Polaris Infrastructure Inc.(TSE:PIF) (OTCMKTS:RAMPF) CFO Shane Downey joins James at the President’s Club Investment Conference at the Atlantis Resort on Paradise Island, Bahamas to discuss the revitalization of his company’s capital structure, and planned dividend payments in 2016.
[four_fifth_last padding=”0 0 0 20px”]Listen to the interview with Shane Downey:
Full Transcript of Interview:
James West: Shane, thanks for joining me today.
Shane Downey: Pleasure.
James West: Shane, give me an overview of what the value proposition is for investors in Polaris Infrastructure Inc.
Shane Downey: Happy to do so. Polaris is a renewable energy company, TSX-listed, with a focus on geothermal, and right now a single operating asset is in Nicaragua. The value proposition I think stems from the fact that right now, we are a revenue-producing, cash-flow-generating company with very clear line of sight to paying a dividend in 2016.
James West: I see. So what kind of numbers are we talking in terms of general revenue, EBITDA, what kind of dividend do you expect to be paying in 2016 in terms of a percentage of share price, etcetera?
Shane Downey: Absolutely. So we’re talking roughly 50 million in annual revenue, approximately 40 million in annual EBITDA, and then to work down from there, to get to a true free cash flow figure of, we think, $10 million to $11 million per year. And the key point that’s certainly worth emphasizing there is that the big deduction off of EBITDA is debt service. We have $195 million in project-level debt, I think an appropriate amount given the stability and long-term nature of the asset, but certainly, debt service coming off of that is significant; so annual debt service for 2016 is expected to be approximately $22.8 million, and that’s down very significantly from $37 million in the pre-re-capitalization scenario of our company.
So the balance sheet was fundamentally changed, or fixed is probably the right word, in May of this year, May of 2015, and previous debt service for 2016 would have been $37 million, now down closer to 23 million. And so that difference there is fundamentally the, now the net free cash flow buffer that we’re talking about, that allows some flexibility to pay a dividend, and try to pair that with an eye towards growth.
James West: Sure, okay. So your net income then, ex debt, is about, sorry, what was it? 20 million?
Shane Downey: Excluding debt, 40 million in EBITDA, 22 million in debt service, 23 million in debt service, and then from a CapEx perspective, we’re budgeting around $5 million to $5.5 million per year. And sort of the split on that is around $2 million per year of true, kind of typical maintenance CapEx on the plant, so relatively low given the $50 million revenue figure, and that’s not really expected to change much materially going forward. And then we budget for $10 million in CapEx for new wells to be drilled on average every three years. So that kind of nets out to us putting aside $5 million to $5.5 million every year. And so I think the really important point there, in terms of reinforcing that this is a net true free cash flow where we’re setting aside funds for CapEx both in the normal course, maintenance, as well as sort of longer term maintenance, almost growth CapEx, we hope.
James West: Okay. So you say you’ve got a single asset and it’s in geothermal. Is the plan to acquire more assets in the geothermal sector, or it’s just expand the (unintelligible)?
Shane Downey: …for the time being, remains focused in Nicaragua and on geothermal. We own rights to an exploration and development property, the Casita project, and the company has invested, historically, $10 million to date on Casita, and we think that the geophysics from that on a preliminary basis have looked very favourable, and so the company is actively in negotiations, discussions right now, with the World Bank for drilling capital to further explore that resource and get it to a commercial stage. And then after that, we’re allowed to proceed and proceed to our satisfaction. At that point, we could then look to build full power plants and raise project level financing at that point.
James West: Okay. So Polaris Infrastructure, then, is a geothermal company exclusively.
Shane Downey: Yes, right now.
James West: So is the choice of the word ‘infrastructure’ in your name, to indicate that you’re planning to be a dividend paying utility play for the most part in the green space, as opposed to when I say ‘infrastructure’ in a name I assume bridges, dams, a variety of assets in different sort of segments. But you’re very geothermally focused and that’s the plan for Polaris, is that correct?
