Polaris Infrastructure Inc

TSX:PIF

Earnings Call Transcript 2020-Q2

[Operator]

Good morning and welcome. My name is Suzanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris Infrastructure Inc. Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Anton Jelic, you may begin your conference.

[Anton Jelic, Chief Financial Officer]

Thanks, Suzanne. Good morning, ladies and gentlemen, and welcome to the 2020 Q2 Earnings Call for Polaris Infrastructure. In addition to the press release issued earlier today, you can find our financial statements, MD&A, earnings press release on both SEDAR and shortly on our website at polarisinfrastructure.com. Unless noted otherwise, all dollar amounts referred to are denominated in U.S. dollars. I'd 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 Infrastructure Inc. and its subsidiaries. These statements or current expectations 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 Annual Information Form for the year ended December 31, 2019. I'm joined this morning, as always, by Marc Murnaghan, Chief Executive Officer of Polaris infrastructure. Before I begin, I would just like to share Polaris' hope that all of you are managing through these unique circumstances and trust you and your families are staying well during these challenging times. At this time, I'll walk through our Q2 2020 financial highlights and comment on our just-announced quarterly dividend. Power generation. Consolidated power generation for the 3 months ending June 30, 2020, and 2019 were 165,541 megawatt hours and 136,136 megawatt hours, respectively. Consolidated power generation for the 6 months ending June 30, 2020, and 2019 were 347,949 megawatt hours versus 283,738 megawatt hours, respectively. These production figures are net of all plant downtime, both planned and unplanned. With respect to Nicaragua, we saw total megawatt hours of 129,678 in the second quarter of 2020 versus 128,957 in the same period in 2019. Our second quarter in 2020 was slightly down from Q1 by 5,666 megawatt hours. In Peru, total megawatt hours for the 3 months ending June 30, 2020, were 35,863 versus 7,179 in the 3 months ending June 30, 2019. Quarter-over-quarter, this represents a decrease in 2020 based on continued downtime in El Carmen and entry in Q2 into the dry season. Revenue. We reported revenue of $18.9 million for the 3 months ending June 30, 2020, compared to $17.3 million in the same period last year. Revenue quarter-over-quarter in 2020 is down slightly by $1.4 million driven mostly by a lack of production at El Carmen and lower-than-anticipated hydrology at 8 de Agosto with a marginal flattening of production at San Jacinto. On a year-over-year consolidated basis, we realized $3.3 million in additional revenue driven by an additional 16.2 megawatt hours net production in Peru, notwithstanding the previously reported incident at the end of February at El Carmen that has been repaired and which Marc will address further in his comments. Net earnings. We recognized a loss attributable to us of $1 million for the 3 months ended June 30 compared to a loss of $8.6 million for the same period in 2019. For the 6 months ending June 30, we realized net earnings of $3.4 million compared to a $5.2 million loss in the same period last year. Adjusted EBITDA. On a quarter-over-quarter basis, adjusted EBITDA decreased to $15.1 million from $17 million principally as a result of the decrease in revenue. On a year-over-year basis, the company has realized $32.1 million to June 30, 2020, compared to $30.3 million recognized for the same period last year. Cash generation. Cash flow from operations during the 3 months ended June 30, 2020, increased by $1.8 to $10.9 million from $9.1 million due to the increase in revenue, coupled with lowest -- lower interest paid when compared to the same period last year, partly offset by the increase in direct costs. Year-over-year for the 6 months ending June 30, the company realized an additional $2.4 million from $22.4 million in 2020 as opposed to $20 million in 2019. Dividend. Finally, I would just like to note again that we intend on paying our 18th consecutive quarterly dividend on August 28 of $0.15 per share to shareholders of record on August 17. This continues the Board and management's commitment to regular, positive distributions to shareholders of Polaris, coupled with an ongoing emphasis on attractively valued accretive acquisitions. With that, I will turn the call over to Marc who will elaborate on current business matters as well as on our quarter end results. Thank you.

