Polaris Infrastructure Inc

TSX:PIF

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Polaris Renewable Energy Inc. Second Quarter 2022 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Anthony Jelic, CFO. Sir, the floor is yours.

[Anton Jelic, executive]

Thanks, Ali. Good morning, everyone, and welcome to the Second Quarter Earnings Call for Polaris Renewable Energy. In addition to the press releases issued earlier today, you can find our financial statements, MD&A and quarterly information form on both SEDAR and our new corporate website at polarisrei.com. Unless noted otherwise, all 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 Renewable Energy 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 June 30, 2022. I'm joined this morning as always by Marc Murnaghan, CEO.

At this time, I'll walk everyone through a summary of our financial highlights. During the 6 months ended June 30, power production was -- sorry. During the 3 months ended June 30, 2022, power production was 163,119 megawatts net compared to 150,676 megawatts net in the 3 months ending last year. As well, during the 6 months ended June 30, power production was 340,884 versus 331,659 in 2021. Revenue was 115 -- sorry, revenue was $15.2 million during the 3 months ended June 30, 2022, 0.22% compared to $14.2 million in the same period last year. As well, revenue was $31.3 million during the 6 months ended June 30, 2022, compared to $29.8 million in the same period last year. Net earnings loss.

Loss attributed to owners was $1.5 million for the 3 months ended June 30 compared to earnings of $0.2 million for the same period in 2021. Despite reporting higher operating income during the period, the company did report a net loss driven by a $2 million charge from the revaluation of a conversion option liability. As well, net earnings attributable to owners for 6 months ended June 30, 2022, was $1 million compared to a loss of $0.8 million for the same period in 2021. Adjusted EBITDA. Adjusted EBITDA was $11.2 million for the 3 months ended June 30, 2022, compared to $10 million for the same period last year, principally as a result of higher operating income.

Adjusted EBITDA for the 6 months ending June 30 was $23.3 million compared to $21.8 million for the same period in 2021. Cash generation. Net cash from operating activities for the 6 months ended June 30, 2022, of $21.8 million, lower than the $24.2 million for the same period last year. Net cash used in investing activities for the 6 months ended June 30 was $40.5 million compared to $1.5 million in the same period of 2021. Net cash used in financing activities for the 6 months ended June 30 was $19.7 million compared to $22 million net cash from financing activities reported in the same period last year.

And finally, dividends. I would like to highlight that we do intend on paying our 26th consecutive quarterly dividend on August 26 of $0.15 per share to shareholders of record on August 15. This continues 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 elaborate on current business matters as well as on our quarter end results. Thank you.

[Marc Murnaghan, executive]

Thanks, Anton. So yes, first about production at San Jacinto in the quarter at 51.8, net average megawatts delivered, and that compares -- so in Q4 of last year, we did 51.4 and in Q1 of this year, we did 52.7. So I would say we're seeing a, call it, a flattening of the production, lowering of declines into what I would call expected and anticipated decline rates, which we model around 3%, 4% decline rate. So that's -- I would suggest that what we've seen over the last 3 quarters running that we are flattening / into that range of declines, which we like. I would point out that Q3 of this year is when we're doing our major maintenance.

So just for everybody to keep that in mind in terms of the numbers. So this quarter, current quarter Q3 will be impacted by our annual maintenance, which we do every year. This is just we can't always get it in the same quarter is somewhat due to the availability of Fuji technicians in terms of the timing. The Peru numbers, I would say we're up on 3 things, really, all of which are good, somewhat less downtime, but more importantly, better hydrology, particularly at 8 de Agosto, which is the largest plant. And we did have not all the quarter but partial of the quarter, but the pricing adjustments came into effect for May and June, which were -- they are linked to, call it, U.S. CPI. So there was a reasonable adjustment on price in those inflators and it's a full adjustment at the revenue level.

