Polaris Renewable Energy Inc.

and we will open for questions following the presentation. If anyone should require operator assistance during the conference, please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Anton Jelic, CFO at Polaris. Anton, over to you.

Thanks, Jenny. Good morning, everyone, and welcome to our call. In addition to our press releases issued earlier today, You can find our financial statements and MD&A on both CDAR Plus and our corporate website, PolarisREI.com. Unless noted otherwise, all amounts referred to are denominated in U.S. dollars. I'd like to remind you 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 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 expectations. These risks and uncertainties include the factors discussed in the company's annual information form for the year ended December 31st, 2023. I'm joined this morning as always by Mark Murnaghan. At this time, I'll walk through our financial highlights. Power generation. During the three months ended June 30th, 2024, per hour production was 186,887 megawatt hours compared to 209,982 megawatt hours in the three months ended June 2023. For Nicaragua in the second quarter of 2024, production was 114,046 megawatt hours lower compared to the same period last year at 131,529 MWh. Consolidated production in Peru for the three months ended June 30th was also slightly lower at 42,374 MWh than the comparative period last year, which totaled 51,986 MWh. At our Dominican Republic Canola 1 solar facility, we produced 14,613 megawatt hours in the three months ended June 2024. This is higher than the second quarter of 2023, reflecting enhanced productivity from the newly installed panels. For Ecuador, the second quarter of 2024, average production of 11,253 megawatt hours was in line with production in the comparative period last year. And finally, in Panama, Vista Hermosa Solar Park production of 4,600 MWh was greater than our management expectations with minimal comparative to 2023, given the facility went COD at the beginning of Q2 last year. Revenue. Revenue was $18,700,000 during the three months ended June 30th, 2024, compared to 20.8 million in the same period in 2023. Net earnings. Net earnings attributable to the owners was $985,000 for the quarter compared to $4.6 million for the same period in the prior year. Adjusted EBITDA. Adjusted EBITDA increased to $13.3 million for the three months ended June 30th compared to $15.7 million for the same period last year. Sorry, that was a decrease to $13.3 million. Cash generation. Net cash from operating activities for the three and six months under June 30th was lower than the comparative period last year, mainly due to lower cash received from Nicaragua as expected due to scheduled downtime for major maintenance of the facility during Q2, as well as recognition of unearned revenue in Peru. Net cash used in investing activities for the three and six months under June 30th was considerably lower when compared to the same periods in 2023. While the cash usage in the current year relates to the Canola One optimization project and the major maintenance of the geothermal facility in Nicaragua, cash usage in investing activities in the same period of 2023 related to disbursements linked to projects such as the construction of the binary unit in Nicaragua and the completion of the Vista Hermosa solar park in Panama. Net cash used in financing activities for the three and six months ended June 30th, 2024 and 2023 are comparable. And finally, dividend. I'd like to highlight that we have also announced once again, we will be paying a quarterly dividend on August 23rd of 15 cents per share to shareholders of record on August 12th. With that, I'll turn the call over to Mark who will elaborate on our quarterly results as well as current business matters. Thanks.

