which gives an indication of how access to and the cost of equity capital has changed for the renewable sector.
While at the same time, the debt cost of capital has also increased dramatically. Over this three-year period we have seen market-based power prices largely following the price of natural gas jumped to heady levels early on.
Before declining the current base levels that are unsustainably low when factoring for long-term industry investment requirements. This has been offset however by the steady march upwards of contracted power prices that are being settled with large industrial customers for access to renewable sources of power.
All of this is to say that our royalty finance product offering must be tailored in real-time almost on a monthly basis in fact as we strive to earn our place and servicing the needs of our sector. Please don't mistake any of this for one.
It is during tough dynamic times that the royalty financing model shines and out-compete, especially when it is applied using a long-term contrarian mindset. This is also when most -- it is most appreciated by those operating level businesses who avail it, or in other words when it can really earn an embedded plate in the broader sector financing landscape.
I understand that for anyone focused on short-term measures this backdrop of conditions can feel very challenging and too hard. But for those of you who think longer term, I feel very strongly about delivering the message that these are indeed the best of times on the ground for what we do.
The entire team understands this and are working tremendously hard right now to make the most of this opportunity to grow and diversify our business and to position us for long-term success and value creation. And with that, let me turn it over to Frank to give you some color on the past year and what is before us.
Frank Getman
Okay, great. Thank you Brian.
Good morning. I'm excited to share with you today an update on our continued progress in building our broad diversified portfolio of renewable royalties.
Our royalty portfolio revenue and cash flow continues to grow, with GBR joint venture level royalty revenue for the full year of 2023 coming in at $10.5 million compared to $7.3 million in 2022, an increase of 44%. Operating cash flow at GBR was $5.1 million for 2023 compared to $2.7 million for 2022, an increase of 89%.
For 2024, we're providing revenue guidance today of $13 million to $16 million based upon our current royalty portfolio including construction-stage projects on which GBR has royalties that are expected to reach commercial operation in 2024 and current merchant power price assumptions. The midpoint of guidance of $14.5 million represents a 38% increase over GBR's revenues in 2023.
These figures include expected late year revenues from our recently announced Angelo Solar investment. We do not include revenue from any additional potential investments during the year.
Our revenue from potential project sales by developers Hexagon Energy or Hodson Energy, where GBR has the option of receiving a portion of the sale proceeds. As you know, in Q4 last year, we announced the closing of a $247 million credit facility for Great Bay.
This financing provides significant liquidity to continue to grow the business at an attractive cost of capital with no dilution to shareholders. We are pleased to be able to deploy some of this liquidity with our recently announced $30 million investment with Apex and its 195-megawatt Angelo Solar project, an attractive project with a strong long-term off-take contract.
Angelo is projected to achieve commercial operations in Q2 and provide GBR with new royalty revenues starting in Q4 of approximately $4.7 million per year for the first five years, before moderating to lower levels for the remaining project life including any re-powering or extensions. A key benefit of this structure is that it provides higher near-term revenue while the revenue ramp from our development-stage royalties over the next several years continues to progress.
I'd like to make a few comments on the macro landscape for renewables. Some of the headwinds we previously discussed in the renewables industry are ongoing, mainly higher interest rates and cost of both debt and equity capital.
Interconnection Q backlogs and delays, higher interconnection costs, supply chain constraints that have shifted from solar panels to transformers and switchgear and political uncertainty. While these headwinds caused project delays and higher costs for developers and sponsors, it creates a backdrop that increases the demand for innovative sources of capital such as GBR's royalty financing.
We're also seeing continued load growth in demand for renewable energy from new data centers to support AI, onshoring of US manufacturing capacity and generally strong economic activity, particularly in Texas. Who knows how long these market conditions will last but it's a good time for Great Bay to deploy.
We've grown our team to eight to try to help us capture this opportunity. We're also trying to determine what the market will bear when it comes to our expected returns for both developer deals and operating projects and are seeking to achieve the higher end of our previously stated 8% to 12% return threshold range, given the current environment.