So that's good. So things moving in the right direction there. And we are also anticipating that we should be getting a further price increase at 8 de Agosto as we are waiting for the approval of the reduction in the committed energy, which we've been -- which we were expecting all along, and we're hoping that it starts to get applied and we get approval within the next month. Other, call it, things of note for the quarter, obviously, people saw we did close the Canoa acquisition on June 28, given that, obviously, no impact on Q2, but the nice thing. So we will have full results, full impact of the results of that acquisition in Q3.

The actual reduction in cash as a result of that was $20.3 million as that included some cash and working capital or positive working capital that was on the balance sheet when we closed the acquisition. So all part of the acquisition. So that's -- so that is great. We also -- the Panama solar projects, which we had actually closed earlier. That everything is moving nicely there. We -- to date, we've spent about $2.5 million. And so that's, call it, off the balance sheet of the cash number, about $2.5 million, and there would be another, call it, $7 million in the budget to be spent this quarter and next.

And we do have a COD on that plant still maintaining, call it, a December commercial operation date for that. The Ecuador acquisition that we announced, we are still working through some documentation with the ministries. We need approval for the share transfer and there's, call it, Yes, there's 2 or 3 other government agencies that need to give the sign off. We're in the process of getting all that. We don't anticipate any problems other than just being documentation. So we would expect to close this quarter. And with -- assuming that, we would then start to see those numbers coming into Q4.

In terms of the other big project we have on the go, which is the Binary unit. Everything is on schedule, on track. We're aiming to have a commercial operation date in December. CapEx to date spent is about $20 million. Our budget is, always was $25 million, still is. And so we -- there's about $5 million more spend to come on the Binary unit, which is on budget. And as I said, we're still on schedule. So we're quite happy with that. We have about 95% of all equipment is on site. The foundation is already built, and we're now very close to just starting to assemble and erect the unit. So that is moving very well.

So just to sum up, just from a cash perspective, just so everybody has is, we have a -- we showed 60 consolidated just over $60 million of cash. We will have another $5 million for the binary estimated, another, call it, $7 million for the Panama Solar and closing of the Ecuador transaction would be approximately $17 million. So just so people have those numbers. And with that, that's about just under $30 million of the $60 million. So we have all the cash to close all this and get those projects to commercial operation. In terms of other focuses, now we are, I would say, the primary focus post these acquisitions is, would be Canoa-2, which is the expansion project in the Dominican.

The site has the ability and the actual current concession has the ability to double the size of the plant, and we are working with one of the main, call it, a government entities to get approval to move forward with that and start negotiating prices for that contract. And so we're targeting to have, call it, the green light to move ahead in the next 60, 90 days on that. They have published some reference prices locally. And conversations have started. So that's going to be a big focus, and we're hoping that's our first sort of project that we get going on that's part of our "pipeline." We are also working and getting ready to prepare for the upcoming bid in Ecuador in October.

We are working with some partners, local partners. The current bid date is October 28, and we have, call it, 3 projects identified that we would like to bid in. So we're quite focused on that. So I would say those would be the 2 between Canoa and getting ready for the bid in Ecuador. We're quite focused on that as well as with the projects in Panama that we're building is quite small, and the plan is definitely not to stop at just those solar projects we have. We are looking at both doing more solar with the current developer, a very similar type transaction as well as there are several hydro projects that we're looking at.

So we really want to move that forward as well. And so there's a lot happening on that front. There's nothing we, let's call it ready to be announced, but we are working diligently on some development opportunities in Panama. And the theme really is on the back of these acquisitions, we really think that there's growth opportunities in all of those markets. And that's where we're focusing our efforts at this point in time. Last comment I would make is on carbon credits. We did have a very small sale in the quarter. We are, I would say, generally, prices somewhat stabilized since March, April. The sales that we've done would be a little bit below that, call it, average that we're seeing in the market, but we are still seeing interest.