Thanks, Anton. So, yeah, as Anton mentioned, I would say consolidated production was generally in line in all of the countries except for Peru. Peru was slightly below, and that was just lower hydrology, which I'll get into in a second. In terms of San Jacinto, Nicaragua was in line, given that we did do major maintenance in April. So that was that was planned major maintenance and so the results I would say were right in line with our expectations given that major maintenance was completed on time on budget and it's just worthy to note that there were no issues with the turbine whatsoever so everything was good to go and we didn't encounter any issues there from a turbine perspective, which is great, which does support the fact that we've moved to 18-month intervals instead of 12-month intervals in terms of the major maintenance for each turbine. Now into Peru, as I mentioned, it was a bit lower. Really what happened is the dry season came just a little bit earlier this year than normally. So that's the reason for the lower numbers in Peru. I would say incidentally, even though it's only a month, but July is marginally ahead of expectations and budget. So it's at least the dry season is not necessarily looking drier than normal. It's just that the season started earlier than it normally does. In terms of the Dominican, It was, we were above in the same period last year principally or all given the replacement program that we started earlier in the year. We were only about 55% done on average through the quarter, but it did help our numbers for sure as we expected. The actual solar irradiation from Q2 this year compared to Q2 last year was lower. So we likely would have had even higher if it was the same. So just a quarter, the resource was a little bit lower. Otherwise, I think we would have been sort of probably another 1,000, 752,000 megawatt hours in the Dominican had it been the same to try to do a comparable year over year. And then lastly, Panama was... production was in line, but somewhat stronger prices than we were expecting. And so that helped the numbers for the quarter as well. In terms of the projects and the initiatives, Kanoa, the panel replacement is going according to schedule. We should be completed by next week. And that's been done essentially on time on budget. And so we should expect to start to see, call it the full benefits of that starting now. So we look forward to seeing those results in the next few quarters. In terms of the The larger project at Kanoa, as I mentioned on the last call, we have received the environmental permit to include batteries. We remain in the process with the regulator to amend the concession, but we do think we are getting very close to achieving that. We've had some positive back and forth, and so we are moving that forward and hope to have that approval of the amendment this quarter, such that we can move forward and and get the down payments on the equipment placed. And once we have that, we think it would be about 12 months from there. And I would say that panel prices continue the trajectory that they've been on, which is positive. And I would say same comment for the batteries. In terms of... acquisitions which I did mention on the last call. We continue to these continue to move forward. We continue to progress on them and we are working hard and hopefully we get something across the finish line in the near term. So that is that remains a key focus. So the combination of what we're working on the expansion of Kanoa plus acquisitions. We think those really are the two main initiatives that we're working on at this time in terms of the growth. And we think that that really ties things together in terms of the capital allocation plan. And we are hopefully really shifting the focus to renewables plus storage as opposed to just renewables. And financially, we're well positioned to do this given our cash position and low leverage. I would just quickly mention that we will be planning on extending the normal course issuer bid, which we put in place about 12 months ago. So we will extend that and we may look to do opportunistic purchases every now and then over the next 12 months. And lastly, I discussed a green bond before. Really for us, this is a Q4 target for this year, which we continue to look towards. The ability to repay, at least in part or in whole, the San Jacinto loan. is January of next year, so we think Q4 is good timing to do something whereby we could have a part of the proceeds to repay that as well as a part of proceeds to fund growth initiatives. is a good blend in terms of use of proceeds. It's the right timing. And so we look forward to trying to execute on that at Q4 this year. And with that, we think we can significantly increase our cash flow per share without the need to raise any equity. We can continue to grow the business and diversify. And so that's really the big strategic imperatives at this point in time that we're looking to execute on in the back half of the year. So that's it for us. We can open up for questions.

Thank you very much. We will now be conducting our question and answer session. If you would like to ask a question, please press star 1 on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. For any participants using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please wait a moment while we poll for questions. Thank you. Your first question is coming from Rupert Murrah of National Bank. Rupert, your line is live.

Thank you. Good morning, everyone. Good morning, Rupert. Mark. Mark, it sounds like you're getting fairly close on an M&A transaction. I'm wondering if you can give us some more color on timing that's anticipated there and what we could expect an acquisition to look like as far as scale or level of accretion goes.

Yeah, so in terms of timing, I would suggest that it is taking longer than we had anticipated, but we do hope to have something colored in the next couple I'd say 60, 90 days, there's some technicalities just from a structuring perspective, but everything, we continue to move it forward as sort of assuming it's going to sort of come under our wing in that timeframe and we're planning for that event. What I would say though, in terms of the makeup is the best analogy I could give is sort of Kanoa which is, you know, in terms of Kanoa, it's about, call it five to six of EBITDA currently with an opportunity to grow and to do on-site, I would say. So call it brownfield expansion on-site that could include just more of the same generating capacity on a take-or-pay basis, but that can also include more generations paired with storage. And so that's really what we're going for with the acquisition strategy, because we think having sort of two engines where we can layer in brownfield expansion that's in our own pipeline, but as well as storage is really what we're trying to do. So we're trying to mirror Kanoa with the acquisition.

All right, great. And then with the potential organic growth on that asset as well as across your portfolio, you're seeing lower costs of solar and batteries. How is the competitive dynamic shifting there? Are you seeing a lot of competition in your target markets also looking at organic growth? Do you see any risk of lower power prices in your target market basically eating up excess returns?

I would say not on the power. No, I probably know it about just because we're dealing in markets where you still have imported as opposed to local. They don't have local gas markets, so they have to import it. So you've got that's the bulk that's going to be your marginal dollar. It's still going to be, at least for the medium term, your marginal cost. So I don't see... pressure there on prices. And for us, it would be you would be slipstreaming into existing contracts, at least for the brownfield growth. You'd already have a contract with great prices that we think so fixed. Well, it's a price that's going up a little bit with inflation. But if you're being able to layer in generation where the CapEx is actually going down, margins should be going up. So that's kind of what we see in those markets. And I wouldn't say that we see any more competition for that, at least at this point in time.

Great. Well, thanks for calling. We'll leave it there. Thanks.

Thank you very much. Your next question is coming from Nick Boychuk of Cormark Securities. Nick, your line is live.

