Polaris Infrastructure Inc

TSX:PIF

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to Polaris Infrastructure Inc.'s First Quarter 2022 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Polaris CFO, Anton Jelic. Sir, the floor is yours.

[Anton Jelic, executive]

Thanks, Todd. Good morning, everyone, and welcome to 2022 first quarter earnings call for Polaris. In addition to the press release issued earlier today, you can find our financial statements, MD&A, quarterly information form on both SEDAR and on corporate website at polarisinfrastructure.com. Unless noted otherwise, all amounts referred to today are denominated in U.S. dollars.

I'd would like to remind you that comments made during this call may include forward-looking statements within the meaning of applicable Canadian securities legislation regarding the future performance of Polaris and its subsidiaries. These statements are current expectations and as 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 quarterly information form for the quarter ended March 31, 2022. I'm joined this morning, as always, by Marc Murnaghan, CEO of Polaris. At this time, I'll walk through our financial highlights.

Power generation, consolidated power generation for 3 months ending March 31, 2022 and 2021 respectively were 177,176 megawatt hours and 180,984 megawatt hours. These production figures are net of all plant downtime, both planned and unplanned. With respect to Nicaragua, we saw total megawatt hours of 113,915 in the first quarter versus 119,854 in the same period last year. In Peru, total megawatt hours in the first quarter of this year was 68,850 versus 61,130 in the same 3-month period in 2021.

Revenue. Revenue was $16.1 million during the 3 months ended March 31 compared to $15.7 million in the same period last year. The increase was the net result of carbon credits sold in the quarter, coupled with higher revenue from Generacion Andina partly offset by lower production from San Jacinto.

Net earnings. Earnings attributable to owners was $2.5 million for the 3 months ended March 31 compared to a loss of $0.9 million for the same period last year. Net earnings mainly increased due to the recognition of deferred income tax benefit from our Peruvian operations given the revaluation of the Peruvian sol since December 31, 2021. Further contributing to the earnings in the first quarter of this year were higher revenue, lower depreciation and amortization expense, and higher other gains in the current period, partly offset by the increase in finance costs and other direct costs.

Adjusted EBITDA. Adjusted EBITDA was $12.1 million for the 3 months ended March 31 compared to $11.9 million for the same period in 2021, principally as a result of higher revenue from the sale of carbon credits.

Cash generation. Net cash from operating activities for the 3 months ended March 31 of $7.6 million was lower than the $17.3 million for the same period last year mainly because in the 2021 period, San Jacinto collected approximately an $8 million overdue receivables balance after the sign-off of the new PPA agreement. Net cash used in investing activities for the 3 months ended March 31, 2022, was $8.2 million compared to $0.6 million in the same period last year, largely due to purchases related to construction and progress of the binary project in San Jacinto.

And then net cash used in financing activities for the 3 months ending March 31, 2022, of $14 million compared to $31.4 million net cash from financing activities reported in the same period of last year. The decrease was driven by the net proceeds relating to the common share issued during the first quarter of 2021, coupled with higher dividends paid in the first quarter of this year and the net impact of the repayment of debt and refinancing completed compared to the last year.

And finally, dividend. I would like to highlight once again that we do intend on paying our 25th consecutive quarterly dividend on May 27 of $0.15 per share to shareholders of record on May 16. This continues, of course, the Board and management's commitment to regular positive distributions to shareholders, coupled with an ongoing emphasis on attractively valued accretive acquisitions.

With that, I'll turn the call over to Marc, who will update on current business matters as well as on our quarter end results. Thank you.

[Marc Murnaghan, executive]

Thanks, Anton. So, few comments that I will add here. First on San Jacinto, I will go from Q4 2021 to Q1 2022. We were up net production from 51.4% to 52.7%. We're at about $52 million this quarter or Q2 to date. So we're up net a little bit from what we believe is the injection system change that we made in December.

