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Ladies and gentlemen, thank you for standing by, and welcome to the Polaris Infrastructure Inc. Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Anton Jelic. Thank you, sir. You may begin.
Thanks, April. Good morning, everyone, and welcome to the 2021 second quarter earnings call for Polaris Infrastructure. In addition to the press releases issued earlier today, you can find our financial statements and MD&A on both SEDAR and shortly on our corporate website at polarisinfrastructure.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 this call may include forward-looking statements within the meaning of applicable Canadian securities legislation regarding the future performance of Polaris Infrastructure 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 our company's annual information form for the year ended December 31, 2020. I'm also joined this morning, as always, by Marc Murnaghan, Chief Executive Officer of Polaris.At this time, I will walk you through our financial highlights. Power generation, consolidated power generation for 6 months ending June 30, 2021 and 2020 were 331,659 megawatt hours and 347,949 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 111,848 in the second quarter of 2021 versus 129,678 in the same period last year. In Peru, total megawatt hours in the second quarter of 2021 was 38,828 versus 35,863 in the same 3-month period in 2020.Revenue, the company generated $12.0 (sic) $14.2 million in revenue from energy sales for the 3 months ended June 30, 2021, lower compared to the same period in 2020. Net earnings, net earnings attributable to owners was $0.2 million for the 3 months ending June 30, 2021, compared to a $1 million loss for the same period in 2020. Net earnings increased due to other gains recorded during the period, compared to other loss in 2020, partly offset by lower revenue. Adjusted EBITDA, adjusted EBITDA was $10 million for the 3 months ended June 30, 2021, compared to adjusted EBITDA of $15.1 million in the same period in 2020. Cash generation, net cash from operating activities for the 6 months ended June 30 of $24.2 million increased by $5.7 million from the same period last year, mainly due to a favorable change in non-cash working capital due to the improved accounts receivable collection during the period and lower interest paid, partly offset by lower revenue and higher cost compared to the same period in 2020.Net cash used in investing activities for the 6 months ended June 30 was $1.5 million, compared to $2.5 million in the same period of 2020, largely due to the decrease in the spending related to the construction of the Generacion Andina facilities, El Carmen and 8 de Agosto. Net cash from financing activities for the 6 months ending June 30, 2021 of $22 million compared to $0.3 million net cash used in financing activities last year. The increase was driven by higher net proceeds related to the common share offering during the 6 months ending June 30, compared to lower net proceeds of debt issuance in the comparative period.Dividend, finally, I would like to highlight once again that we do intend to pay our 22nd consecutive quarterly dividend on August 29 of $0.15 per share to shareholders of record on August 16. This continues the board and management's commitment to regular, positive distributions to shareholders, coupled with an ongoing emphasis on attractively valued accretive acquisitions. With that, I will turn the call over to Marc who will elaborate on current business matters as well as on our quarter end results. Thank you.
Thanks, Anton. So I'll jump in just to start with a couple of the things that affected the results and then get into sort of the go-forward things. So we did maintenance at San Jacinto, which was expected. That ends up being around a $1 million sort of reduction in revenues and EBITDA, which was expected. The comment I would make though is given COVID, last year we had to do it in August and there's nothing we could do to get around that. So the quarter-over-quarter comparisons can be a little bit tricky. Going forward, we will aim to continue to do the maintenance in the same quarter every year, just so that expectations are clear on that. But there was little we could do, so that has about a $1 million impact on the EBITDA line planned.We did have an unplanned downtime at 8 de Agosto in Peru which net-net cost about $500,000 in the quarter. The issue has been rectified and we don't expect that to continue in the future. But that did have about a $500,000 impact there. And then we also had about a $500,000 impact on the G&A line actually at the corporate level, about just under $400,000 of that is a timing/one-time issues that we don't expect to continue and about $100,000 is a more longer-term increase on a quarterly basis in the G&A, as we have ramped up initiatives to look at other assets and acquisitions which does require certain technical, legal and accounting expenses that we do expense on an operating basis as opposed to capitalizing those to a potential future deal. So that's the reasons for the reduction on the EBITDA line relative to prior quarters.In terms of the overall comment about production, so it's hard to see, but in Nicaragua at the plant, both before and after the maintenance, we were running at about 55 net which has been quite stable. We've been at, I would say since end of January or February, we've been running around 55 net since then. We ran about 55 net before the maintenance. We were running 55 net after the maintenance, since the maintenance to now. So I would suggest that the field is stabilizing without any more drilling and it's been that way for 6 months here. So that's what we're seeing on the production levels at San Jacinto. And really it has confirmed what we've been doing, a lot of extra work on the numerical model that barring any