Polaris Renewable Energy Inc.

Greetings. Welcome to the Polaris Renewable Energy Inc. Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Anton Jellick, CFO at Polaris Renewable Energy. You may begin.

Thanks, Holly. Good morning, everyone, and welcome to the 2023 Q2 earnings call for Polaris Renewable Energy. In addition to our press releases issued earlier today, you can find our financial statements and MD&A on both CDAR and our corporate website at polarisrei.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 Renewable Energy and its subsidiaries. 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 operations. These risks and uncertainties include the factors discussed in the company's annual information form for the year ended December 31st, 2022. I'm joined this morning as always by Mark Murnaghan. At this time, I'll walk you through our financial highlights. Power generation. During the three months ended June 30th, 2023, quarterly consolidated power production was 211,765 megawatt hours higher then the 163,119 MWh consolidated power production for the three months ended June 30, 2022. Due to additional production from the Binary Unit in Nicaragua, as well as the Dominican Republic and Ecuador facilities acquired in 2022, coupled with Vista Hermosa Solar Park in Panama beginning operations in this quarter. For Nicaragua, the increase in production is a result of additional production from the binary unit, partly offset by expected declines in production from the steam fields. Consolidated production in Peru for the three months ended June 30th, 2023, was marginally higher than the comparative period last year, due to somewhat better hydrology across the country for the quarter. For the Dominican Republic, the Canoa One facility produced 13,000 398 megawatt hours in the three months ended June 30th, 2023. For Ecuador, the San Jose de Minas facility produced 11,323 megawatt hours in the three months ended June 30th. Generally, as in Peru, we have seen better hydrology than in the prior year. Revenue. Total revenue was $20.8 million during the three months ended June 30th, 2023, compared to $15.2 million in the same period last year. This increase was the combined result of a 30% increase in production contributed by the company's facilities, coupled with an increase in the effective PPA prices applied to our three Peruvian facilities. Net earnings. Earnings were $4.6 million for the three months ended June 30th, 2023, compared to a loss of $1.5 million for the same period last year. This increase was driven by higher operating margins, coupled with higher deferred income tax recovery, partly offset by higher finance costs during 2022. Adjusted EBITDA. Adjusted EBITDA was $15.4 million for the three months ended June 30th, compared to 11.2 million for the same period in 2022, principally as a result of higher operating margins already discussed. Cash generation. Net cash from operating activities for the three months ended June 30th of 10.3 million is lower than the 14.2 million for the same period last year, mainly due to higher receivable balances and lower payables held at June 30th, 2023 compared to 2022. Net cash used in investing activities for the three months ended June 30th was 1.4 million compared to 32.4 million spent in the same period last year due to funding of construction of the binary unit in Nicaragua and the Vista Hermosa solar park in Panama and also the funding of the acquisition of Kanoa One in the Dominican Republic. Net cash used in financing activities for the three months ended June 30th of seven point six million compared to five point seven million cash used in financing activities in the same period last year in twenty twenty two. The company refinanced fences sent senior debt and paid nine point five million in issuance costs. Finally dividend I'd like to highlight that we've already announced we'll be paying a quarterly dividend August twenty fifth of fifteen cents per share. to shareholders of record on August 14th. 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, first, some comments on the production performance in the quarter. I would say on a consolidated basis, it was in line a little ahead, so we're very happy about that. hitting the budgets and our own internal projections. Peru was a little bit higher, DR was a little bit lower, but net-net, we were very happy with the overall production and continue to remain on track into this quarter. As people know, we commissioned the binary unit at the end of 2022, and it continues to operate well, high availability, so very happy about that. The other project that we commissioned and constructed on our own was the Vista Hermosa Solar Park in Panama that was put into service in Q2 and we've had just over three months now and that production is right on track with what we were budgeting so we are very happy with that. So all in all hitting sort of our long-term average estimates of production in the quarter and year to date. And in fact, NECA was up a little bit quarter over quarter because some of the work we did on the injection system. So NECA was up a bit quarter over quarter, which is great. We did get a little bump in the pricing in Peru, so starting May 1, Ocho de Augusta, which is our biggest plant there, had the price adjusted, which we had always expected. but it happened and so we had a price in the $40 in the 40s which is it's now running at 61 so expected but but obviously that helps and that's going to be the number going forward so that really helps in terms of the obviously the top line but also given that we took over the operation of the all the plants in Peru our costs are down a bit so so nice margin expansion in Peru and we expect that to continue In terms of the quarter, the cash generation, as Anton mentioned, cash from operations is about $10.3 million. The uses of that, the largest use was $4.4 million in