We had made one earlier last year in the fall, didn't really work. We've gone back to what I would call more of an outfield injection strategy, and we'll look to continue to optimize. But we are working with actually a new technical consultant that very recently, and they reinforced that the idea that the Oakfield is, in their view, they agree with us, a much better strategy. But they think we can do even more things to continue to do even more out field and more to promote, call it, this higher steam fraction. And we actually are looking at several options with them.

We don't have any guidance on that yet. I think, call it, when we report Q2 or Q3 and around that time, we'll be able to give a little bit more color. But the general concept is increase some -- this is all with existing wells and not what I would call big CapEx, big drilling CapEx, but this is things like assetizing jobs to improve some of the injection capacity of the outfield wells, which we think would reduce or eliminate, call it, the declines that we're going forward.

And also they have some ideas on some of the production wells that are in service that are some of the smaller ones that they think have been limited in terms of production based on actually events that happened during drilling. And so there's ways that they think we can attack that against on a "small dollar" basis but could get, I would say, megawatt gains, not huge, but 1, 2, 3 megawatt kind of gains per well. So that's quite interesting.

We're looking at that as well as some actual options to potentially reduce the variability of 93, which is the well that cycles for us. So I think we're moving into a period where we're going to have some interesting options that aren't sort of a 0 drilling or a big drilling campaign, but rather more maintenance type CapEx and optimization. So and again, given the price we have there, I think it will pay to do that, but it's not something we need to do. It's not something we would do right away that we could probably do it sort of a little bit every year. So that's quite interesting.

The one other comment I'll make is just so that everybody is aware, the major maintenance at San Jacinto is actually going to be July of this year and not -- so it won't land in Q2 like it did last year, and that's just because it's very hard for us to be able to nail down every year the same month the Fuji technicians as to when they come over. So that's actually going to be July.

Comments about Peru. I would say hydrology net was similar, but net downtime was lower. We did have a little bit of downtime at El Carmen, which was resolved. That might have cost us only about 1,000 -- 1,500 megawatt hours. But other than that, I would say, given it was the rainy season the plants were all running at reasonably high levels as expected. So that's good. I think the big point about Peru is that we haven't received a communication about what the prices will be as of May 1 of this year, but there will be reasonable increase in the prices for 8 de Agosto and El Carmen, what we think is in the 8% to 9% range given that they have a link to U.S. CPI in the contract. And they didn't get one last year. So the sum of effectively the last 2 years of inflation will get applied going forward starting this month actually. So that's very good.

Comment on the cash position. The total cash, including some LCs, et cetera, that we put on the binary unit is about $87 million. That is down, but we've now invested approximately $14 million in the binary unit to March 31 and had advanced at that time about $1 million for the solar project in Panama. And with that, so we're looking at, call it, another $11 million on the binary unit to spend from here.

And on that binary unit as we are, we're still -- we remain on time, on budget with the Q4 in-service date, targeting first revenues end of Q4, beginning of Q1. So everything is looking very good there. And then now we do have another project, which is the Panasolar or the Panama solar project. We have started the -- call it, the earth preps. We have nailed down the inverters, the panels, transportation. So that's all in good shape and within budget. So at this point in time, it does not look like we've been impacted on the transport and the supply side for the panels, which is good. And we are looking at a similar in-service date for that, which will be Q4. Again, late Q4 in service first revenues, call it, starting first thing Q1 next year for the solar project in Panama.

And that's the first acquisition we announced, which is closed. And then the other 2, which I'll mention are Ecuador and the Dominican Republic. So both of those binding SPAs have been signed, but we haven't closed yet, and both of those transactions have the same 2 main conditions, which is lender approval and Ministry of Energy approval for the share transfer, which we don't expect issues on either one of those.

The only thing is the question is how long will it take, but we're in the process of the solicitations have already been made, and we're working with the ministries to get them comfortable. Again, we don't expect any issues on that. I think our best guess in terms of timing would be, call it, June, July to receive the approval and then close immediately thereafter.

