Polaris Renewable Energy Inc. (PIF) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Polaris Infrastructure Inc's. Fourth Quarter 2020 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the call over to your speaker for today, Anton Jelic, CFO. Thank you. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to the 2020 Fourth Quarter Earnings Call for Polaris Infrastructure Inc. In addition to the press releases issued earlier this morning, you can find financial statements, our MD&A on both SEDAR and shortly on shortly our website at polarisinfrastructure.com. Unless noted otherwise, all amounts referred to are denominated in U.S. dollars. I'd like to remind everyone that the comments made during this call may include forward-looking statements within the meeting of applicable Canadian Securities Legislation regarding the future performance of Polaris Infrastructure Inc. and its subsidiaries. These statements are current expectations and, as such, are subject to a variety of risks and uncertainties that could cause 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, 2020. I'm joined this morning, as always, by Marc Murnaghan, Chief Executive Officer of Polaris. At this time, I'll walk through our 2020 fourth quarter financial highlights. Starting out with power generation. Consolidated power generation for the 3 months ending December 31, 2020 and 2019 were 171,933 megawatt hours and 144,761 megawatt hours, respectively. Consolidated power generation for the 12 months ending December 31, 2020 and 2019 were 662,893 megawatt hours compared to 570,934 megawatt hours, respectively. These production figures are net of all planned downtime, both planned and unplanned. With respect to Nicaragua, we saw total megawatt hours of 127,823 in the fourth quarter 2020 versus 132,182 in the same period to last year. In Peru, total megawatt hours for 3 months ending December 31, 2020, were [ 44,110 ] versus 12,579 in the same 3-month period in 2019. Looking at revenue, we reported revenue of $18.5 million for the 3 months ending December 31, 2020, compared to $17.8 million in the same period last year. Revenue quarter-over-quarter in 2020 is up by 4% due to higher production in Peru, partly offset by some lower production at San Jacinto, Nicaragua. On a year-over-year consolidated basis, we realized 5% more revenue to a tune of $74.7 million compared to $71.3 million in the same period in 2019. Net earnings. We've recognized net earnings attributable to us of $24.2 million for the 3 months ending December 31, 2020 compared to net earnings of $13.6 million for the same period in 2019. This $10.6 million increase was the net result of a $24.5 million impairment reversal at San Jacinto, offset by an increase of other direct costs and general and administrative expenses in the 3 months ending December 31, 2020. For the 12 months ending December 31, 2020, we realized net earnings of $28.8 million compared to $14.5 million loss in the same period in 2019. The $14.3 million increase in earnings was driven primarily by the impairment reversal in the current period compared to an impairment recorded in 2019, coupled with the increase in revenue, and partly offset by the increase in direct costs, G&A and other losses -- sorry, other losses and gains recognized in the period. Adjusted EBITDA. On a quarter-over-quarter basis, adjusted EBITDA decreased to $13.6 million from $14.1 million, principally as a result of higher direct costs and expenses, partly offset by higher revenue reported in 2020. On a year-over-year basis, the company has realized $58.7 million to December 31, 2020, versus the same $58.7 million recognized over the comparative 12 months in 2019. Moving on to cash generation. Net cash from operating activities for the 12 months ended December 31, 2020, at $40.3 million decreased by $6.8 million from the same period in 2019, mainly due to a $4 million increase in net change in noncash working capital and higher costs, partly offset by lower interest paid and higher revenue during the same period last year. Net cash used in investing activities decreased for the period ending December 2020 by $42.3 million to $2.9 million from $45.2 million in the same period of 2019, largely due to the decrease in spending related to construction in Peru. The construction of which was completed in late December 2019, of course. Net cash used in financing activities for the period ended December 31, 2020 of $10 million increased by $2.9 million compared to $7.1 million net cash used in financing activities reported in the same period last year. The increase was driven by an $8.8 million higher repayment of debt during the 12 months ending 2020, partly offset by $5.8 million higher proceeds from debt issuance compared to the proceeds received from the debentures in the same period in 2019. ESG. The company is very pleased also to announce that it has issued its inaugural 2020 Annual ESG Report, which details Polaris' ongoing emphasis on environmental, social and governance priorities as part of its core business principles. It's now available on our corporate website for review. Finally, dividend. I'd like to highlight that we did pay our 20th consecutive quarterly dividend on February 26, of $0.15 per share to shareholders of record on February '19. This continues the Board and management's commitment to regular, positive distributions to shareholders, coupled with an ongoing emphasis our on attractively valued accretive acquisitions. With that, I'll turn the call over to Marc to elaborate on our current business management as well as on our quarter end -- quarter and year-end results.