Shane Downey: Right now, we’re 100 percent geothermal focused. I think the use of the word ‘infrastructure’ in our name, very intentional insofar as we do aim more medium and long term to position ourselves flexibly as a small, well-capitalized and growing company. The ability to be flexible and to be nimble, so we’ll remain focused on renewables, we’ll remain focused primarily Latin America. I don’t think we would rule out Canada or the US, but that’s certainly not going to be the primary strategic focus. And that could very well expand over time beyond geothermal; I think that would be the ideal for us from the perspective of diversifying the company, reducing concentration risks, not only from a country perspective, but also from an asset perspective.
James West: Okay. So your market structure, you’ve only got 15.6 million shares out.
Shane Downey: Yeah, that’s correct.
James West: That’s incredible. So you’re obviously able to raise capital at a real premium with such a low issuance; is that a result of a consolidation formerly?
Shane Downey: It is, yes. So in May of 2015, just earlier this year, the company underwent a significant re-capitalization that involved private equity placement of $60 million USD, as well as just over $50 million CDN in bonds converted at basically $0.80 on the dollar into equity as well. So really cleaned up the balance sheet, and that was paired with a 2001 stock consolidation that saw the number of shares outstanding fall to a more reasonable, sensible level as you mentioned. So that saw the existing shareholders take a significant haircut, but the company was certainly at a point where the balance sheet was broken and something was needed to fix it.
So with the combination of raising the capital, needing to spend, committing to spend approximately half of that on the San Jacinto project, leaves us well-capitalized, a strong balance sheet going forward.
James West: Sure. Okay, now, as a new shareholder then, coming into what looks like a very good opportunity in that the structure is being consolidated, etcetera, but I would want to know that the problems that broke the balance sheet before the consolidation have been remedied. So what were those problems, and how have they been remedied?
Shane Downey: No, absolutely. I think firstly, the remedy is around, we’ve got entirely new senior management team at the head office level, and that actually involved creating a head office in Toronto for the first time where the company has been listed for several years. So that’s CEO Marc Murnaghan and myself as CFO.
And then also a predominantly new Board of Directors. So we’ve got a deep Board that’s got significant experience in the infrastructure space somewhat generally, but certainly across Central America and the Caribbean, and importantly, two of our new directors, both independent, are Spanish-speakers. That’s something the company was able to say in the past, and given a single asset in Nicaragua, the rationale is pretty obvious there.
I think that in terms of decisions being made that led to the balance sheet issues in the past, I’d fundamentally characterize that around having a capital base and then spreading it simply too thinly. So right now we remain focused, and we’re in fact focusing more time and significant capital, on the San Jacinto asset. So while there’s concentration risks to that asset, it’s cash flow positive, and we want to really cement that to be highly cash flow positive for the years to come. So at the high level, in terms of a current drilling program, we’re anticipating given our cost structure, $1 million of additional EBITDA/free cash flow per year, per megawatt. So there’s certainly a lot of upside should our drilling campaign proceed as we hope, somewhere in the neighbourhood of 14, 15 million additional megawatts would increase free cash flow from 10, 11, all the way up to approximately 24 or 25 million.
James West: I see. You mentioned a private equity investment. Does that impact Polaris’ portion of free cash flow? Does the private equity investment realize some of that, or is that some other way reconciled in the balance sheet?
Shane Downey: No. Simply a private placement that closed in May, which was made up of a series of Canadian institutional investors. So no, no further implications on our cash flow.
James West: 100 percent to –
Shane Downey: Yeah, correct. At this point I would say that makes us a relatively tightly held public company, and so part of the aim obviously is to diversify and grow share holdings.
James West: Okay, so where are the significant risks going forward, to your business plan?
Shane Downey: Well, I think there’s certainly some risk associated with the geophysics, and there’s drilling risk. I think many of us can relate to the simple fact, we’re drilling down anywhere from 500 to 2,500 metres, and so we can say with certainty we don’t know exactly what we’re going to get. So there’s risk to that from a drilling and exploration perspective, but I think the real point there is, we’ve got, at this point, a $420 million plant that was built over the course of several years that’s producing, it’s got a history now of being relatively stable. And that de-risks, we think, much of the cash flow profile going forward.
And then otherwise, the risks that have existed for the company in the past have really stemmed from spreading too thin and not having sufficient capital to flexibly manage through things, whereas now, we remain focused on our San Jacinto project, we’ve got opportunities to invest in a binary unit, which does not have resource risk and is able to drive incremental megawatt production above ground, and then focusing on an additional project in Nicaragua.
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