[Marc Murnaghan, CEO & Director]

Thanks, Anton. So I'm going to start with a little bit more granularity on the numbers than I normally do, just to explain some things because we did have a few things happen in the quarter that I think are worthy of some explanation. So the first is, if you look at EBITDA from Q1 to Q2, so down just under $2 million. The makeup of that would be approximately, call it, $800,000 of lost revenue from El Carmen being out of service. We -- in addition to that, we incurred $360,000 in expenses for the repairs in the quarter that are expensed, and I'll get into it. But the insurance proceeds that were received that go against that are not an offset of expenses, but rather, they come in below that in other income. So that kind of gets you to $.2 million. And then quarter-over-quarter, because San Jacinto was down, that would be about $700,000 there. So that gives you sort of approximately the $2 million difference, of which I would say "permanent" would be maybe $600,000 to $700,000 of that, and the rest is temporary. And then -- so just -- and then on -- the insurance proceeds. So we had to expense, call it, $360,000. We did actually receive an advance of $550,000, which comes into the other income. And that's actually not included in the cash flow either. So we don't get any real, call it, operating benefits from those payments. So that does have an impact on the numbers. Other important comment is the cash. So the cash at June 30 show just -- sort of consolidated just over $48 million. We actually did 2 drawdowns on the Brookfield facility. So we did one in June, which was the bulk, which was $22 million, but we did a $5 million drawdown in July. So the actual cash balance on that is $5 million higher. But -- so if you were looking at sort of the quarter-over-quarter cash and using the $27 million proceeds from Brookfield, it would look light. And the reason for that is a $5 million drawdown came in subsequent to the quarter end. In terms of free cash flow, we generated $7.3 million free cash flow in the quarter, which is, call it, EBITDA less total debt service, less any cash taxes, less any CapEx. And we did $16.5 million for the 6 months. Again, for the quarter, if you did look at the insurance proceeds as an offset of the repair cost, it would be closer to, call it, $7.8 million of free cash flow. So still what I think is a very strong level of free cash flow generation, even though we did have one plant that was fully out of service or was out of service for the whole quarter, i.e., El Carmen. One other comment I would make is that -- and this has to do with the major maintenance at San Jacinto. We originally had planned to do that in April of this year. But given travel issues with COVID, we've had to delay it. We are now set for this month. So we will expect to start that next week. But we did have to do -- or just we made the decision to do the cleaning of one of the condensers rather than wait because we weren't sure. And that would have impacted the numbers by about 0.5 megawatt at San Jacinto in the quarter. We should get that back in the sense that the major maintenance this month will be, call it, a day shorter because we did do that work. So we can -- we'll earn that back. So in terms of the operations, Peru, the big thing is that we did get El Carmen back online last week. So it -- and we did the -- last week, we've done tests. So all the tests were completed successfully. So that's great news. It's hard to give an exact, call it, time line. But we think if it wasn't for the COVID restrictions, we'd likely would have had that online in May -- end of May. And so call it, somewhere between a 2, 2.5-month delay that we just couldn't get around because of quarantine restrictions, et cetera. So -- but it's online. So we will expect going forward here that, call it, Q3 this year, Q4 and even I would say Q1 because we did have teething issues on 8 de Agosto in Q1 of this year, but -- so Q3, Q4 and Q1, the goal and the hope is that we have Peru fully contributing to the revenue and the EBITDA, whereas they weren't sort of in the comparative quarters for last year. So we definitely look forward to having that coming online. With respect to Nicaragua and San Jacinto, just to give people a bit of a reminder. So Q3 of last year, we did 60 megawatts net. Q4, we did I think 59.9 net. Q1 of this year, we did bump up to 62 net, which was -- we did have, call it, less cycling in the cycling wells. But also we had done a small change in the injection system configuration, which we got an initial bump. But we've, I would say, backed down to that 60 level that we saw in Q3 of last year would be, call it, the right level to think of in terms of where we -- where the field found stabilization. So that this quarter or Q2 at 59.4, remember that we did have that, call it, 0.5 megawatt of downtime. So it's still quite close to that 60 megawatts that we had in Q3 of last year. And that actually is very close to the numerical model in terms of the predictions of where we would be without any significant capital investment. So we are tracking very close to what the numerical model predicted at that, call it, 60 net of Q3 last year. Now we do expect that to -- call it a 1% to 3% decline from there would be what the model predicts. So -- and we are tracking on that. With respect to -- I'm not going to talk much about the Brookfield loan, but everyone saw that. We then shortly after that announced Panama. We continue to work on that. We are drafting the share purchase agreement now. We're, I would say, within 2 to 3 weeks of finalizing our diligence. So we're very close to having that, call it, ready to go with the only -- the caveat there is that Panama has -- they did an opening -- opening up. It was a staged opening, and then they've gone back because the cases definitely spiked. So that's the part that we're just going to have to keep an eye on. And the only thing we can do is get ready, which I would say we are -- we will be there. And to the extent that they open up and let construction companies mobilize that we're at least ready to go. But everything continues to move forward on that, and we don't see any issues there other than just what is an appropriate, call it, start date. And the last comment I'll make before we turn it over to questions is given the Brookfield loan and the cash flow generation, I think we are sitting here with a very strong balance sheet with cash of over $50 million consolidated, which I think is a great asset in this time. So even though Panama might take a little bit longer for instance to get started, I think given this environment, I think in the medium to long term, having the cash but also a relatively underlevered balance sheet should enable us to take advantage of even more opportunities in the market. And I think in the medium term, that will be a big benefit to shareholders. Because at current sort of debt and cash levels, we're at net debt of between 2 to 2.2 to 2.5x, depending on how you treat the convertible. But even if you treat that as debt at 2.46x -- and that's a trailing EBITDA number, not a go-forward EBITDA number, that is very conservatively financed. So I think we will be able to continue to grow through this and take advantage of a lot of the opportunities that we are still seeing in the market. So with that, I will turn it over to questions.

