Polaris Infrastructure Inc

TSX:PIF

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone, and welcome to the Polaris Renewal Energy Inc. Second Quarter 2024 Earnings Call. [Operator Instructions] At this time all participants are in a listen and only mode and we will open for questions following the presentation. [Operator Instructions] Please note this conference is being recorded.



I will now turn the conference over to your host, Anton Jelic, CFO at Polaris. Anton?

[Anton Jelic, executive]

Thanks, Jenny. Good morning, everyone, and welcome to our call. In addition to our press releases issued earlier today, you can find our financial statements and MD&A on both SEDAR plus and our corporate website, 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 annual information form for the year ended December 31, 2023. I'm joined this morning, as always, by Marc Murnaghan. At this time, I'll walk through our financial highlights power generation.



During the 3 months ended June 30, 2024, power production was 186,887 megawatt hours compared to 209,982 megawatt hours in the 3 months ended June 2023. For Nicaragua in the second quarter of 2024, production was 114,046 megawatt hours, lower compared to the same period last year at 131,529 megawatt hours. Consolidated production in Peru for the 3 months ended June 30 was also slightly lower at 42,374 megawatt hours than the comparative period last year, which totaled 51,986 megawatt hours.



At our Dominican Republic and our one solar facility, we produced 14,615 megawatt hours in the 3 months ended June 2024, this is higher than the second quarter of 2023, reflecting enhanced productivity from the newly installed panels. For Ecuador in the second quarter of 2024, average production of 11,253 megawatt hours was in line with production in the comparative period last year. And finally, in Panama, Vista Haemosa Solar Park production of 4,600 megawatt hours was greater than the -- than our management expectations with minimal comparative to 2023, given the facility went COD at the beginning of Q2 last year.



Revenue. Revenue was $18.7 million during the 3 months ended June 30, 2024, compared to $20.8 million in the same period in 2023. Net earnings. Net earnings attributable to owners was $985,000 for the quarter compared to $4.6 million for the same period in the prior year.



Adjusted EBITDA. Adjusted EBITDA increased to $13.3 million from 3 months ended June 30 compared to $15.7 million for the same period last year. Sorry, that was a decrease to $13.3 million. Cash generation. Net cash from operating activities for the 3 and 6 months ended June 30 was lower than the comparative period of last year, mainly due to lower cash received from Nicaragua as expected due to scheduled downtime for major maintenance of the facility during Q2 as well as recognition of underne revenue in Peru.



Net cash used in investing activities for the 3 and 6 months ended June 30 was considerably lower when compared to the same periods in 2023. While the cash usage in the current year relates to the Canola One optimization project and the major maintenance of the geothermal facility in Nicaragua, cash usage in investing activities in the same period of 2023 related to disbursements linked to projects such as the construction of the binary unit in Nicaragua and the completion of the Vista Hereros Solar Park in Panama. Metcash used in financing activities for the 3 and 6 months ended June 30, 2024, and 2023 are comparable.



And finally, dividend. I'd like to highlight that we have also announced, once again, we will be paying a quarterly dividend on August 23 of $0.15 per share to shareholders of record on August 12. With that, I'll turn the call over to Marc, who will elaborate on our quarterly results as well as current business matters.

[Marc Murnaghan, executive]

Thanks, Anton. So yes, can mentioned, I'd say consolidated production was generally in line in all the countries, except for Peru. Peru was slightly below, and that was just lower hydrology, which I'll get into in a second.



In terms of San Jacinto, Nicaragua was in line, given that we did do major maintenance in April. So that was planned major maintenance. And so the results, I would say, were right in line with our expectations given that Major maintenance was completed on time, on budget, and it's just worthy to note that there were no issues with the turbine whatsoever. So everything was good to go, and we didn't encounter any issues there from a turbine perspective, which is great, which does support the fact that we've moved to 18-month intervals instead of 12-month intervals in terms of the major maintenance for each turbine.



Now into Peru. As I mentioned, it was a bit lower. Really what happened is the dry season came just a little bit earlier this year than normally. So that's the reason for the lower numbers in Peru. I would say, incidentally, hits only a month, but July is marginally ahead of expectations and budget. So it's at least the dry season is not necessarily looking drier than normal. It's just that the season started earlier than it normally does.



In terms of the Dominican, it was -- we were above the same period last year, principally or all given the replacement program that we started earlier in the year. We were only about 55% done on average through the quarter, but it did help our numbers for sure, as we expected.



The actual solar radiation from Q2 this year compared to Q2 last year was lower. So we likely would have had even higher if it was the same. So just the quarter, the resource was a little bit lower. Otherwise, I think we would have been sort of probably an 1,072,000 megawatt hours in the Dominican hadn't been the same to try to do it comparable year-over-year.



