Earnings Call: Q1 2021

May 6, 2021

Earnings release

Good day. Thank you for standing by, and welcome to the Peralis Infrastructure Inc. First Quarter 2021 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the call over to your host, Anton Jelic. Please go ahead. Thanks, Felida. Good morning, everyone, and welcome to the 2021 Q1 earnings call for Polaris Infrastructure, Inc. In addition to the press releases issued earlier today, you can find our financial statements and MD and A on both SEDAR and shortly on our website. Unless noted otherwise, all amounts referred to are denominated in U. S. Dollars. I'd like to remind you as always that comments made during the call may include forward looking statements 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 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 by Mark Murnahan, Chief Executive Officer. Now into the quarterly highlights. Power generation. Consolidated power generation for the 3 months ending March 31, 2021, 2020 We're 180,984 Megawatt Hours and 183,332 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 119,854 in the Q1 of 2021 versus 135,344 a year ago. In total in Peru, sorry, total megawatt hours for 3 months ending March 31, 2021 were 61,130 versus $47,988 in the same 3 months last year. Revenue. The company generated $15,700,000 in revenue from energy sales for the 3 months ending March 31, lower compared to the same period in 2020. This quarter was the 1st full quarter under the amended power purchase agreement price in respect of San Jacinto and Nicaragua, which was the largest contributor to our decline in revenue. The lower PPA price was part of the broader negotiation with the government, which included an extension of the concession period and inclusion of a binary unit. Lower production at San Jacinto was offset by higher production from our hydroelectric facilities in Peru. Net earnings. The net loss attributable to owners was $900,000 for the 3 months ending March 31, compared to $4,400,000 in earnings for the same period in 2020. The decrease was attributed mainly to lower revenue and higher from our 21% share price increase during the 3 months ending March 31. Adjusted EBITDA. Adjusted EBITDA was $11,900,000 for the period ended March 31, compared to The $17,000,000 for the same period in 2020. Cash generation. Net cash from operating Activities for the 3 months ending March 31 of $17,100,000 increased by $8,200,000 from the same period in 2020, mainly due to a favorable change in non cash working capital due to the accounts receivable collection during the period and lower interest paid, partly offset by lower revenue and higher costs compared to the same period in 2020. Net cash used in investing activities decreased to $600,000 from $2,000,000 in the same period in 2020, largely due to the decrease in spending related to the construction of the Geraracion and Dina facilities of El Carmen and Ocho D'Agosto. Net cash from financing activities for the period ended March 31 of net 31,400,000 increased compared to $6,700,000 in financing reported in the same period in 2020. The increase, of course, was driven predominantly by net proceeds of $38,200,000 given the Private offering that closed during the quarter. Dividend. Finally, I would also like to highlight that we do intend on paying our 20 1st consecutive quarterly dividend on May 28 of $0.15 per share to shareholders of record on May 17. This continues the Board and management's commitment to regular positive distributions to shareholders, coupled with a continuing emphasis on Attractively valued accretive acquisitions. With that, I will turn the call over to Mark, who will elaborate on current business matters as well as on our corporate Quarter end results. Thank you. Thanks, Anton. So a few comments before we turn it over to questions. First one I want to make is just it's not clear in the numbers, but we had Just wanted to discuss the pricing in Peru. It was a good quarter in terms of production, but less of a contribution to EBITDA than It otherwise would have been just because of the way that the PPAs work there, which is that if you're running below your committed energy, There is a price penalty, which we had in Q1. Without that, EBITDA and revenue for Peru would have contributed an extra $700,000 to $800,000 So and this is not something that is permanent in the sense that for El Carmen, we that was due to The outage incident last year, which we are being covered for from an insurance perspective, but that's not something that you can run through the P and L. And also the Agosto is something that we did expect given that when we purchased the company and the contracts, The committed energy under that contract we knew was high, and we are able To reduce that committed energy by up to 15%, which we will do, but you can't apply for the reduction until 2 years after COD, which would be December of this year, we will apply for it. And it is a contractual right. So we will get it and expect that that gets the higher price gets Applied starting in 2023, which will have a positive impact for Karoo. So wanted to mention that. The second thing I'll mention is that the Strong cash position. We did raise equity, which is a big contributor to that obviously. But the other thing is that the accounts receivable in Nicaragua came down nicely. So