Thank you. Thanks, Anton. And probably more into subsequent events and sort of looking forward, and I know we'll open up to questions. But obviously, everybody knows that we did raise in equity capital, closed the financing a few weeks ago of CAD 51 million, just shy of USD 40 million. One other thing that's quite important though is that since year-end, and even it's -- that we have started maybe a little bit in December, but the receivables in Nicaragua have come down to a nice low level, so we've generated some extra cash there, somewhere sort of in the $5 million to $10 million. Those 2 items and with the strong cash balance that we had going ending the year, we're now sitting with a cash balance of over USD 100 million, which sets us up quite nicely for all of the initiatives that we want to work on. First being the binary unit, which we have communicated on that, was a key part of the renegotiated contract last year, which is the inclusion of the binary unit. We have -- and just to remind people, we spent a lot of time in 2017 with the designs, and actually ran a tendered process, so we decided not to go ahead with it for contracting reasons. That has changed. So we are investing off the designs but being finalized by our owners engineer that we have already contracted. We will be finalizing those designs very shortly. And then moving to the full tender process with the expectation that we will award the contracts to the equipment supplier middle of the year, so probably July would be the target for that. And from there, let's call it, 12 to 16 month construction project from that point in time. So we're moving ahead with that. And I think we'll be able to give final sort of configurations in terms of the sizing. We think 7 megawatts at the low end is doable and upwards of, call it, 10 megawatts net, is what we're targeting when we can get a final visibility on that. And I think once we contract and give that visibility, I think that -- unlike the drilling campaign, that's a number that is very bankable. So we are full steam ahead on that. Chuspa, which is the hydro project in Panama, we had been delayed because of the COVID situation there last year. It is much better as we speak in terms of the cases, but also the construction sector has been open for quite some time now. So we -- everything is pointing in the right direction there. We have -- there was a site visit 1.5 weeks ago, there -- with our owners engineer. There are some small design changes that we want to make. They're not major, whatsoever. So once we finalize that, we can move to finalizing the change of the contractors, and we're aiming for a June start and mobilization on that project. So those 2 projects, the binary and then Chuspa, were well on in hand from a capital perspective before we did the financing. We would not have done the financing if we didn't think that there were other opportunities to grow the business and diversify the business. We think that's the case. We had done a lot of work, call it, pre-COVID on certain opportunities, but COVID put a lot of things on the shelf. But we are -- we have seen that, that has changed and things are back in play in earnest as of the beginning of this year. So we felt it prudent to put some more capital on the table to be able to take advantage of those opportunities, and we are working on several. There's no guarantee that we can close those, but we are optimistic that we, given the amount of things we're looking at, that we should be able to do something. And now -- so we have the capital to do a binary unit, to do Chuspa, to do either one, call it, 2 sort of smallish acquisitions, or 1 bigger acquisition that would be material for us. So we have the balance sheet to do that. And as I said, with the improvement in payables in Nicaragua, that even adds a little bit more there. So we've got the cash to do it. And one thing we haven't done yet is deal with the debt in Nicaragua, which is another big focus for this year for us, and that is -- we are in the middle of talks with our current lenders about restructuring the debt, given the extra term on the loan, and that would provide, really, just the re-profiling, I would say, which is that we are paying down very high percentage of the loan balance this year, next year, the following year, given the fact that the prior contract was expiring. So our principal payments, you'll see around $18 million or $19 million, or $20 million next year, but that was based on the old contract, which had a 2029 expiry. So now that we have a 2039 expiry, we think, at a minimum, we can flatten that out, reduce the principal payments and try to match it more. And then from there, we have started conversations with other groups about doing a much broader refinancing. And so that is -- those conversations are happening. It is a key focus for this year. I would suggest that it's, call it, restructuring first. And then we would look to do something potentially bigger, given, again, the debt-to-EBITDA at the -- even the revised price is still quite low. And depending on how the, call it, the acquisition situation looks in the next 3 to 6 months, that would tell us whether we're, call it, going to the market with a -- just a revised Nicaragua San Jacinto refinancing, which there is interest in, or are we looking at doing something potentially broader that includes, let's say, Chuspa and maybe 1 other project or 2 other projects that we've acquired. So that's what we're debating. We definitely think that, that opportunity exists. So -- but first, it's restructuring, then I think we'll look to do a refi later. One other thing we're noting is the is the carbon credits that is a focus for us to execute something there this year. We do already sell carbon credits at the small 5-megawatt facility in Peru. But we had to, last year, revalidate the bigger plants in Nicaragua, which is done. And we are now in the process of finalizing the verification and, call it, listing process that will take 4 to 6 months to finalize all that because we're actually going back and verifying credits even from 2012 up to present day. But we think we'll be ready to have a sale of those, probably Q4 of this year, so which we think would be an interesting milestone for the company because that's a reasonable amount of credits there. And at the same time, the group that verified and validated the 5-megawatt plant, Canchayllo, in Peru for carbon credit is also -- we started mid- to late last year, the process of doing the 8 de Agosto ad El Carmen facilities in Panama, or sorry in Peru, which are -- which would be under the exact same system under the United Nations Carbon Credit system. So they wouldn't be ready until likely the end of this year, but we think that they could be ready for sale next year. So we are pushing forward [ until one gets smarter ], do what we would think would be a reasonable volume in the fourth quarter this year on the carbon side, and also into next year with 2 other facilities that would be able to sell carbon credit. So we think that's a unique asset for us and it's something that we want to absolutely move forward with this year and get visibility on the opportunities are there and what kind of potential upside there is, longer term, on that. So that's a big focus for us as well. And then my only other comment, just in terms of backward-looking for the dividend payout last year. If you look at sort of the cash flow from operations, before principal, it was 20% last year. And I'd bring that number up just because that's -- it's a way to compare us with any of the other public comps because it's hard to get the principal repayments on the debt. But if you look at us on a post principal, it would have been just over 40%, and that includes sort of all principal payments and an interest on the convert. And I would just suggest that those principal payments, in our mind, are now high, given the tenor of the contract in Nicaragua. So with that, that concludes my remarks, so we can open it up for questions.

