Polaris Renewable Energy Inc.

Good day, ladies and gentlemen. My name is Tasha, and I'll be your operator today. At this time, I would like to welcome everyone to the Polaris Infrastructure, Inc. Third Quarter 2020 Earnings 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. At that time, in order to ask a question, you can press star and the number one on your telephone keypad. To withdraw your question, press the pound key. Thank you. I'd now like to turn the call over to your host, Mr. Anton Jelic, CFO. Please go ahead.

Thanks, Tasha. Good morning, everyone, and welcome. In addition to the press releases issued earlier today, you can find our financial statements and MD&A on both CDAR and shortly on our website at polarisinfrastructure.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 Infrastructure Inc. and its subsidiaries. These statements are current expectation 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 reform for the year end of December 31, 2019. I'm joined this morning, as always, by Mark Moynihan, Chief Executive Officer of Polaris. Before I begin my discussion, I would just like to share Polaris' continuing 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 2020 third quarter financial highlights and comment on our just announced quarterly dividend. Power generation. Consolidated power generation for the three months ended September 30th, 2020 and 2019 were 142,194 megawatt hours and 142,435 megawatt hours respectively. Consolidated power generation for the nine months ending September 30th, 2020 and 2019 were 490,143 megawatt hours and 426,174 megawatt hours, again, respectively. These production figures are net of all plant downtime, both planned and unplanned. With respect specifically to Nicaragua, we saw the total megawatt hours of 118,857 in the third quarter of 2020. versus $133,025 in the same period last year. In Peru, total megawatt hours for three months ending September 30, 2020 were $23,337 versus $9,410 in the same three-month period in 2019. Our facility at El Carmen restarted operations on August 4. Revenue. Revenue. We reported revenue of $17.1 million for the three months ending September 30th, 2020, compared to $17.6 million in the same period last year. Revenue quarter over quarter in 2020 is down slightly by $1.8 million, driven mostly by lack of production in Del Carmen for much of the quarter, lower than anticipated hydrology generally in Peru this year, and downtime associated with our annual maintenance at San Jacinto, Nicaragua. On a year-over-year consolidated basis, we realized 2.7 million additional revenue driven by an additional 12.2 megawatt net production in Peru. Net earnings. We recognize net earnings attributable to us of 1.3 million for the three months ended September 30th, 2020, compared to net earnings of 2.8 million for the same period last year. For the nine months ending September 30th, 2020, we realized net earnings of 4.7 million compared to a $0.8 million loss in the same period in 2019. Adjusted EBITDA. On a quarter-over-quarter basis, adjusted EBITDA decreased to $13 million from $14.3 million, principally as a result of a decrease. On a year-over-year basis, the company has realized $45.1 million to September 30, 2020, compared to $44.6 million recognized for the same nine months in 2019. cash generation. Net cash from operating activities for the nine months ended September 30th, 2020 of 30.1 million decreased by 1.5 million from the same period last year, mainly due to a 1.1 million increase in our accounts receivable, coupled with a $2 million increase in prepaid expenses, partly offset by a 1.5 million decrease in our accounts payable balance compared to 2019. Net cash used for investing activities decreased for the nine months ending September 2020 by $26.9 million to $2.2 million from $29.2 million in the same period last year, principally due to the decrease in spending related to the construction of the Generación Andina facilities, El Carmen and Ocho de Agosto, for which construction was completed in late December 2019. Net cash used in financing activities for the nine months ending September 2020 of 1.9 million increased by 1.6 million compared to 0.3 million net cash used in financing activities last year. As a result of 6.5 million more repayment of debt during the nine months ending September 2020, partly offset by 4.9 million higher proceeds from debt issuance compared to the proceeds received from the debenture's in the same period last year. Dividend. Finally, I'd like to highlight that we do intend on paying our 19th consecutive quarterly dividend on November 30th of 15 cents per share to shareholders record on November 20th. This continues the board and management's commitment to regular positive distributions to shareholders coupled with an ongoing emphasis on attractively valued accretive acquisitions. With that, I'll turn the call over to Mark, who will elaborate on current business matters as well as on our quarter-end results. Thank you.