Also mentioned a little bit on the carbon sales. We did a small amount. These were some 2015, 2016 vintages at San Jacinto. We had actually entered into that agreement last May, June, but we were thinking it's just sort of differ toes in the water and sell a little bit of the vintages. The price was agreed upon back then. We would likely -- but we couldn't close it, sorry, until this quarter. So not a huge dollar amount, but I still think it's important to note we will likely have a little bit more coming in, in this quarter.

Prices are in the current market higher than what we agreed to sell those at back, call it, in May of last year. So we don't have a firm plan yet in terms of what to do on, call it, the 2018, '19, '20 credits in San Jacinto and go forward, but we're going to be formulating that. But definitely, the market has strengthened into the $3 to $5 per ton versus the $1.50 that we sold those at.

So we will continue to look at potentially bringing in some revenue on a quarterly basis for the carbon credits going forward. And we are in the final throws of having 8 de Agosto finally approved. That's taken a bit of time, but we're hoping to have that done in the next few months. And also we will look to -- once sort of acquisitions are closed, the plants in operation already are not something we can do anything on, but any of the even small expansions or brownfield expansions or second phases, we have already sort of started the process of the paperwork, call it, to get those. So continuing to have more projects in the portfolio that have -- or that they're generated carbon credits. So we continued to be very focused on that.

And then we don't have -- it's a bit early given that we haven't closed on the Ecuador and the Dominican yet. But what I would say is once I would suggest on the second quarter call, we will be able to give much more guidance in terms of the "pipeline" there. So what would the status be of the second phase at Canoa, we should have -- be able to give people color on where we sit there. There is a small brownfield expansion in Ecuador. We'll be able to give color there as well as more color on the bid process that we anticipate entering into.

As people know, we have been working on at least one hydro project, but there's actually more in Panama. So I think we don't have a lot of "guidance" on the pipeline today. But by second quarter, we should be able to give people a lot more color on that to see both how the acquisitions are going to be sort of integrated but then how our, call it, generic pipeline is developing and building out both from a timing and a pricing perspective. So I think we'll really be making that transition starting the Q2 call.

So that's it for the formal part. So we can open up for questions now.

[Operator]

[Operator Instructions] And the first question is coming from David Quezada from Raymond James.

[David Quezada, analyst]

My first question, maybe just a broader strategic question now that you've come through a pretty active period of M&A. Is it fair to say now that the focus, as you kind of alluded to, will be primarily development going forward? Will you still consider M&A, are there -- and then I guess maybe a related question, do you now feel like you're pretty happy with the footprint in terms of the geographical regions where you now have operations or will have?

[Marc Murnaghan, executive]

Yes. So what I would say is geographically speaking, I think we can -- we've gone from 2 to 5. I would also note, just I didn't, but all of these are still in U.S. dollars, which I think is really important to mention. And so we now have 5 jurisdictions in USD. I think in the short term, the plan would be to basically with Peru and now Ecuador, Dominican and Panama that we can really grow within those countries. So I would -- I'm not going to say never to new jurisdictions, but what we like is that then these, call it, other 4 jurisdictions, I think we can really grow this company into the, call it, $80 million to $100 million EBITDA range without needing a new jurisdiction.

And then I would say we are, for sure, transitioning from what has been to now basically a pure acquisition. We have done -- everything has essentially been acquisitions. We can transition to more of a, call it, development mindset, but it won't be 100% development. So we still see opportunities to -- for instance, there are other Canoas out there, there are other San Jacinto, which is the hydro project in Ecuador. We do see more of those. And especially in the size of ranges we're looking at, we don't see a lot of competition. And so what I can't do right now is give you what's going to be the percentage breakdown.

I think the important thing is we can now though grow organically without the need to do the acquisitions, but I would suggest we will for sure be doing more because we've been working on building up a nice pipeline that started 4 years ago, and so it continues to grow. So I would say maybe in the short term, we integrate these acquisitions. We really start to get some runs on the board in terms of the growth pipeline. And then maybe it's more like in 6 to 12 months, you can start to see some of these other potential acquisitions layered in.