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

My first question here, just a quick confirmation on your comments, Marc, around the refinancing. I just wanted to confirm, you said that after the restructuring at San Jacinto, you could do a broader refi, and that would include San Jacinto, Chuspa and a potential project to be acquired in the future. So I guess, a broader refinancing across those, potentially, 2 or 3 projects. And maybe just if that's correct, what kind of terms do you think -- could you get better terms on a broader refi? Or how would that compare?

Yes, absolutely. I think you can get better terms and not really, David, though, on a rate. We can improve the rate somewhat, I think. But I think more importantly we could really improve your tenor and your principal repayments. So even from what we're looking at doing on the restructuring. So the big -- for us, the real win in that is extending your amortization schedule such that rather than whether it's $10 million to $15 million of principal repayments, it's $7 million to $10 million. So it would really free up a lot of cash flow. So -- and I think the only, call it, debate and in our mind, is the timing of that because for sure, the more you have, the better you can get. So the question then becomes sort of how soon, if we assume we do some form of restructuring with the current loans, how soon after that you go to do something where I think you could, for sure, take even money out in terms of equity, so we would add to the total amount by maybe $25 million to $40 million, just on the San Jacinto part. So I think it would be both improving the amortization schedule, but also potentially freeing up extra cash to go do more acquisitions. So that would be the other big benefit.