Thanks, Anton. So I'll make some comments here. Obviously, the maintenance in Nicaragua for Q3, which was planned, but that would have a negative impact or did on the quarter. What I would suggest, though, just a general comment about the overall production levels At San Jacinto, probably a better metric is quarter to date. We're at around 59.3 versus we reported 59.9 in Q4 of 2019. So that is a small drop, but still quite stable and well within the range of declines that we would expect to see. And very importantly, it's quite close to the numerical model that we do have posted on CDAR, which was done by Jacobs, where they do several scenarios, one of which is just a no more capital reinvestment in the plant. What do the declines look like? And theirs is actually quite low. The good thing is at these levels, we're tracking quite closely to that. So I think that's very important to note. I think the other thing is that with Q3, we had two things. We did expect that it is the dry season in Peru, so we knew the production was going to be low, but we also got El Carmen back into operation on August 4th, so it was not basically producing for July and a few days in August, so it was out of that. But important to note is that this quarter, so all three facilities are in operation. We are coming into the rainy season. So I think that we are coming into a few quarters here where in Peru we have the plants running. We should be in better sort of hydrology conditions and no plant maintenance or downtime at San Jacinto and Nicaragua as well. In terms of the EBITDA, what I'll comment is for the quarter, the major maintenance has an impact of about $1.5 to $1.6 million negative. When you combine that with what we had to do for the El Carmen repair costs is that we expensed about $430,000 of repair costs. So that's actually an expense item, although we have actually already recuperated some of that from insurance proceeds, and we do expect to recover the remaining part. So the full reimbursement on those, but when we do receive the remaining payments, which we think that there's about $600,000 remaining, that would not come in to call it the revenue or above the EBITDA line. And then the other is just that it's hard to give an exact number, but I would say the range of the reduction in call it EBITDA because of the dry season is sort of 1.2 to 1.7 negative. So those are all the call it the negatives, call it the drags on EBITDA for Q3. And then the other items on the positive, which I'd say is on the cash and cash flow position. As you can see, our cash position is quite strong. We had, again, because of the LIBOR, it was very low. Q3 this year versus Q3 last year, it was about a $600,000 interest rate savings. A very small portion of that is just because there's a lower principal balance on the senior loans in Nicaragua, but the bulk of that is because of pure rate savings. So that's a very good savings on the interest rate there, the interest cost. The other thing is that we We had Fuji technicians monitoring the maintenance remotely this year, so that is not a huge savings, but it was around $250,000 to $300,000. Again, that's a CapEx line, so that rather than come into our operating cost, it's below the line, but it is a bump to our cash flow of about $300,000 for the quarter. And as well as the accounts receivable days have come down or came down a bit in the quarter. So that helped the cash position as well. So that's in the quarter, cash improvements. And then looking forward, just want to note that, as I said, I did say before, we do expect to get the insurance proceeds of around $600,000 in the current quarter. And then a longer term, but it's in other assets, but it's basically a value-added tax recoverable, and that asset's around $5 million that we basically generated while we put the plants into operation, but you don't get it back. You only get it back through your invoices. So we expect to get that back over three years, but that's a number that won't come into the EBITDA line, but it will be a material cash... addition call it to the to the cash flow uh in Peru in the next that's likely to last over three years so about a million and a half per year so um those are what I call sort of the operational financial um comments I would make um the uh the Panama the situation is we continue to get ready to mobilize at this point in time, given the COVID situation and given just the risks, we realistically think that Q2 2021 is a more realistic time to start the project. So that is effectively a one quarter delay from what we were expecting three, six months ago. It's not material, but we do think it's prudent to to aim for that as opposed to trying to mobilize and launch in January, just given the risks of a potential shutdown in the construction sector again, which has happened. So I would say that there's a small delay there, but what we do, we are hoping to start that in Q2 of next year. Well, I would say at a very high level, you know, Panama is something we are very much looking forward to, to, to getting going. I would, if I can see as a baseball analogy, it's, it's a, it's a single, it's a, it's a good diversification strategy continuation, but we do we do want to do more. We are looking at more and given the cash position that we have and, and the, the fact that we continue to pay down debt, um, you know, we do have a low overall net debt position, uh, or low net debt to EBITDA as a company. So I think the next three to six months is going to be looking at, uh, adding some of these other opportunities that, um, that we are looking at that would be either more things similar to Panama, but also hopefully some things that are larger than that, um, to, uh, to accelerate the diversification. We do know that, or we do want to diversify. We think the public market wants to see more of that. And there is a lot of interest in the sector. It continues to grow. We think that, you know, what's likely keeping us back a little bit is just the fact that we do need to diversify more. The good news is with that balance sheet and what we do think are refinancing opportunities combined with some of the other opportunities in our pipeline. We very much think we're going to be able to execute on that. Realistically, first thing, Q1 of next year, I think that a lot of the opportunities that we've been looking at have had an ability to put things on pause due to COVID. But I think that that's going to stop in Q1 of next year. And people will We'll come back to the table, and I think we're going to be able to get some other things done other than Panama in Q1 of next year. So with that, I'll open up the questions.