I would also note that this range does not factor in any long-term option value inherent in the royalty financing model that we have spoken about at length in the past. In sum, Great Bay remains well positioned with almost 2.5 gigawatts of operating royalties, 895 megawatts of projects with GBR royalties and construction, almost 20 gigawatts of wind, solar and storage development projects in our developer portfolio and a strong pipeline of new business opportunities.
Finally, I'd like to recognize the tremendous efforts of the entire team at Great Bay. We are a small but mighty team doing great work to deliver long-term value to our shareholders.
We look forward to reporting on our progress throughout the rest of 2024. That's it from my update.
I'll turn it back to you Brian.
Brian Dalton
Thanks Frank. Before I get to that, I'll give it back to you to start up on questions.
Flora Wood
Joanna, we're ready for questions now.
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.
[Operator Instructions] First question comes from Rupert Merer from National Bank Financial. Please go ahead.
Rupert Merer
Hi. Good morning, everyone.
Frank Getman
Good morning, Rupert.
Rupert Merer
So looking at the investment landscape I think, you invested $36 million last year at GBR. You're off to a quick start this year.
You've announced the $30 million commitment and I think you have another $23 million your development partners, but you've got a lot more liquidity than that. So do you have any goals for capital deployment this year or any forecast that you can leave with us?
Frank Getman
We have we have internal goals. I'm not sure we're ready to share with the market right now.
It's a little bit -- we're opportunistic in that it takes two parties to be able to close the transaction. We have numerous conversations ongoing both at the developer stage.
But I think excitingly a lot of them are at the operating stage royalties as well. So, I guess, we're glad we had that liquidity but we're confident that we'll be able to deploy that over time.
Brian Dalton
Rupert, I might add as well that if there's any in that we're trying to make that liquidity stretch out, I don't think that's the case. We see the current market as being quite opportune and representing a window in time.
So, obviously to the extent that quality deals can be sourced we want to take advantage of this market window as much as we possibly can. But again, it's just -- it's opportunity-driven and deals got to close.
So we're trying to do as much as we can. It's probably the right answer.
Frank Getman
Brian has made it clear to me. Don't worry about spending all the money.
Stick with good deal.
Rupert Merer
Very good. No it seems like a lot of the opportunities are in Texas.
Can you comment on the attractiveness of Texas versus other markets? And do you feel the need to diversify a little bit away from Texas at this point given your exposure there?
Frank Getman
Well, I guess, two things. First on the diversification there's a lot of non-ERCOT projects in our developer pipeline.
So we're going to naturally diversify over time. And that's in PJM, we have a number of projects in MISO, and other areas of the country.
So that's going to happen naturally because that's -- but the reason that you're seeing more activity in Texas is because their interconnection process isn't valid stuff the way the rest of the country is. So actually that's one of the few areas where projects are still moving forward and things are getting done.
So I think that's what you're seeing. And then finally, there's just tremendous -- like I can't overstate the load growth in Texas.
It's unlike anything we really -- I've seen in my entire career in the electric power industry, where you've seen usually talking 1% to 3% growth we're talking 6%, 7%, 8% load growth in some areas of Texas, it's just incredible. And it's interestingly not just everybody from California moving to Texas.
It's also manufacturing. It's getting back to smoke stack solid core manufacturing demand, but a lot of that now has a much higher electrical component to it.
So whether it be the data centers or the Bitcoin mining. So it's just a really -- if there wasn't the load growth to go with it, I might be concerned, but there's tremendous load growth in ERCOT.
Rupert Merer
And when you look at that market and your forecasts for this year in Texas, how much are you impacted by curtailments and how do you see that playing out in the near and medium term? I know we're seeing a lot of storage go into that market, but also a lot more generation too.
Brian Dalton
Yeah. No, it's a great question.
We factor that in. We have -- we do that analysis up front when we make the investment, so we factor in -- if it's a particular area that there's curtailment, we'll just factor that into our price forecast assumptions so that in some ways I don't mind investing in a constrained area if there's visibility that over time it's going to become unconstrained because the assumptions that we're using at the time we're making the investment are lower for power prices.
