Polaris Renewable Energy Inc

F:N4T

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, and welcome, my name is Adam and I will be your conference operator today. At this time, I'd like to welcome everyone to the Polaris Infrastructure 2019 First Quarter Results Conference Call. [Operator Instructions] Mr. Jelic, you may begin your conference.

[Anton Jelic, Chief Financial Officer]

Thank you, Adam. Good afternoon, everyone, and welcome to the 2019 First Quarter Earnings Call for Polaris Infrastructure. In addition to the press release issued or press releases issued earlier today, you can find our financial statements and MD&A in both SEDAR and our websites. Unless noted otherwise, all dollar amounts referred to are denominated in U.S. dollars, of course. I'd like to remind you that the comments made during the call may contain forward-looking statements within the meaning of applicable Canadian securities legislation regarding the future performance for Polaris Infrastructure. These statements are current expectations and such are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties include the factors discussed in the company's annual information form for the year ended December 2018. Certain measures referenced in this call do not have any standardized meaning as prescribed by IFRS and therefore, considered non-GAAP measures and the company's earning releases consolidated financial statements and MD&A. Unless otherwise noted, all financial information is prepared in accordance with IFRS. I'm joined today by Marc Murnaghan, Chief Executive Officer at Polaris. At this time I'll walk through our Q1 2019 financial results and comment on our recently announced quarterly dividend. After which, I will turn the call over to Marc for additional commentary. During the first quarter of 2019, San Jacinto operations delivered net 64.3 megawatts versus delivery of 53.9 in prior year. You should note that there was an impact in year-over-year production due to planned maintenance. Our major maintenance at San Jacinto for 2019 occurred in the early part of April and was completed successfully and this downtime will be reflected in our Q2 results. The prior year maintenance wrapped up in February 2018, thus Q1 of '18 revenue and adjusted EBITDA were impacted negatively earlier than this year.The Canchayllo facility saw its first full quarter of operating results under the Polaris banner with total production of 8.86 gigawatts for an average of 2.93 monthly. Given this level of generation, we recognized $18.6 million in revenue, up from $14.7 million in the prior year period. The 26% quarter-over-quarter increase in revenue was driven by the combination of the increase in generation as well as a 2% annual increase in tariffs under our PPA as well as a $400,000 approximate full quarter contribution from our newest Peruvian operating facility at Canchayllo.Given revenue growth combined with ongoing cost containment, the company generated adjusted EBITDA in Q1 2019 of $15.9 million versus $12.3 million in the prior year period. Company reported net earnings for Q1 of $3.4 million versus a $0.5 million in the prior year. As of March 31, the company had a cash balance of $33 million of which $13.91 million was held in debt service reserve accounts, another $7 million set aside for plant operations. Operationally, the company operating income was strong year-over-year, providing $3 million in contribution. Finally, I would just like to emphasize that we have declared our 13th conservative quarterly dividend, which was confirmed by our Board on May 3rd, and be paid on May 30th to shareholders of record on May 15. The $0.15 share dividend reflects a 30% payout-based ratio, based on our Q1 results that continued the Board and management's commitment to regular positive distributions to shareholders and employers. With that, I'll turn the call over to Marc, and we will take questions once Marc has completed his comments. Thank you.

[Marc Murnaghan, CEO & Director]