Thank you. We'll now take questions. At this time, if you would like to ask a question, please press star and the number one on your telephone keypad. To withdraw your question, press the pound key. And we'll pause for just a moment to compile the Q&A roster. And our first question comes from the line of David Casada from Raymond James. Your line is open.

Thanks. Good morning, guys. My first question here just on, I guess, operationally, I guess it's the first quarter now, or you've got to have a couple months with all three of the hydro facilities in Peru running, and I appreciate it's a slow quarter in terms of hydrology, but are they all now operating in line with what you would expect heading into the rainy season here?

Yeah, I'd say we're still, in terms of, there's really two things. It's are the plants operating at your high capacity factor and what's the hydrology. We've noted starting in September, October, the production has picked up at, more importantly, the El Carmen and the Ocho de Agosto plants. I'd say still a little bit below what our expectations are, but for sure a much bigger improvement than Q3. And then it's really, it's back half of November and then really December as to when you know whether the rainy season is going to be on target. So I'd say we're trending in that direction, but it is a bit early to tell.

Okay. Okay, great. And then at San Jacinto, there's some commentary in the MD&A about just what your cycling wells, and I appreciate that. I think it relates more to the year to date. than specifically on the quarter. But just wondering if you can comment at all on how those have been trending more recently, if they've picked up maybe subsequent to the end of the quarter here.

Yeah, I'd say that if you were to think of really, if you think of 2019 versus 2020, The first half of 2019 still had the effects of what I call 12-5, which was the well that we put on April of 2018, which was a big well. But it can take anywhere from 6, 12 to 18 months for both the well and or the field to stabilize. And we – it was, I would say, July or August of 2019 that we saw – the field stabilized at a lower level than what it had been with 12, five, call it quite strong for the first half of 2019. But if you were to look at, call it the back half of 2019 to now, you know, to me, that's the sort of the baseline was sort of the back half of last year, which we did, we averaged 60.0 net. Okay. And we did actually a little bit better than that in the first half, But we did, we're at, as I said, for quarter to date, we're at 59.3. You can't really use the Q3 because of the major maintenance, but so for Q4, we're at 59.3 versus the 60.0. So I think that that's, so the wells, these quote unquote cycling wells have actually been more stable, but the overall field is stable and that's call it a 1% decline. which is right on target. Okay, great. And that is what, you know, we modeled it basically a one to 3% decline in the upcoming years without any reinvestment in the plant.

Perfect. Okay, great. Thank you. And then just one more for me, just the comments there on the things maybe opening up in terms of M&A opportunities into the new year. Just wondering if there's any, new comments that you could provide just qualitatively maybe on the nature of the opportunities you're looking at just in terms of geography and modality?

