Polaris Renewable Energy Inc

F:N4T

Earnings Call Transcript

[Operator]

Good day, everyone, and welcome to the Polaris Renewable Energy Inc., Fourth Quarter 2024 Conference Call. [Operator Instructions]



It is now my pleasure to turn the floor over to your host, Anton Jelic, Chief Financial Officer. Sir, the floor is yours.

[Anton Jelic, executive]

Thanks, Matthew. Welcome, everyone, to the 2024 year-end 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 SEDAR+ and our corporate website, at polarisrei.com.



Unless noted otherwise, all amounts referred to are denominated in U.S. dollars.



I'd also like to remind you 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 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 31, 2024.



I'm joined, as always, this morning by Marc Murnaghan, CEO; and Yumey Fernandez, our Director of Finance.



At this time, I'll walk you through our financial highlights.



Power generation. Consolidated power production for the year was 764,756 megawatt hours, versus 800,951 hours in 2023; while in Q4, we saw 195,797 megawatt hours generated, compared to 192,820 megawatt hours last year.



For Nicaragua, in the fourth quarter of 2024, production was 116,400 megawatt hours, lower compared to the same period last year at 112,195 megawatt hours. Sorry, higher. My apologies, higher.



Consolidated power production in Peru for the 3 months ended December 31 was in line with the comparative period in 2024.



At our Dominican Republic Canoa 1 solar facility, we produced 14,315 megawatt hours in the 3 months ended December 31. This is a 12% increase versus the fourth quarter in 2023, despite lower irradiation, owing to increased productivity of the new solar panels.



For Ecuador, in the fourth quarter of 2024, average production of 6,395 megawatt hours was lower than the comparative period in '23.



And in Panama, Vista Hermosa Solar Park production of 4,389 megawatt hours was marginally lower than the same period last year.



Revenue. Revenue was $18.8 million during the 3 months ended December 31, compared to $18.7 million in the same period last year; and $75.8 million for the full year, compared to $78.5 million in 2023.



Net earnings. Net earnings for the year was $3 million, compared to earnings of $11.7 million for the full year 2023.



Adjusted EBITDA. Adjusted EBITDA of $55 million for the year, compared to $57.7 million for the same period last year.



Cash generation. Net cash from operating activities for the 12 months ended December 31 was $35.1 million, lower than the $44 million for the same period in '23.



Net cash used in investing activities for the 12 months ended December 31 was $3.3 million, compared to $11.4 million in the same period in 2023.



And the net cash from finance activities for the 12 months ended December 31 of $27.7 million was largely impacted by the issuance of green bonds for $175 million in December 2024. Normalizing for the effect of the green bonds, the cash used in financing activities in 2024 would have been comparable to the $27.7 million net cash outflow from financing activities in 2023.



And then finally, dividends. I would like to highlight that we have already announced we will be paying a quarterly dividend on February 28 of $0.15 per share.



With that, I'll turn the call over to Marc, who will elaborate on Polaris' annual results as well as on future business matters. Thank you.

[Marc Murnaghan, executive]

Thanks, Anton. Okay. So in terms of the results, I would highlight that in Q4 year-over-year, Nicaragua was actually up year-over-year, which is quite important. The way we've been running the field is that the binary is not at full capacity. It's at about 8 megawatts, instead of 10, which we implemented earlier last year. And with that, I would say the field is showing very good stabilization. It was actually -- the steam in Q4 was up year-over-year.



And so we're quite happy with how that's stabilized. And we may get back to looking at moving that up later this year, just depending on how the wells perform in the first half of the year. So we're quite happy with that.



Peru. Q4 was quite strong, which is nice to see because Q3, which is the dry season in Peru, was actually a -- was a very dry season. But the rains came, and the production was very good in Q4 for Peru, and that has continued on this year so far. So it does seem that the rainy season is back and in full force, which is great.



As well in Dominican. That was up given the panel replacement, and we do expect to have sort of a full year of the benefits of the panel replacement this year. So hopefully, we can get a little bit closer or to the budget that we had when we did that. But we are seeing the benefits of that, and I would say it's generally tracking in terms of the efficiencies that we were looking for. Irradiation in the quarter was lower year-over-year, but the actual sort of conversion efficiency was very close to what we predicted when we did the replacement program.



And lastly, in terms of the actual historical results, I would say that if you look at '24 versus '23, when you add our Op costs and our G&A costs, they're actually down year-over-year. So again, in an inflationary environment, I would say we're keeping our eyes on the cost control and doing a very good job at that.