debt repayment, so we continue to pay down debt. $3.2 million in the quarterly dividend with CapEx of around ballpark $1.5 million, so not a huge number. I'll get into some of those CapEx items in a second here, but that actually – nets out to an increase of just over a million dollars in the cash position. So we ended the quarter on a consolidated cash position of about 41 million. So that's up, debt's down. So the balance sheet improving and depending on your chart for this year, but we are running sort of close to that, our target of about $60 million of EBITDA for the year, so that would put us at net debt to EBITDA of around 2.3 times, which we think is a very conservative balance sheet and is something that we're going to look at going forward, but that leaves us a lot of cushion and I think room to grow the balance sheet there. In terms of the projects that we're currently executing, right now it's all, I call it a current project optimizations, but these are the highest return on capital we're going to get. We are doing the battery project in Peru, which is the smallest. That's only a 500,000 capex project, but that's set to start in September. So we look forward to that, which would be our first battery project. So we're excited about that. The well optimizations, I'd say the biggest short-term project we're working on are the well optimizations in Nicaragua, which are starting next week. The process for that is there's two wells that we're looking to clean out effectively. It's 4-2 and 6-3. The first one, the process is you cool it down first and then you start to circulate your solution through there. That only takes about a week, but then you need to let it heat up. So we should have a sense of success on these two wells, call it mid-September, plus or minus. It's hard to predict exactly how long it takes for the wells to heat up, but it could be from three, four, five weeks to and then you can flow them again. So we're quite optimistic about the results of this, and hopefully they can come online a little bit in September in the current quarter, but more so in Q4 and going forward. Just worth noting that these wells, it means for the current quarter, they're out for about four weeks, and the sum of the two wells is about three megawatts. So we do have about a month of three megawatts out for the current quarter. And then lastly, the other project that we are executing is in Ecuador, which is tying in effectively another stream into the intake. And that is ongoing and should be ready, I would say, by end of Q1 2024. And that we would look to increase production there by about 20 to 25%. And so those are the current projects. In terms of Kanoa 2, we did announce this is a new project, although it's an expansion of the current Kanoa 1. We signed the PPA in May. We have most of the development ready to go. We have done some very small things on site, but the big one is we are working on finalizing the interconnection agreement before we start the big construction. And we are aiming to finalize that this quarter, get that done. And if we can do that, then we can really start the construction in earnest and to try to have that in service by back half of next year. But on Kanoa, in the same spirit as the other projects, we do have room under the current PPA to deliver more energy and we are working on that as we speak and we'll have more to update people on the next quarterly call. But that again would be very high return on capital and with not a lot of capital that we think we could add some panels potentially as there is room and it's a very good contract. So if we can do that, we will likely do that before we even get to Kanoa too. I can't comment on the size, but there would be, yeah, very high return. And I guess for me, the big message here is that whether it's the well optimizations in Nicaragua, the additional stream in Ecuador, or optimizing Kanoa One, what we really are trying to do here is make sure that, call it high return, lower risk projects of current operating projects really do generate higher returns than sort of new development projects. And so we want to make sure that those, we maximize those and that they have to be sort of top priority so that we can hopefully meet or beat people's expectations, their own expectations next year, but using less capital in a time where capital is more expensive. With interest rates, obviously the cost of growth has gone up. So we're we are making sure that we really focus on the lower hanging fruit, call it. And just a comment, two more comments. One is we still are working on several M&A files, nothing obviously to announce, but I think that this higher interest rate environment is starting to take hold in certain areas. Some people obviously have fixed loans, but there are a lot of projects we see that have floating rate loans And so this is the longer the rates they hire, you know, I think that just means sellers are coming to the realization that this isn't sort of a really short term phenomenon. And so we are having a lot more conversations on that front, which could get interesting. And then lastly, it was not in the disclosure, but the board did approve. that we will institute a normal course issuer bid, at least just have it. It is still subject to TSX approval, so we don't have that, but we'll work to getting that in the next two weeks. And then there would be a separate announcement there. We just think that it's prudent to have that option in place. We think that there's very good return in our shares, and depending on where the market moves, I think it's always good to have that arrow in the quiver, because if there's obviously a great return on our share price, then I think it makes sense to take advantage of that as well, given that we are building some cash here and the net debt to EBITDA is quite low. So, with that, we can open it up for questions.