Polaris Renewable Energy Inc.

Good day. Thank you for standing by, and welcome to the Perales Infrastructure, Inc. First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, press star 0. I would now like to hand the call over to your host, Anton Jelic. Please go ahead.

Thanks, Felita. Good morning, everyone, and welcome to the 2021 First Quarter Earnings Call for Polaris Infrastructuring. 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. Unless noted otherwise, all amounts referred to are denominated in U.S. dollars. I'd like to remind you, as always, that comments made during the call may include forward-looking statements within the meaning of applicable Canadian securities legislation regarding the future performance of Polaris. These statements are current expectations 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 forum for the year ended December 31st, 2020. I'm joined this morning by Mark Murnaghan, Chief Executive Officer, now into the quarterly highlights. Power generation. Consolidated power generation for the three months ending March 31st, 2021 and 2020 were 180,984 megawatt hours and 183,332 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 119,854 in the first quarter of 2021 versus 135,344 a year ago. In Peru, total megawatt hours for three months ending March 31st, 2021 were 61,130 versus $47,988 in the same three months last year. Revenue. The company generated $15.7 million in revenue from energy sales for the three months ending March 31st, lower compared to the same period in 2020. This quarter was the first full quarter under the amended power purchase agreement price in respect of San Jacinto and Nicaragua, which was the largest contributor to our decline in revenue. The lower PPA price was part of the broader negotiation with the government, which included an extension of the concession period and inclusion of a binary unit. Lower production at Santa Cinta was offset by higher production from our hydroelectric facilities in Peru. Net earnings. The net loss attributable to owners was 0.9 million for the three months ending March 31st, compared to 4.4 million in earnings for the same period in 2020. The decrease was attributed mainly to lower revenue and higher general and administrative costs and other non-cash losses resulting from the market-to-market accounting adjustment on certain liabilities from our 21% share price increase during the three months ending March 31st. Adjusted EBITDA. Adjusted EBITDA was $11.9 million for the period ended March 31st compared to 17 million for the same period in 2020. Cash generation. Net cash from operating activities for the three months ending March 31st of 17.1 million increased by 8.2 million from the same period in 2020, mainly due to a favorable change in non-cash working capital due to the accounts receivable collection during the period and lower interest paid, partly offset by lower revenue and higher costs compared to the same period in 2020. Net cash used in investing activities decreased to $0.6 million from $2 million in the same period in 2020, largely due to the decrease in spending related to the construction of the Generacion and DINA facilities at El Carmen and Ocho de Agosto. Net cash from financing activities for the period ended March 31st of net $31.4 million, increased compared to $6.7 million in financing reported in the same period in 2020. The increase, of course, was driven predominantly by net proceeds of $38.2 million given the private offering that closed during the quarter. Dividend. Finally, I would also like to highlight that we do intend on paying our 21st consecutive quarterly dividend on May 28th of $0.15 per share to shareholders of record on May 17th. This continues the Board and Management's commitment to regular positive distributions to shareholders, coupled with a continuing 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 corporate quarter end results. Thank you.