So it's going to be a blend. For sure, it's going to be a blend. And I think that's really important because we really see the opportunity to get this sort of platform to a size that has a little bit of scale. And all it would take is probably 1 or 2 more acquisitions, and you can see your way to that $100 million of EBITDA in the medium term, which I think is really important.

[David Quezada, analyst]

Absolutely. That's great color, thanks Marc. And then maybe one on San Jacinto as you move to complete the binary unit and you've talked about some changes on the injection strategy and things that you're evaluating them. I'm just curious, does the injection strategy or any other, I guess, element of the operations there change once the binary unit comes online? Is there any other adjustments you'll need to make?

[Marc Murnaghan, executive]

Not really actually because we probably a little bit more chemical dosing like we do some acid dosing right now actually to prevent silica. And we'll need to do a little bit more on that, not a lot. But the actual configuration of the injection system and the wells we know, we are going to try to -- so for instance, one of the proposals is to -- so we have 2 injection wells in the north and one which we think should actually be able to do 300, 400 ton an hour. It's only doing about 100. So they want us to consider at least doing an acid job on that. And that would help the binary and that we could just send an extra 200 or 300 ton to the north part of the field, which we know from all of the chemical tracers that we've done over the years have absolutely no connection to the field.

So I would say yes there is a minor tweak, which is trying to get a little bit more into the north. So we will look at doing that. But I would also say we've run all the numbers and say that if you can't get that extra 200, that's 200 out of a total of 1,700 tons of brine and the rest of it literally is going in that other well in the North. So we're I don't think your risk is high on the downside and maybe again a little bit on the upside if you can do it, but it's not huge.

[David Quezada, analyst]

Okay. Fair enough. That's good color. And then maybe just one last one. Obviously, the focus, I think, has been the new jurisdictions in the M&A. But I'm just curious if you have any update on any of the development projects that you had at one time looked at in Peru around the time that you acquired the 2 or the hydro facilities there?

[Marc Murnaghan, executive]

Yes. It's an interesting question, David. I would say I don't have an update to give you. We are, maybe the best way to describe it is, have been in the process of testing those projects off a little bit. Just we don't see a call for power there for probably another 18 months maybe it's 2 years, but it's coming. And the reason why we took a pause is just because of that. They contracted a lot of megawatts years ago, and then we're still in this period of working that off, so to speak.

And they had cheap gas, that's changing. I would say the spot prices are changing. They've been picking up. And so they haven't announced the date. We think that this year, they will probably announce something. So it's early days. I wouldn't -- so I wouldn't say we're really focused on it, but we are starting to look at that again and maybe that's an event for 12 to 18 months from now where we're actually bidding into something, getting ready to end the next year. But we, for sure, would do more there with that pipeline. It's just been -- the market there has been quiet.

[Operator]

The next question is coming from Naji Baydoun from Industrial Alliance Capital Markets.

[Naji Baydoun, analyst]

I just want to start with Panama. Can you just walk us through some of the milestones that you need to hit this year to get those projects online and I'm thinking specifically about the contracting structures for those projects.

[Marc Murnaghan, executive]

Yes. So on the contracting side, so given the size of this project, this is, call it, a $10 million CapEx project, which is very small. To get the COD, we're not going to borrow any money. So we don't have anybody telling us that we needed a contract. Obviously, if we would borrow money, a lender would say, okay, you need to -- you're not getting the money until you've got X percent contracted. Given that we don't have that, we're actually not in a rush to get the contract. So we're more focused on the construction.

And given that it would be -- our estimate is about 20,000 megawatt hours out of that facility, which would be 2% to 3% of our overall production, we're not sort of worried about having that at spot, at least to start. And then we know we can get contracts, but we're not in a rush on that. And I do think that we're going to -- I mean, this year, for sure, the impact of oil prices has put inflation into the power prices there. So I think having some exposure to that is a good thing for us as a company longer term.