I don't think really much has changed other than in terms of geography or type of asset. We are looking at some hydro, obviously, but other asset classes like wind and solar. What I would suggest is that we're just a lot of the conversations that we started even before COVID, and much of them were before COVID, they get put a little bit on hold, but a lot of these situations are call it groups that are incented and want to do something, but I would say that this year, a lot of them, those conversations just got put on hold. We are not what I would say, losing out to other people coming in. So it's not as if we're seeing people coming into these opportunities at all. What we're seeing is that, you know, both sort of buyers and sellers hit the pause button. But the general sense is that in some cases, for instance, because banks were willing to, you know, give forbearance until 2020, but that's not going to continue in our opinion. So we are going to see a pickup in those conversations that we are now. So, and I would characterize them as, you know, we are looking for some other singles like Panama. We are looking at some other things that I call, you know, more like doubles and triples because I, the one thing that has changed is it may not have call it, uh, come into the share price yet, but I would say the interest level in the sector has not stopped. And we are confident that we can find capital on an attractive basis if we were to do something bigger than some of the things we've been doing. And there's not a lot of groups that are looking in, call it the $50 to $150 million asset class. So that remains open for us, but I think there's actually more capital there than there was three, six months ago. So we just have to sort of put those two things together in the next three to six months. That's great, Colin. Yeah, we're looking and we're willing to look at some larger transactions because I do think we as a company will benefit from it, from the public markets, and we need to do something to take advantage of the capital that's there.

That's great, Collar. Thanks, Mark. Appreciate it. I'll get back in the queue.

Thanks, David.

Our next question comes from the line of Mack Whale from Cormac Securities. Your line is open.

Hi. I'm wondering if we could just kind of review the the annual expectations for each of the Peru assets. And I know in your presentation, you've given ranges like 29 to 31, I think that's Canchao, and then El Carmen's 40 to 50, and then 120 to 135 on Cocho de Agosto. I'm wondering if... I'm trying to get... I think my seasonality is all wrong. I'm trying to get an idea of how... this quarter looks to a typical quarter that you would expect? I mean, are those numbers what we should be using for Q3 next year? And so maybe just two parts of the question, like just confirm whether we should be using annual numbers that I just said that are from the presentation and then put in context Q3 just so that I can adjust Q2 and Q3. Right, so...

So to give you a sense of what, you know, we would have in our budget for next year for the different assets would be 29 for Kinshio. We have 45 for El Carmen, so that hasn't changed. Kinshio hasn't changed. And we have 120 for Ocho de Agosto, so that's the lower end. Lower end, yeah. But not, okay, it is too early to tell because, you know, I would say that there has been a ramp up. There's been two things happen this year, which is you didn't hit the ground at 100%, right, on Ocho de Augusto, but we're almost there now. And we do know the hydrology was just low in the area this year. So it's just too early for us to put a pin in. you know, whether it's a combination, whether it's some combination of the ramp up, well, it is a combination of the ramp up and low hydrology, but we're still using call it the 120 for next year.

Okay. Okay. Then just remind me about Q4 of 2019. Those Was there something, I know I could read through the MD&A, but I'm just wondering about, I think.

I don't have, Max, sorry, but I'll just, and I can get it to you later, but I don't have our broken down for Q4 for each asset, but we would have, call it, I think I've got 50,000 in total for the three assets for Q4. It's a reasonable percentage, and it would be even slightly higher than that for Q1.

Yeah, okay. That's where I am for those quarters, and that's where I was going. I was trying to think of what does that leave for Q4, but I can see it's going to take us a while to understand that seasonality, and I guess same for you guys as well, right? Okay. Okay.

Yeah, and I would bet a lot are quite sharply expected to be low. Those really are the low ones. But we're really going to need a full year of operations before you can make comments on, I would say, the hydrology in the real long term. Right. Is it 120, 125, 115, is it 130? But we're still in that range, at least for now. Okay. Yeah. In Kansai, just so you know, it's been very steady since it's hit COD. It's been sort of between 29 and 32 since. And we also think just given the structure of the plant at El Carmen, you know, it should be a tighter range. Like maybe it's 40 to 45, but that range, given the head and the design, should be somewhat closer. It's probably going to be Ocho de Agosto that has some more variability there.