In terms of what we're looking for, for the current year, with the operating assets in place, it's, call it, flattish in terms of production. We do think Nicaragua will be running at a level very similar to where it was at in Q4. I think our numbers for the year, including major maintenance, which this year we're doing major maintenance in November, we're budgeting between 460,000 to 470,000 megawatt hours for the year, which would be similar to last year and running, call it, flat to Q4.



Very similar for the other assets, although we would look to Peru being somewhat higher this year, back to more normal levels.



And then you can take that and then what will be additive is that we did receive approval from the local regulators in Puerto Rico, which we needed for our acquisition of Punta Lima Wind Farm. We needed the approval for the change of control, which we've received. And so we're now moving to closing, which we would expect will happen before the end of this quarter. So you should see, call it, 3 quarters of contribution from that acquisition this year.



In terms of, call it, growth beyond that, really, I'll start with the organic. And on the backs of closing the Punta Lima, we hope to be undertaking something that we think is very interesting, which is grid-connected storage programs that they're looking to implement on the island. And that would likely be our first project there. It would be brownfield, as it would be on the site.



And so I would say that as I sit here now, we would be shifting, call it, in terms of brownfield opportunities, shifting a little bit from the Dominican to Puerto Rico as soon as we close. And we should be able to be giving more color on what that opportunity looks like in terms of the capital outlay and the timing, but it should be coming actually quite quickly. So pay attention to those updates shortly.



In the DR, the DR is still there. It's just happening a little bit slower. And we still think that solar plus storage, and storage is the key here, is going to remain an important part of our organic growth, going forward. Really, they're just trying to work out the regulations as to how it all gets paid for in terms of energy versus capacity. But it is coming. It's needed. They really need it. And so we're ready to go. We're just positioning ourselves with that. It's just likely a little bit slower.



And that's on, call it, organic growth of existing properties.



And in terms of M&A, the pipeline is robust, as it always has been. What I would say, though, now I think the multiple gap, call it, between what we trade at and what an operating asset, a good operating asset with a reasonable contract life on it, there's always been a multiple gap. I would say that, that multiple gap is lower than it's ever been, for numerous reasons. So there still is a gap, but it's much smaller. So that's encouraging.



And given that we completed the bond offering in Q4 last year, we actually have some dry powder in terms of capital from that to put it to work. And so I think that combination bodes well for, call it, something in the back half of the year on the M&A side to complement what we're looking at on the organic side.



And in terms of what is the capital we have, I think it's just -- at December 31, we showed, I think, $217 million of consolidated cash, but that's prior to paying out the 3 loans that we paid out. After paying that out, the way to look at it, the pro forma cash on the balance sheet is about $100 million. And if you earmark $20 million for the Punta Lima transaction, that would leave us with about $80 million of cash, consolidated cash, on the balance sheet after closing Punta Lima and after repaying all the debt, which for us is a very healthy level, and I think we can do a fair amount of damage with that. And then that's really what we're going to be focused on in the next 3 to 6 months here.



So with that, I'll open it up for questions.

[Operator]

[Operator Instructions] Your first question is coming from Nick Boychuk, from Cormark Securities.

[Nicholas Boychuk, analyst]

On that organic opportunity in Puerto Rico that you just mentioned, can you expand a little bit more maybe on potential magnitude, how much you could add to the site, like, how much the interconnect an afford for you to add in batteries and the pace at which you think you could maybe get that developed?

[Marc Murnaghan, executive]

So one of the nice things about the project is that there's somewhat of an overbuilt interconnect relative to the project. And then the transmission line is over about, let's call it, 130 megawatts, relative to a 26-megawatt wind farm. But the substation, so if we were to stage it a little bit, the substation is about 40 megawatts, okay?



So just on that alone, if we were to, call it, optimize -- if the first phase was trying to optimize the 40-megawatt substation, based on what we're looking at in terms of -- and just to add a bit, it's really a grid stabilization program and, call it, energy shifting program that they're looking at doing there. And so you're not really even connecting into the renewable plant. It's literally just a battery connected to the grid that they dispatch as they want to. So it's technically simpler.



So the first phase, we would be limited to the 40-megawatt substation unless and until such time as we, call it, added capacity to that. So if all we did was [indiscernible] that theoretical, call it, not theoretical, the 40 megawatt, if that's the first phase, and based on capacity prices that are being discussed, it would be anywhere from, if we could max that out, sort of $15 million to $20 million of EBITDA for us, which would be material.