Thanks. Good morning, Mark. With all the growth that you're the public growth that you're talking about here, organic, Dominican, and then also this M&A, can you just remind us what the CapEx expectations are for the remainder of this year and then into 2025?

So just, I really will stick to the organic. I would say if we start in Q4 at the DR, you're looking at about 10 million. I mean, the nice thing is the CapEx has come down. Originally, we were thinking it would be like 40, 45 in total. To do all of that, I think it's probably 10 less, so 35. I would say 10 of it would be in Q4, something like that, and 25 would be next year.

Okay, thanks. And then with your comments here on the cost profile changing, can you kind of walk us through what the returns on that invested capital should look like? I'm assuming IRRs have come up pretty meaningfully. Does that change how you're thinking about where you'd want to deploy other dollars?

I wouldn't say that it's changed where we want it. I think we were already starting from a very attractive level, so it's more that we want to get going on it as quickly as can because I think... I mean, time has, the last 12, 18 months, it's been our friend in terms of the cap cost coming down. But now I would say it's just so good, we'd like to get going. You know, they've come up probably another two or three percentage points, maybe more on the IRR side. So to levels that are, you know, call it circling around 20%, so plus or minus. So, you know, that's fantastic for something that's backed by still a lot of time left on a take or pay contract, right? So... Yeah, I think they've come up. They're great. And we just want to get going on it.

Got it. And then last for me, just we didn't touch on Panama at all. Merchant prices still sticking around 150 bucks there. With that level, any color you can share on when they're potentially going to start to come down and normalize a little bit and whether or not you would look to either A, lock that in or B, do more development there to kind of take advantage of that while you can.

yeah so so just for your for your benefit too the the rainy season generally starts in may so so in panama you have an impact of they have a lot of hydro relative to their their total capacity in the grid so um when you get more rain spot prices come down so that's started in june um so they had already started coming down so that the profile in the quarter was that they were highest in april in the middle in May and then lower in June. So Q3, probably looking at 70, something like that. It's hard to know for sure. And that reflects the rainy season. But I think the longer-term prices are going to come into that range probably starting in Q4 because they do have new capacity coming online. That would be our best guess at this moment. And yes, we are... waiting for them to finalize the details on a 500 megawatt renewable power call that we would be bidding into in q4 that's that's what the the published timeline is and there's been a bunch of back and forth with participants so that should be getting lost any time now so we for sure would be bidding uh our plants into that that would be our first option because those are 15-year contracts with the best effectively government credit. And if that doesn't, if we don't get something that doesn't move forward, we would still, there still is the possibility to go to commercial off takers. There's a lot of commercial off takers. The only issue there is there's normally about, it takes seven years would be the average instead of 15. So I still don't feel like we're in a rush to do that though. So I would suggest we'll, it would be, see where this 500 megawatt call, you know, lands do that first. And if we get something great, if we don't, we would still likely look to contract with some commercial group for maybe 40 to 50% of the capacity. All makes sense.

Appreciate it.

Thank you very much. Your next question is coming from Patrick O'Donnell, who's a private investor. Patrick, your line is live.

Hey, good morning. Thank you for taking my questions. Good morning. I saw on the IR deck a target 6.5 EBITDA multiple. I was curious to know just thought process and maybe how conservative or what considerations you have in assessing the operating costs on acquisitions. Or do you get really good visibility on what it will take to operate a potential acquisition project?

So, I'll deal with the second part. Yeah, op costs, at least in our sector, have very good visibility. Our number one cost actually is our capital costs or is our operating costs. the staff is usually not a big number to operate these plants and reasonably known and fixed. So I would say very good visibility on op costs and going forward. And in fact, I think if anything, we've showed that we tend to budget assuming we don't achieve, call it optimization and synergies on that, but we have continued to do that. So I think we've shown that we can actually get our cost down over time. And then in terms of the multiple, I think we put a higher one in because when we look at a comp set of Latin America only power companies, which for the most part, those companies actually are a blend of renewables and types of gas. So they're not pure renewable companies. And I mentioned that just because if anything, the gas would probably be a bit of a drag on their multiple. But when we look at those, we're looking at probably nine to 10 times EBITDA would be the average of the comp set. So I think we're putting numbers that are quite conservative on that multiple.

Okay, okay, that's that's great to know in good context to I think quick ones, but What what about replacing degraded power at? In Nicaragua with with solar is there an ability. I know you're moving panels over there for some of the Just operating energy use, but is there an ability to kind of backfill degraded power with renewables at that site under the contract?