And then the milestones really was -- the big one was we've already secured the inverters and the panels. We would expect those to sort of get into Panama in August. So that would be a big milestone. And from there, it's really just the assembly. So that would be -- and then from there to actual COD, there's not a lot of big milestones. It's really just assembling the structure.

[Naji Baydoun, analyst]

Okay. Got it. So it seems like a pretty straightforward for now. Just to finish on Panama. I know you said you'll have more in a few months. But is Chuspa or another hydro project part of the plan in Panama for the next, let's say, 12 months or so? Is that something still to be ironed out?

[Marc Murnaghan, executive]

It's still to be ironed out, I would say we are -- we have several others we're looking at. We have that one, which is actually we think had a good, call it, permitting or environmental sort of permit, good news very recently. So it's definitely on the front burner in terms of the thinking. But what -- to go a bit deeper into my point about Q2 will really give people more color on the pipeline is that we now will have other call it, potentially Canoa too.

We've got, as I mentioned, Ecuador, we have some of these other ones. So I think we're going to -- we're not in a position to say, okay, next year, this is the one in the 2024, it's going to be this one. And how it all layers in, is where we're going to try to give people color on Nexus. But what I would say is that there's a lot more in the mix to choose from, from our perspective, which I think is a good thing.

[Naji Baydoun, analyst]

Absolutely. Okay. So we look forward to that update when it's time. I just wanted to quickly touch on Peru with the energy commitments, the adjustments. I think you've already filed for those. So do you expect to see the impact of that in Q2? And would it be retroactive for Q1 as well?

[Marc Murnaghan, executive]

So for sure, it wouldn't be retroactive to Q1, and I'm talking calendar. So in Peru, their "power year" is May 1 to April 30 just because of the rainy season. That's how they do it. And so our expectation is that it would -- so we don't have the -- we made the application back in January. They wanted a bunch of technical information about the hydrology, which we gave them. So they seem to be happy with it, and all indications are that we will get it. And I just can't tell you whether we're going to actually get the document this month, next month. It is the government agency. They are notoriously slow, but our expectations are that it would be retroactive to May 1.

[Naji Baydoun, analyst]

To May 1 of this year, okay. And obviously, going forward. Okay. And just the last question. So with Ecuador and Dominican Republic getting into the portfolio soon and then think about Panama next year. Does that give you enough to start considering a portfolio refinancing sort of initiatives, maybe in 2023 or would you still prefer to wait a bit and hold off on that?

[Anton Jelic, executive]

Great question. I would suggest that I think we would want to have that color, as you say, which is okay, here's what we're going to be constructing in 2023. Here's what we're going to be building in '23 and '24. So essentially, I think we need a little bit more sort of meat on the bone than what we have as opposed to just the operating assets that we're buying in Panama. But if we had, call it, 1 or 2 more, then I think we absolutely can. What we are doing is doing, call it, we have started the -- it's a bit like the carbon credit process, not as intense but to do a green bond, which a lot of people have done, you do need to have a, call it, a third party come in, you effectively approve a framework, which won't be an issue for us.

But so we are going to start that process to have that overlay. We'll do that in, call it, the next 3 to 6 months. And then to the extent what we have is interesting, that way we can at least start to look at that in 2023. So we'll get ourselves ready from both, call it, a financing construct perspective, get more of the pipeline ironed out so that we're at least ready and then we'll see where that's at. I would say that to the extent we can do something, that is a big, call it, I think, a big value creation exercise for the company. And it is something that we're absolutely pointing towards. I just -- I'm not at the point where I can commit to the timing of that. But a lot of what we're doing is absolutely heading in that direction. One of the reasons, for instance, that I want to stay in U.S. dollars is to make that event that transaction easier to do. I think it would be easier. We say everything we do is in U.S. dollars. That's a big reason for that.

[Naji Baydoun, analyst]

Understood. That's very clear. So it sounds like you have a lot on your plate it's going to be a very active couple of years ahead.