Thanks, Anton. So a few comments before we turn it over to questions. First one I want to make is just it's not clear in the numbers, but we had just wanted to discuss the pricing in Peru. It was a good quarter in terms of production, but less of a contribution to EBITDA than It otherwise would have been just because of the way that the PPAs work there, which is that if you're running below your committed energy, there is a price penalty, which we had in Q1. Without that, EBITDA and revenue for Peru would have contributed an extra $700,000 to $800,000. And this is not something... that is permanent in the sense that for El Carmen, that was due to the outage incident last year, which we are being covered for from an insurance perspective. But that's not something that you can run through the P&L. And Ocho de Augusto is something that we did expect, given that when we purchased the company and the contracts, the committed energy under that contract we knew was high. and we are able to reduce that committed energy by up to 15%, which we will do, but you can't apply for the reduction until two years after COD, which would be December of this year. We will apply for it, and it is a contractual right, so we will get it and expect that the higher price gets applied starting in 2023. which will have a positive impact for Peru. So I wanted to mention that. The second thing I'll mention is that the strong cash position, we did raise equity, which is a big contributor to that, obviously. But the other thing is that the accounts receivable in Nicaragua came down nicely. So we received, and this was part of the, call it, the extension of the contract, terminating the old, having a new one. And so any receivables left on the old were paid in the quarter. So that really helped their cash position as well. There was a small asset sale, a small number. And then there's even a few more of those on the books that we are still looking at doing. They're not huge numbers, but let's call it latent asset value that we are – you know, looking to monetize and then put even more cash on the balance sheet. And we did, it took a long time, but we recently finalized the insurance settlement on El Carmen, which should bring in about another million onto the balance sheet this quarter. So point is, is that we are very well cashed up to execute on all the key initiatives that we have on the go. Um, the first one being the binary unit, which, um, we sent tender letters out, uh, mid April, um, to all of the equipment manufacturers. When we started the year, we were looking at call it a seven to 10 megawatt binary unit, but we had to run a bunch of, uh, chemical tests on the brine, which we did. Um, and, um, to assess as to how much, how big you can go on the binary unit. And so the good news is that those were as good as could be expected. So we went out with a 10 megawatt binary unit package. So that's going to be the number we're looking at. And that does make a big difference on the numbers going forward. So we're very happy with that. the schedule on this is that we are expecting to have firm proposals from the equipment manufacturing by the end of this month. And then within, call it four to six weeks, so end of June or first thing in July, we will sort of sign a contract, choose the equipment supplier, and lock in the prices and the budget. So that's, and we'll make sure that that is communicated to the market. But once we get to that, you know, it is call it an 18 month construction process, but, but the numbers we think will be very firm. And if it's 10 megawatts, we know we're going to be looking at call it eight and a half to 9 million in call it cashflow and revenue generation off of the binary unit. So that's, That's the number one initiative that we have sort of on the docket. The second is Chuspa, and that is Peru. We had slight delays because of COVID, but things are looking very good there now in terms of the case count. And the construction's been open now for quite some time, and we expect it to stay that way. So we're... we're aiming for within four to six weeks having signed the SPA and mobilizing and launching construction on that project. And that'll get us, that'll get us, call it the third jurisdiction, and using some of the equity capital for that project. So those are moving ahead and very much in the short term here. And now that still leaves us with a reasonable amount of excess cash sitting on the balance sheet. And so on the M&A front, which we are working on, we have more irons in the fire than we've ever had. So we are working on that. There's a lot of opportunities in existing jurisdictions that we're in, primarily Peru. But also Panama, we're really hoping to add something so that we're doing more than just the Chuspa project. And so we have a lot of opportunities in Panama that we're looking at and a few other jurisdictions. And we're in the process now of trying to have something, call it this time next quarter. So when we report, the aim would be to have something by then on that front. The other big initiative that we're working on, which would make a real big difference for the company in terms of the cashflow generation is the refinance front. So, and we have a lot of different options that we're looking at. There's call it five or six interesting options ways to do the refinancing at Santa Cinto, given that we are in a period of, we have an 18-year contract, but we're amortizing over eight years. And in fact, the next four years are the heaviest part. So there's a huge benefit to us to doing a refinancing, given the ESG, call it momentum. There's a lot of different groups looking at doing something on both a call it project specific basis, but we also have groups that are talking about doing a more global hold co refinancing. And that is one of the biggest initiatives we have that we're working on as a company. The global refinance would take a bit more time. I think it's that sort of a three to six month timeframe, but everything is pointing to us having at least a few good options on that front within that timeframe. So that is, call it the fourth big initiative. And the last one, which is worth mentioning, is just that we had mentioned that we were looking to do a sale of some carbon credits. We were just finalizing the process at San Jacinto. We already have carbon credit sales at Canchao in Peru, but we're also starting, or not starting, we should have the other two facilities accredited within the year. So we are making sure that all of our facilities could generate some form of carbon credit revenue. And in the last, call it two months, we see a lot of inbound interest in those. We do have some vintage credits, which will not garner, call it, top dollar in the market, but there is latent value. And this is something that just keeps, we just keep seeing sort of some inbounds and extra interest in that. So we're more confident than ever that we can at least do something on that front. And even if the dollar numbers at the start of it are, call it in the 100, 200, 300,000 dollar range, which is not material, it would be for a very small percentage of our credits. So we think the bigger picture could be material for the company if the world continues to move in that direction. So with that, where we're aiming as a company is when you include the binary in an intrusive executing with the capital we have on hand, we're looking at call it 40 to 45 million of operating cashflow as a company US, which is, and that does not include an acquisition. And I think we can obviously improve that to even higher numbers if we were able to put the excess cash to work in an acquisition. And so I think those are very good numbers as to where we're heading. And to the extent we are able to execute the refi, that could help that a little bit, but also free up even more cashflow. And I think at that point in time, we've maintained the dividend where it is for a while now. And I would suggest that I don't think a dividend growth strategy is going to be the main focus given the diversification, but I do think we would like to get back to some dividend increases and it would likely be on the backs of a refi because that has a really big impact on the free cash flow generation. So that's where we're aiming. And with that, I'll pass it over for questions.