So we still -- I probably need 60 days to really dot the I's and cross the T's on that, but that's what we're looking at. So I would say that's material. They're nice long-term contracts. Obviously, it's in U.S. dollars.



And that, I think, has about a 12-month build cycle. Again, so it's not an operating asset. But in terms of -- I would put that as even lower than constructing a solar plant in terms of risk. So 12 months. So reasonably quickly, reasonably low risk. And we could do that with the cash on our balance sheet right now, for sure.



And then I think to the extent that -- and the numbers we're seeing is that they, on a consolidated basis there, would like to probably do more of it. So we would need to increase the capacity of the substation, which that would be more of, call it, I'd say, an 18-month to 24-month timeline. You could look to potentially double it there, double those numbers. And in terms of when you would have clarity on that, it would probably be within 12 months.

[Marc Murnaghan, executive]

I would say there's also a smaller -- it's not as big of an opportunity. So if you were to double the EBITDA numbers, obviously, those for us are very material. Call it, the -- I would put a mid -- an opportunity in terms of timing in there that would be actually adding some solar and backing the solar up with storage so that you can be delivering energy, call it, between [ 6:00 a.m. ] and 12:00 p.m., which is when they really want it, not in the middle of the day. We've had conversations, and they're very amenable to discussing that probably in 6 to 12 months. So that wouldn't be big, but I think that's an additional brownfield organic opportunity we're going to look at there.

[Nicholas Boychuk, analyst]

Okay. And obviously, $15 million to $20 million, that is a meaningful EBITDA pickup. And given that it's more of an infrastructure, it sounds like, asset, should we be thinking that this comes at a lower return on invested capital? Like, is the incremental CapEx going to be high for this? Or is this going to be a very attractive growth opportunity for you?

[Marc Murnaghan, executive]

I don't have any numbers in the deck. I would say, at least as we're looking at it, it would be the best sort of return on capital we have in our, call it, pipeline of both organic and acquisitions at this point in time.

[Nicholas Boychuk, analyst]

And then on that M&A front, I know the pipeline is still active, like you said. Given geopolitical issues that are happening, obviously, U.S., but also now with Ecuador, are you thinking differently about where you would want to expand and what that fuel type or technology would have to be? Like, are you shifting maybe more towards now certain markets versus others? I know it's obviously going to be USD-denominated, but any color there would be interesting here.

[Marc Murnaghan, executive]

I don't know if we've really shifted where. Yes, I would say Ecuador is not on our list right now. That's for sure. We are looking at some things in Panama that are contracted, and that's what really we would want to see there. We are looking at DR. We're even starting to see some other opportunities in Puerto Rico. Those would be the 3 that we're looking at of the current portfolio. But there's a few other markets that we are looking at, all in USD, all in the region.



And I would say that there is a bit of a domino effect to what's happening in the U.S., but in a good way for us, in the sense that, one -- like, we're looking at an asset that has some ownership, I believe, by a U.S. company, and they're for sure doing some consolidating at home, shall we say. So I think that, that is actually -- I don't see that many negative impacts to what's happening in the U.S. to us, and now we're starting to see some potential, call it, positives for us on the acquisition side. Because capital -- a lot of whether it was through the loan programs or the grants or the tax equity, that's what fuels the U.S. assets. So if people have commitments that they made or projects they made and if that's at all in jeopardy, they're starting to retrench a little bit. They're going to have to take care of that first. So I think that's going to open up opportunities where we are, and we're seeing literally one just as of yesterday that looks quite interesting. So I think it's just a net positive for us.

[Nicholas Boychuk, analyst]

Okay. That's good to hear. And then last for me, obviously, you've got this cash balance, you've renewed the NCIB. Should we be thinking at all about the dividends? Or are these growth opportunities just so attractive that it isn't worth allocating capital to a dividend?

[Marc Murnaghan, executive]

I would say they're so attractive. So that takes precedence. I think we can do both: grow quickly and potentially, call it, increase the, call it, returns to shareholders. So obviously, we've got a USD 0.60 annual dividend. We are buying back a very small amount of stock. My preference, though, would be to increase the dividend, and I think we could do that. And I think that's what we will look at.



