Polaris Renewable Energy Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 6 speakers on the call.

Operator

Please note this conference is being recorded. I will now turn the conference over to your host, Anton Jelleck, CFO at Polaris. Anton, over to you.

Speaker 1

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 and A on both SEDAR Plus and our corporate website polarisrei.com. Unless noted otherwise, all amounts referred to are denominated in U. S.

Speaker 1

Dollars. I'd like to remind you that comments made during this call may include forward looking statements within the meaning of applicable Canadian securities legislation regarding the future performance of Polaris Renewable Energy and its subsidiaries. These statements are current expectations and as such are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties include the factors discussed in the company's annual information form for the year ended December 31, 2023. I'm joined this morning as always by Mark Murnahan.

Speaker 1

At this time, I'll walk through our financial highlights. Power generation. During the 3 months ended June 30, 2024, power production was 186,887 Megawatt hours compared to 209,982 Megawatt hours in the 3 months ended June 2023. Juanicipar Agua in the Q2 of 2024 production was 114,046 Megawatt hours lower compared to the same period last year at 131,529 Megawatt Hours. Consolidated production in Peru for the 3 months ended June 30 was also slightly lower at 42,000 374 Megawatt hours than the comparative period last year, which totaled 51,986 Megawatt hours.

Speaker 1

At our Dominican Republic Canola 1 Solar Facility, we produced 14,613 Megawatt Hours in the 3 months ended June 2020 or this is higher than the Q2 of 2023 reflecting enhanced productivity from the newly installed panels. For Ecuador, in the Q2 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 Megawatt hours 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 3 months ended June 30, 2024 compared to $20,800,000 in the same period in 2023.

Speaker 1

Net earnings. Net earnings attributable to owners was $985,000 for the quarter compared to $4,600,000 for the same period in the prior year. Adjusted EBITDA. Adjusted EBITDA increased to $13,300,000 for 3 months ended June 30 compared to 15,700,000 for the same period last year. Sorry, that was a decrease to 13,300,000.

Speaker 1

Dollars Cash generation. Net cash from operating activities for the 3 6 months ended June 30 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 under revenue in Peru. Net cash used in investing activities for the 3 and 6 months ended June 30 was considerably lower when compared to the same periods in 2023. While the cash usage in the current year relates to Canola 1 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 3 6 months ended June 30, 20242023 are comparable.

Speaker 1

And finally dividend, I'd like to highlight that we have also announced once again we will be paying a quarterly dividend on August 23 of $0.15 per share to shareholders of record on August 12. With that, I'll turn the call over to Mark who will elaborate on our quarterly results as well as current business matters. Thanks.

Speaker 2

Thanks, Anton. So yes, 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 planned major maintenance.

Speaker 2

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 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.

Speaker 2

I would say incidentally, it's 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.

Speaker 2

The actual solar radiation 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.

Speaker 2

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.

Speaker 2

In terms of the larger project at Kanoa, we as I mentioned on the last call, we had received the environmental permit to include batteries. We are 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 get the down payments

Speaker 3

on the

Speaker 2

equipment placed. And once we have that, we think it would be about 12 months from there. And I would say the 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.

Speaker 2

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 2 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.

Speaker 2

And financially, we're well positioned to do this given our cash position at 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 the green bond before. Really for us, this is a Q4 target for this year, which we continue to look towards.

Speaker 2

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 do 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.

Speaker 2

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. So we can open up for questions.

Operator

Thank you very much. We will now be conducting our question and answer session. Thank you. Your first question is coming from Rupert Merer of National Bank. Rupert, your line is live.

Speaker 4

Thank you. Good morning, everyone.

Speaker 2

Good morning, Rupert.

Speaker 4

Mark, it sounds like you're getting fairly close on an M and A transaction. 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?

Speaker 2

Yes. So in terms of timing, I would suggest that it is taking longer than we had anticipated, but we do hope to have something call it in the next, I'd say 60, 90 days. There's some technicalities just from a structuring perspective. But everything we continue to move it forward sort of assuming it's going to sort of come under our wing in that time frame 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 in terms of Kanoa, it's about, call it, 5% to 6% of EBITDA currently with an opportunity to grow and to do on-site, I would say.

Speaker 2

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 generation paired with storage. And so that's really what we're going for with the acquisition strategy because we think having sort of 2 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 it's we're trying to mirror Hanoa with the acquisition.

Speaker 4

All right. Great. And then with the potential organic growth on that asset as well as across your portfolio. You're seeing lower cost of solar and batteries. How is the competitive dynamic shifting there?

Speaker 4

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?

Speaker 2

I'd say not in 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 costs. So I don't see pressure there on prices.

Speaker 2

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.

Speaker 2

And I wouldn't say that we see any more competition for that at least at this point in time.

Speaker 4

Great. Well, thanks for color. I'll leave it there. Thanks.

