Polaris Renewable Energy Inc.

Ladies and gentlemen, thank you for standing by and welcome to Polaris Infrastructure Inc's fourth quarter 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your first speaker 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 our financial statements, our 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 everyone that the 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 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 31st, 2020. I'm joined this morning as always by Mark Murnaghan, Chief Executive Officer of Polaris. At this time, I'll walk through our 2020 fourth quarter financial highlights. Starting off with power generation, consolidated power generation for the three months ending December 31st, 2020 and 2019 were 171,000 933 megawatt hours and 144,761 megawatt hours, respectively. Consolidated power generation for the 12 months ending December 31st, 2020 and 2019 were 662,893 megawatt hours compared to 570,934 megawatt hours, respectively. These production figures are net of all plant downtime, both planned and unplanned. With respect to Nicaragua, we saw total megawatt hours of 127,823 in the fourth quarter of 2020 versus 132,182 in the same period last year. In Peru, total megawatt hours for three months ending December 31st, 2020 were 44,110 versus 12,579 in the same three-month period in 2019. Moving on to revenue, we reported revenue of 18.5 million for three months ending December 31st, 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 and Nicaragua. On a year-over-year consolidated basis, we realized 5% more revenue to the tune of to 74.7 million compared to 71.3 million in the same period in 2019. Net earnings. We recognize net earnings attributable to us of 24.2 million for the three months ending December 31st, 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 in other direct costs and general and administrative expenses in the three months ending December 31st, 2020. For the 12 months ending December 31st, 2020, we realized net earnings of $28.8 million compared to 14.5 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 and gains are recognized in the period. Adjusted EBITDA. On a quarter-over-quarter basis, adjusted EBITDA decreased to 13.6 million from 14.1, 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 31st, 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 31st, 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 non-cash working capital and higher costs, partly offset by lower interest paid and higher revenue compared to 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 finance 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 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 would like to highlight that we did pay our 20th consecutive quarterly dividend of February 26 to $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 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 and year end results. Thank you.

Yeah, thanks, Anton. And I'll jump probably more into subsequent events and sort of looking forward, and then we'll open up to questions. Obviously, everybody knows that we did raise some equity capital. We closed the financing a few weeks ago, 51 Canadian, just shy of 40 US. One other thing that's quite important to note is that since year end, and even it would 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 to $10 million. I mean, those two items and with the strong cash balance that we had going, ending the year, you know, we're now sitting with a cash balance over $100 million U.S., 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, and that was a key part of the renegotiated contract last year, which was the inclusion of the Binary Unit. And just to remind people, we spent a lot of time in 2017 with the design and actually ran a tender process. We decided not to go ahead with it for contracting reasons. That has changed, so we are dusting off the designs. They're being finalized by our owner's 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 contract to the equipment supplier middle of the year, so we call it July would be the target for that. And from there, it's call it a 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 exact sizing. We think seven megawatts at the low end is doable and upwards of call it 10 megawatts net is what we're targeting. We can get final configurations. visibility on that. And I think once we contract and give that visibility, I think that that's unlike a drilling campaign, that's a number that is very bankable. So we are full steam ahead on that. CUSPA, which is the hydro project in Panama. We had been delayed because of the COVID situation there last year, but 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 everything's pointing in the right direction there. There was a site visit a week and a half ago with our owner's 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 terms with the contractors, and we're aiming – for a June start and mobilization on that project. So those two projects, the Binary Inn and Chuspa, were well 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. 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 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 the binary unit, to do CHUSPA, to do either one, call it two sort of smallish acquisitions or one 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 reprofiling, I would say, which is that we are paying down a 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 this year are around 18 or 19, 20 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 those conversations are happening. It is a key focus for us this year. I would suggest that it's called restructuring first, and then we would look to do something potentially bigger, given, again, that the debt to EBITDA at even the revised price is still quite low. And depending on how the – call it the acquisition – situation looks in the next three to six months, that would tell us whether we're going to the market with 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 one other project or two other projects that we've acquired. That's what we're debating. We definitely think that that opportunity exists. So, but first it's restructure and then I think we'll look to do a refi later. One other thing worth noting 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 five megawatt facility in Peru, but we had to last year revalidate the bigger plant in Nicaragua, which is done, and we are now in the process of finalizing the verification and call it listing process. That will take, call it four to six 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, call it Q4 this year, 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 and validated the five megawatt plant in Peru for carbon credits is also, we started mid to late last year, the process of doing the Ultra de Agosto and El Carmen facilities in Panama, or sorry, in Peru, 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 to, one, get smarter, do what we would think would be a reasonable volume sale in the fourth quarter of this year on the carbon side, and also enter next year with two other facilities that would be able to sell carbon credits. So, you know, 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 what 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, but the dividend payout for last year, if you look at sort of the cash flow from operations, Before principal, it was 20% last year. And I bring that number up just because that's the easiest 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 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.

Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press the pound key. We'll pause for just a moment to compile the Q&A roster. Once again, to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from David Casada from Raymond James. Please go ahead, your line is open.

Thanks. Morning, everyone. My first question here, just a quick confirmation on your comments, Mark, around the refinancing. 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 two or three 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?

Yeah, so I think you can get better terms And not really, David, though, you know, on a rate. We could improve the rate somewhat, I think. But I think more importantly we could really improve your tenor and your principal repayment. 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, you know, whether it's 10 to 15 or principal repayments, it's 7 to 10. So you would really free up a lot of cash flow. And I think the only call it debate then 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, you know, if you assume we do some form of restructuring with the current loans, How soon after that do you go to do something where I think you could for sure take even money out in terms of equity out because you would add to the total amount by maybe $25 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. Thanks, Mark. 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 that 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 back, 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 seven years, it's You don't want to have a lot. You know, we think something in the, you know, maybe a third of that is possible. And then, you know, the big question is, okay, well, what do you think you get? The issue with the old vintages is it can be very hard to really get a really good price. But, you know, maybe we can be at a 75 cent per ton. So if we sold, you know, 5,000, that's at least, you know, 250, 500,000, let's say, in terms of cash for us. But really just dipping our toe sort of in the market and then 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. Thank you. You know, 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, you know, has activity ramped up with the pandemic and, you know, just any updated thoughts there?

Yeah, I think the big comment would be that most groups, things got put on pause. We see owners of projects where the projects aren't their core business, they have other businesses. But they're maybe playing defense on their other businesses. And they were kind of given a 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 is sort of pressures in these other businesses are increasing the desire to transact on something in the power business.

Okay, perfect.

Thanks for that. Yeah, so having the cash, I think, is a very strategic long-term advantage for us.

Got it. Great. Thanks, Mark. Appreciate it.

Your next question comes from Mac Whale from Cormark Securities. Please go ahead. Your line is open.

Hi. Hey, Mark. In doing both the refinancing and maybe restructuring, are there penalties involved or costs, like one-time costs that we should consider?

Yeah, 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 a negotiation. That's the bulk of it. There is a negotiation happening on the subject. Technically, there's a make-hold there, but we are in the final process, we think, of coming up to an agreement on more just a percentage of the outstanding amount. that would be higher than, you know, the senior, one and a half to two, but nothing super material in the sense that that's about a $20 million principal value. So even if it was, you know, call it a big percentage in the five to 10% range in dollar terms, it's not a lot. And so that sort of, that wouldn't wag the dog, so to speak, but a bigger, and that would be a small amount to clean everything up. and move on. Okay.

And so, and the, I guess on what you replaced it, you wouldn't need to have that senior and sub structure.

Correct. Yeah. And now that would be more on a total refine, right? So that we have to take, but in terms of what we're looking at with the current lenders is a restructuring, but keeping the general structure the existing sort of structure in place, but redoing the principal payments in a way that just frees up cash for a term.

Yeah. 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 would look at the refi and like they have a different pot of money that has different terms requirements or is it a completely different set of people?

Well, I would say it's both in the sense that there is a completely different set of people that, you know, it's one person wants $150 million. You know, we've had conversations with groups where the terms of the loan would be something more like a five-year loan that's not even amortizing. And these are what I would call 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 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 one. But that kind of group wouldn't really, they would want to get rid of the existing lenders. It would be one, maybe two, maybe two lenders. 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 approach. because they're quite interested in that, and that that would be more of a syndicated with maybe instead of seven, which is what we have now, maybe it's four. So it's both. And we have both options, and it's a bit early to tell which way we can go on it.

Okay. And with that, did that come from the potential lenders, the idea that you could – couple together more than just the one asset?