Okay. Excellent. That's great. And then maybe just another one on the Carbon Credits, your comments there. So I guess just to frame it up, you've got back, I guess, credits you've built up since 2012, as well as an ongoing creation of credits through generation at San Jacinto. So is it going to be a situation where once you get them certified later in the year, you could sell a lump sum of the ones that have been built up? Or would it be just like a continuous stream based on an inventory that extends back to 2012?

So you could do a lump sum of the history, not likely all of it because it's about $250,000 a year. So if you take 7 years, it's a lot. We think something in the maybe 1/3 of that is possible. And then the big question is, okay, what do you think you'd get? The issue with the whole vintages is it would be very hard to really get a really good price. But maybe we could be a $0.75 per tonne. So if we sold 5,000, that's at least $250,000, $500,000, let's say, in terms of cash for us. But really, just dipping our toe sort of in the market and testing the water. So we can do history lump sum and then, more likely, you're doing sort of the current stuff next year, I would think, and rolling that forward on an annual basis, hopefully.

Okay, great. Excellent. I think that -- maybe just one more question. I know we ask you this every quarter. But just given the fact that it does look like you're getting close to doing something strategic on the M&A front, maybe just any comments you have on how things have evolved more recently in the core markets or the key markets that you're looking at, just for diversification. Has activity ramped up with pandemic and just any updated thoughts there.

Yes. I think the big comment would be that most groups' things got put on pause. We see owners of projects that were -- the projects aren't their core business, they have other businesses. But they're maybe playing defense on their other businesses. And so -- and they were kind of given a stay of execution last year because everybody kind of went on pause, but that's not going to happen. So what we are seeing sort of pressures in these other businesses are increasing the desire to transact on something in the power business.

Okay. Perfect.

Yes. So the -- having the cash, I think, is a very strategic long-term advantage for us.

Our next question comes from Mac Whale from Cormark Securities.

In doing both the refinancing and maybe restructuring, are there penalties involved or cost, like onetime costs that we should consider?

Yes. So there is -- I think if you assume sort of 1.5% to 2% on the senior loans in Nicaragua, which is about 100 of the total. And there is areas of negotiation. That's the bulk of it. There is a negotiation happening on [ that side of it ] because, technically, there's a make-whole there, but we are in the final process. We think of coming up to an agreement on just a percentage of the outstanding amount that would be higher than the senior, 1.5% to 2%, but nothing super material in the sense that, that's about a $20 million principal value. So even if it was, call it, a big percentage in the 5% to 10% range in dollar terms, it's not a lot. And that -- sort of that would wag the dog, so to speak, but a bigger [indiscernible] and that would be a small amount to clean everything up and move on.

Okay. And so -- and I guess on what you would place it, you wouldn't need to have that senior and sub structure?

Correct. Yes. And that would be more on a total refi, right, so that we have to take it out. But in terms of what we're looking at with the current vendors, is the restructuring that -- keeping the general -- the existing service structure in place but redoing the principal payments in a way that just brings that cash short term.

Okay. And presumably, you would cut down the number like you wouldn't syndicate it out to what you had before? Like I'm just wondering, is it the same people that will look at the refi? And like do you have a different pot of money that has different term requirements? Or is it a completely different set of people?

I would say it's both in the sense that there is a completely different set of people that -- it's one person, $150 million. We've had conversations with groups that -- where the terms of the loan would be something more like a 5-year loan, that's not even amortizing. And these are -- I would call it more institutional lenders in the U.S., and they wouldn't want anybody in. Interestingly, on that, we had a few of them said, okay, we're quite interested, what kind of insurance can you get? And we've talked to the World Bank on that and we've got very good quotes on the insurance. So that, we think, is a -- so if you have that sort of political insurance wrapper combined with the credit and the long-term contract, we think that's quite an interesting product. And so we haven't really pushed that yet because we want to do step 1. But that kind of group wouldn't really -- they would want to get rid of the existing lenders, and it would be 1, maybe 2 -- maybe 2 lenders. Then -- but we even have had conversations with some of the existing lenders that have said that they would want to talk to us about a broader refinancing because they're quite interested in that. And that would be more of a syndicated with -- and maybe instead of 7, which is what we have now, maybe it's 4. So both -- it's both. I think -- and we have options, and it's a bit early to tell which way we should go on it.