Operator

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

Speaker 3

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

Speaker 2

So just I really will stick to the organic. I would say if we start in Q4, the Doctor, you're looking at about 10 $1,000,000 I mean the nice thing is the CapEx has come down. Originally, we were thinking it would be like $40,000,000 45 percent 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 of it would be next year.

Speaker 3

Okay. Thanks. And then with your commentary on the cost profile changing, can you kind of walk us through like 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 would like to want to deploy other dollars?

Speaker 2

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 costs coming down. But now I would say it's just so good. We'd like to get going.

Speaker 2

They've come up probably another 2 or 3 percentage points, maybe more on the IRR side. So to levels that are, call it, circling around 20%, so plus or minus. So that's fantastic for something that's backed by still a lot of time left on a take or pay contract, right? So yes, I think they've come up. They're great and we just want to get going on it.

Speaker 5

Got it. And then last

Speaker 3

for me, just we didn't touch on Panama at all. Merchant prices still sticking around $150 there. With that level, any color 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 of take advantage of that while you can?

Speaker 2

Yes. So this for your benefit too, the rainy season generally starts in May. So in Panama, you have an impact of they have a lot of hydro relative to their total capacity in the grid. So when you get more rain, spot prices come down. So that's started in June.

Speaker 2

So they had already started coming down. So 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.

Speaker 2

And then 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 what the published timeline is and there's been a bunch of back and forth with participants. So that should be getting lost anytime now.

Speaker 2

So we for sure would be bidding our plants into that. That would be our first option because those are 15 year contracts with effectively government credit. And if that doesn't or if we don't get something and that doesn't move forward, we wouldn't still there still is is the possibility to go to commercial off takers. There's a lot of commercial off takers. The only issue there is they're normally about it takes 7 years would be the average instead of 15.

Speaker 2

So I still don't feel like we're in a rush to do that though. So I would suggest we're we'll it would be, see where this 500 megawatt call 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.

Speaker 3

Okay. That makes sense. Appreciate it.

Operator

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

Speaker 5

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

Speaker 2

project? So I'll deal with the second part. Yes, op costs, at least in our sector, are very good visibility. Our number one cost actually is our capital costs or where's our operating costs. We the staff is usually not a big number to operate these plants and reasonably known and fixed.

Speaker 2

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 op 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.

Speaker 2

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 9 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.

Speaker 5

Okay. Okay. That's great to know and good context. 2, I think, quick ones. But what about replacing degraded power in Nicaragua with solar?

Speaker 5

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?

Speaker 2

Yes. 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 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.

Speaker 2

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 of the company, it's better to take that, let's say, dollars 10,000,000 of free cash flow and put it into the Dominican or an acquisition. So to get us to a more diversified company so that we can call it close that multiple gap. I would say we do have a sector in Nicaragua in the 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.

Speaker 2

And we have turbine space and we have contract space. So we are considering options to potentially bring in outside capital to see if we can target that to get exactly at the point that you're raising. But 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 prospective. 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

Speaker 4

that. Got it.

Speaker 5

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.

Speaker 2

Yes. So from 2020, 2021, beginning half of twenty twenty one, the market really improved. We did sell some. We thought we're 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 tonne to $5 a tonne, call it, is what we were selling at.

Speaker 2

And they went back to $0.25 a tonne and volumes just kind of disappeared. However, to your point, like 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 $2 to $3 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 we're maybe we're at the early days. It's hard to I can't give guidance.

Speaker 2

But if we could get some sales 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 tonne 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.

Speaker 5

Got it. And are those typically corporate buyers or who

Speaker 3

are the

Speaker 5

buyers that you've seen?

Speaker 2

Yes, they're believe in it, yes, corporate. So one of the largest buyers is Corcia, which is a it's an alliance of all the airlines because they buy. They actually 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 I believe you have some other energy companies that decide that they're going to do it.

Speaker 2

So it's mostly corporate. There's a few governments, but I think

Speaker 3

it's

Speaker 2

voluntarily doing it. That means that that market can kind of is a bit more volatile, but it seems to be coming back.

Speaker 5

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

Speaker 2

Okay. Thank you.

Operator

Thanks very much. The next question is coming from Devin Schilling of Ventum Financial. Devin, your line is live.

Speaker 3

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

Speaker 2

So at least everything we've seen, 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 and seems to be continuing. So it's 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 it's really 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.

Speaker 2

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 our conversion of call it our EBITDA and 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 buy back stock, but we you would look that we would have the ability to do all of those things.

Speaker 2

So I would suggest that while I do think there's a rate savings, I would that wouldn't necessarily be the biggest driver for us at this point in time.

Speaker 3

Okay. Yes. So repayment terms is kind of a key component. Yes. Okay.

Speaker 3

No, that's I would

Speaker 2

start there. I would start with that one actually, yes.

Speaker 3

Yes. Okay. No, that's helpful. Thank you so much. That's everything for me.

Speaker 2

Great. Thanks, Noah.

Operator

Thank you very much. Well, that appears to be the end of our

Speaker 3

question and answer session.

Operator

I will now conclude the call.

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