So you have some kind of built-in relief valve, when storage is built or new transmission is built. So we try to be smart on that up front, and it's become a really important factor in our due diligence.
Rupert Merer
Great. Thanks for the call.
I'll get back in the queue.
Brian Dalton
Yeah.
Operator
Thank you. Next question comes from Nick Boychuk from Cormark.
Please go ahead.
Nick Boychuk
Thanks. Good morning, guys.
Brian Dalton
Hey, Nick.
Nick Boychuk
Coming back to Rupert's question on kind of the expectations for the year, I'm just curious if you can expand maybe a little bit more on the types of opportunities you're looking for. You've got a couple operating royalties under your belt now, different modalities, different regions.
If there was a perfect opportunity to come up, what would the characteristics be? Maybe size, technology type, contract versus merchant, like just walk us through what the perfect opportunity would be.
Brian Dalton
Yeah. I don't know.
I don't mean to be flippant. It really is -- there is no perfect opportunity.
We're kind of outsourcing these deals. But I will tell you what we're seeing is that there's a lot of folks who are in this transition.
They're trying to own more projects from being a buying flip developer to being an IPP. Similar to what Apex is doing, and there's others doing it in the market.
And what they're running up against is that it's costing them because of delays and the increasing cost of the equipment and higher cost of debt, it's costing way more than people had forecast. So they're looking to stretch their equity dollars.
You see a lot of people in the market. You see it everywhere with these asset sell-downs that's happening industry-wide.
We we're a great alternative to -- if you want to sell down a minority position in an operating project, don't sell down a minority position, maintain 100% control and take a royalty from Great Bay and because we're passive or not equity, you'd be able to maintain your ownership. So we're seeing opportunities like that.
And then also just people looking to extend their project equity dollars across multiple projects, because it's just the amount of capital required to build up this project is enormous. So I think that's a -- we're seeing a lot of that opportunity.
There is tremendous demand for early-stage development capital. We're being a little, I would say we're being very selective in new developer opportunities, because of the delays, if someone's in an early stage developer day, even if they're a great team, the projects are probably going to be looking at 2030 or beyond.
And that's changed dramatically from when we made our investments into our developer partners. So, if someone -- one thing we're looking at potentially is DG, because a DG developer because those are not slowed down by the interconnection delays, we're still able to get those projects online and operating.
So there seems to be a good flow of construction going on in those projects. That might be something we're looking at.
So I don't know, if that's just to give you a flavor what the kind of opportunities we're seeing.
Brian Dalton
Nick, I'd probably add the other component of that landscape that we probably are seeing from shifting is counterparty quality. The type of player that is starting to see our financing is attractive and certainly expanded a little bit, maybe just with change in conditions maybe it's a function of adoption.
But in these difficult times, it's probably not unusual to strong groups that are weathering a bit, and seeing opportunities for consolidation and all kinds of things. So that's one really positive feature we've certainly been seeing like the quality or the strength of the counterparty that is engaging with us on average certainly going up.
Frank Getman
You take my call a couple of years ago, stop taking our calls, all right.
Ben Lewis
How's that royalty thing working again?
Nick Boychuk
On that dynamic there then does that suggest that you're maybe seeing more opportunities that might be larger in scale for the operating deals? Or is the kind of $30 million deployment like what we just saw with Angelo Solar kind of like that sweet spot where one of these larger developers could monetize or sell down but not give up too much of the economics?
Frank Getman
Right. I think it's -- I think that $30 million to $50 million for a single operating project is probably the range we're looking at but there are folks out there who are looking to recycling assets is the big buzzword.
It just means like sell stuff because I need money to grow. Well, if they have a portfolio that's one of the things you're looking at.
There's someone with multiple projects. Is there a portfolio structure we can put in place where we do it across multiple projects.
That would be a bigger check, but we haven't been able to complete one of those yet.
Brian Dalton
Yeah. So Frank, I think that's exactly right.
And that -- there's a maximum really amount of royalty exposure that fits well in a structure. So, it's kind of a function of the size of the individual projects.