At this time, if you would like to ask a question, press star and the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And there is a question from the line of David Uzeda with Raymond James.

Thanks. Morning, guys. Just... Maybe a quick question just on the Peruvian currency. I know that it's weakened quite a bit recently. I'm just wondering if you have any exposure there on the operating side. I know that your contracts are in USD. Is there any change to the operating expenses there because of the move in the currency?

Yeah, no, because we effectively are a US dollar contract and US dollar expenses. locally, so we don't really see any impact on that.

Okay, fair enough. And then, Mark, I'm just wondering if you can comment on, there's some commentary in the MD&A just around changes you made to the injection strategy in 2018 and the, I guess, like a little bit of a greater decline in the output in the near term, but it's better for the long term. And just any color you can provide, maybe on the quantum there. And I certainly appreciate this wouldn't be a near-term thing, but when could you look at resuming drilling there, like in terms of a time frame?

Yeah, so we had a well, it was called 11-2. We have about 1,500 tons an hour of brine, and we drilled 11-2 in 2018. And it takes about 1,000 tons an hour of the brine. And it's a well that is in the north of the field. And we run these chemical tracers to see if what goes in your injection wells comes back up through your production wells. And that well has effectively no connection with the field. And then we get advice from two different technical advisors, one from New Zealand principally and one from Iceland. And the advice was you should use as much outfield injection because what that does is it limits any temperature decreases in the core part of the field and that it's better to, in the long run, to maintain high, we call it enthalpy, but call it high temperature in the field. And what you can lose in that is that there's less, you're producing less from your recycled water as opposed to just the natural recharge. So now there can be times when you do that and you actually get what they call boiling and so you can improve the production. That hasn't happened, but the advice is to keep with this kind of a strategy because even if you end up with less of your produced water being produced, so hence you have somewhat higher declines in the short term, In the long run, it will be much better because the declines will go down. We have just updated the numerical model based on this with Jacobs. And I do think we'll end up putting a version of that online. And so to give you an example, we would do declines of 3% a year, but sort of 3% a year every year for the life of the contract, let's say. Um, what, what the new numbers that we're getting were sort of 4% this year based on where we ended last year. Okay. So, um, but 4% this year, 3% next year, 2.4 to 1.5 and going down to like, you know, around 1% a year. So if you actually look further ahead, that's, you know, you're in a much better spot, um, six, seven years from now. even though, you know, call it end of last year. And now we're, we are slightly lower than what we were hoping, but, but in the long run, it's going to be better. That's, that's the, that's the advice. And that's sort of, that's the plan.

