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.

Thank you, gentlemen. In order to ask a question, simply press star, then the number one on your telephone keypad. We'll pause for just a moment while we compile the Q&A roster. And your first question comes from the line of David Quesada of Raymond James. Please go ahead. Your line is open.

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

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

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

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

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

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

That's great. Thank you. I'll get back in the queue.

Thanks, David.

And our next question comes along with Mac Whale of Cormark Securities. Your line is open.

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

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

Yeah, that makes sense.

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

Okay. Yeah, I follow it through on the EBITDA line. It was just when I was looking at the income statement itself, I'm wondering maybe there's a way that the direct costs are reported. I'm just looking at the raw direct costs from under $2 million to $22.7 million. And I was just looking at that from going forward, obviously, The 2.7 is probably pretty high as I go forward.

Yeah, that's too high. Absolutely. So it's at a minimum too high by $400,000 per quarter.

Okay.

And we didn't have in the quarter, we didn't have anything else from an operating cost perspective that was that much different than Q1. It was really that low.

Yeah, there wouldn't be. I was just wondering whether there was something that you've added headcount or something.

It's very small. No, nothing chunky. There's been a little bit at the head office, but we're talking maybe $150,000 a year. So quite small.

Okay, and then on the other costs, most of that increased. There's a Well, other income. It's a big 3.3 negative. That's all the convertible, the option, conversion option.

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

Yeah, exactly.

Yeah. So...

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

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

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

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

Yeah, and it's not like in... northern North America where you have, like, a snowpack and you're worried that there's, like, a long-term effect. Like, everything is sort of reset every year given the nature of the resource.

Correct. That's the view. And so, yeah. Okay.

Okay. Yeah, that's good. Okay, thanks. That's all my questions.

Thanks, Nick.

And just a reminder, in order to ask a question, simply press star, then the number one on your telephone keypad. Your next question comes in the line of Najee Baidun of Industrial Alliance. Your line is open.

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

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

The reason would be, as you mentioned, it's because you don't want to have too much of a lag or a difference between programs and you'd rather keep it on a consistent schedule or go back to a normal schedule.

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

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

Yeah, I just think it's a bit later. But as we, you know, in Nicaragua specifically, we're now, you know, sub two times that EBITDA, right? And that will continue to go lower. as we move forward here. And the way that I would look at it is that what we're hoping to do is ramp up the conversations with the parties that we had before in Q4 to start to take a serious look at it in 2021. Yeah, I would like it to be a bit sooner, but I think that's the realistic timeframe.

Okay, that's great. The rest of my questions have already been answered. Thank you.

Okay, thanks, Nadia.

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

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

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