[Operator]

[Operator Instructions]. And the next question today is coming from Nick Boychuk from Cormark Securities.

[Nicholas Boychuk, analyst]

First question on the dividend. Can you kind of walk us through what your thinking is on when any potential increases in that might come?

[Marc Murnaghan, executive]

Yes, I have said to people we wouldn't consider it until the back half of this year once we are comfortable that the binary unit is in good shape. Obviously, that's putting a nice bow on the project. But in Nicaragua, but also would be a big reason why we could increase the dividend. We want to make sure that we just don't have any capital cost "blowouts" which we don't at this point. And so that for us would be a really important event. And I think that, that's -- when are we going to have a lot of -- obviously, 100% confidence is when we had COD in Q4, but can we look at it before then. I think so, once we have, for instance, all of the equipment that is all on ships now and we expect in the next 30 to 60 days, everything will be basically in -- within 60 days. It will all be on site, and it's going to be an assembly project. So I think as long as everybody is comfortable with that, our balance sheet is in very good shape. So we can start to look a little bit forward. I would say once we're in the final stages of the assembly of the unit.

[Nicholas Boychuk, analyst]

That's good color. And then just quickly on the carbon credits. Obviously, I appreciate you can't divulge too much into [ plans for ] '18, '19, '20 [ vintage pay a ton ], like finalized yet, but can you give any color on sort of the dynamics in the market, who's coming to you with the interest, as that changed at all since the last time we spoke? And then obviously, are there any opportunities also for you to maybe future sale or to lock in credit sales?

[Marc Murnaghan, executive]

Yes. So we did -- last year, when we did that forward sale, we did make a press release. We did agree to another small one, which we didn't press release, but we will likely close that this year. It's a bit a similar size and amount, okay? And for that, that will give us, again, a little bit of revenue in Q2 or extra cash. I would say from there, it's likely going to be price driven. I would say as I said, we're seeing sort of the $3 to $5 range. I think if we were to be able to get closer to the higher part of that range, like $4, $5, we would let go some more as we move forward here. We're not in a rush.

And part of the reason we're not in the rest is to the second part of your question, which is just anecdotally, we are getting -- it's pretty -- it's a weekly event where somebody is representing somebody and they call up looking for credits. And we've had people say, "Hi, we're looking for X million credits in Latin America." So they want a bucket in Latin America, which is sort of interesting in and of itself. So I would say just a continual pretty consistent groups approaching us and we're at the point now -- we've done a few sales.

We're going to take a bit of a pause here, at least for the next 3 months, and we're more focused on getting -- making sure we're ready with these acquisitions and the expansion projects because once you get sort of the COD on any of these, it's over. So we're spending more time, quite frankly, focusing on making sure we have the inventory of credits to work with because I think that really is the more sort of scarce commodity here right now. So it continues to be interesting. And yes, there's a gap, I would say, between, call it, forestry "nature-based ones" and renewable ones. But I think the buyer universe is going to dictate that there's a gap. But if one moves up, so is the other one.

So maybe there's -- I think right now, maybe it's a $10 spread, not even, but I think there can be a spread, and there can be a spread of the nature base go to 50. And the renewables can go higher. So it seems like it a buyer universe, it's fine with that. The buyer universe is fine with the different sort of 2 or 3 key verification entities, and we're looking at new ones.

So what I do like about it is what it seems like is that the people that are approaching us may not be the end buyer, but the end buyers are companies that have made a commitment to get to carbon neutral or whatever in 10 years or 20 years, and that's going up. And those entities are doing it. So less based on any, call it, government mandates and more just based on their own internal policies. And so they're driving the market, which I think is really good. I think as long as you have these private entities making these decisions, I think these markets will start to get a little bit more liquid and more deep as we move forward here, which I think is really good for us.

[Operator]

There are no further questions in queue at this time. I would now like to turn the floor back to the management team for any closing remarks.

[Anton Jelic, executive]

Thanks everyone, for joining today. Have a great day. Thank you.

[Operator]

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.