Awesome. That's great color. Thanks for that. And then maybe just one other one. I believe you maybe touched on this in your comments, just the, the potential for, um are there non-core asset sales like do you think that you could ever see or would you would you consider um selling casita and and i believe in the past we've talked about i believe some equipment that you had in the u.s um that that you're not that you're not using is there any any potential to um sell that or make use of it somehow um so the answer would be yes we would um

We would for sure do something like that. Up until last year, there wasn't a lot of interest in that turbine, but we actually are seeing more interest in geothermal globally. And that's a geothermal-specific turbine, not to dive too deeply into that, but I think there were more contracts in the U.S. award in geothermal last year than there have been in like a decade. So we just need, you know, people to be doing projects. And then I think that's going to get interesting. So yeah, we still own that. And there's a chance we would sell it. I would say nothing's active on it right now. Things like Casita and I would say even our Western section may not be a sale, but there could be partnership opportunities whereby there are companies that are looking to do geothermal projects in the region. potentially a deal where somebody comes in and puts up some more of the risk capital. So I would see there less of a selling for cash, although that still is a possibility, but maybe taking back a carried interest and having other people with bigger balance sheets do some of the heavy lifting on the drilling. And that would be a different way to sort of extract some value.

Okay, great. Thanks for that, Mark. Appreciate it. That's all I had for now.

Thanks, David.

Your next question comes from the line of Amit Sheeth with Beacon Securities.

Good morning, guys. A couple questions for me. First, maybe if you have any more color on the M&A discussions and how has that progressed since our last call? whether any changes in certain jurisdictions or any changes in the types of assets you're looking at?

I would say not in the type of assets we're looking at in terms of jurisdictions. We probably are casting the net a little bit wider in terms of jurisdictions, although I would... What we are doing for sure is call it the perceived political risk threshold would still have to be lower than Nicaragua, but we are looking at more jurisdictions that fall within that to just cast the net wider because there are transactions we could literally sign up tomorrow. We still think the return profile is a little bit low for us for what we can get. And so, you know, we're just, we don't want to jump at the first transaction. And then there's a few, as I said, that we could do right now, but that with more opportunities, more jurisdictions, we'll get something that really fits strategically, which we have, we think, but that also fits the return profile. So yeah, Um, and, um, that's really where we're at. We actually continue to see them, you know, new ones filling in the pipeline. Um, and as I said, I think, um, you know, we, we have a goal of call it three, three months here in mind. Um, and we'll see where we get to.

That's great. It's very helpful. Uh, And maybe, I mean, you guys are working on a bunch of initiatives, at least on the corporate side, in terms of acquisitions, refinancing, and development of Panama. In the back of your mind, do you have, like, a priority list in terms of execution, which ones you would like to get going before the others? Would you have a preference? Like, do you want to get the refinancing first, and that will make you in a better position to execute another M&A? or how do you think about that?

Yeah, it's a good question. I think we can't thread the needle on everything. I would suggest that what we have right now, even with TUSPA in there, and given that we have Peru sort of more of a global refinancing, is... is interesting to people. And would it be more interesting if we had another acquisition, let's say more in Panama or even Peru? For sure it would be. But I think what we're not going to do is wait for that because I do think what we have and the interest is enough that we can move forward with the global re-sign and then to, because that's a long process anyway, that is a three to six month process. which we started, and to the extent something hits on the M&A front, it can only help that process. In other words, I don't think that if it would slow it down, it would only help it, and you could fit it into that process along the way.

That's great. And maybe last one, housekeeping item here. I think if I heard you correctly, is it safe to assume the decline rates for the new numerical model, at least for the short term, around 4% this year off last year and 3% for the next year at Sena Center?

Yeah, that's right. We literally got this on Monday. So In some form, we will have to update what's out there and we will be doing that. That is a no reinvestment scenario. One of the things that's important to realize is that sometimes it's hard to kind of go down the decline curve, but I can tell you that you're your actual free cash flow generation is obviously higher in that scenario. So we are generating significant free cash flow even with these declines. And we as a company are making the decision that it's better to take that and use it for the diversification than to increase, call it, because we could probably drill another well or two. We think it's better to wait probably more like four or five years to do that. We could drill a well or two, and we would get a bump in short-term capacity, but we just think it's a better way to go is to be harvesting that and using that for diversification.

That's great. I appreciate the call, Mark, and I'll jump back in the queue.

Your next question comes from the line of Mack Whale with CoreMark Securities.

Hi, Mark. You suggested the dividend increase strategies around doing the refi. If you just did the re-amortization, was it sufficient enough to allow for an increase under that scenario?