We're still seeing -- and it really depends on the vintage of the credits but -- and we think we'll do maybe a little bit more this quarter, call it, older vintages. I think we have some from pre-2016, which I think is an important to, call it, a date, but we're likely going to sell a little bit more. But anecdotally, we do -- even though pricing seems to have flatlined a bit, I would say, anecdotally, the interest in the credits in general continues to go up and different parties that want to discuss doing something and the prices that are better than where they are today. So continued, I would say, momentum there.

And we're -- every sort of growth project that we're looking at, we are already in the process of moving with a form of validation and verification process as we get all of those certified so that we can get our, our goal is, what I'm seeing is an ability, call it, entering 2023 to be generating on an annual basis around 400,000 tons a year. So with the goal to increase that as we continue to grow because I think our development projects, we can get them validated and verified as well going forward. So not hugely material yet, but I would say at $5 a tonne, which we are starting to see that, it starts to get, I think, quite good for us. So we continue to make sure that we're focused on that and it doesn't take a lot of capital to get all of our projects ready and have that option value. So continued progress there. And then with that, I'll turn it over for questions.

[Operator]

[Operator Instructions] Our first question is coming from David Quezada with Raymond James.

[David Quezada, analyst]

My first question here, maybe starting with Canoa and I guess, the potential expansion to the Canoa 2 project. Just curious, Marc, what your thoughts are on like how the supply chain is looking today for panels in Latin America? And when you look to secure them if you get the green light for that project?

[Marc Murnaghan, executive]

Yes. Good question. We haven't started that process yet. I would say it's 32 megawatts DC, call it 25 AC. We're still -- that would be considered quite small. And so I think it's easier to get panels for that size of the project then for a 250-megawatt project. but when would we be going realistically end of the year, early next year? So that would be the timing. And -- but we didn't have any issues with the current ones in Panama that we're doing. And at least initial conversations with them at a very high level of we're doing something like that or Dominic Republic closer to the end of the year. They're telling us that, that should be fine. And the pricing indications are stable, which is good.

[David Quezada, analyst]

Okay. Excellent. And then maybe moving on to Ecuador and your comments around the upcoming bid and the 3 projects there. Are you -- I believe it was hydro electric that you're primarily looking at there with your partner. So maybe if you could just confirm that, that's hydro. And any other color you can provide on, I guess, maybe a ballpark size of those projects.

[Marc Murnaghan, executive]

Yes. So the -- so yes, it's hydro for it's really 2 reasons; One is, we think that, call it, just from a globally competitive perspective, the hydro there is super interesting, there's a lot of very high-quality hydro projects there, yet to be developed, and we think it's globally unique. Combined with we see doing more solar and possibly win, for instance, in the DR and Panama. So I think just from a diversification perspective, it makes sense for us as well to focus on Hydro for Ecuador. And given that our partner sort of has the local experience in hydro in terms of knowing the contractors, knowing how to do budgets properly, et cetera, and manage the risk.

So we feel like we have something that's a little more unique in Ecuador than, call it, doing the solar and the wind, which I think will also be somewhat more competitive. In terms of the project sizes that we've been looking at is basically smallest 17 Actually, I'm not going to give specifics at this stage, but I'd say that would be at the low end, and we're actually looking at things as high as 45 megawatts and some stuff in between. So it's a bit of a range, I know. But yes, that all of those would be, again, I think, below where it gets really competitive and of a size that I think we can handle.

[David Quezada, analyst]

Okay. Awesome. That's super helpful. And then maybe just one last one, actually, one that I meant to ask about Canoa-2. You mentioned that there have been some reference prices put out there. I'm sure you can't say anything specific. I'm just curious maybe any color around how prices have trended in that market recently? And how you think a subsequent contract would compare to the existing PPA you have at Canoa-1.