further drilling, it looks like the field has settled into equilibrium here around this level and we can expect some small declines from here, but small.In Peru, the comment I would make is I did comment on the unplanned downtime at 8 de Agosto. The other plants were fine. El Carmen ran fine. Canchayllo ran fine. And I would say El Carmen, the hydrology was probably a little bit better. And despite the unplanned downtime at 8 de Agosto, we do know that the hydrology was better. To give you an example, in 2020 in Q2 8 de Agosto did 27,300 megawatt hours. This quarter it did 21,400. But we estimate that the downtime cost us over 9,000 megawatt hours, so we would have been north of 30,000 megawatt hours relative to 27,000 last year, which is about a 10% to 12% increase. And so that confirms that last year was somewhat of a drier year that we started in and that when we run our number now based on our projection of 115,000 to 120,000-125,000 seems reasonable, provided that we have much higher availability which we do expect going forward.The other comment would be, we would expect that the pricing -- so pricing this year is lower, which we did expect because of 8 de Agosto is running below the committed energy. But starting in January of next year, we will be able to reduce the committed energy to a level that we think is achievable, and we had always expected that we would have to do that. But so that the actual, call it, with the pricing penalties that we're at this year, it makes it -- we're just going to be generating lower this year. But we would expect that that can get back to "normal" with prices moving from the low 40s to the mid-50s starting next year. I would also just say that we did after the quarter, receive $1 million in the insurance proceeds, which does not end up going into the revenue and EBITDA line, although we had those expenses expensed for -- the reparations were expensed in the EBITDA line. And then the cash has come in now. In terms of the go-forward, we made the announcement on the binary unit last night. When we initially started out, it was looking sort of -- we'd initially thought sort of 7 to 8 megawatts in our contract. We have -- we are allowed to do up to 10. And based on the numerical modeling process that we did with Jacobs, we looked at many scenarios, and the 10 megawatts seems very safe to do, because we have an ability with certain injection wells that have no connection to the production field that we can go to the higher number and safely without impacting reservoir temperature, so that's very good news, and there's a big difference between -- it's almost $1 million in revenue per megawatt, it's about $900,000 in revenue per megawatt. So that adds, call it, another $2.5 million in revenue, and yet our cost, realistically, our budget for the whole project is $25 million. So to move from 7 megawatts, we had a budget of $20 million, but to get to 10 with $25 million, obviously, you can see that the economies of scale really work in your favor for that. So we were very happy to have signed that. And the -- with a company like Ormat, who is the world leader in providing this type of equipment. So we look forward to working with them. And based on this, we're moving forward and a commissioning date, call it, in late Q4 2022 with full commercial operations commencing in Q1 2023. And that ties into the other initiative at San Jacinto which is the refi. We have narrowed it down and have signed an engagement letter with a with a lead arranger in the region. And they're an arranger, but also will provide capital on the loan, and that we are now in the process of talking to both existing and potential new lenders about a restructuring of the current loan. I'd call it technically a refinancing, I guess, but we're looking to do the same amount of money, same amount of capital, which is around $100 million to $110 million total, but with a big change in the amortization schedule, which was part of the plan after redoing the PPA in December last year with something that has an amortization period that ties much better to the length of the contract. Right now, it's aiming down quite rapidly. And what that would do for us is really free up a lot of cash in the next 3 or 4 years. So that is set in motion, and we should have clarity on that by Q4 this year. And the binary unit does tie into that somewhat in the sense that once we've signed the contract and we're moving forward, the numbers already look quite good, but with the binary unit, which is -- it's not like drilling. It's a pretty bankable revenue stream coming in and that should help it. So they do dovetail. So those are the 2 big things that we're working on in Nicaragua.Then when it comes to the growth, the other growth with Chuspa in Panama, we are in the last stages of choosing the contract or we had to get revised budgets based on the fact that we're ready to go. And given that there has been inflation in the world, you need to go back to people and get them to go back and quote their suppliers, et cetera. So we had to go through that process. We're in the very last stages of that. And I would suggest that the number, given that a lot of the materials had already been on purchase, including turbines and some of the piping for the conduction channel, we have not seen a very large change on that front. So that's good. And then -- so we would expect to be moving forward with signing the share purchase agreement in the next 60-90 days and mobilizing thereafter. And that would be a project that would come on, call it, early 2023. I would just reiterate the small sort of carbon credit sale that we did, which is only, call it, $400,000 revenue. That will likely close Q4 this year. And we continue to see, I would suggest, interest in carbon credits at both our San Jacinto facility, but also we are still in the process of certifying both 8 de Agosto and El