Okay. And would that -- did that come from the potential lenders, the idea that you could couple together more than just the 1 asset?

No, that's really -- that's us, and we know that you don't really need to ask people if more diversification and more, call it, equity. For instance, the reason why it is the way we structured there is that we've effectively -- there was a small piece of debt. We've negotiated to a point that it's going to be more like a subordinated payment, such that it looks like we equity financed 100% of it, so that we then can put it into a package. And if there's one thing we know, is that lenders like to look at -- have more diversification and even scale, just even the size. The one thing when I said there's some groups we talk to that say it's $150 million. Some of them was just -- it's got to be $150 million. They don't want to do $100 million. So some of these groups, we actually needed some scale. And they prefer to do $200 million or $250 million on the loan side. So having something like Chuspa or even Chuspa and acquisition, really means you're giving some scale, too, which fits with that market better.

Okay. And so presumably, they're not looking at what you got on in price now as a starting point. They're looking at your cash flows and the track record of cash flow production and counter-party [ grit]. Like they're looking at it from, I'm going concerned that you have a track record on. Is that fair? And the reason I'm asking is because -- that's why they might consider $200 million or $150 million a year.

Yes. I mean a lot of these people are looking at loans or projects that haven't even started yet. So we have that. We have the track record and a long-life asset, right? So they can look at that and they can look at the payment history, which has been very good. So from a credit perspective, they look at that, they see it's already operating. Really, at that point, they're looking at -- and don't forget, the binary unit really provides, call it, a 0 decline asset to come into the mix. And then you run the numbers, and you're then debating -- you're not really debating the credit risk, you're debating about, okay, so is it going to be [ 2, 3, 4 or 5 ]. It's going to be a curve, really, but they're debating that. And when you on the numbers, you can have some very, what I think, are overly conservative assumption on the decline rate and $150 million is no problem, just on San Jacinto. And that's what they were looking at. [indiscernible] run the decline curve that we think would be overly conservative, and their coverage ratios are still fantastic.

Well, and there's nothing in the power agreement that includes where the debt is, like it's presumably -- like does it sit at a holding company level, above the project? Like does it shift where it resides?

As with the local entity, that has to remain the case. But whether how you connect that local entity is completely up to you.

I see, right. We can loan it out to another -- I guess [indiscernible].

Yes, 100% equity always in Nicaragua. And Polaris is lending money down. It does -- that doesn't, that wouldn't impact our contract.

Your next question comes from Naji Baydoun from IA Capital Markets.

I guess, just to start off, there's some commentary, obviously, on the corporate development team in the MD&A. You've expanded that team. I'm just wondering if you think now you have all the talent that you need going forward? Or do you still expect a ramp-up in hiring?

Good question. I think we're -- I think we have what we need from an execution of an acquisition from, I call it, a due diligence finance function, potential debt restructuring from, even, I would say, the HR in the region because we do have the boots on the ground. The only thing that I think we don't have -- and I don't know if we really would bring it in. But, for instance, some of the things we're looking at, like we are looking at some solar, and/or we're looking at some things that are hydro, but that have solar expansion opportunities. That -- solar is much less complicated than geothermal and hydro, but you would still want to have some expertise in terms of assessing that opportunity. But I would suggest that at this point in our life cycle, it would just make sense to contract that out to an engineering firm that has that experience similar to what we did in Peru with the hydro. So the short answer is yes, I think we have everything that we need to execute for several years now. But when we look at some of -- if we enter into a different asset class, i.e. solar, we would need to, call it, bring in some external consultants.

Okay. Okay, that's helpful. And I guess the question that's tied to this, obviously, the focus for you today is more diversification. And with Panama, you're going to be in 3 jurisdictions. I guess if we fast forward a few years, from a longer-term perspective, how are you thinking about what the right balance is for you between more regional diversification versus maybe having a more concentrated but leading market presence in select regions in Latin America?