we received and this was part of this, call it, The extension of the contract terminating the old, having a new one. And so the any receivables left on the old were paid in the quarter. So that really helped our cash position as well. There was a small asset sale, a small number, But so and then there's even a few more of those on the books that we are still looking at doing. They're not huge numbers, but let's call it Latent asset value that we are looking to monetize and then put even more cash on the balance sheet. And we did it took a long time, but we recently finalized the insurance settlement on El We should bring in about another $1,000,000 onto the balance sheet this quarter. So point is that we are very well cashed up To execute on all of the key initiatives that we have on the go. The first one being the binary in it, which We sent tender letters out mid April to all of the equipment manufacturers. When we started the year, we were looking at, call it, a 7 to 10 megawatt binary unit, but we had to run a bunch of Chemical tests on the brine, which we did, and to assess as to how much How big you can go on the binder unit. And so the good news is that those were as good as could be expected. So we went out with a 10 megawatt Minor unit package, so that's going to be the number we're looking at and that does make a big difference On the numbers going forward, so we're very happy with that. The schedule on this is that we are expecting to have Firm proposals from these equipment manufacturing by the end of this month and then within call 4 to 6 weeks, so end of June or first thing in July, we will sort of sign a contract, choose the equipment supplier And lock in the prices and the budget. So that's and we'll make sure that that is communicated to the market. But once we get to that, It is, call it, an 18 month construction process, but the numbers we think will be very firm. And If it's 10 megawatts, we're going to be looking at, call it, dollars 8,500,000 to $9,000,000 in, call it, cash flow And revenue generation off of the binary units. So that's the number one initiative that we have sort of on the docket. The second is Chustat and that is Peru. We have had slight delays because of COVID, but things are looking very good there now in terms of the case count. And the construction has been open now for quite some time and we expect it to stay that way. So we're aiming for Within 4 to 6 weeks having signed the SPA and mobilizing and launching construction on that project and that will get us That will get us call it the 3rd jurisdiction and using some of the equity capital for that project. So those are moving ahead and very much in the short term here. And now that still leaves us with a reasonable amount of excess cash sitting on the balance sheet. And so on the M and A front, which we are working on, we have, Call it more irons in the fire than we've ever had. So we are working on that. There's a lot of opportunities in, call it, existing jurisdictions that we're in, primarily Peru, but also Panama. We're really hoping to add Something so that we're doing more than just the Schuster project. And so we have a lot of opportunities In Panama that we're looking at and a few other jurisdictions. So and we're in the process now of trying to have something, call it, This time next quarter. So when we report, the aim would be to have something By then on that front. The other big initiative that we're working on, which would Make a real big difference for the company in terms of the cash flow generation is the refinance front. So And we have a lot of different options that we're looking at. There's Call it 5 or 6 interesting ways to do the refinancing at Santo, given that we are in a period of We have an 18 year contract that we're amortizing over 8 years and in fact the next 4 years are the heaviest part. So there's a huge benefit to us to doing a refinancing given the ESG, call it momentum. There's a lot of different groups Looking at doing something on both a, call it, project specific basis, but we also have groups that are talking about doing a more global Holdco refinancing. And that is One of the biggest initiatives we have that we're working on as a company, the global refinance would take a bit more time. I think it's that sort of a 3 to 6 month Time frame. But everything is pointing to us having at least a few good options on that front within that timeframe. So that is, call it, the 4th big initiative. And the last one, which is worth mentioning is just that We had mentioned that we are looking to do a sale of some carbon credits. We're just finalizing the process of San Jacinto. We already have carbon credit sales at Cancayo in Peru, But we're also starting or not starting, we should have the other two facilities accredited within the year. So we are making sure that all of our facilities could generate some form of carbon credit revenue. And in the last, Call it 2 months, we see a lot of inbound interest in those. We do have some vintage credits, Which will not garner, call it, top dollar in the market, but there is latent value. And this is something that just keeps We just keep seeing sort of some inbounds and extra interest in that. So we're more confident than ever that we can at least do something On that front, and even if the dollar numbers at the start