[Marc Murnaghan, executive]

Yes. So I can tell you, I mean, with the reference prices, the ranges, but call it anywhere from 80 to 100 for solar, which I think globally, you'd say, is still quite good, obviously, lower. And that has more to do with the fact that panel prices, for instance, when Canoa-1 was done were much higher. So they know that panel prices have come in, hence, the reference prices have come in. The only thing I would say is I don't think those -- the reference prices were in a way published before this, call it, increase in Nat gas and oil. So I think that there's room to do a little bit better than that. Because it's the one thing that's different, David, is it's not as if they're like a fit price, which they publish it and that's it. These are re "reference prices." So they're guiding the market. But I think, as I said, they were put out a little bit before the recent run-up. And, in the grid and the DR is reasonably heavily, call it, on the fossil fuel-based percentage. And so I think there's a bit of room from the 80 to 100 range to do a bit better.

[Operator]

Our next question is coming from Nicholas Boychuk with Cormark Securities.

[Nicholas Boychuk, analyst]

Can we get a little bit of color on the plans for the remaining $30 million of cash on hand. Just any info you can share on how that's going to be deployed? And what your thoughts are around using debt financing for both Canoa, Ecuador, just how you're going to be able to leverage that $30 million to get more of these projects developed.

[Marc Murnaghan, executive]

Yes. And so I would say one thing I did mention, but there's a very small like a $2 million to $3 million expansion project at the current -- Again, we're expecting to close, let's say, in the next 30 days in Ecuador. Once we do, there's a small project, it's like $3 million, but quite profitable, brownfield expansion there. And then if we have success the same we do on Canoa-2, I would say, that's, call it, a $30 million plus or minus project. And if you just, let's say, 60-40 equity or debt equity, so that would be like $12 million of equity, right? So I would say that would be the principal thing that we have a line of sight on right now for use of that cash on hand. With the assumption, which we're quite comfortable with that, call it, get boring debt on that wouldn't be hard to get.

And I think our plan initially, as we, let's say, we do Canoa-2 and then assuming we get, have some success on more in Ecuador, we see, and I would even put Panama on there. So we have more to do in Panama. So whether it's something in Ecuador, Panama, we will be using up, I would say the rest of the equity. It's a question of timing. But the other big assumption is we see every one of those markets locally wanting to provide a reasonable level of debt onto these projects if we want it. So I think the funding strategy is use cash on hand to do equity for at least a couple of the projects, borrow locally. But that if it comes at us, call it, a little bit faster.

We still think we have room to do call it, when I run my numbers for next year, we're at, call it, 3x total debt to EBITDA, not even net debt. So it will be a little bit lower on a net debt-to-EBITDA basis. We're in the process of, call it, the certification to do green sort of bond financing type. So we're even considering do we do a bit of subordinated debt green bond, something like that. So we're not quite there yet, but it is definitely sort of something we're considering for sure to the extent that the pipeline comes at us in an accelerated way such that we're using up that $30 million of cash quicker than we can generate.

[Nicholas Boychuk, analyst]

Okay. And I guess a follow-up to that. What would potentially catalyze that pipeline to come out to you a little bit sooner? Could it be a corporate PPAs in the local market, would you be more open to taking merchant exposure rather than waiting for auctions? What could be drivers of per say faster?

[Marc Murnaghan, executive]

I would say the 2 levers, partly would be PPAs in local markets. And we're-- The plan really in September, October, as an example, so in Panama, where we 100% equity building because it's a small plant, 100% equity, but we have the opportunity to do more. I think to do, to double or triple that, we're going to want to get a better sense as to what the PPA market is like there. And which is not going to be too hard to do. We're going to start looking at that in the fall here. And again, given prices have been much stronger in that market than what people are expecting because of fuel costs.