I would say we're going to lean to more diversification as long as we're not going too far away, geographically speaking, because the view, I would say, is in this sector. Having a concentrated market position doesn't necessarily help you out all that much, combined with the fact that the opportunities that I think in the last 2 to 3 years that we're looking at are below the radar of, call it, the big pension funds or the bigger power companies. And so that is an advantage for us. And so if we tried to get much bigger, start looking at $500 million opportunities, I just think the returns are going to start to really get compressed. So I think it's more about diversifying the platform in the region and getting solar in there, getting another country or 2 in there, so that within 3 to 4 years, it's 4 countries, it's minimum 3 asset classes, maybe 4. That's, I think, what our preference would be.

Okay. Got it. That's great detail. And then one last question. I guess you've been highlighting your ESG policies and disclosures more and more over the past year. I'm just wondering if you can talk about what you believe is the next sort of natural step for you on that front? Meaning, are there any other specific ESG disclosures or targets that you might be looking at highlighting, let's say, this year?

Well, I think that the -- really, the 2 areas would be, well, it's really all the -- all 3, there will be a little bit more in the sense that I think the carbon credit isn't technically part of the E, but I think highlighting that and showing that we have that as an asset and potentially monetizing it, I think, moves the E forward. On the S front, I think we do a very good job of advertising it. It's particularly for Nicaragua. We've done some very good programs in Peru last year, but we were limited because of, basically, travel restrictions with COVID. So it was -- just even getting to site -- Peru did some very aggressive lockdown. So as they open up this year, I think we're going to ramp up the social in Peru, and so we really -- that is -- we're waiting for that, and it's really important for us to do that. So I think the social is going to really ramp up in Peru this year, probably the back half, but it will ramp up. And then on the governance side, I think it's just more disclosure in terms of our compensation practices. So that is, as a small company, I would say that the E was easy for us and the S was easy for us, but the governance is harder in the sense that you need more resources and you need Board members very focused on it. So the good news is that we brought on Margot Naudie last year in June, and so she has a good -- very great capital markets background. And her and our Chair, Jaime, have really spent a lot of time on the governance, so a disclosure. The process was on the compensation. And so we've really pulled up our stocks on that, which we think is very important because everybody is looking at it. So I think you'd see a marked difference this year, more on the G than the other 2.

Your next question comes from Steve Kammermayer from Clarus Securities.

Just back to the acquisitions here, you mentioned in some of your commentary that some of the vendors, maybe their other businesses are seeing some pressure now that covered the year in. Are potential prices coming down that you would need to pay for some of these acquisitions? Or have they stayed relatively the same as back in March '20?

I think they've stayed the same in the sense that the sector has really gone up. But because of those pressures, they haven't. So they sort of stayed the same, I think. It's more, they're available. Now, I would say that, again, the area that we're looking at, we think the return profiles are very good compared to the larger assets.

Okay. And what would be the -- can you give us an idea of what a relative price difference would be, an operating asset versus a development asset? And maybe on a multiple standpoint, what you're looking at or what you're seeing?

So yes, let's say that like a really clean operating asset, anywhere from 9 to 11x EBITDA, whereas a build -- as an example, we think we can build Chuspa at about 6 to 7.

Okay. And you mentioned, again, back to your commentary, maybe do a couple of small acquisitions or a larger one. Can we assume that if you do the larger one, that would be an operating asset? Or would there be some development opportunities to that as well?

Every -- so the ones that are, call it, like a lead would combine both. So we do have some things that we're looking at that are sort of pure development. I mean so Chuspa would be one of them, right? But we have a few others that would be similar to that. But the main ones we're looking at are a combo of operating plus a development. And I think that's a really important point in the sense that, obviously, the -- we think the plant is quite attractive that you get current production with the growth opportunity. So we have, call it -- we have enough of those that are on our side, so that have a combination, which I think is an important part.

We have no further questions. This will conclude today's conference call. Thank you for your participation. You may now disconnect.