[Operator]

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

[David Quezada, Equity Analyst]

My first question here, just on San Jacinto and the shut coming up, can -- maybe if you could just remind us what you expect net generation to be during the quarter. If you can comment on that at all, and also the potential for any tweaks or optimization that you can do during that shut, if any.

[Marc Murnaghan, CEO & Director]

So the way that we look at it is more that you typically lose, call it, will likely lose about 10,000 megawatt hours in the quarter, which would equate to about 1.3 in revenue, 1.3, 1.4. That's sort of the estimates. And I would say in terms of -- it's not really -- there's not really much this time around in terms of optimization. What you do see is post that, there's always a recharge from the wells that you shut in. And that usually lasts, call it, 4 to 6 weeks. So -- and that part is a bit harder to predict. So it's hard to give, call it, an exact number for the quarter in terms of what the total generation would be. But I would make the comment that normally, we do maintenance usually in March or April every year. And so this is a longer time between maintenances. So again, we don't know exactly, but I think that the longer you go between maintenance, you'll probably see somewhat of a, not huge, but somewhat of a higher decline as you continue. And then once you do the maintenance and you close some of the wells, they get that recharged quickly and then you bump back up after that.

[David Quezada, Equity Analyst]

Okay. Great. That's helpful. And then just, I guess, with respect to the outlook and the opportunities you're seeing in Latin America, I think the comment last quarter was that you're kind of more filling up the top of the funnel in terms of your opportunity set. But things have maybe slowed down in terms of advancing opportunities at, I guess, the bottom of the funnel. Is that still a fair characterization of what you're seeing? Or have things opened up a little bit?

[Marc Murnaghan, CEO & Director]

No. I would say it's a fair characterization in that there's been a few sort of fits and starts in both, for instance -- I mean we're looking obviously outside of Peru, but both -- and we are hoping to start something in Panama very shortly here. But both those have kind of -- it's been sort of open up, shut. So I would say the stuff that we already had in our funnel is easy to move forward, and there is a lot of stuff filling the top part. But I would say the stuff in the middle, if you -- things that we -- if you've been to the site, visited the management team a few times, those things are easy to continue to move forward. It's -- if you haven't been to visit people and visit the sites, that's, I would say, that's the part that we're -- we need to get on a plane and see these assets. So that is -- I would say that hasn't really changed too much. So more on the top, but the middle part is moving slowly. But what I would say though is that I do think that the -- there is an offset, is that if moves slowly, the requirements for people to do transactions is going up in terms of our -- again, our cash and our balance sheet should come in very handy here.

[David Quezada, Equity Analyst]

Absolutely. Definitely. And then maybe just one more for me. Appreciate you've got a very strong cash position right now but I'm just wondering the relationship with Brookfield that you've established with the loan they've provided you. How you see that evolving in the long term? Do you think that could be a long-term relationship where they partner with you on other projects?