And then lastly, Panama was -- production was in line with somewhat stronger prices than we were expecting. And so that helped the numbers for the quarter as well. In terms of the projects and the initiatives, canola, the panel replacement is going according to schedule. We should be completed by next week, and that's been done essentially on time, on budget. And so we should expect to start to see, call it, the full benefits of that starting now. So we look forward to seeing those results in the next few quarters.



In terms of the larger project at canola, we -- as I mentioned on the last call, we have received the environmental permit to include batteries. We are -- we remain in the process with the regulator to amend the concession, but we do think we are getting very close to achieving that. We've had some positive back and forth. And so we are moving that forward and hope to have that approval of the amendment this quarter such that we can move forward and get the down payments on the equipment placed. And once we have that, we think it would be about 12 months from there. And I would say the panel prices continue the trajectory that they've been on, which is positive, and I would say, same comment for the batteries.



In terms of acquisitions, which I did mention on the last call, we continue to -- these continue to move forward. We continue to progress on them, and we are working hard and hopefully, we get something across the finish line in the near term. So that is -- that remains a key focus. So the combination of what we're working on, the expansion of canola plus acquisitions. We think those really are the 2 main initiatives that we're working on at this time in terms of the growth. And we think that, that really ties things together in terms of the capital allocation plan. And we are hopefully really shifting the focus to renewables plus storage as opposed to just renewables. And financially, we're well positioned to do this, given our cash position and low leverage.



I would just quickly mention that we will be planning on extending the normal course issuer bid which we put in place about 12 months ago. So we will extend that, and we may look to do opportunistic purchases every now and then over the next 12 months.



And lastly, I discussed the green bond before. Really for us, this is a Q4 target for this year, which we continue to look towards the ability to repay at least in part or in whole, the San Jacinto loan is January of next year. So we think Q4 is good timing to do something whereby we could have a part of the proceeds to repay that as well as the part of the proceeds to do -- to fund growth initiatives is a good blend in terms of use of proceeds. It's the right timing. And so we look forward to trying to execute on that at Q4 this year. And with that, we think we can significantly increase our cash flow per share without the need to raise any equity. We can continue to grow the business and diversify. And so that's really the big strategic imperatives at this point in time that we're looking to execute on in the back half of the year.



So that's it for us, so we can open up for questions.

[Operator]

[Operator Instructions] Your first question is coming from Rupert Merer of National Bank.

[Rupert Merer, analyst]

Marc, it sounds like you're getting fairly close on an M&A transaction. I'm wondering if you can give us some more color on timing that's anticipated there? And what we could expect an acquisition to look like as far as scale or level of accretion goes?

[Marc Murnaghan, executive]

Yes. So in terms of timing, I would suggest that it is taking longer than we had anticipated, but we do hope to have something called in the next, I'd say, 60, 90 days, there are some technicalities just from a structuring perspective, but everything we continue to move it forward as sort of assuming it's going to sort of come under our way in that time frame and we're planning for that event.



What I would say though, in terms of the the makeup is the best analogy I could give is sort of canola, which is in terms of canola it's about, call it, $5 to $6 of EBITDA currently with an opportunity to grow and to do on site, I would say. So call it, brownfield expansion on site that could include just more of the same generating capacity on a take-or-pay basis, but that can also include more generation paired with storage. And so that's really what we're going for with the acquisition strategy because we think having sort of 2 engines where we can layer in brownfield expansion that's in our own pipeline, but as well as storage, it's really what we're trying to do. So it's -- we're trying to mirror canola with the acquisition.

[Rupert Merer, analyst]

All right. Great. And then with the potential organic growth on that asset as well as across your portfolio, you're seeing lower cost of solar and batteries. How was the competitive demic shifting there? Are you seeing a lot of competition in your target markets? Also looking at organic growth? Do you see any risk of lower power prices in your target market, basically eating up excess returns?

[Marc Murnaghan, executive]

I'd say not in the power -- no, probably notable just because we're dealing in markets where you still have imported as opposed to local -- they don't have local gas markets, so they have to import it. So you've got -- that's the bulk. That's going to be your marginal dollar. It's still going to be at least for the medium term, your marginal costs. So I don't see pressure there on prices. And for us, it would be you would be slipstreaming into existing contracts, at least for the brownfield growth, you already have a contract with great prices that we think so fixed -- well, it's a price that's going up a little bit with inflation. But if you're being able to layer in generation, where the CapEx is actually going down, margins should be going up. So that's kind of what we see in those markets. And I wouldn't say that we see any more competition for that, at least at this point in time.

[Operator]

Your next question is coming from Nick Boychuk of Cormark Securities.

[Nicholas Boychuk, analyst]

With all the other growth that you're talking about here, organic median and then also this M&A, can you just remind us what the CapEx expectations are for the remainder of this year and then into 2021?

