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Good day, ladies and gentlemen, and welcome to the Polaris Infrastructure Inc. Third Quarter 2021 Earnings Conference Call. [Operator Instructions]It is now my pleasure to turn the floor over to your host, Anton Jelic, CFO. Sir, the floor is yours.
Thanks, Kate. Good morning, everyone, and welcome to the 2021 Third Quarter Earnings Call for Polaris Infrastructure Inc.In addition to the press releases issued earlier today, you can find our financial statements and MD&A on both SEDAR and on our corporate website at polarisinfrastructure.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 Infrastructure Inc. 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, 2020.I'm joined this morning, as always, by Marc Murnaghan, Chief Executive Officer of Polaris.At this time, I'll walk through our financial highlights. Power generation. Consolidated power generation for the 9 months ending September 30, 2021 and 2020 were 480,981 megawatt hours and 490,143 megawatt hours, respectively. These production figures are net of all plants downtime, both planned and unplanned.With respect to Nicaragua, we saw total megawatt hours of 120,838 in the third quarter of 2021 versus 118,857 in the same period last year. In Peru, total megawatt hours in the third quarter of 2021 was 28,482 versus 23,337 in the same 3-month period last year.Revenue. Revenue was $14.8 million during the 3 months ended September 30 compared to $17.1 million in the same period last year, lower due to the amended PPA price at San Jacinto, primarily offset by higher production from 8 de Agosto and El Carmen. Revenue was $44.6 million during 9 months ended September 30, 2021 compared to $56.2 million in the same period last year.Net earnings. Earnings attributable to orders was $1.4 million for the 9 months ended September 30, 2021 compared to $4.7 million earnings in the same period last year. This decrease was attributed mainly to lower revenue and higher direct costs and G&A expenses. The decrease was partly offset by other gains resulting in the sale of certain investments, insurance proceeds and the mark-to-market accounting adjustments on certain liabilities.Adjusted EBITDA. Adjusted EBITDA, a non-GAAP measure used by the company, was $32.7 million for the 9 months ended September 30, 2021 compared to $38.7 million for the same period of 2020, principally as a net result of lower revenue, higher direct costs and expenses.Cash generation. Net cash from operating activities for 9 months ended September 30 of $33.9 million, increased by $3.8 million from the same period 2020, mainly due to a favorable change in noncash working capital due to the improved accounts receivable collection during the period and lower interest paid, partly offset by lower revenue and higher costs compared to the same period last year.Net cash used in investing activities for the 9 months ended September 30, 2021 was $8.6 million compared to $2.2 million in the same period last year, largely due to the increase in restricted cash and advances related to the construction of the binary unit in San Jacinto.Net cash from financing activities for the 9 months ended September 30, 2021 was $14.5 million compared to $1.9 million net cash used in financing activities reported in the same period 2020. This increase was driven by higher net proceeds relating to the common share offering during the 9 months ending September 30 of this year compared to lower net proceeds of debt issuance in the company in comparative period and higher dividends.Dividend. Finally, I'd like to highlight that we do intend on paying our third -- 23rd consecutive quarterly dividend on November 26 of $0.15 per share to shareholders of record on November 15. 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'll 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 with respect to just a couple of comments on the statements in the quarter results before I move on to other items.So Q3, as expected, is the dry season in Peru. So it's always the lowest quarter of the year for the results coming out of Peru. And to give you some numbers, we did 28,000 megawatt hours in Q3 in Peru. It's not entirely comparable to the year before, given that El Carmen didn't come back into service and it wasn't operational for the full quarter last year, 8 de Agosto was. And of note, it was up, call it, 20%, 25% this year over last year. So the hydrology was better this year, again, even though it's a dry season, but somewhat better hydrology at 8 de Agosto, which was up and running for the whole quarter, both years. So make note of that.But to give you a sense, 28,000 megawatt hours relative to -- so Q4, our budget is between 45,000 to 50,000 megawatt hours for the 3 plants consolidated. And so just that difference alone would be about $1 million change from this quarter to next quarter with the costs effectively running the same. So from Q3 to Q4, at least for Peru, you should see sort of somewhere around $1 million bump in revenues and hence EBITDA, if things progress as we expect coming out of Peru.And Anton did mention cash came down somewhat principally because of the real, what I would call, CapEx, so the binary unit of the quarter was $12.1 million. So payments have already been made in several areas there. There's also some cash that got moved over to restricted cash for NLC. But that move should be able to come down over time next year as we get through the progress on the binary unit. And so on that, everything is moving as expected. We're still in the early days, but there's been no issues whatsoever. So we are at this