[Marc Murnaghan, CEO & Director]

Yes. Absolutely. I think the number that we did with them would have been on the small end for them. Well, it is on the small end, and they would like to expand it. They, for sure, like hydro. I think they're open to, not every jurisdiction, but a lot of the jurisdictions that we're looking in. And I think it can work well in that -- for instance, I don't know. I can't comment about Panama, but let's just say there was an interest there. I think we could still use our equity dollars, and then we could potentially increase the size of our facility with them, either close to COD or after COD, and then recycle sort of our equity. So I think that formula can work, and I think that they're interested in growing it because there's -- the benefit to them is that they have a lot of capital, and they can't do just the big transactions. So they're looking for some of these opportunities that their group really wouldn't be rolling their sleeves up on, right? So yes, I do think there's a good synergy there. And we just -- we need to -- as long as we do our part, I think there's a reasonable amount of capital there for us.

[Operator]

And our next question comes from the line of Mac Whale of Cormark Securities.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Marc, when you look at the direct costs -- you addressed this in your comments about the incremental cash flow differences from Q1 to Q2. Was there something particularly low in Q1? Because the differential seems to be a fair amount higher than just the $360,000 from the El Carmen. Is there other increases?

[Marc Murnaghan, CEO & Director]

Well, yes, but don't forget that the -- I mean, the costs for the actual -- so if I look at the delta in EBITDA, which is about $2 million, so you get $360,000 from those extra expenses, okay? But the difference in revenue -- we did about $850,000 in revenue in Q1 from El Carmen, and we had 0 contribution in Q2 from it. So there's $850,000 right there, and we didn't -- there was no benefit from our cost side to having that out of operation in the sense that the O&M structure that we have there -- because we do have an O&M provider that's local. Effectively, the staff remained the same throughout the quarter. So we had $850,000 less revenue and exactly the same cost base. So that -- so those 2 things alone are $1.2 million of the $2 million, if that makes sense.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Right. Okay. Yes, that makes sense. Yes.

[Marc Murnaghan, CEO & Director]

So put it another way, if it had been in operation and hadn't done -- and we didn't have the repair cost, the EBITDA would have been up $1.2 million higher. Okay. And then San Jacinto -- and I did try to say this Q1. Like we -- I felt like that bump from 60 to 62 was somewhat unsustainable. And that was -- so that would be a $500,000, $600,000 difference from Q2 to -- yes, from Q1 to Q2, of which I don't think we're going to earn that back. But -- and then the rest, which is a couple of hundred grand, would be other small temporary things.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. Yes. I follow it through on the EBITDA line. It was just when I was looking at the income statement itself, I'm wondering maybe there's a way that the direct costs are reported. I'm just looking at the raw direct cost from under $2 million to $2.7 million. And I was just looking at that. Going forward, obviously, the $2.7 million is probably pretty high as a go forward, but...

[Marc Murnaghan, CEO & Director]

Yes, that's too high. Absolutely it would be. So it's at a minimum too high by $400,000 per quarter. And we didn't have -- in the quarter, we didn't have anything else from an operating cost perspective that was that much different than Q1. It was really that though. Yes.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Yes. There wouldn't be -- I was just wondering whether there was something that's either added, headcount or something, that there is maybe...

[Marc Murnaghan, CEO & Director]

I would -- it's very small. Like I think -- no, nothing substantive. Like there's been a little bit at the head office. But we're talking maybe $100,000, $150,000 a year, so quite small. Yes.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Yes. Makes sense. Okay. And then on the other costs, most of that increase -- like there's a -- well, other income, that's a big $3.3 million negative. That's mostly -- that's all the convertible -- the option, conversion option?

[Marc Murnaghan, CEO & Director]

Yes. So the basic concept there is if your shares go up, there's a charge. And if your shares go down, there's a gain. It's not cash. It's -- and there's really not much you can do. That's just the IFRS policy.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And then lastly, on the -- so 17 days downtime being scheduled in August for the turnaround at San Jacinto, was that quite a bit longer before? I may have just been modeling incorrectly, but would it have been more than 20 days scheduled?