[Anton Jelic, executive]

So just -- I really will stick to the organic. I would say if we start in Q4 and the DR, you're looking at about $10 million. The nice thing is the CapEx has come down. Originally, we were thinking it would be like 40%, 45% in total to do all of that. I think it's probably 10 less, so 35%. I would say 10 million of it would be in Q4, something like that in 25% of what would be next year.

[Nicholas Boychuk, analyst]

Okay. And then with your commentary on the cost profile changing, can you kind of walk us through like what the returns on that invested capital should look like? I think obviously IRs have come up pretty meaningfully. Does that change how you're thinking about where you would like wanted to deploy other dollars.

[Marc Murnaghan, executive]

I wouldn't say that it's changed where we want. I think we were already starting from a very attractive level. So it's more that we want to get going on it as quickly as we can because I think -- I mean, time is -- the last 12 to 18 months, it's been our trend in terms of the cap costs coming down. But now I'd say it's just so good, we'd like to get going. They've come up probably another 2 or 3 percentage points, maybe more on the IRR side. So to levels that are, call it, circling around 20%, so plus or minus. So that's fantastic for something that's backed by still a lot of time left on a take-or-pay contract, right? So yes, I think they've come up. They're great, and we just want to get going on it.

[Nicholas Boychuk, analyst]

Got it. And then last for me, just we didn't touch on Panama at all merchant prices still sticking around $150 there. With that level, any color you can share on when they're potentially going to start to come down and normalize a little bit and whether or not you'd look to either, a, lock that in or be do more development there to kind of take advantage of that what you can...

[Marc Murnaghan, executive]

Yes. So just for your benefit, too, the rainy season generally starts in May. So in Panama, we do have an impact of -- they have a lot of hydro relative to their total capacity in the grid. So when you get more rain, spot prices come down, so that's started in June. So they had already started coming down. So the new profile in the quarter was that they were highest in April in the middle and then lower in June.



So Q3, probably looking at 70, something like that. It's hard to know for sure. And that reflects the rainy season. And then -- but I think the longer-term prices are going to come into that range probably starting in Q4 because they do have new capacity coming online. That would be our best guess at this moment. And yes, we are waiting for them to finalize the details on a 500 megawatt renewable power call that we would be bidding into in Q4. That's what the published time line is, and there's been a bunch of back forth with participants. So that should be getting lost any time now. So we, for sure, would be hitting our plans into that. That would be our first option because those are 15-year contracts with effectively government Credit.



And if that doesn't -- if we don't get something and that doesn't move forward, we wouldn't still -- there still is a possibility to go to commercial off-takers. There's a lot of commercial uptakers. The only issue there they're normally about take 7 years would be the average instead of 15. So I still don't feel like we're in a rush to do that, though. So I would suggest we'll -- it would be -- see where this 500 megawatt call lands do that first. And if we get something great, if we don't, we would still likely look to contract with some commercial group for maybe 40% to 50% of the capacity.

[Operator]

Your next question is coming from Patrick O'Donnell, who's a private investor.

[Patrick O'Donnell]

I saw on the IR deck, a target 6.5% EBITDA multiple. I was curious to know just thought process and maybe how conservative or what considerations you have in assessing the operating costs on acquisitions? Or do you get really good visibility on what it will take to operate a potential acquisition project.

[Marc Murnaghan, executive]

So I'll deal with the second part. Yes, of costs, at least in our sector, a very good visibility. Our #1 cost actually is our capital cost or was our operating costs. We -- the staff is hugely not a big number to operate these plants and reasonably known and fit. So I would say very good visibility on our costs going forward. And in fact, I think, if anything, we show that we tend to budget assuming we don't achieve, call it, optimization and synergies on that, but we have continued to do that. So I think we show that we can actually get our cost down over time.



And then in terms of the multiple, I think we put a higher one because when we look at a comp set of Latin America only power companies, which, for the most part, those companies actually are a blend of renewals and types of gas, so they're not pure renewable companies. And I mentioned that just because if anything, the gas would probably be a bit of a drag on their multiple. But when we look at those, we are looking at probably 9x to 10x EV EBITDA would be the average of the comp set. So I think we're putting numbers that are quite conservative on that multiple.

[Patrick O'Donnell]

Okay. That's great to know. Good context. 2, I think, quick ones. But what about replacing degraded power in Nicaragua with solar? Is there an ability? I know you're moving panels over there for some of the just operating energy use, but is there an ability to kind of backfill degraded power with renewables at that site under the contract?