of it are, call it, in the $100,000 $200,000 $300,000 range, which is not material. It would be for a very small percentage of our credits. So we think the bigger picture could be material for the company if the world continues to move in that direction. So with that, where we're aiming as a company is When you include the binary ended in Chuspa executing with the capital we have on hand, we're looking at, call it, dollars 40,000,000 to $45,000,000 of operating Cash flow as a company U. S, which is and that does not include an acquisition. I think we can obviously improve that to even higher numbers if we are able to put the excess cash to work in an acquisition. And so I think those are very good numbers as to where we're heading. And to the extent we are able to execute the refi that could help that a little bit, But also free up even more cash flow. And I think at that point in time, we haven't we've maintained the dividend Where it is for a while now and I would suggest that I don't think that dividend growth Strategy is going to be the main focus given the diversification, but I do think we would like to get back to some dividend increases And it would likely be on the backs of a refi because that has a really big impact on the free cash flow generation. So that's where we're aiming. And with that, I'll pass it over for questions. We'll pause for just a moment to compile the Q and A roster. And there is a question from the line of David Zaida with Raymond James. Thanks. Good morning, guys. Just Maybe a quick question just on the Peruvian currency. I know that it's weakened quite a bit recently. I'm just wondering if you have any exposure there on the operating side. I know that your contracts are in USD. Is there Any change to the operating expenses there because of the move in the currency? Yes. No, because we effectively are a U. S. Dollar Contract and U. S. Dollar expenses locally, so we don't really see any impact on that. Okay, fair enough. And then, Mark, I'm just wondering if you can comment on there's some commentary in the MD and A just around Changes you made to the injection strategy in 2018 and the I guess like a little bit of Greater decline in the output in the near term, but it's better for the long term. And just any Color you can provide maybe on the quantum there. And I certainly appreciate this wouldn't be a near term thing, but when could you look at Resuming drilling there like in terms of the time frame? Yes. So We had a well, it was called 112. We have about 1500 tons an hour of mine, And we drilled 11.2 in 2018. And it takes about 1,000 tons an hour From the brine, and it's a well that is in the north of the field. And we run these chemical tracers to see if what goes in your injection wells comes back up through your production wells. And that well has effectively no connection with the field. So and then we get advice from 2 different technical advisers, one from New Zealand principally and one from Iceland. And the advice was you should use as much outfield Injection, because what that does is it limits any temperature decreases in the core part of the field and that it's better to in the long run To maintain high, we call it empathy, but call it high temperature in the field. And what you can lose in that is that there's less You're producing less from your recycled water as opposed to just the natural recharge. So Now there can be times when you do that and you actually get what they call boiling and so you can improve the production. That Hasn't happened, but the advice is to keep with this kind of a strategy, because even if you end up with, call it, Less of your produced water being produced. So hence, you have somewhat higher declines in the short term. In the long run, it will be much better because the declines will go down. We have just updated the numerical model Based on this with Jacobs, and I do think we'll end up putting a version of that online. And so to give you an example, we used to we would do declines of 3% a year, but 30% a year, every year for the life of the contract, I'd say. What the new numbers that we're getting were sort of 4% this year Based on where we ended last year, okay. So, but 4% this year, 3% next year, 3.4% to 1.5% and going down to like around 1% a year. So if you actually look further ahead, that's You're in a much better spot 6, 7 years from now, even though, call it, end of last year and now we are Slightly lower than what we were hoping, but in the long run, it's going to be better. That's the advice and that's sort of that's the plan. Awesome. That's great color. Thanks for that. And then maybe just one other one. I believe you maybe touched on this in your comments, just The potential for other non core asset sales, do you think that you could ever see or would you consider Selling Casita and I believe in the past we've talked about, I believe some equipment that you had in the U. S. That you're not using, is there any potential to sell that or make use of it somehow? So the answer would be yes, we would. We would for sure do something like that. We would Up until last year, there wasn't a lot of interest in that turbine, but We actually are seeing more interest in geothermal globally. And that's a geothermal specific turbine, not to dive too deeply into that, but It's I think there were more contracts