Polaris Renewable Energy Inc.

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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. Mr. Anton Jelic, you may begin your conference.

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 CDAR 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 expectation 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 31st to 2019. I'm joined this morning, as always, by Mark 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 dividends. Power generation. Consolidated power generation for the three months ending June 30th, 2020 and 2019 were 165,541 megawatt hours and 136,136 megawatt hours respectively. Consolidated power generation for the six months ending June 30, 2020 and 2019 were 347,949 MWh versus 283,738 MWh, 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 three months ending June 30th, 2020 We're 35,863 versus 7,179 in the three months ending June 30, 2019. Quarter over quarter, this represents a decrease in 2020 based on continued downtime at El Carmen and entry in Q2 into the dry season. Revenue. We reported revenue of $18.9 million for the three 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 Ocho 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 Mark will address further in his comments. Net earnings. We recognized a loss attributable to us of $1 million for the three months ended June 30th compared to a loss of 8.6 million for the same period in 2019. For the six months ending June 30th, 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 the same period last year. Cash generation. Cash flow from operations during the three months ended June 30, 2020 increased by $1.8 million to $10.9 million. from $9.1 million due to the increase in revenue coupled with lower interest paid when compared to the same period last year, partly offset by the increase in direct costs. Year over year for the six months ending June 30th, 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 28th of 15 cents per share to shareholders of record on August 17th. 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 Mark, who will elaborate on current business matters as well as on our quarter end results. Thank you.

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 the EBIT from Q1 to Q2, so down just under 2 million. The makeup of that would be approximately call it 800 of lost revenue from El Carmen being out of service. 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 1.2. And then quarter over quarter, because Santa Cinta was down, that would be about $700,000. So that gives you sort of approximately the $2 million difference, of which I would say quote-unquote permanent would be maybe $600,000 to $700,000 of that, and the rest is temporary. And then on the insurance proceeds, so we had to expense, call it $360,000. We did actually receive in 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. Another important comment is the cash. So the cash at June 30th just sort of consolidated just over 48. We actually did... two drawdowns on the Brookfield facility. So we did one in June, which was the bulk, which was 22. 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 six months. Again, for the quarter, If you did look at the insurance proceeds as an offset of the repair costs, it would be closer to $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 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 half a 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'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, and we did the last week. We've done tests, so all of the tests were completed successfully, so that's great news. It's hard to give an exact, call it timeline, but we think if it wasn't for the COVID restrictions, we likely would have had that online in May, and in May, and so um call it uh somewhere between a two two and a half month delay um that we just couldn't get around because of quarantine restrictions etc so um but it's online so um we will expect you know going forward here that um call it q3 this year q4 and even i would say q1 because we did have teething issues on Ocho 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 we did 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, back 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, you know, where the field found stabilization. So that this quarter, Q2 at 59.4, remember that we did have That's about half a megawatt of downtime, so it's still quite close to that 60 megawatts that we had at Q3 of last year. That actually is very close to the numerical model in terms of the predictions of where we would be without any significant capital investment. 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, and we are tracking on that. 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 are, I would say, within two to three weeks of finalizing our diligence. So we're very close to having that, call it ready to go, with 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 case has 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 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, you know, 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 Canada 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 under levered 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 Debt and cash levels were at net debt of between 2.2 to 2.5 times, depending on how you treat the convertible. But even if you treat that as debt at 2.46 times, 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 advantages of a lot of the opportunities that we are still seeing in the market. So with that, I will turn it over to questions.