Yeah, it could be. Although I think the reason why I'm suggesting the refinancing is that I would call it more reprofiling, but within the existing term of the loan that we have right now, which is definitely on the table. you're more sort of playing around with the edges. If you're not really changing the eight years to something more like 12 to 15, there's just less to work with. That's all. So I wouldn't say it's out of the question, but when you, when you look at the numbers on doing a 15 year, you know, amortization compared to an eight year, you are effectively doubling or doubling. you know, having what your principal payments are. And so you just, you would just have much more to work with. That's all.

Okay. And is there, like, if you went down the route of, uh, reprofiling, would you push out, like, would you let that lie for a couple of years since you kind of went to the bother of it before you would do a refi? Like there's one kind of push out the other.

So initially we sort of thought that, but I would just say no now. I would say we're going to try to do the refi now and do it in a parallel path for sure.

Yeah, okay. On the carbon credit, you talked about seeing some revenues this year, and that's based on like a dollar because it's the – the backdated one, the inventory, is that right?

Yeah, and so we have one contacted 2012, 2013, and I would say that we've had interest in those at price levels higher than that now. So just in the last month, before we were talking $0.50 to $0.80, let's call it maybe double that already. and just the level of inbounds sort of suggests that I think more people in the voluntary market, again, we're in the voluntary market, right? We're not in the compliance market. But you're just sort of seeing these signals that, you know, if that number's already doubled in the last month, you know, something's going on. Yeah.

Does the accreditation process allow people them allow the credit? Is it the same process for them to be valid for compliance market or is that a whole other thing? Is that something you do or is it something?

It's all on us. Interestingly, I would suggest that it's any of the acquisitions that we look at, I haven't seen a single one of them that has actually done, and they all could have, They all could have because they would have fit into the UN's, this mechanism that we have. But it takes a reasonable amount of money, a lot of time. So the validation and verification process is a real, it's probably a year and a half minimum to do it. You're actually supposed to do it before you hit COD. There's ways to do it after, but it gets harder and harder. So I would just suggest that on the one hand, it is a bit of a headache for the companies like us to do it, but I also think it limits supply. Yeah. So, for instance, if we were, again, looking at buying an asset that has an operating plant, it would be very hard. retroactively to get any on those, but a lot of the things we were looking at have some expansion, whether it was doing some solar, for instance, on the hydro in Panama. We could apply there. So I think we'll continue to make that part of the strategy, and the more that we do this, I think the better we'll get at that validation, verification process, and it would be Whereas these single project owners just won't be able to do that. And I'm hoping, but I do think with all of these companies that are going to have their carbon neutral pledges, they're likely going to be doing it more through the voluntary markets than they would be through the, you know, everybody talks about the European, the compliance ones, which is basically polluters trading credits, right? I people in the, they call it the companies doing their own, I think they're going to have to do more of it in voluntary markets.

Okay. That makes sense because you're trying to make that market more restrictive in Europe, right? So that the pricing actually matches something realistic. So there's actual, so you have to make a decision between investing in an asset versus just buying credits, right? And that's been notoriously badly done in Europe. So it makes sense that they tighten it, that they would then, the next game plan would be, well, let's just buy some voluntary ones, right?

Yeah, so I'm hoping that that has upward pressure on price. And then, but it does, this is where the process itself needs to be, in a way, very hard to do so that those buyers feel comfortable that they're true credits, right?

Yeah. Yeah, it's part of what they're buying, right, that it's valid. Okay, just last question. Just remind us of the difference between the pricing, like, say, post-2023 in Peru. Like, once you change the commitment level, just remind us what the difference is with this. differential is in the pricing?

So now, so there's Ocho de Agosto will go back to the $53.90. Now that assumes there's no inflate. There is an inflator, by the way, in that one. So if it works, it has to go up every 5% CPI, which it might actually have done that by then. But assuming no, it will go to $53.90. And El Carmen will go to $55.90. And in the quarter, we were only receiving it, I believe it was $39.30 on Ocho de Agosto and something like $43 for El Carmen. So, yeah, it was a big pricing hit because it was good volumes in the quarter for the plants. And just remind me. That is a right of ours. That is not something you apply for and hope to get it. That is a right we have. They just make you wait two years. Yeah. Okay.