Okay, thanks, Anton. I'm going to be reasonably brief here. My focus, I don't think there's a lot to add in terms of San Jacinto other than, you can see the numbers that Anton mentioned. We did maintenance this year in April as opposed to March. So that just needs to be taken into account, but we're very happy with those results. And I think we're looking to be in and around this level and think though for the next little bit here, while we are doing something called a miracle model which is a realist, kind of a field management exercise but we wouldn't expect to be, call it that thing, any significant CapEx other than just the typical annual maintenance CapEx at the facility, at least for the next year, likely 2. And we'll be reviewing the miracle model with our technical advisers over the next 3 months and then I'll give you the longer-term view of kind of -- it has in the way along our [ hydrogen more ] wells, potentially [indiscernible] but we're in more of that kind of a lull at least for, call the next 12, 24 months. The big focus for us for right now is the construction in Peru and I'll just touch on how -- we'll say there are 3 key areas. First being the actual transmission line. We're completely in a transmission line, the 16-kilometer line and that is something that, we're going to call it 80%, 85% of the construction was done. We've advanced that a little bit, not much because the big focus there was that there was about the same number of rights of way that has been secured from the landowners. So the towers had the rights of way and then they were building towers. We're now at above 95% of the vertical way and we're on track and we've not had any issues, and so we're anticipating that we will have 100% of the right of way concluded this month. The -- that's not a real, call it, hard or technical construction job within efficient lines, so your risk there is more on the rights of way, so we're happy with the progress there. And the other area that we need to work on, there's a lot of areas, I'm not going to go through them all, but call it the key areas that we can intake. At 8 de Agosto, that is, let's call it 70%, 75% done, but there was certain works that we wanted to add to it as well as the repair works that need to be done. But that can't be done until the dry season, which really commenced last week. And so that was to be expected and basically October to April is the wet season there and so that wasn't anticipated but it's -- so we're now starting work on that. The anticipated timeline on that is sort of 3 to 4 months but we have, call it, let's say, 6 months to really finish that before the rainy season starts again. So I think you're going to reason out on buffer there. And then the last focus item that I would mention is -- are the, call it the new tunnels that we're constructing. We did geotechnical work back in January and we're now constructing a tunnel at both El Carmen and 8 de Agosto. The one in El Carmen we did some of it before we developed 8 de Agosto and that one we're 25% done and the tunnel at 8 de Agosto is about 20% done. So I would say that we started probably 2 or 3 weeks later than were hoping, getting some exclusive permit issues but the rates, I would say more important, the rate that we're -- that we are the perimeter and meter today we are getting is at or even above what we were expecting. And there are [indiscernible] which [ bid ] a bit better than what we were anticipating so that's -- we're happy with that. So with all that being said, we're fully mobilized now that we're in the dry season and we remain, call it on target for Q4 operation dates this year for both the clients and transmission lines. And with that, we are getting obviously a contribution from Canchayllo and that when you work through the numbers, that leaves the remaining kind of small EBITDA contribution from Peru but not a lot right now. Obviously, once these 2 essentials are put into operation we'll have a material, for us, increase not really in the EBITDA, but I think it's important to mention that the conversion of EBITDA to free cash flow is much higher than you could in lieu of the debt infrastructure as well as we'll have less call it maintenance capital for whatever hydro facility than we would for geothermal. So a material improvement in the free cash flow is a big milestone for us. So we're happy with the progress to date. So with that, I will finish my remarks and we will open it up for questions.

[Operator]

[Operator Instructions] And your first question comes from David Quezada from Raymond James.

[David Quezada, Equity Analyst]

My first question here, just on San Jacinto, the wells from the most recent drilling program. Are you really comfortable that those have stabilized at this point?

[Marc Murnaghan, CEO & Director]

Yes. We've put it on, call it end of March, early April last year and I've said you typically need 6 to 9 months and so we have now seen -- I think almost the last few quarters is it's stabilized. So it feels like we're at the right spot here. And then for sure there was a decline in the first 6 months.

[David Quezada, Equity Analyst]

Okay. Fair enough. That's good. And then just -- got it. And then just moving on to the Andina projects. Sounds like you got a reasonable buffer there before the October, end of October date there for the PPA. Is there any method to -- or potential to extend that date if you need it?

[Marc Murnaghan, CEO & Director]

Yes. And in fact, we're going to apply for an extension in the letter, what? Just to get ourselves the options. And we can do that as many times there's no any kind of weather event, you just record it and you should put them in a bucket and so we've always planned that we would be kind of a standard. So we will apply for the extension, not likely that we will get some extension and then I would also say there is -- there are certain way, that if for some reason we had issues which again I would say, we're on schedule, but if we aren't on schedule and in the end we don't get an extension, there -- the bottleneck there is -- there are certain ways to have temporary solutions where you could actually technically connect the plant and reach your COD, if you really need to. It's not that, that would be a long-term solution -- but I don't think we're going to get to that but that -- even that possibility exists is just worth pointing out, I guess.