Okay. Okay. That's helpful. Okay. You commented on Panama. And then in terms of other opportunities, has there been any change in, I mean, given where the balance sheet is and the confidence you have in the Peruvian assets, I mean, do you, is there anything that you were kind of looking at and getting close on and then thought, you know what, we, this is not going to move the needle enough. Like we need to like, are you, I guess the question I'm asking is, is how, how do you view the opportunities? And has that changed at all? Like, and if it has, does that mean things do take longer? Like, even though it's a bigger deal, does it, would it take longer for you to sort of put a pin in it because maybe it's a little more risky or I'm just trying to get a sense of whether, whether there's a shift at all in your view of the opportunity.

So I would say sometimes there's actually an inverse relationship between sides and, and work load. Um, so we absolutely have turned away things that actually look economically interesting, but might only be, you know, five to 10 megawatts. Um, it's pretty hard to get economies of scale there. Um, And I would say we're not here to just please the public markets, but I do think that we need to have broader diversification. And sometimes some of the bigger opportunities are actually cleaner. So there has been a, I would say there's been a, the shift has been probably turning away more of the small ones and looking at some of the smaller what I'd call something that has actual current operations plus, you know, potential pipeline, but a combo where you are not going to steal the operating one, but you get, you know, a bit of both that you're looking for. I'd say that's where we are shifting more to that because we do also have some development in our own pipeline that we can work towards. But so I would say the recognition is, or the thinking is we need to set our sights somewhat higher in terms of the size of the opportunities we're going at, because I think we can then really open up. You know, I showed somebody this, but, you know, with our market cap of $200 million, for instance, Borlex is $4 billion now, right? Yeah. there's not a lot of companies and, and especially in this region that are 500, 750 or a billion dollar mark, like valued companies, there's a huge sort of chasm there. So I think, you know, our plan is going to be to, to sort of get into that size range is quicker than we originally thought, because I think then the opportunity set will open up even more.

Yeah.

Okay.

That makes sense. Um, Okay. And then just last on, oh, you touched on the refinancing possibilities. Is there, has anything changed on that front specifically with Nicaragua?

Um, not, um, what I, what I would just say is that, um, we are, we have always discussed the binary in it, right? We mentioned that it's something that's discussed, um, And we continue to be interested in it because we do think it's a logical next step for the resource. However, you have coming by January 2021, there'll be only eight years left on the current contract. And I have mentioned this before with the concept of including the binary, extending, acknowledging the fact that the binary is very economic and they realize that, but so there, there are conversations happening. So I think that, um, uh, and those have continued. Um, and so what we're, the high level would be in conjunction with everything we just talked about, but is that if we were able to, um, have call it a longer contract, have a binary unit included, that's a natural for the refinancing. So, um, And we're thinking that that could be something that is for sure a first half of 2021 sort of thing that we have to quote unquote market.

Okay. Oh, and just last, Q2, is the expected turnaround on the other turbine?

So that is a good question. We're aiming for April. Yeah. Okay. It has not been confirmed, but Yeah, that's what we're looking at right now.

Okay. Okay, great. That's all my questions. Thanks.

Thanks for that. Our next question comes from the line of Najee Beydoun from Industrial Alliance. Your line is open.

Hi, good morning. Just to follow up on that last question. So the maintenance schedule for Senescent Hill would be sort of Q2 next year, sort of in line with what you would usually do? And are you still targeting sort of that two to three week window on that? Yeah.

Yeah. I mean, it was, I think, 17, 18 days. And we were looking at, I think we will do this unit remotely again for 2021. And then 2022, 2023, we would go back to in-person, but then flip back to remote just because of the cost savings and it works so well. So that's what we're looking at right now.

Okay. So a bit more cost savings maybe next year then with the change in the maintenance. Okay. So I just had a couple more questions. On Panama, are you? currently looking at trying to contract out the rest of the output from the facility or are you comfortable just running half merchant at this point?

Yeah, I think given the size, that would be such a small percentage of our overall production that would not be contracted that we think it's better to get it up and running and then try. The other thing is with COVID, nobody's everyone's quite in the moment. And so people aren't really thinking long-term because, you know, they don't feel the need to contract right now. So those both point to get up and running and then worry about optimizing the contracting situation after.

And I'm assuming you're looking at maybe other assets in the country as well. If that were to materialize, do you think then it would be kind of give you more flexibility to maybe contract out a larger portion of the portfolio in that country?