It's important to them and it's important for all as well not to have too much of the economics of the project because in the long haul that can impair motivation for longer-term option realization re-powering and those kinds of things. So there's a certain level you want to stay within.
Frank Getman
If I could just add on a follow-up on that, Brian. Like that's also one of the reasons why we structure our direct single project operating royalties with a higher front-end royalty that steps down over time.
It has the benefit of both providing near-term cash flow and revenue, but it also gets us down to a lower percentage in later years where it was less of a burden that Brian is talking about so that we don't impact our decision to spend money on CapEx and the like. So there's a couple -- just having a higher royalty rate isn't always a good thing.
There's a bit of an art not a science to this.
Nick Boychuk
Got it. That makes sense.
And then just last one here going to the other side of the barbell approach. In the guidance comments, you kind of mentioned that you could potentially expect to receive project sales from Hexagon or Hudson.
Are you seeing anything with those two partners that suggest that they could be monetizing some projects near-term? And -- and if so would you want to monetize that value instead of taking a royalty?
And if so why would you prefer that?
Frank Getman
The answer is yes. They're both moving forward with project sales and looking to continue to advance their portfolios.
We still get a royalty and maybe that was confusing in what we said there. We still get a royalty on the project that's sold is just we -- it was basically risk mitigation.
We said, but for some reason, there were such delays that we didn't feel confident that the rest of the program was going to get us our royalties we wanted the cash flow front. We have the right, but not the obligation to take a share of the sale proceeds, but we still get our royalty just to be clear.
The reason that we would do that and I think we probably will, because we also have an option with both Hexagon and [indiscernible] to deploy additional capital to basically have a put, to put more capital into them in the future if we want to. So to us it seems -- would seem to make sense to take the cash now and the early project sales and continue to deploy down line we have better visibility.
That seems like a prudent thing. So, we haven't made any final decisions yet, but just to be clear we still get a royalty on.
It's not in lieu of a royalty.
Brian Dalton
Yes. And we're essentially financing primarily with debt right now.
So, adding something from the other side of the ledger along the way. It's just prudent.
Nick Boychuk
Okay. Got it.
Thank you.
Operator
Thank you. Next question comes from Jonathan Lamers at Laurentian Bank Securities.
Please go ahead.
Jonathan Lamers
Good morning. Thanks for taking my question.
On the Angelo investment, just to circle up, there were a number of positives from that including a high level of near-term cash flow and with the operations starting in May and you're getting first royalty payments in October. I guess, first of all, as you put the debt financing to work is near-term cash flow something you're focused on for the next round of investments?
Frank Getman
I think that's where the greatest risk/reward opportunity for us is today. Like, we would have loved to invest in operating cash flow in projects back when we started the company three years ago.
But the fact was that the returns that we got were not that attractive. That dynamic has changed.
So it seems to us it makes a lot of sense that we can deploy into operating cash flowing assets at healthy returns that provide immediate revenue. That has the additional benefit and I referenced this in my comments that, it's providing near-term revenue until we hit this wedge of developer royalties which we have coming in the next couple of years.
And we have -- we see these things. It's happening.
There's a big leg of royalties coming at us. Well we can fill the near term with near-term cash flow, it's a nice bridge to that longer-term revenue.
So I guess, that's how we're thinking about it.
Jonathan Lamers
And it was nice to see as well, the demonstration of the continuing relationship with Apex. There was some discussion earlier about, seeing high-quality counterparties coming to the table.
Do you foresee continued opportunities with partners like the Apex and TGs of the world that might have been acquired since you started working with them?
Frank Getman
Well, our number -- we have our goals for the year we set with the Board every year. And our number one goal every year since we started the company has to be a great partner, because that's something that Brian tell me early on that long term, you're in these projects for a long time.
You want to be a great partner and you are good partners so you oftentimes see follow-on investment opportunities. And while we didn't want to get bought out of our original investment with Apex, Aries came in they saw this is what they wanted to do.