So I think we're hitting it at a good time. I also think though that we are just sensing that the demand locally for backing projects like this from a lending perspective is quite strong. And their willingness to take some merchant exposure is something that's part of that equation as well. And so if I talk about panel, I think there's a lot more to be done there, but we wouldn't go spend another $40 million on a per merchant basis without knowing whether we can finance it and it's all merchants. So we're going to try to put those pieces in place in the fall here. So it's-- You mentioned the PPA, I'd say that's one of them. The other one is, call it, call it, debt accessibility in the local markets, but we're getting a sense it's quite good right now. And we're going to start to try to put those pieces in place in the fall here.

[Nicholas Boychuk, analyst]

Okay. That's good color. And then the last, just you kind of mentioned twice that there could be opportunities, particularly in the Dominican for wind. That's a bit of a new development and new fuel type for you guys. Can you talk a little bit about the, I guess, the experience, the track record and what you're seeing in that market to suggest that those different projects are available?

[Marc Murnaghan, executive]

Yes. I would just say it's from conversations with developers, early stage, I would say the dynamic of at below a size range, i.e. below, let's say, $200 million project size, there still is very few, call it, corporates doing what we're doing. And so we've had conversations with several people that have some wind projects in development. We've also had some that are actually already in production. So yes, we're just seeing whether it's a single project owner of an operating one or somebody that can't really even put the equity together to get it built.

That dynamic exists, and it plays out in a lot of these markets as long as, again, we're not doing a $250 million project. So we keep seeing that. And I would say we see less in wind, for instance, than we do in solar and hydro, but we do see some. And so yes, we see it. And to your point about experience, we don't have it yet, which is why probably we haven't done it yet, but I don't think that I wouldn't let that prevent us from doing something in wind because I do think it would be around the portfolio. And I don't see it as complicated as hydro and geothermal.

But we would absolutely be cognizant for instance, if we did a development one, we sort of know where we need to draw the line between our capabilities, what we have now, what we don't. And so you might be a little bit heavy on the third-party engineers in terms of resource assessment, designs, construction costs assess all of that, actually third-party engineer to actually an owner's engineer story to help you build it. We'd probably be heavier than we would on some of the hydro where we do have the experience. So we would need to lean a little bit more on outside consultants, but I wouldn't let the fact that we don't have wind stop us from doing one.

[Nicholas Boychuk, analyst]

Got it. That makes perfect sense. And just last follow-up. You mentioned that, that $200 million threshold is kind of like the, I guess, the breakeven where you're seeing more competition above that from higher corporate players. Is that kind of roughly a good number to think of for wind, solar, hydro in each of your markets?

[Marc Murnaghan, executive]

Yes. I mean debatable maybe, 250 maybe. But Yes, I don't know if it really is-- I mean what I haven't seen is whether it's really technology dependent as much as dollar-dependent. You might get a little bit more competition coming down a bit more on the hydros because they're so unique. But at the same time, the big people have almost stopped because they know they can't go another 5,000 megawatts in hydro. So let's do that in solar and wind. So more dollar value driven than necessarily technology driven.

[Operator]

Our next question is coming from Naji Baydoun with iA Capital Markets.

[Naji Baydoun, analyst]

Sorry, I missed the part of the call earlier. So sorry, if you've already maybe addressed some of these topics. I guess maybe just a quick update on the Panama seems to be going in the right direction. Maybe just a click update on Ecuador, the Dominic Republic. What are sort of the next steps to the time lines to execute on the expansions in both of those, I guess, the assets that you've already acquired or are acquiring?

[Marc Murnaghan, executive]

Yes. So Ecuador, we have yet to close, we're just been back and forth with some of these government entities. We're anticipating in the next 30 days. Once we do that, we have a, call it, a $3 million $2.5 million, $3 million, call it, I'm calling it an energy expansion, which we really, we don't need any approvals, we just go do it. So we can do that right out of the gate. There's a capacity expansion, which we would need to bid in to the call, and that's in October. But the plan there, we think, given that all you're doing is adding a turbine, the actual, there's no more op-cost.