in the U. S. Awarded to you from last year than there has been in like a decade. So we just need People will be doing projects and then I think that's going to get interesting. So yes, we still own that and there's a chance We would sell it. I would say nothing is active on it right now. Things like Casita and I would say even our Western section It may not be a sale, but there could be partnership opportunities whereby there are companies that are looking to do geothermal Projects in the region, potentially a deal where somebody comes in and puts up some more of the risk capital, Right. So less I would see there less of a selling for cash, although that still is a possibility, but maybe taking back A carried interest and having other people with bigger balance sheets do some of the heavy lifting on the drilling. And that would be a different way to Sort of extraction value. Okay, great. Thanks for that, Mark. Appreciate it. That's all I had for now. Thanks, David. Your next question comes from the line of Amit Sheth with Beacon Securities. Good morning, guys. A couple of questions for me. First, maybe if you have any more color on the M and A And how has that progressed since our last call? Were there any changes in certain jurisdictions or any Changes in the types of assets you're looking at? I would say Not in the type of assets we're looking at. In terms of jurisdictions, we probably are casting the net a little bit wider In terms of jurisdictions, although I would what we are doing for sure is, Call it the perceived political risk threshold would still have to be lower than Nicaragua, But we are looking at more jurisdictions that fall within that to just cast the net wider because And there are transactions we could literally sign up tomorrow. We still think the return profile It's a little bit low for us for what we can get. And so we're just we don't want to jump at the first Transaction and then there's a few, as I said, that we could do right now. But that with more opportunities, more jurisdictions, We'll get something that really fits strategically, which we have, we think, but that also fits the return profile. So And that's really where we're at. We actually continue to see them, the new ones filling in the pipeline. And as I said, I think we have a goal of, call it, 3 months here in mind, and we'll see where we get to. That's great. It's very helpful. And maybe, I mean, you guys are working on a bunch of initiatives, at least on the corporate side, in terms of acquisitions, refinancing and development Of Panama, in the back of your mind, do you have like a priority list in terms of execution, which ones you would like to Going before the others, would you have a preference? Like, do you want to get the refinancing first and that will make you in a better position to execute another M and A Transactions? Or how do you think about that? Yes. It's a good question. I think we can't Thread the needle on everything. I would suggest that what we have right now, Even with Chuspa in there and given that we have Peru sort of more of a global refinancing It's interesting to people. And would it be more interesting if we had another acquisition, let's say, more in Panama or even Peru? For sure, it would be. But I think what we're not going to do is wait for that, because I do think what we have And the interest is enough that we can move forward with the global refi and then to because that's a long process Anyways, that is a 3 to 6 month process, which we started. But and to the extent something hits on the M and A front, It can only help that process. In other words, I don't think that it would slow it down. It would only help it. And you could fit it into that process along the way. That's great. And maybe last one, a housekeeping item here. I think if I heard you correctly, Is it safe to assume the decline rates for the new numerical model, at least for the knee short term around 4% this year Of last year and 3% for the Nexia at Santa Santa? Yes. That's right. We literally got this on Monday. So in some form, we will have to update what's out there and we will be doing that. That's very clear. And just to be clear, that is a no reinvestment scenario. And I think one of the things that's important to realize is that sometimes it's hard to kind of Go down, it's kind of the decline curve, but I can tell you that your actual free cash flow generation is obviously Higher in that scenario. So we are generating significant free cash flow, even with these declines. And that we as a company are making the decision that it's better to take that and use it for the diversification than To increase, call it, because we could probably drill another well or 2. We think it's better to wait Probably more than 4 or 5 years to do that. We could drill a well or 2 and we would get a bump in short term capacity, But we just think it's a better way to go is to be harvesting that and using that for diversification. Your next question comes from the line of Mac Whale with Cormark Securities. Hi, Mac. You suggested that dividend increase strategies around doing the refi. Would you If you just did the reamortization, would you look to is it sufficient enough to allow for an increase Under that scenario. Yes, it could be. Yes. Although I think The reason why I'm suggesting the refinancing is that