I think the only gating -- it's not even a gating item. It's just if the growth comes at us really quickly, it's more back end on the dividend increases. But if it's slower, we probably get to the dividend increases sooner.



So we're just trying to balance those 2 things, but I really think we can do both.

[Operator]

Your next question is coming from Rupert Merer, from National Bank.

[Rupert Merer, analyst]

You talked a little about the stability that you're seeing in Nicaragua, but you are going to do some major maintenance and contemplate some future enhancements. So I'm wondering, can you talk to us about the maintenance program? What does that look like? What's the length of time and the cost? And what could your future enhancements look like?

[Marc Murnaghan, executive]

Well, just -- we actually call it major maintenance, but we do that every 18 months, Rupert. So there's 2 turbines. And so every 18 months, we take 1 of the 2 turbines down for a period of 2 to 3 weeks. So the actual hard cash cost of that is around $500,000 in terms of outlay of cash. The bigger cost is your downtime, which is about, typically, I'd say it's 7,000 to 8,000 megawatt hours as to what you lose. That was in the numbers.



So of note, so last -- 2024 had major maintenance in it, but 2023 didn't, just because of the 18-month cycle. So we will be doing it again in November. So the numbers I gave you, though, include a major maintenance in it in terms of production for the year. In other words, it includes -- that is net downtime for major maintenance.

[Rupert Merer, analyst]

Right. Got it. And what kind of enhancements could you look at in the future? Are you still considering the addition of the solar panels in Nicaragua? And [indiscernible]?

[Marc Murnaghan, executive]

Well, we are. Well, in terms of solar panels, we have the ability to do it. But based on -- we've just put that on hold because of Puerto Rico, and there is an openness to discuss that in terms of -- the PPA price there is much higher. It's higher there than it is in Nicaragua. So if we can do something there, which I will know, I'd say, in the next 6 to 12 months, it's just the difference is so big that it's worth waiting. So we're waiting to see if we can do something in Puerto Rico. If not, we can do something in Nicaragua. If we did Nicaragua, that would be an enhancement.



In terms of really what we can do in Nicaragua, aside from drilling wells, I would say there's no big enhancements. I think we're -- potentially, we can move the binary up a little bit later this year. Potentially, we can -- we've got one of our wells that's closed, 93. We've really just been running pretty much most of last year with that well closed. So potentially, we can open it a little bit more, potentially we can move the binary up, and those are all noncapital outlay type sort of enhancements. But I would say, really, the biggest enhancements we can make are drilling, and I wouldn't say that that's in our near-term future.

[Rupert Merer, analyst]

Okay. Great. Secondly, you're considering some larger M&A deals. You, as you say, pro forma, have a fair amount of liquidity available. When you're looking at acquisitions, do you contemplate working with partners? A lot of your peers will have partial ownership of projects or do asset sell-downs. Are you in discussion with potential partners on maybe getting into some larger deals?

[Marc Murnaghan, executive]

So historically, we're 100%. I would say I don't have a problem with, let's just say, being partnered with somebody 50/50 on something. We wouldn't want to be a -- we can't be a 40%, call it, financial partner, though. That's definitely not us. But we are looking at some things on a 50/50 basis right now with other actual strategic players.



So yes, we are looking at it, and we would look at it. And I would even say we're looking at some things with more, call it, they're strategic in the sense that they're more local. So there are benefits at times to partnering with some strong local groups. So that is also something that's of interest to us, and we have 2 or 3 things of those that we're looking at right now.

[Operator]

Your next question is coming from Aaron Dunn, from Keystone Financial.

[Aaron Dunn, analyst]

Just wondering, can you walk us through what you would expect maybe the CapEx to be for 2025 roughly, just relative to what it was last year?

[Marc Murnaghan, executive]

It's really going to come down to, I would say -- well, first, let me divide between maintenance, sustaining CapEx and growth CapEx.



So in terms of maintenance CapEx, we're going to be in the, I would say, $1.5 million, $1.75 million range for just sustaining CapEx, and that includes the maintenance program.



And then in terms of growth, until we close the Puerto Rico, that's going to likely be -- so I can't comment on acquisitions. So there's nothing I can give you there. And in terms of the organic, I would say that the actual CapEx, $30 million to $40 million.

[Aaron Dunn, analyst]

$30 million to $40 million.

[Marc Murnaghan, executive]

Yes. And with hopefully, I would say, a lot more sort of specificity on that within 60 days.