Our ability to be competitive in the call is very high. So that's-- but we would need to bid in, okay, for that. So there's sort of 2 stages; One, we don't need anything; Second one, we need to get a bid or win in the bid. As far as Dominican, we closed June 28, and we're in the process with the authority to get the concession basically agreed upon, which gives us the green light to go start negotiating prices with the distributor. And there's been conversations already with both. There's a lot of back and forth. There have been conversations with the distributor, which is the current one that we sell to right now. And we're -- that's the #1 focus here, and we're -- what I said earlier was called a 60 to 90-day time line to have, call it, clarity on contracts and pricing.

[Naji Baydoun, analyst]

Okay.

[Marc Murnaghan, executive]

Once we have that, assuming we get that, then it's -- then you go to do final designs and then you go start to finalize the real budget. And in my mind, it's a 2023 project. Okay.

[Naji Baydoun, analyst]

Okay...

[Marc Murnaghan, executive]

From a construction perspective that's what we're aiming towards.

[Naji Baydoun, analyst]

So begin construction sometime next year, if you can get everything sort of lined up for the end of this year.

[Marc Murnaghan, executive]

Yes. Correct.

[Naji Baydoun, analyst]

Just based on the earlier comments, it sounds like, I mean, capital is no longer a big hurdle. You have the development assets now that you're clearly focused on and executing on. And it's just about getting, I guess, the right agreements and the right contracts in place. With all of that, where do you see sort of the company going in the next 2, 3 years as you build out these development projects, you already have the jurisdictional leveragation. In your view, what's sort of the next phase of the evolution of Polaris Renewables is going to be?

[Marc Murnaghan, executive]

Well, I think the issue with, call it, this development pipeline is that we're going to move it forward, but the time lines are the time lines of development, which is aren't as fast as, call it, acquisitions. And I would say that we spent years building an acquisition pipeline in addition to this, to what we have. And there's more than what just the DR and the Ecuador acquisitions. And in fact, before we announced those, there would have been a few others that we actually thought were the lead candidate. Once we signed the 3, the Panama Ecuador and the DR, we put that pipeline, call it, on hold, not from a knowledge perspective, but from an execution perspective. And I would say it's still kind of in that phase, but it's still there. And the principles that I just said to Nick, which is below a certain size range, there still is much less competition that we see. And so I wouldn't suggest that there's going to be, that pipeline of acquisition opportunities is not going to go away, and it will be part of what we will be looking at doing in parallel with these development projects in the next 2 or 3 years.

[Naji Baydoun, analyst]

Okay. So it's on...

[Marc Murnaghan, executive]

The ideal is like -- well, both Ecuador, I would say, and DR, current operations with expansion opportunities sort of already built in, but also entering into a market where you see much more. So we do see ones like that in the pipeline. And I think at a point in time, that should come back.

[Naji Baydoun, analyst]

So maybe just to kind of summarize, if M&A was the primary focus and new jurisdictions, you have that today. Now maybe the focus from a capital allocation perspective is a bit more balanced in terms of development today and maybe M&A tomorrow? I guess maybe just to finish off, what does that leave maybe the dividends on the stack sort of lower on the priority list?

[Marc Murnaghan, executive]

I don't know if I would say that. I think we want to get back to dividend increases, because I see that I don't necessarily see that as going counter to wanting to allocate capital with acquisitions because I think that we got back to dividend increases, our ability to raise capital for -- There are different sort of kettle of fish doing a development project, which is I think Canoa, we can just fund it with cash on hand plus internally generated funds, it's great that if we do find something that's, call it, another Canoa or bigger that's operational. I think would we look to raise some capital likely if we find the right opportunity and we're at the right share price. And I think dividend increases, likely helps that.

[Naji Baydoun, analyst]

Okay. Okay. really appreciate it...

[Operator]

[Operator Instructions] There appears to be no further questions in queue. Do you have any closing comments you'd like to finish with?

[Marc Murnaghan, executive]

No, just thanks everyone for joining our call. Have a great day.

[Operator]

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