[David Quezada, Equity Analyst]

Okay. Great. That's helpful. And then maybe just one last one if I could. Just on, maybe some comments, Marc, on the political situation in Nicaragua, if you have any insight there?

[Marc Murnaghan, CEO & Director]

Well, proceedings on the ground I would say are seeing that are quite normal, the operations so far has not been impacted whatsoever. Power in any country just trends slowly higher than it is trending a little bit higher. The -- I think the fact that they started to negotiate internally in the country in March was a big step and there have been some advances made but that was the first big step. They have been releasing prisoners, which is sort of the first demand from, call it part of the group that is sitting at the other side of the table. And so it's -- they're making progress, maybe not at the pace we'd like, but I think they are making progress in the first issues they're negotiating. It's hard for me to comment any further than that, but the conflict is how the next elections look like and potentially having a new flow-in is absolutely something that is being discussed. It is a subject put on the table, at least from what I've heard.

[Operator]

And your next question comes from Jeremy Rosenfield with Industrial Alliance Securities.

[Jeremy Rosenfield, Equity Research Analyst]

Just on the GA construction, maybe can you just clarify for me if I'm reading it correctly. So it looks like the total estimated capital cost is $38 million and I think if I just go back at the acquisition announcement it was $35 million. So it just seems like it has picked up a bit. I'm just wondering if I'm reading that correctly or if there is something else that's being included that wasn't included before? And also I think it says there's $2 million in expense cost that, correct me if I'm wrong, are not being included in those numbers but you will get the preferred return for that $2 million? Am I reading all this correctly?

[Marc Murnaghan, CEO & Director]

Yes. We -- it seems marginalized in the cost but it's still within, call it, what we need conservatively in our contingency. So effectively it's taking longer tunnels and then you are right; those other -- some of the costs that we are expecting would be included in that 15%. And it's sort of the payback capital.

[Jeremy Rosenfield, Equity Research Analyst]

All right, okay. Okay, good.

[Marc Murnaghan, CEO & Director]

So there's -- some of the things we have impacted the way they are paid elements that -- in a way that they were expected so in terms of the conflict of 15%, those are included.

[Jeremy Rosenfield, Equity Research Analyst]

Right. The equipment costs are essentially fixed at this point. It's really just the construction right now, right?

[Marc Murnaghan, CEO & Director]

Correct.

[Jeremy Rosenfield, Equity Research Analyst]

Okay. So let me turn just for a second to development opportunities, further acquisitions and just sort of your preferences in terms of capital allocation. And I know going back last quarters you would have listed sort of acquisition opportunities as being potentially better risk-adjusted returns relative to the other developments that came along with Union Energy and I'm just curious if you could handicap that for us a bit again and just go back on that acquisition versus developments versus other capital allocation issues?

[Marc Murnaghan, CEO & Director]

Yes, so I -- it really wouldn't really change, Jeremy. I would say that we did continue to see, in other words, we do see things improve, sure, and one of the jurisdictions that we have high on our list but in terms of risk-adjusted to the way you're looking at it that, that would still be at the top of our list compared with the right familiar returns of capital allocation. We are happy with Peru jurisdiction. There is reasonable amount of activity from a financial perspective there and the interest level in these types of projects but there's also pretty interesting opportunities to help people with expense account and need help follow. So we like that because the greenfield, even if your overall capital crosses all the same, the timelines could be quite long in the greenfield. So in terms of getting all the permits and dealing with the communities and get to social lesson. So we -- I would say we still like how that 8 phase development acquisition that we see, we see enough of those that we like that.

[Operator]

Your next question comes from Mac Whale of Cormark Securities.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Marc, would you look at the [ evening ]? You sound pretty confident about all of that sounds almost administrative. Is that normal to not have that at hand when you go towards construction on the transmission line?