[Aaron Dunn, analyst]

Okay. And most of it, primarily that growth is sort of coming from the Puerto Rico expansion there potentially?

[Marc Murnaghan, executive]

That's what we're anticipating, yes.

[Aaron Dunn, analyst]

Okay. And then looking at the Dominican Republic, the storage, that's going to be delayed. As of your last presentation, the COD was Q3 2025. Do you have any sense for, like, what type of delay you'd be looking at there? Are you looking at 2026 or even potentially later?

[Marc Murnaghan, executive]

I would say I would guide to construction CapEx outlay of '26; 12-month, call it, execution; so 2027 revenue.

[Aaron Dunn, analyst]

2027. Okay. And then just in terms of M&A. So with the valuation spread being more narrow, does that open up larger opportunities for you? Is that changing the way that you're approaching acquisitions? Or is it just kind of opening up more of the same opportunities?

[Marc Murnaghan, executive]

I wouldn't say -- I would say we're looking at larger anyways, because we have to as a company. So we already would have moved the size range up, and we already were doing that. I would say sort of $5 million EBITDA at the low end, up to $25 million. And we had done some smaller ones before. We won't do that again. So that already was part of the plan in terms of upsizing. And I would say that we are now seeing even the larger ones come in, in terms of multiples, which is great.

[Operator]

Your next question is coming from Shawn Kravetz, from Esplanade Capital.

[Shawn Kravetz, analyst]

My questions have been answered.

[Operator]

Your next question is coming from Kirk Wilson, from Beacon Securities.

[Kirk Wilson, analyst]

Most of my questions have been answered, but I do have one more here. So just looking at Panama and the solar parks there. I see the firm rights for 2025 weren't awarded. Can you give us some color on pricing that we should be looking at for the Vista Hermosa parks?

[Marc Murnaghan, executive]

So $60 to $70 for this year. It's tough. It's going to become very gas price-dependent. Now I would also say that we are going to look to potentially -- there's some commercial contracts that we could look to do instead. But those would be in that range as well. And I think that, that is an indication, obviously, as to where those people think the market is going to be this year. I would say if nat gas goes back to $2 an Mcf, you're probably in the $50 to $60, and then you could almost add about $10 a megawatt hour for every dollar per Mcf more than that range. So you sort of have to sensitize it to the gas price, which I'm not an expert in that, but $60 to $70 is probably realistic.

[Operator]

Your next question is coming from Steve Kammermayer, from Clarus Securities.

[Stephen Kammermayer, analyst]

Most of my questions have been answered here. But just on the acquisition front, I mean, you say you have the $80 million there from the green bond, looking at taking some bigger swings possibly. You're getting to a bigger size here. What size do you think production-wise do you need to get to before one of the bigger players maybe comes in and takes a look at you, just based on where you're trading versus their multiples?

[Marc Murnaghan, executive]

I don't -- I mean, that's a tough one for me to answer, Steve, but I would say I think part of the reason we've always been targeting people to the $80 million to $100 million of EBITDA number is I think that is, at the low end, you're getting into people's range, but also that it is just a much more diversified portfolio. I think diversification is -- it's not just a size thing. I think we do need to get our portfolio more diversified such that it is -- it's not just the public markets that want to see a diversified portfolio, it's the strategics. And by that, I mean both strategics as well as financial infrastructure funds. So in that range, I would say we're diversified enough for a much broader audience to take an interest.

[Stephen Kammermayer, analyst]

Okay. That's great. And with the green bond, you paid down a bunch of the debt. I think you paid down the Brookfield as well. Would there be an appetite for them to partner on something larger with you now that you have the cash and perhaps maybe they'll want to put in some debt as well? Have you had those conversations? Or we're way too early for that?

[Marc Murnaghan, executive]

I'd say they would be interested in lending money as long as it's bigger. We did -- that $25 million was very small for them. So it would have to be 3x, 4x that probably on the lending side. In terms of partnering, I wouldn't expect it, just given -- that's a bridge that's probably too big. That gap is too big in terms of [indiscernible].

[Stephen Kammermayer, analyst]

Right. Actually, I was thinking more on the debt side to partner.

[Marc Murnaghan, executive]

So for sure, I think that they're -- it was a good relationship. I think they're happy with how we performed. And so, yes, I think it's just it would have to be part of a bigger transaction, and they could provide a nice sort of sliver of capital on a bigger transaction, for sure.

[Operator]

Thank you. That completes our Q&A session. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.