[Marc Murnaghan, executive]

Yes. I would say solar is the easy one, but you're going to be limited. There's only so much space. So it's not going to -- that really -- the #1 way to keep the power up or even grow it would be by drilling more geothermal wells, which we can do, but we made the decision that that's quite capital intensive. I think we would prefer to take our excess cash flow that's being generated by that facility and use it to grow in other jurisdictions. Because to the last question, that multiple that we think we can get to is highly linked to us being more diversified. So we don't think it really -- even if it's good economics in terms of an IRR, if we were to drill a new well, we really think that, at least in this form, the company is better to take that, let's say, $10 million of free cash flow and put it into the Dominican or an acquisition. So to get us to a more diversified company so that we can call it, close that multiple gap.



I would say we do have a sector in Nicaragua in what we call the wet sector, which has not been drilled. -- that is -- we think there's a duplicate of the resource we have right now and we have turbine space, and we have contracts space. We are considering options for [indiscernible] outside capital to see if we can target that to get exactly at the point that you're raising. But that's, I would say, it's somewhat early days on that, and I wouldn't want to comment on that, but it is for sure something we're going to look at because we think it's prospective. But if we can -- we would rather do that on a, call it, more of a joint venture type basis and bringing in a partner if we were to do that.

[Patrick O'Donnell]

Got it. Okay. Makes sense. And last question, what's the status of generating carbon credits for revenue? I know you guys did that a couple of years ago, but haven't really -- I guess I haven't seen it in a few years.

[Anton Jelic, executive]

Yes. So from 2020, 2021, beginning half of 2021, the market really improved. We did sell some, we thought on good prices and then the inflation rate because we're in voluntary markets, the voluntary market is just a cut or they went from, let's say, the were from $250 a tonne to $5 a tonne, call it, is what we were selling at. And then they went back to $0.25 a ton and volumes just kind of disappeared. However, to your point, like we are seeing interest in volumes coming back, and we are actually looking at transacting again in some maybe smaller volumes, but call it in $2 to $3 range. So that market you are starting to see, I would say, percolating of interest from buyers, again, which didn't exist 12 months ago. So we're -- maybe we're at the early days. I know it's hard to -- I can't give guidance, but if we could get some sales in that range, we wouldn't sell everything, but we would for sure start making sales if we can get in the $2 to $3 a ton range. It seems like there's interest there, and so we're exploring it. So maybe we get something in the back half of the year, we'll see...

[Patrick O'Donnell]

Got it. And are those typically corporate buyers? Or who are the buyers that you've seen?

[Marc Murnaghan, executive]

Yes. The believe corporate -- so one of the largest buyers is CORSIA, which is -- it's an alliance of all the airlines because they buy. They actually -- when people buy voluntarily credits, they then have to go and match that. So they're quite a big buyer consortium, their buyer. And then you have some other energy companies that decide that they're going to do it. So it's mostly corporate. There's a few governments, but I think it's mostly corporate but because it's -- yes, they're voluntarily doing it. That means that, that market can kind of -- is a bit more volatile, but it seems to be coming back.

[Operator]

[Operator Instructions]. Your next question is coming from Devin Schilling of Ventum Financial.

[Devin Schilling, analyst]

Just on the green bond market here. Maybe you guys can just comment on the health of this market right now? And I guess, what rates you're seeing out there versus the current cost on the step that you're looking to refinance?

[Marc Murnaghan, executive]

So I think everything we've seen and really not the experts, but that the market continues to be very strong. I know the first half of the year was really strong. It seems to be continuing. So that market seems to -- for sure think rates are coming down a bit or at least have stabilized and there's a lot of capital there. So that's our sense.



I think there would be it's really the big benefit for us isn't really rate, although I think maybe we can save 50 to 100 basis points on a rate basis. It's the different amortization schedule because we're so lowly levered right now, and we're still damming down our debt pretty quickly. We think we're paying down our debt too fast relative to the life of the contracts and the assets. So we would prefer to blend in a bond where you're either no amortization or very small amortization such that our conversion of, call it, our EBITDA and the free cash flow just goes up even if the rates stay the same.



So we think that is an appropriate thing to do, and we could take that extra cash flow and then use it to grow the company. Maybe you increase the dividend, maybe you buy that stock, but you would look -- we would have the ability to do all of those things. So I would suggest that while I do think there's a rate savings, I would -- that wouldn't necearily be the biggest driver for us at this point in time.

[Devin Schilling, analyst]

Okay. Yes. So repayment terms is kind of the key component.

[Marc Murnaghan, executive]

Yes.

[Devin Schilling, analyst]

Okay. [indiscernible].

[Marc Murnaghan, executive]

There. I would start with that one, actually, yes.

[Operator]

Well, that appears to be the end of our question-and-answer session. I will now conclude the call. Thank you very much, everyone, for joining us. This does conclude the call.

[Marc Murnaghan, executive]

Thank you.

[Anton Jelic, executive]

Thank you.

[Operator]

Enjoy the rest of your day, and thank you for your participation.