point on schedule for a, call it, Q4 2022 commissioning date with, call it, the revenues and cash flows really starting in Q1 2023. So nothing has changed on that. So budget and timing on the binary unit stay the same.Other -- really sort of 3 other areas. The debt refi is moving as expected. We had -- I think it was probably 90 days ago, we engaged in agent that's supposed to, call it -- and a ranger, but also a principal. And so they are well on the way in that process. There's plant visits about 6 weeks ago with participants in the loan. And to remind people what we're doing is not -- don't have the aim of increasing the total amount of debt at San Jacinto, rather just terming it longer to match the fact that we have an 18-year contract. And so we're just trying to match the debt with the new contract, which would free up a reasonable amount of free cash flow to have in our hands over the next 3 or 4 years, principally.So that's moving well. And it would be a mix actually of some existing lenders just rolling over into the new facility with 2 or 3 new ones that have quite an interest in participating in the loan. So we are now in, call it, the legal dock part of the process. The technical advisers for the lenders and the ESG advisers for the lenders have submitted all their final reports and everything is looking good. And so now it's down through sort of legal documentation. We would expect that, call it, mid-December, December 15, let's say, is the target close date where we sit today. So that would be a big event for us, with effectively the new term starting Jan 1.On the acquisition side, we've been quite vocal. The fact that we're targeting acquisitions, we raised money in February with the intent of that. I remain highly confident that we will be putting that extra capital that we raised to work in the very short-term profile of what we're looking at is a combination of current production plus some expansion on, on-site plus the potential to grow more with other development projects. I would -- where we are at is on 2 separate opportunities. We are in between the LOI phase and the, call it, shareholder purchase agreement phase. So we're not at the point of announcement, but we are moving much closer to that.And the thinking is that based on where we sit today, that is, both would likely happen this quarter. So we continue to push that forward, which is really the key sort of initiatives we're working on, and that would set us up very nicely for 2022 because if we did close, as I said, the profiles would have even some instance, call it, financial impact for 2022.And then the last thing I'll mention before I turn it over is on the carbon front. It's still unclear exactly what may kind of out of the Glasgow meeting this week. We are getting some positive signals, and it may take a little bit of time to decipher or even see whether the agreements end up, but it's looking that it should be a net positive based on what we're hearing, which would reinforce, I guess, the strategy that we've had of ensuring that the current plans we have are on track for being verified and ready to potentially sell credits. We did announce a credit sale earlier this year, and we've done a little bit more that we haven't announced.But I think we'll see in the next month here that there should be some agreement that what we would hope for would increase the number of parties that could satisfy their carbon reduction goals through buying voluntary credits, which is -- which are the UN credit mechanism that we're part of, which is a voluntary market. But to the extent that either companies -- or countries can reduce their emissions or hit emission reduction goals by buying voluntary credits, we would fall under that. So that is something that we continue to ensure that we're ready for, and it seems to be moving in the right direction.With that, I will open it up for questions.
[Operator Instructions] Our first question today is coming from David Quezada at Raymond James.
So my first question here, just on the operations in Peru. It sounds like things are operating quite well. Would you say that you're at the point now where it's kind of hydrology equivalent, you're kind of the steady state? Or do you see any opportunities now that you've had these operations running for a while to optimize, be it on the O&M side or any other ancillary kind of investments you could make there?
Yes. I think we're -- we have a little bit of maintenance planned in the next few weeks at 8 de Agosto, but we're really getting -- I would think 2022 is a -- I don't -- we don't really have any other, call it, post facility maintenance. There's always a little things we got to fix, but it keeps going down, down and down. So I think we are entering a period in 2022 with just basic operations. We actually have an outsourced party doing that on a contract. So I don't see the cost next year coming down. I would see opportunities for that more likely a little bit down the road, which we do see.But I don't think there's huge sort of cost savings there, rather production should be going up as any of these teething entries are done combined with pricing going up because remember that 8 de Agosto right now is receiving a lower price than its contract just because it's below the committed energy, but we will be applying first thing Jan 1 to reduce that, which we're allowed to do as part of your contract, which should get us back to or close to the PPA price, which is -- it's about a 20% difference in the pricing. So I would see more benefits coming from the top line in the next few years rather than the bottom line.