But things have changed, markets change we maintain that relationship and we were able to get this additional piece of business done. So, you never want to burn any bridges and we are really focused on being a good partner.
So I would say, hopefully, yes, that's our goal is to continue to do repeat business and ongoing business with good strong counterparties, who we have good relationships with.
Jonathan Lamers
Okay. Thanks.
So one interesting thing in the call slides was on the development pipeline. The number of gigawatts you're showing now for Nova Energy and Hexagon moved up from the last slide.
I know Nova has a big portfolio of projects and your contracts I believe are for royalties on a portion of those. I guess has there been any change in the development pipelines for those two that you're trying to highlight there?
Or are you just..
Frank Getman
Yes, it's just the fact, they're doing their job. They're growing their pipeline, they're seeing opportunities.
And it's in part a direct response to our capital. And this is the same thing that happen with TGE.
When we first invested in TGE I think they had like 1.4 gigawatts or something there. But now they have almost 6 gigawatts.
Well, a lot of that was a direct result of our capital. And our program works that all of that goes into the pot.
So we likely – hopefully, we don't get royalties out every single one of those means there's been long delays or unless we deploy additional capital, which is also what we did with TGE. So I mean the fact that they're building that collateral base for us is nothing but a positive.
And I've been incredibly impressed with Nova and Hodson go from a true start-up when we first invested to now they have approximately 5 gigawatts of projects across the country. It's just – they're a very professional team.
They've done this before. Declan is a leader in the industry and then there's a reason why
Jonathan Lamers
Okay. Thanks.
And just on the – just an accounting question I guess, just your share of the losses at the joint venture. So we start to see the royalty revenues flowing there.
Do you expect that to sort of trend at about this rate until 2026, when we start to see more of the projects in operation.
Brian Dalton
I'll let Ben handle the specific question about accounting but the – they're being very conservative in that they expense everything. They're expensing a lot of the upfront costs and that just flows through to us.
So it's just a function of how they're accounting for this development activities. Ben?
Ben Lewis
I think you're asking about Nova. And they – thus far they've expensed pretty well every dollar that they've incurred.
So what you'll see on our books I think it's – will recognize the losses and we have recognized losses whether in this stage and when their projects get further along and they either sell them or start to lend them, that trend will reverse and we'll go in the other direction. So – we don't have any concerns there.
Jonathan Lamers
Okay. Thanks for your comments.
Operator
Thank you. Next question comes from Devin Schilling at PI Financial.
Please go ahead.
Devin Schilling
Hi, good morning. Just on your 2024 guidance range, does this include the pending escrow payment from Titan Solar?
And I guess also what are the remaining steps here for the payment to be released from this project?
Frank Getman
Yes it does. And if we haven't already received it, I think we'll be receiving it shortly.
So it does include that. And the works has been done.
It's just the process of tax equity stemming off to release escrow. It's not – there's really no risk to those revenues.
Devin Schilling
Okay. Okay.
No that's good to know. And then I guess just secondly here, I see the Canyon Wind royalty addition in the MD&A here.
I think this was not fully expected on my end. I guess any details you can share on this?
And what's the possibility for some of these other royalties to jump forward in the Q?
Frank Getman
I think Canyon is an NextEra project. NextEra plays their construction activities are very close to the vest, and that's prerogative and we're not going to -- they're a big player in the market.
They're going to disclose to us what they want to disclose when they want to disclose it and we respect that. But they are also probably the best counterparty in the entire industry at building projects and getting them done in a timely fashion on time and on budget.
So they're very, very -- have a very, very strong machine in building out these projects, but they keep the information close to their vest and that was NextEra project.
Devin Schilling
Okay. Great.
Well, regardless it was great to see you here. That's everything from me.
Thanks guys.
Operator
Thank you. The next question comes from John Mould at TD Securities.
Please go ahead.
John Mould
Hey, good morning everybody. I'd like to maybe just start with Enbridge and they held their Investor Day yesterday and several TGE projects showed up in their materials as late or mid-stage development projects.