Yeah, absolutely. And especially if we can, again, what I don't know if we can pull off, but we are absolutely trying to do is to bring in and ability to layer in solar. And when you marry that up with hydro, your ability to contract goes up dramatically because of the counter-seasonality. So that's something we are trying to do.

And I guess a question. Yeah, that's another question. Well, I guess just tied to that, you talked about wanting maybe to do bigger deals going forward. Are you already in discussions with other partners, let's say such as Brookfield, to maybe help finance some of those larger deals? Or are you looking to do something 100% on your own for now?

It's a bit of everything. Yeah, I would say yes to companies like Brookfield. but there's other sort of, uh, it depends on which part of the balance that you talk about, but at the debt level, there's, there's a lot of different avenues as well as, you know, equity call it at the project level. That's not sort of corporate equity, but so there's a whole bunch of, um, you know, if there's a shortage somewhere, it's more on the project side than it is in the capital side of generally say right now. So, okay.

So it's an all of the above approach then, you would say?

Yeah, all of the above.

Okay. That's all I have. Thank you. Okay, thanks.

Once again, if you'd like to ask a question, press star and the number one on your telephone keypad. Our next question comes from the line of Peter Smith, private investor. Your line is open.

Yeah, good morning. Morning to you. Just a quick question. I know hydro, wind, and solar seem like the most common renewable technologies I see out there, but is biomass or another geothermal project attractive to Polaris?

Actually, that's an interesting question. I would say biomass, yes. We don't have any of those that we're looking at right now. We have, and I would say the biomass in the region, which is mostly sugarcane, at least from my perspective, is There's a much better business model than wood chips or wood biomass. And you can get pretty good contracts because it's base load. So we don't have any right now, but we would look at that. And I think these grids will continue to want that type of power, just like they would want geothermal. And we would look at geothermal. We have some geothermal that we're looking at. I think The only thing that we wouldn't do right now, at least right now, given our size, is to look at something where you need to go spend $20 to $40 million in drilling to prove up a resource. I think there are those out there, but I don't think that's for us. We have looked at a couple of operating plants that wanted to expand, so we actually already had some current production, but still they wanted some capital to grow the facility or even put a binary unit on. So, uh, we have looked at that. Um, and so we would, um, and, you know, I do think there's going to be a place for geothermal again, coming forward, you know, it's not as popular as solar and wind right now for, for, you know, some good reasons, but, but it's also the only baseload of all sorts of renewables. So you can't build a grid entirely on solar and wind. And, um, I just, but I think we're still maybe a few years away from a lot of these grids recognizing, they probably recognize it, but they're going to have to differentiate pricing schemes for geothermal. It might take a bit of time for that, but it's something we for sure keep our eyes on because I think you're going to need these types of assets and we have the sort of experience and expertise in it.

Yeah. That's what I was curious about is whether you have scarce expertise in that regard, because there's a lot of, hydro, wind and solar out there and a lot of competing players. Do you view yourself as being a scarce resource in that regard for your expertise?

I would say yes in terms of people that are looking at transactions. There's other companies out there that for sure have it, but it is more of a niche. The one area that we don't have anything right now, but We have talked, for instance, there are a lot of small, mid-sized projects in the Caribbean, geothermal. They actually have geothermal resources, but they don't have any expertise, quite frankly. We have had those conversations about us coming in as an investor, a partner, and for sure an operator. When we started the plant in Nicaragua, for the first three years, the company outsourced the operations to a group that had the expertise, which was a good plan, right? After the three years, we got rid of the operations contract and now we do it ourselves. We have had conversations with other people about us now doing that. So it is something we're looking at doing. I think it's interesting. I just think that the only thing we wouldn't want to do is get into an area where like to my prior comment, which is if it's a three to five megawatt small project on an island in the Caribbean, I think that's just It might make some economic sense, but it's too small. So it's just trying to find something that fits.

Good. Well, thank you.

Yep. Thanks, Drew. Any questions?

There are no further questions at this time. This concludes today's call. Thank you all for your participation. You may now disconnect.