Okay. Excellent. That's helpful. And then maybe one other one, just on the carbon credit side of things. Any additional color you can provide just on how those voluntary credits, how the pricing has moved? If it's different in the regions you're looking at? And maybe a related question. Have you ever considered or looked at some of the conservation type carbon credit investments that can be made if there are any in Nicaragua or Peru or elsewhere? And if that would be something that since you're already kind of in the carbon credit business that you might look at longer term?
So I guess the short answer on the last part is, yes, we would look at it, although I don't think that is in our sort of short term because I think you're looking at real capital investment and that you would need, I think, a little bit more visibility on the market itself. Because for us, the low-hanging fruit is, it is -- there are NIM costs per plant to get them verified and validated, but it's not. We're talking anywhere from 25,000 to 75,000, which, based on the pricing, there's a very quick payback. It does take a while. It's probably 1.5 years to get something done, and it is quite a rigorous process. But -- so our view is, let's just make sure we get all of our current plants and even the ones that we're hoping to acquire. If they can be or any of the expansions, that is, I think, the best return on capital that we can have. And as long as there's more to do there, I think we'll stick to that.And in terms of the pricing, I would say, even a year ago, when we were looking at it, we had some inbounds that sort of $0.50 a ton. And then it kind of went to $0.75 and then $1, and we transacted higher than that, sort of in between there and we've some at $1.50, some a little bit below that. So again, those aren't fantastic prices, but those are for vintages and that has moved just in 12 months quite a bit. And there's a lot of interest and inbound still on it. We've had proposals for higher numbers on a per ton basis for more, call it, the recent inventory or the go forward.So yes, I think the momentum is for that price to hit higher. And this is just my personal view that you have for people or companies and countries to, call it, meet goals, carbon tax of $50 a ton or $70 a ton or whatever and even the market in Europe is traded at around EUR 40 a ton, whereas if you can buy a "voluntary credit," let's say, $5 a ton or $10 a ton, I think that's going to get opened up. That's -- so because there's too much of a distance between where we are and where those, call it, nonvoluntary markets are. So I think there's going to be a push to open the value numbers up for the voluntary credits.
Our next question today is coming from Ahmad Shaath at Beacon Securities.
Marc, just a quick question for me on Panama. Any updates on Panama? And that's it for me.
Yes. The -- everything continues to move forward. I would say, it's a little bit slower than we want and that likely it's more of a Q1 launch. And our plan, though, would be to provide, call it, a more detailed update on that timing in conjunction with what we hope to be other sort of news on the acquisition front because if you recall, one thing I hadn't mentioned is the jurisdictions that I sort of described the profile of the acquisitions we're looking at in terms of their operational plus an expansion plus development.But in terms of the countries, we're for sure looking in Panama. We're looking in Peru. We are looking in Colombia. We are looking in Ecuador. We're looking in Costa Rica, in Dominican Republic. So that's sort of the list of countries, and Panama is there. And so -- and it's absolutely at the forefront. And so we're hoping to have something more there and then that will sort of tie in the shoes, but then we'll provide a more, call it, fulsome update on what the plans are for Panama at that time.
Our next question today is coming from Nick Boychuk at Cormark Securities.
Just wondering if you can kind of walk us through the Peruvian assets a little bit closer here. I'm just kind of looking to reconcile the production levels from Canchayllo versus 8 de and El Carmen, recognizing it's a dry season, it just seems Canchayllo performed, from the capacity factor standpoint, much better than 8 de and El Carmen. Any color you can give there?
Yes. So that one of the 3 plants, it's almost -- so it's actually downstream from a big dam that's owned by Electro Peru. And so they do regulate water flows such that there is more in the dry season, and they kind of build up their dam in the rainy season. So that one is not exactly flat, but almost flat. So if you think of 30,000 megawatt hours, it's sort of what it's done since COD like plus or minus. It's probably better to just model that one at 7,500 a quarter.
Okay. Perfect. That makes sense. And then on the acquisition front, obviously, I expect you can get too much detail, but anything you can comment on in terms of size, amount of capital you think it will pick up and what your plan to be for the remainder of that cash flow?