I'm just wondering any takeaways you might have from their update yesterday? And can you just maybe speak more broadly to Enbridge's sponsorship of TGE and the impact that's had on the progress, so the pipeline versus maybe what you would have anticipated otherwise.
Frank Getman
Sure. I did not participate or attend or listen in on that yesterday.
So I don't know the specifics of what you're talking about, but I know we have our quarterly calls in very constant communication with Tri Global roles and Enbridge. And it's been unbelievable to watch the commitment from Enbridge, I don’t know if they talked about the hundreds and hundreds of millions of dollars, and I think it's approaching $1 billion as they've invested into TGE and their projects for interconnection deposits for panel orders for I think they're going to go out looking to secure wind turbines.
So I mean things that Tri Global could never have done on its own, Enbridge has stepped up and is providing their balance sheet and really providing an acceleration. If there are projects that are getting delayed, it's not because Enbridge, its not -- doesn't want to go ahead to the Meadows [ph], my guess is it probably because of interconnection delays.
Brian Dalton
I'd just add that, like, it's really important to remember what happened when Enbridge bought TGE and effectively -- with an effective sale of all of projects in the pipeline. And that number looked and still looks well-beyond what we would have originally obtain royalties on.
So in essence what happened is we gained an option on the entire portfolio at the time of the acquisition. And I'm telling you I think it's starting to look pretty valuable right now.
John Mould
Fair enough. That's good context.
And then maybe just on the Leeward-owned projects. Can you maybe just provide a little color?
How do those -- and maybe I'm not understanding it quite correctly, but how do those fit into the TGE construction pipeline, they don't own them anymore. Are they still managing those?
Or is it fully up to Leeward to move them forward. And I ask that recognizing that those are still a part of your broader royalty agreement.
So, if other projects move ahead then they get superseded. So, that's not a risk.
But just wondering where those are fitting at this point?
Frank Getman
Yes. No, those are fully in control of Leeward now and Leeward were just funding those not Enbridge.
But we met recently -- I met recently the CEO and they are committed to those projects. And I think a couple of them got fast-track status in PJM, which they were very pleased about, which is fantastic for us and fantastic for them.
So, we've seen nothing to suggest that they're not fully committed to those projects and to go forward and build them as quickly as they can.
John Mould
Okay, great. Those were -- all my other questions were answered.
Thank you very much.
Operator
Thank you. Next question is a follow-up from Nick Boychuk at Cormark.
Please go ahead.
Nick Boychuk
Thanks. We haven't really touched on the smaller debt facility and the potential to deploy that into some of the interconnection queue issues.
I'm just wondering, Frank, if you're starting to see a little bit more opportunity to deploy that capital and what that might mean for future opportunities?
Frank Getman
Yes, I think you're referring to the LC facility the $23 million facility. And yes, that is -- that may be the single biggest bottleneck in the entire industry right now and to fully realize that potential we do a lot more than $23 million, but what we're working on now is there's -- the devil is in the details with how a third-party, Great Bay, post on behalf of a developer with MISO or PJM or one of these RTOs and still maintains control of the capital, so that if something happens and we want to put it back to keep the risk-free nature of that deposit.
If we just give it directly to the counterparty and they put it in, we've lost control of it. So, we've had to work and Zach has done a tremendous job digging into the details and I think we're getting close to being able to complete our first one of those -- inter-connection deposit, support mechanisms and it's a great use of that LC facility because we're paying a fee on it.
So, we definitely want to be able to deploy it to turn into a revenue generator than a cost or expense.
Nick Boychuk
Okay. Thank you.
Operator
Thank you. [Operator Instructions] There appear to be no further questions.
I will turn the call back over for closing comments.
Flora Wood
Thank you, Joanna. Brian I'll let you speak.
I just wanted to say--
Brian Dalton
No, no, you go ahead. I'm sure we're going to say the same thing, but thank you.
Flora Wood
Okay. Well, interrupt me if we don’t.
But I just wanted to say that -- well I want to thank everybody for joining and to say that that was a really great set of questions from the analysts and I'm looking forward to talking to you soon after Q1.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.