No, that's really, that's us. I mean, we know that you don't really need to ask people if they're, you know, more diversification and more, call it equity. You know, for instance, the reason why I say two is because the way we structured it 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 for such that it looks like we've 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, you know, to have more diversification and even scale, just even the size. You know, the one thing when I said, you know, there's some groups we've talked to that say it's, you know, 150. Some of them, it's just, it's got to be 150. They don't want to do 100. So some of these groups, you actually need some scale and they prefer to do 200 or 250 on the loan size. So, having something like 2SP or even 2SP and an acquisition really means you're getting some scale too, which fits with that market better.

Okay. And so presumably they're not looking at what you got on in place now as a starting point. They're looking at your cash flows and the track record of cash flow production and counterparty risk. They're looking at it from I'm going concerned that you have a track record on. Is that fair? That's why they might consider 200 or 150. Yeah.

I mean, listen, you know, a lot of these people are looking at loans for projects that haven't, you know, even started yet. So we have that, we have the track record and, and, and a long life asset. Right. So, 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 say it's already operating. Really at that point is they're looking at, and don't forget the binary unit really provides a, call it a zero decline asset to come into the mix. And then you run the numbers and you're then debating, you're not really debating about credit risk, you're debating about okay, so is the decline going to be two, three, four, five? It's going to be a curve, really, but they're debating that, and when you run the numbers, you can have some very, what I think are overly conservative assumptions on the decline rate, and 150 is no problem, just on San Jacinto. Yeah, yeah. Okay. And that's how a lender will look at it. They'll get super negative. They'll run a decline curve that that we think would be overly conservative, and their coverage ratios are still fantastic.

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

Right. And it's with the local entity. That has to remain the case. But how you finance that local entity is completely up to you.

I see. Right. You could loan it out of another. I get it.

From that perspective, the 100% equity dollars in Nicaragua and Polaris is lending money down, that wouldn't impact their contract.

Okay. I get it. Okay. Great. That's all my questions. Thanks.

Your next question comes from Najee Beydoun from IA Capital Markets. Please go ahead. Your line is open.

Hi, good morning. I guess just to start off, there's some commentary, obviously, on the corporate development team in the MD&A. You've extended 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?

A good question. I think we have what we need from an execution of an acquisition, from I call it a due diligence, you know, finance function, potential, you know, debt restructuring, from even I would say an HR in the region because, you know, 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. You know, 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 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, yeah, I think we have everything that we need to execute for several years now. But when we look at some of it, if we enter into a different asset class, i.e. solar, we would need to probably 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 three jurisdictions. I guess if we fast forward a few years from a longer term perspective, how are you thinking about, you know, 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 that I think in like two to three 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've tried to get much bigger, start looking at, you know, $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 getting solar in there, getting another country or two in there so that if in three to four years it's four countries, it's minimum three asset classes, maybe four. That's, I think, what our preference would be.

Okay. Got it. That's great detail. And one last question. I guess you've been highlighting your ESG policies and disclosures, you know, 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 really the two areas would be – well, it's really all three that would be a little bit more – in the sense that I think the carbon credit isn't necessarily 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. Peru did some very aggressive lockdowns. As they open up this year, I think we're going to ramp up the social in Peru. We're waiting for that and it's really important for us to do that. 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 Naughty last year in June, and so she has a very great capital markets background, and her and our chair, Jaime, have really spent a lot of time on the governance, the disclosure, the processes on the compensation, and so we've really pulled up our socks on that, which we think is very important because everybody is looking at it. I think you'd see a marked difference this year more on the G than the other two.

Fantastic. Thank you, Mark.

Thank you.

Your next question comes from Steve Kammermeier from Claris Securities. Please go ahead. Your line is open.

Good morning, guys. 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 COVID's a 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's really gone up, but because of those pressures, they haven't. So they've sort of stayed the same, I think. It's more that 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, maybe on a multiple standpoint, what you're looking at or what you're seeing?

So, yeah, let's say that like a really clean operating asset, anywhere from 9 to 11 times EBITDA, Whereas a build, as an example, we think we can build Chuspa at about six to seven.

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 called at the lead 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 the development. And I think that's a really important point in the sense that And obviously, we think the blend is quite attractive if you get current production with the growth opportunity. So we have enough of those that are in our sites that have the combination, which I think is an important part.

Okay. Great. That's all I had. Thanks.

Thanks, Dave.

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