Yes. So the target really is when we have the cash to do the binary unit, right, and we said that. And then when we raised the funds, we raised CAD 50, which was net around USD 38 at the time, net proceeds in February. That's what we're working off of and that's very close to sort of the equity component of what we're looking at. We're thinking that we want to execute what's it within our capital availability right now and not do anything more, such that we can execute it and drive forward. And I think if we put those pieces in place along with the refi, where I am hopeful that we can get back to some dividend increases at some point next year. And then -- so everything we're doing is within our means now, and hopefully, we get some credit for it in the equity price, so that to the extent there's others that we're looking at, which we are, we would have, call it, better share price, slight cheaper cost of equity to pursue those things.
Our next question today is coming from Naji Baydoun at IA Capital Markets.
Just on Peru. I guess you're going to file to adjust the energy commitments early next year. Do you expect to get full 15% since that's discussed at one time?
Yes. So that's -- we will apply for the full 15%. There's -- it's not as -- it's your right within your contract to do that. So it's not as if you're applying and hoping that you get it at Peru, you just need to go through the process. What -- the only remaining question in our line is how fast we would get it, and at what point they would adjust the price. But with the "power" here in Peru is May 1, April 30. So we think it would start being applied in May 1 most likely.
Okay. So it wouldn't be retroactive to January, but it would be attractive to May 2022?
Yes. That's the best assumption that we're going -- when we -- the way we read it is it looks like in theory, it could be retroactive to Jan 1, but I don't think that that's a practical assumption. I think it's just better to you assume starting on May 1. I think we'll get the approval before May 1, so it's not as it should be So we applied Jan 1, let's say, a 90-day process. it then starts being applied in May 1.
Okay. Okay. Great. And just on the refinancing, I guess, taking a bit of time, but now that maybe you're close to getting it done, can you share any thoughts about expectations? Maybe if there's going to be any changes to the rates or it's really just about the tenure at this point?
So yes, a good point. So we do expect some improvement on the blended rate to what we're getting now. So that isn't the driving factor, but I do think we're going to see a rate improvement on a blended basis, what we have now. And right now, the loan is hamming down to 2028, but in 2 tranches. And the first tranche is big and it's hamming down to 2024. So 2022, 2023, 2024 are really heavy years. So it's really -- even though 2028, it's -- on a weighted basis, it's more like we're hamming down to 2026. So 5 years, whereas we're -- what we're -- the term sheet we're working off of is the 15-year straight line amortization.
Okay. Got it. That's very helpful. And just the last question I had was around the dividend is the expectation. And I know maybe it's a bit too soon that just based on the refinancing alone, you could maybe do a dividend increase? Or would you rather wait and get more operating assets in the door?
So I think -- yes, just based on the refi 2022, we could. I think it's even less based on getting operating assets in the door, which will help for sure. With that, I think it would just be ensuring that there's not going to be any major cost over on the binary unit, which we'll know by, I think, Q2 next year. And that really should not be. I'm not saying you would wait until it's in service and then commissioned. But Q2 is kind of a big quarter where that's when all of the equipment would have been manufactured.And just to be clear, we have a fixed price contract on $14 million of a $25 million budget. So that won't change. It's just -- there'll be a confidence level, I think by, call it, by July of next year that everything sort of marching forward as planned. And in my mind, that's sort of when there would be the confidence, you just -- because that's a project if there was a risk of cost overruns, again, which are very small, but you just wouldn't want to be increasing your dividend too far in advance of that. That to me, that's the bigger one, as to what the point would be, where you say, okay, we're confident now. Even if -- because you pointed out, even if because of the refi from an operational basis, the payout ratio is going down and you could do it.
Yes, I understand. You just want to be a bit more conservative than maybe wait for the second half of next year. Just tied to your comment about the pricing, I know the budget for Chuspa has gone up a bit, but have you selected a contractor? Like do you think that there's going to be some pressures on that project?
We did have -- I think a month ago, we met with a whole bunch of contractors that already provided budget years ago. They refreshed them. There actually was not a lot. There, good news is the equipment and the people are all sitting in Panama offering. So things that we're looking at, and I would even include some of the growth stuff that we haven't announced it. When you have equipment and people already in country, you're not seeing sort of the supply chain issues, right? So short answer is no. We haven't seen anything on that front.
[Operator Instructions] We have no further questions in queue at this time. Do you have any closing comments you'd like to finish with?
No, I think we're okay.
Thank you very much.
Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.