[Marc Murnaghan, CEO & Director]

Yes, it could have. So there was certain things that -- so the way we're doing it actually is we've -- it's still, quite frankly, not -- we could have done maybe October, maybe November, but Fuji was worried that, that wasn't going to -- that there were still risks to that. So what we are doing is we've cut a few things out, and we've installed a bunch of cameras, and we're doing remotely. So instead of -- you're correct, it was originally going to be sort of more than 20 days. And -- but not all of that. We've had a lot of back and forth with Fuji, and there's things in those maintenance programs that are nice to have versus need to have. And so there's, I'd say, a reasonable amount of the nice to haves. We don't need to do them, so we're not going to do them. It is actually going to be an interesting -- because all of the people that we have on the ground have done most of this work for Fuji. Because what normally happens is they over their technical people, and a lot of the actual manual work is done by our people. It always has been. And so we're going to -- those people that have done that are going to redo it. So we just don't need it to be as long. So there'll be some small also even cash savings because of that and then less downtime. We might do end up doing a little bit more of an expanded one in 2020, but we'll see. We may not have to.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And then lastly, you mentioned in the, I think, in the -- not the press release, but the MD&A about water flows in Peru being lower than expected. Do you -- how do you handle that? Like at the beginning, do you mark that as your new normal? Or do you make an adjustment in your forecasting?

[Marc Murnaghan, CEO & Director]

We'll maybe adjust our forecasting a little bit, but it's still -- when you're in your first year, it's a bit hard to truly forecast what you do as we look at other plants in the area. And the closest plant to our plants, I think it was COD in 2014 or 2015. And this year is definitely the lowest year it had. So that's key, right? It's -- we know there's less rain this year than there is normal. So that's -- so it's, for sure, too early to say we should adjust our forecast. And by that, I mean your long-term average for sure. But for this year, it's going to be somewhat lower because it is a drier year. Now that starts to change in, call it, September, October. And from September to December, that's when you're going to make the bulk of your production because it's always Q4 and Q1 are the 2 big quarters. So the deltas aren't that big in the drier months in terms of actual megawatt hours, right? So if it -- if the raining season comes in like normal, September, October, then the numbers shouldn't be that far off. So it's too early to change the forecast, I would say.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Yes. And it shouldn't have -- it's not like in northern North America where you have like a snow pack and you're worried that there's like a long-term effect. Like everything is sort of reset every year given the nature of the resource.

[Marc Murnaghan, CEO & Director]

Correct. That's the view. And so yes. Yes.

[Operator]

[Operator Instructions] Your next question comes from the line of Naji Baydoun of Industrial Alliance.

[Naji Baydoun, Equity Research Analyst]

Just wanted to maybe go back to the San Jacinto maintenance. So I guess the maintenance program this year is a bit later than when you typically would have completed it or would like to do it. What does that mean for the maintenance for next year? Would you want to go back to more of a regular schedule? Or would that also get pushed out?

[Marc Murnaghan, CEO & Director]

That's a good question. We haven't decided. I think if we could, we would likely go back to the regular. So as long as Fuji -- as long as the world -- traveling is easier, et cetera, then I think we'd go back to, call it, April for 2020. But we haven't made that decision yet.

[Naji Baydoun, Equity Research Analyst]

Okay. And the reason will be, as you mentioned, it's because you don't want to have too much of a lag or a difference between programs. And you'd rather keep it sort of on a consistent schedule or go back to like a more normal.

[Marc Murnaghan, CEO & Director]

I think it's, yes, I think it's just -- it's good to -- don't forget that Fuji, it's good to get on a regular schedule, just from a practical, logistical perspective because the -- you want to make sure the technicians are available. And if you're always changing -- they've got other clients, right? So it's just good to get into a rhythm with them because they can plan and make sure that they're available. So that's probably the biggest reason.

[Naji Baydoun, Equity Research Analyst]

Okay. Got it. And just wondering if you had any updates on potential refinancing initiatives, and I guess, particularly for Nicaragua. Or is that maybe a bit later down the line?

[Marc Murnaghan, CEO & Director]

Yes. I just think it's a bit later. But as we -- in Nicaragua specifically, we're now sub-2x debt-to-EBITDA, right? And that will continue to go lower as we move forward here. And the way that I would look at it is, is that what we're hoping to do is ramp up the conversations with the parties that we had for -- in Q4 to start to take a serious look at it in 2021. That's -- yes, I would like it to be a bit sooner, but I think that's the realistic time frame.

[Operator]

And there are no further questions in the queue. I turn the call back to the presenters.

[Marc Murnaghan, CEO & Director]

Okay. Well, with that, thanks, everybody, for joining, and have a great day. Take care.

[Operator]

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