[Marc Murnaghan, CEO & Director]

It is actually, yes. So we hired a professional services firm, [ Avalina ], that is basically all they do. This is a pretty trying process from what I've learned and -- they need to go and sit down with every single landowner and you have -- I don't know how many there are. It would seem 100. You can have sort of 5 representatives for 1 part of the land and so you can just sit down with all of them. It makes it a little bit more -- the terms of the negotiator are pretty, sort of, cookie cutter, maybe a bit strong but it's just how they do it. And they even have -- and I'm pretty sure they're treating the number. You never want to go there but once you get to a certain percent, the government can sort of enforce some form of deal. Obviously then you get to negotiating the prices so we -- yes, so far so good.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay, that's not a situation where the last guy holding out overall, "You don't get my property,' has you over a barrel. It's more that the government can force them to accept that staying sort of deal that everybody else has. Okay.

[Marc Murnaghan, CEO & Director]

I don't have that percent off the top of my head but anyway. And so we think it will be approximate on one of the problems would be if we were going to run into problems, we're going to run into it now.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And then the repairs on one of the -- I'll come to the word, it's already been done. Is that because -- is that a repair it was damaged somehow, like it wasn't operating yet? Is that correct or did I misunderstand?

[Marc Murnaghan, CEO & Director]

Yes, because it wasn't -- it was work, it wasn't 100% complete and so the intake was effectively exposed from everything running through it and it wasn't compliant for that and so it finished it all so if you're having some damages on some stones and boulders through parts of that, any standard and stuff like that. So part of it is, some of it is some of the rebar is damaged. It's not like you're going to tell me it just needs a renewable bunch of stones but you couldn't get out of it. So the water levels of ours, it's not high-impact stuff but that's the kind of stuff we're talking about.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And then lastly, on the operations in 2 countries and the OpEx or your G&A, is that roughly what we saw in the quarter? You expect it to continue this level or are you going to add some more heads or how is that looking ahead?

[Marc Murnaghan, CEO & Director]

Yes, I think it is reasonable to expect that the G&A, well, for sure there was an increase. I think we expected a little bit, more but maybe another 50 to 100 a quarter but ramping, maybe that doesn't come in until Q3, Q4. So it wouldn't be a lot but it's probably a little bit.

[Operator]

And your next question comes from Brent Buchanan of Wood Gundy.

[Brent Buchanan, First VP & Investment Advisor]

Marc, just a quick question on it. I'm just curious on with the waterfall and the wet and dry season. I'm assuming, there is some seasonality or a lot probably to the power production levels that you get?

[Marc Murnaghan, CEO & Director]

Yes. So that is something that we obviously don't have in Nicaragua. So it tends to be October to April, [indiscernible] season. And the latest that these plants can die, most of the high-numbers plants stemming from my knowledge and maturity to the zoning, and you can define that later on. You have 2 chief lines and so during the rainy season we run 2 of them on fully [indiscernible] at capacity and then during the dry season you can line them off and you sort of run together on it depends on obviously what capacity felt with a lot of folks but you're hoping you get that from on anywhere from 60% to 100% capacity during that season and then if you send back sort of maintenance on the line that's down every year. So the nice thing with that is you can have 1 line down that is not as expensive, really, to do the maintenance on it.

[Brent Buchanan, First VP & Investment Advisor]

Okay. And I think you mentioned in the MD&A both the accounts receivable collection in Nicaragua is staying stable. It got a little slower last year but hasn't changed?

[Marc Murnaghan, CEO & Director]

Yes, particularly around August and September, it's been stable since then. The number that we reported, a little bit high, don't forget though that our invoices are going up as well so you're achieving a natural increase already. And then as of today, it's around $15 million, $15.5 million, so it's come down a little in the quarter. So that's the color. It stayed stable for a very long period of time now.

[Brent Buchanan, First VP & Investment Advisor]

Okay. And final one just on the convertible debt financing announced. Is there a status on that?

[Marc Murnaghan, CEO & Director]

Yes, I can't say too much about it other than we're confident that we'll be left with much of an impression before May 28 closing and closing and we're confident that we're going to get -- we'll get the full deal done after the insurance on April and May.

[Operator]

And we have no further questions at this time, so I'll turn the call back over to our presenters.

[Anton Jelic, Chief Financial Officer]

Yes, thank you very much, everyone, for joining us today.

[Marc Murnaghan, CEO & Director]

That's it. Thanks, everyone.

[Operator]

And this does conclude today's conference call. You may now disconnect.