Recall it, I would call it more reprofiling, but within the existing term of the loan that we have right now in the years. You are, Which is definitely on the table. You're more sort of playing around with the edges. If you're not really changing The 8 years to something more like 12 to 15, there's just less to work with. That's all. So I wouldn't say it's out of the question, but when you look at the numbers on doing a 15 year amortization compared to an 8 year, You are effectively doubling or having what your principal payments are. So you just have much more to work with. That's all. Okay. And is there like if you went down the route of rec profiling, Would you push out like would you let that lie for a couple of years since you kind of went to the bottom of it before you would do a refi? Like Does one kind of push out the other? So we initially we sort of thought that, but I would just say no now. I would say it's not We're not going to we're going to try to do the refinance and do it in a parallel path for sure. Yes, okay. On the carbon credit, you talked about seeing some revenues this year, and that's based on like $1 Because it's the backdated one, the inventory a little bit. Is that right? Yes. And so we have that 1 contracted 2012, 2013. And I would say that we've had You have interest in those at price levels higher than that now. So just in the last month before we were talking $0.50 to $0.80 Let's call it maybe double that already. And just the level of inbound sort of suggests that more I think more people in the voluntary market, again, we're in the voluntary market, right? They're not in the compliance market. But it's just you're just sort of seeing these signals that that number has already doubled in the last month. Something is going on. Yes. Does the accreditation process allow Allow the credit is it the same process for them to be valid for compliance market or is that a whole other thing? Guess that's something you just wanted something Yes, it is. It's all on us. So and interestingly, I would suggest that it's Any of the for instance, any of the acquisitions that we look at, not as I haven't seen a single one of them That has actually done and they all could have, okay. They all could have because they would have fit into the UN's business mechanism that we have. But it takes a lot of money, a lot of time. So the validation and verification process is a real It's probably a year and a half minimum to do it. You're actually supposed to do it before you hit COD. There's ways to do it after, but it gets harder and harder. So I would just suggest that On the one hand, it is a bit of a headache for the companies like us to do it, but I also think it limits supply. Yes, for sure. And on the one so for instance, if we were Again, looking at buying an asset that has an operating plant, it would be very hard to retroactively to get any on those. But a lot of the things we were looking at have some expansion, There is doing some solar on the hydro in Panama. It's we could apply there. So I think we'll continue to make that part of the strategy and the more that we do this, I think the better we'll get at that Validation, verification process and it would be whereas these single project owners just won't be able to do that. So and I'm hoping this, but I don't, but I do think with all of these companies that are going to have the carbon neutral pledges, They're likely going to be doing it more through the voluntary markets Then they would be through that everybody talks about the European, it's the compliance ones, which is basically polluters trading credits Right. People in the they call it the companies doing their own, I think they're going to have to do more of it in voluntary markets. Okay. That would make sense You're trying to make that market more restrictive in Europe, right, so that the pricing actually matches something realistic. So there's Actual so you have to make a decision between investing in an asset versus just buying credits, right? And that's been notoriously badly done in Europe. So it makes sense if they tighten it that they would then the next game plan would be, well, let's just buy some voluntary ones, right? Yes. So I'm hoping that that has upward pressure on price and then but it does this is where The process itself needs to be in a way very hard to do so that those buyers feel comfortable That they're true credits, right? Yes. It's part of what they're buying, right, That is valid. Okay. Just last question. Just remind us of the difference Between the pricing, like, say, post-twenty 23 in Peru, like once you Change the commitment level? Just remind us what the difference that what the differential is in the pricing? So now so there's O2Degasco will go back to the $53.90 Now that assumes there's no there is an Later, either way, in that one. So if it works, it has to go up every 5% CPI, It might actually have done that by then, but assuming no, it will go to $53.90 and El Catamen will go to $55.90 and in the quarter, we were Only receiving, I believe, it was $39.30 on and off to the A. M. A. S. Dollars and something like $43,000,000 for El Carmen. So Yes. So it was a big pricing hit because it was good volumes in the quarter for the plants. And just remind me that is not that is a right of ours. That is not something you apply for and hope