Yeah, I would say solar is the easy one, but you're going to be limited. There's only so much space, so it's not going to, you know, that really, the number one way to keep the power up or even grow it would be by drilling more geothermal wells which we can do, but we've made the decision that that's quite capital intensive and we would prefer to take our excess cash flow that's being generated by that facility and use it to grow in other jurisdictions. Because to the last question, that multiple that we think we can get to is highly linked to us being more diversified. So we don't think it really, Even if it's good economics in terms of an IRR, if we were to drill a new well, we really think, at least in this form, the company is better to take, let's say, $10 million of free cash flow and put it into the Dominican or an acquisition to get us to a more diversified company so that we can close that multiple gap. I would say we do have a sector in Nicaragua in what we call the wet sector which has not been drilled. That is, we think there's a duplicate of the resource we have right now. And we have turbine space and we have contract space. We are considering options to potentially bring in outside capital to see if we can't target that. to get exactly at the point that you're raising. But, you know, that's, I would say it's somewhat early days on that. And I wouldn't want to commit on that, but it is for sure something we're going to look at because we think it's perspective. But if we can, we would rather do that on a, call it more of a joint venture type basis and bringing in a partner if we were to do that.

Got it. Okay. Makes sense. And last question, what's the status of generated carbon credits for revenue? I know you guys did that a couple of years ago, but haven't really, I guess I haven't seen it in a few years.

Yeah, so from 2020, 2021, beginning half of 2021, the market really improved. We did sell some, we fell with good prices, and then with inflation rates, because we're in voluntary markets, the voluntary markets just disappeared. or they went from, let's say, anywhere from $2.50 a ton to $5 a ton, call it, is what we were selling at, and they went back to $0.25 a ton, and volumes just kind of disappeared. However, to your point, we are seeing interest in volumes coming back, and we are actually looking at transacting again in some maybe smaller volumes, but call it in two to three dollar range so that market you are starting to see I would say percolating of interest from buyers again which didn't exist 12 months ago so so we're maybe we're at the early days and you know it's hard to I can't give guidance but if we could get some sales that in that range we wouldn't sell everything but we would for sure start making sales if we can get in the $2 to $3 a ton range. It seems like there's interest there, and so we're exploring it. So maybe we get something in the back half of the year. We'll see.

Got it. And are those typically corporate buyers?

Or who are the buyers that you've seen? Yeah, they're corporate. So one of the largest buyers is Corsia, which is an alliance of all the airlines. because they buy. They actually, you know, when people buy voluntarily credits, they then have to go and match that. So they're quite a big buyer, the consortium, they're a buyer. And then you have some other energy companies that decide that they're going to do it. So it's mostly corporate. There's a few governments, but I think it's mostly corporate. But because it's, yeah, they're voluntarily doing it, that means that that market, you know, can kind of, is a bit more volatile. But it seems to be coming back.

Okay. Yeah, good to hear. All right. Thank you. Thank you so much. Thank you.

Thanks very much. Just a reminder, if there will be any remaining questions, you can press star one on your phone keypad now. The next question is coming from Devin Chilling of Ventum Financial. Devin, your line is live.

Well, hi, guys. Good morning. Just on the green bond market here, maybe you guys can just comment on the health of this market right now. And I guess, you know, what rates are you seeing out there versus the current costs on this debt that you're looking to refinance?

So at least everything we've seen, and we're not the experts, but that the market continues to be very strong. I know the first half of the year was really strong. It seems to be continuing. So that market seems to, for sure, think rates are coming down a bit, or at least have stabilized, and there's a lot of capital there. So that's our sense. I think there would be... The big benefit for us isn't really rate, although I think maybe we can say 50 to 100 basis points on a rate basis. It's the different amortization schedule. Because we're so lowly levered right now and we're still amming down our debt pretty quickly, we think we're paying down our debt too fast relative to the life of the contracts and the assets, so we would prefer to blend in. a bond where you're either no amortization or very small amortization such that, you know, our conversion of, call it our EBITDA, the free cash flow just goes up, even if the rates stay the same. So we think that is an appropriate thing to do, and we could take that extra cash flow and then use it to grow the company. Maybe you increase the dividend, maybe you buy that stock, but you would look, we would have the ability to do all of those things. So I would suggest that while I do think there's a rate savings, that wouldn't necessarily be the biggest driver for us at this point in time.

Okay, yeah, so repayment terms is kind of a key component.

Yeah, I would start with that one, actually, yeah.

Yeah, okay, no, that's helpful. Thank you so much. That's everything for me. Great, thanks, though.

Thank you very much. Well, that appears to be the end of our question and answer session. I will now conclude the call. Thank you very much, everyone, for joining us. Thank you. Enjoy the rest of your day, and thank you for your participation.