Carmen, which we expect to have ready early next year, and at which stage, all of our facilities will have carbon credits, and we could for sure sell more and we think we could sell more of our vintages. And so we are looking at doing that, although we do think that there will be a lot more clarity in November when countries meet and discuss their commitments. And hopefully, that's a positive result. And given what we're seeing in terms of interest levels, we seem to be seeing more interest level in what we have, not necessarily increases in prices yet from what we've done, but we're hoping that that sort of more pricing pressure coming in the next 6 months. So we're going to test that. And I'd say there's a chance we do maybe some more small vintages before the end of the year. We'll at least look into that with a hope towards there being more. For sure, we'll have more product to offer and hopefully some momentum on the pricing side next year. And then in terms of acquisitions, the pipeline continues to fill. I would say we really are looking at 2 or 3 that we're narrowing down to trying to get done here. That part is moving a bit slower than we wanted, but we are still confident that we're going to get something done here before the end of the year and the profile of what we're looking at, given that both the binary unit and Chuspa are development projects, call it, we are looking at acquisitions that would be in operation that have cash flow, revenue and EBITDA so that that would hit immediately. And also we are looking at opportunities that have that combination of current revenue, cash flow, but also some growth and expansion that comes with it. But we really aren't looking at ones that are only sort of development stage. We are looking at assets that have current production. So that, the benefit of that, obviously, to the extent we get something done here is that while we're waiting for the binary unit and Chuspa to come online, we can have some other revenue and EBITDA come online in between that. So that is the, call it, the profile of the things we're looking at, and we're working hard to get something done this year.So with that, I'll turn it over to the operator to open up for questions.
[Operator Instructions] Your first question is from David Quezada with Raymond James.
My first question just on the binary unit budget at $25 million. Is that below what you had been expecting? And maybe just any comments now that things have been firmed up a little bit more, what kind of return expectations you're looking at there.
Yes, I would suggest, given at that size, I think we would have expected the budget to be a little bit more, partly because there had been in terms of steel and some materials, there has been inflation, call it, the COVID inflation. But I think it was just offset by a competitive environment, and this is in a part of the world, I think, where equipment suppliers are looking to get some good reference sites.
Okay. Great.
We're very happy with that. I mean that if we -- and the more important one is the increase in size, if we hit that size, which there's no reason to think we won't. You're looking at, call it, $8.5 million to $9 million of free cash on $25 million investment. So you can do those numbers, but it's less than a 3-year payback.
Yes. No, that's great. I certainly agree with that. Maybe a follow-up question just on Nicaragua, I guess, more broadly, I know that the election is coming up later this year. Do you think your view on potentially drilling in Nicaragua will change? Or could it change post-election, assuming everything goes peacefully there? And just thoughts on whether or not you even need to, just given your comments around the stabilization of the field and the fact that the binary unit is coming online.
So I think with the binary unit coming online and being bigger than what we were originally thinking, that doesn't rule out drilling, but I think it pushes it further away into -- and now I'm talking like maybe that's a '25 event, '26. I wouldn't say never, but I think it just pushes it out. And so what we would consider is the western fields, which is effectively untapped. There -- geothermal is starting to see interest from a lot of new players. And we, at one point, had a grant for almost $1 million to do surface studies over there. We are looking at potentially partnering to drill there as opposed to -- because I do think the current field has found its level, and we would just be pushing the envelope too much on the drilling side. The binary unit is fine. I mean it's a great add. We will look at doing something on the western side. If we can find, call it, very cheap or free capital to go do something there, I could see us doing that in the next 2 or 3 years because then that could really add to -- that would be additive steam for sure. So that's something we look at. It's early days, but I think given the level of interest that's kind of emerging in the sector, yes, we're going to -- we'll look at that.
Okay. Awesome. And then maybe just one last one. I appreciate these are probably for the most part, longer-term opportunities. Just wondering if there's any update or if you're still looking at any of the development projects you had in Peru at the time of the Andina acquisition.
Not -- I would say, short term, no; medium term, yes. And I would define medium as 2 to 3 years. Just on that, David. I would say that we still have 2 or 3 live, call it, acquisition files in Peru. That to me is more what we're looking at in the short term. And then I think the market -- they will start to do more calls for power, but it's just a question as to whether it's 18 months or to 36 months. I think that's the range that they will do tenders, and that's, I think, when we'll get back to the pipeline.
[Operator Instructions] And your next question is from Naji Baydoun with IA Capital Markets.