And what was, what was the genesis of that under production? Like, was it a resource issue or was it a technical issue on the plant?

So, so I'll split them. So El Carmen was the technical issue because we had the outage and it was out for, it should have been about a two months, but because of COVID it was four. So that was, On that plan, we don't know for sure, but we don't think that that one is something that we will apply for. In other words, we think that its committed energy is doable based on what we see. Ocho de Agosto is a different story in that it's $140,000 a year. We think that the long-term production, and we always did think that it was going to be between 115 and 125, okay? So no matter, you know, that they're both the resource and just assuming very high availability, that we would be applying and we would likely do the full 15%, which would get that 140,000 down to 119,000 megawatt hours, okay? Last year, I think, You know, where we see the resource right now is that that actually is doable based on Q1. And we have, call it 5% to 10% more small improvements. The only thing that would prevent us from getting there, and I would suggest that rather than doing the 119, it might be 110 to 115, is just... Because at times when the resource is so strong, it comes with branches from trees, and there's all these different systems of filtering that out and getting rid of it, so you maintain high availability. And so we're making a few tweaks here and there. But then that's what was partly the issue last year as well, most of which has been dealt with.

Okay. Great. That's all my questions. Thanks. Thanks, Mike.

Your next question comes from the line of Najee Beydoun with IA Capital Market.

Hi. Good morning. Just wanted to start off by the follow-up on David's question on additional non-core asset sales. Are you considering maybe – Any of the development prospects that you have in Peru, are those on the chopping block or you'd still prefer to keep those in-house and maybe develop them over time?

Yeah, I would suggest that those are keepers for us in the sense that long-term we see good marketing in Peru. We also, the development costs to get a project, you know, to a PPA and bankable is huge. much less than a geothermal project. One of the reasons why we would consider partnering on some of the geothermal is to get yourself the bankability, you know, could take 30 to $50 million, which is a bit big for our size of company. So whereas the Peru, it's not that. So our preference would be to keep the Peru hydro in-house. I was also referring to, for instance, we did make a small investment in a, and actually a Canadian developer of some biomass projects, which we still think is quite interesting, but that's something that would be on the order of $500,000 that we might look to sell that. So little bits and pieces, again, nothing hugely material, but a few things in all of that to say that it does help our cash position, which should help us execute on the M&A strategy. Okay. And I would even say, sorry, I would even say that I will calling carbon a non core asset is probably not the right thing to do, but to the extent that you can put a little bit of cash on your balance sheet by selling a small amount, um, is something new for us. And, and I think, you know, it does somewhat fall in that category.

Okay. Got it. Appreciate that. And, and just, um, going back to the binary unit, um, So I understand, I guess you've locked down the size. In terms of the tenders that are up there, have you locked down sort of the costs? Like, can you provide any more details on that front? Is it in line with your previous expectations or have the numbers moved around?

We really won't know until the end of this month when we get the letters. You know, we have been assuming some cost increases. And at this point in time, all we can say is, given with the increase in size, we think it's going to be closer to the 22 to 25. That's what we have right now. But until we get those firm proposals, there's really nothing else. We can't do anything else until then. So that's really when we're going to have more certainty.

Okay, got it. And just one last follow-up or question for me. I noticed that corporate costs have been trending a little bit higher the last couple of quarters. Just wondering if you can talk about, is that sort of the run rate we should expect going forward?

So there was some one-time legal costs in the GNA, but I think in the quarter that we're not going to have, then we're also... We do have, I would call, some increases on the insurance side, which will be permanent. And those actually weren't in the quarter. So net-net, I think it is better just to assume these costs now going forward. We've had very minor, you know, to execute on this strategy, we have probably the next two bodies at the corporate level, which is a very small sort of add. But between that and the insurance, I think we are going to be running around this level at it. we'll do what we can to reduce it, but I think it's better to run it, you know, as is, as in this quarter.

Okay. Okay. I appreciate that. Thank you very much.

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Okay. Thank you.

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Thank you, everyone, for joining us today. Have a good day. Thank you.

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