To get it, that is the right we have. They just make you wait for years. Yes. Okay. And What was the genesis of that under production? Like was it a resource issue or was it a technical issue on the plant? So I'll split them. So El Carmen was the technical issue because we had the outage, and it was out for It should have been about a 2 months, but because of COVID, it was 4. So that so on that plan, and it's We don't know for sure, but we don't think that that one is something that we will apply for. In other words, we think that it's Committed energy is doable based on what we see. Ultra de Agosto is a different story in that it's 140,000 a year. We think that the long term production came in, we always did think that it was going to be between 1 $15,000,000 $125,000,000 Okay. So no matter That they're both the resource and just assuming very high availability that we would be applying and we would likely do the full 15 percent, which would get that higher 40,000 down to 119,000 megawatt hours. Last year, I think Where we see the resource right now is that it actually is doable based on Q1. And we have, call it, 5% to 10% more Small improvements, the only thing that would prevent us from getting there and I would suggest that rather than doing the 119, it might be 100 and $10,000,000 to $115,000,000 is just because at times when the resource is so strong, it comes with Branches from trees and there's all these different systems of filtering that out and get rid of it, so you maintain high availability. And so we're making a few tweaks here and there. And that's what was partly the issue last year as well, Yes. Has been dealt with. Okay. Great. That's all my questions. Thanks. Thanks, Mike. Your next question comes from the line of Najeeb Baidu with IA Capital Markets. Hi, good morning. Just wanted to start off by the follow-up on David's question on additional non core asset sales. Are you considering maybe any of the development prospects that you have in Peru? Are those on the chopping block? Or you'd still Preferred to keep those in house and maybe develop them over time? Yes, I would Suggested those are keepers for us in the sense that long term we see good market in Peru. We also The development costs to get a project to a PPA and bankable It's much less than a geothermal project. One of the reasons why I think we would consider partnering on some of the geothermal is To get yourself the bankability, it could take $30,000,000 to $50,000,000 which is a bit big for our size of company. So whereas the Peru, it's not that. So our preference would be to keep the Peru hydro in house. I was also referring to, for instance, we did make a small investment in actually Canadian developers in biomass projects, which we still think is quite interesting. But That's something that would be on the order of $500,000 that we might look to sell that. So Little bits and pieces. Again, nothing hugely material, but we've a few things and all of that To say that it does help our cash position, which should help us execute on the M and A strategy. Okay. Good. And I would even say sorry, I would even say that I will calling Carbon a non Core asset is probably not the right thing to do, but to the extent that you can put a little bit of cash on your balance sheet by selling a small amount It's something new for us, and I think it does somewhat fall in that category. Okay. Got it. Appreciate that. And just going back to the binary unit. So I understand, I guess, you've locked down the size. In terms of the tenders that are out there, have you locked down sort of the costs? Can you provide any more details on that front? Is it in line with your previous expectations or have the numbers moved around? We really won't know until the end of this month when we get the letters. We Have been assuming some cost increases. And at this point in time, all we can say is Given the increase in size, we think it's going to be closer to the 20 2 to 25, that's what we have right now. But until we get those firm proposals, There's really nothing else. We can't do anything else until then. So that's really when we're going to have more certainty. Okay. Got it. And just one last follow-up or question for me. I noticed that corporate costs have been trending a little bit higher the last couple of quarters. Just wondering if you can talk about, is that sort of the run rate we should expect going forward? So there was some one time legal costs in the G and A, but I think In the quarter that we're not going to have, Ben, we're also we do have, I would call, Some increases on the insurance side, which will be permanent. So and those actually weren't in the quarter. So net net, I think it is Better just to assume these costs now going forward. We've had very minor to execute on this strategy, we have probably the 2 bodies At the corporate level, which is a very small sort of add, but between that and the insurance, I think we are going to be running around this level and We'll do what we can to reduce it, but I think it's better to run it as is as in this quarter. Okay. I appreciate that. Thank you very much. There are no other questions. Okay. Thank you. I'll turn the call back over to the host. Thank you everyone for joining us today. Have a good day. Thank you. This concludes today's conference call. You may now disconnect.