Maybe just starting on Chuspa, can you maybe quantify like the move in the budget? I think it was about $20 million at the time that you kind of announced the intention to acquire in the project. Is that still sort of the right number?
We're running $22.5 million now.
Okay. So that's the updated budgets are you're getting just a bit closer to $22 million or $23 million, okay.
Yes. Yes.
Just your comments on M&A and looking more to, I guess, on operating assets to try to balance the development projects. What's really the trade-off in your view today, I guess, in valuation of doing an operating asset, just based on what you're seeing in the pipeline?
Yes. I mean it's not operating versus, let's say Chuspa, it's going to be a lower return. And we do think, though, that we think we're in the low to mid-teens on Chuspa, for instance, in terms of IRR. And what we're trying to do is put together a portfolio though. So if you think of the binary unit, which is north of 30%, Chuspa at, call it, low to mid-teens and then buying an operating asset. You're going to -- if it's a good asset and it has expansion, you're going to be anywhere from 7% to 9% in this environment. And we've seen transactions happening even lower than that. But we think we're -- with the portfolio of opportunities we're looking at, we think we can land in that range that I quoted, and that we look at it on a bit of a portfolio basis that if we get some operating at that, we develop let's say, at 7% to 9%, we develop Chuspa at say, 11% to 14%, and we do the binary at 30%, that that actually is a good blend for everybody, but we need all of it. So that's how we're seeing it. And that is, I think, the delta in the return profiles. What I would say is it is somewhat country dependent. In other words, a big part of the strategy is that given the perceived political risk in Nicaragua, we are looking at jurisdictions where the view is we have to go to jurisdictions that have a lower perceived political risk, hence, the 7% to 9%, right? There would be some jurisdictions, for instance, we could find more assets in Nicaragua, operating at higher return thresholds than that, for sure. But we don't think that's the right thing to do. So if you're going to start to high-grade the jurisdictions, that has to come with lower return expectations.
Right. That's the trade-off that you except but it makes sense. Okay. That's great color. And just last question on the carbon credits, once that certification is done. Just wondering what's your view on sort of the strategy there. Like, would you rather just sell some credits opportunistically, I guess, on a one-off basis? Or is there an opportunity to maybe lock in maybe a lower price but lock in sort of a recurring selling stream with a particular buyer or several buyers potentially?
Well, you've hit the nail on the head in terms of what we're considering. Like those are sort of your options. My guess is until November comes around, it would be more the former, i.e., sell just a small amount of vintages, if we get a little bit more movement on the price. Because my -- the vintages -- this is policy driven, right? And vintages, to me, it's a bit more of a coin toss as to what's going to happen. I'm more of a believer that in the go-forward, there's going to be strong demand. And I'm talking voluntary credits here, which is what we have. Vintages, it could be that way. It could also be well, well, it's voluntary. So there's a little bit more risk, I think, in terms of where pricing goes on voluntary, which suggests we're -- but there are people out there that think those -- there could be good upward pressure on prices for the historical vintages. So we are kind of talking to some of those groups. So if I was -- my guess is it's more -- we may do something on some vintages this year, but wait on the go-forward. But there are groups out there that would look at potentially setting kind of a floor price and then maybe you share some upside. Given our cash position, though, I'm not in a rush on that.
Appreciate that. Congrats on signing the contract, the binary unit.
Your next question is from Ahmad Shaath with Beacon National Securities.
Marc, my question is on the refinancing discussion. I remember you mentioned before on previous calls that there was potentially room to do something on a portfolio basis. Is that still the case? And is that -- so would that tie into the assets you're looking to acquire being in production? Just wanting maybe to get a sense of the potential size of these acquisitions or the assets in production.
So the thinking at this point is, while that's still a possibility, we think the better path is get something done this year on a restructuring of just the existing amount in San Jacinto, get Chuspa going, get an acquisition done and for that, we raised the capital in February, which was just under USD 40 million. It was CAD 50 million. It was call it, net, just say, USD 40 million. So we have sort of USD 40 million to -- for, call it, the equity of an acquisition. And we want to get something like that done so that the combination though of an acquisition plus Chuspa plus an even better San Jacinto once the binary unit comes online, pushed us to -- let's just get restructuring done at San Jacinto this year, but then look to do a broader corporate level thing once those pieces are all in place. So one step first and then the -- what I would hope would be a bigger -- potentially even equity raising corporate debt offering would come after we have more diversification.
[Operator Instructions] And there are no questions at this time.
Okay. Thank you, everyone.
Ladies and gentlemen, thank you for joining today's conference call. This concludes the conference. You may now disconnect.