July 04, 2016 - 5:34pm EST by
2016 2017
Price: 8.05 EPS 0 0
Shares Out. (in M): 16 P/E 0 0
Market Cap (in $M): 125 P/FCF 0 0
Net Debt (in $M): 158 EBIT 0 0
TEV ($): 281 TEV/EBIT 0 0

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Polaris Infrastructure Inc. (PIF:TSX)



Formerly called Ram Power, Polaris built and now owns and operates a state-of-the-art geothermal power plant in Nicaragua.

Polaris Infrastructure Inc. could qualify as be one of the good turnaround stories this year. The sweeping recapitalization eliminated the company’s excessive debt burden, which was crucial for the turnaround to take place. Polaris reduced its net debt from C$229M at the end of 2014 to C$121M at the end of September 2015 (a decrease of approximately $107M or 47%). The current yield is over 6 per cent and it has strong upside if management’s expansion plan pays off.

Geothermal power is probably the most reliable source for renewal energy. It is unique in that it is the only “green” power source which can be considered base load, meaning grid operators can rely on it, unlike solar or wind. The energy is created by tapping into superheated underground water reservoirs and piping steam to the surface, where it spins turbines that make electricity. The water, once cooled, is pumped back into the reservoir to be reheated by the Earth’s core and then reused, on a continuous basis. The technology is old and highly reliable and has been around for a long time.


Following a recapitalization, the company is in a relatively stronger financial position and started paying a dividend from Q2 2016. The dividend will be USD $0.10 per share, paid quarterly, representing a 50% payout ratio and a 6.2% dividend yield.

Based on projections, Polaris should achieve approximately $50-million of revenue this year excluding the impact of new wells. It will do about $40-million of EBITDA (earnings before interest, taxes, depreciation and amortization), and about $12-million of free cash flow. This base of earnings is already funding an annual dividend of USD 40 cents a share. Each additional megawatt of production represents about USD $1-million of EBITDA, most of which is free cash flow. For example, if Polaris’s drilling program adds 15 MW of incremental power, it is about USD $15-million of additional free cash flow. Polaris has the cash in the bank to work on such expansion programs and has announced its intention to commence work on at least one development program called Casita.


While the company had financial challenges, operationally performance has been consistent. Commercial operations started in January 2012 and the plant has operated steadily for the past two years, producing net output between 48 MW to 50 MW. With three new wells being drilled and the binary unit, Polaris should reach 60 MW in 2017 and 70 MW by 2018.




Date Gross MW Hourly Production Tourbine Availability
2012 35.7 99.3%
2013 53.3 99.8%
2014 54.1 99.8%
2015 54.6 99.8%
2016 53.5 100.0%


Power Purchase Agreement

Polaris has a power purchase agreement in place with the Nicaraguan power distributors for up to 72 MW. The contract is until 2029, at a rate of $115 per MWh. Their price is lower than the Nicaraguan wholesale price of $170/MWh, making the San Jacinto plant very competitive. The contract includes an annual 3% price increase over the next eight years and a 1.5% price escalator thereafter.




In 2015, Polaris generated $50 million in revenue and $39 million in EBITDA. These numbers shouldn’t fluctuate much in 2016 but three expansion wells (3 MW to 5 MW each) should increase revenue to $60 million in 2017. The company is currently trading at an EV/EBITDA multiple of 5.6x and about 4.4x 2017 numbers, if the company can reach $50 million in EBITDA. This is far cheaper than peers which trade above 10x EBITDA. As the company builds an operating history and starts paying a dividend, multiples should compress (stock increase).








Revenue (M)




















Debt (M)





Interest (M)







Ram Power’s former management overspent on both the power plant and the drilling program. Construction began in December 2009 at a cost of over $430 million, with about $250 million coming in debt. There were a number of covenants including minimum net power production of 55 MW. The company only produced 49 MW, resulting in a default. In April 2015, the company raised $60 million, converted $42 million of senior secured debentures into equity and consolidated its common shares on a 2000:1 basis. The term of the credit facility was increased while lowering the interest rate by 1.5%. Debt costs were cut almost in half from $37 million to $21 million. The company also changed the Board of Directors, appointed Marc Murnaghan as CEO and changed its name.




Polaris is in the process of drilling three expansion wells, with the first finished in late 2015 and the second one should be completed in Q1 2017.  Both these wells should increase production to 60 MW from 50 MW generating EBITDA of $50 million, up from $40 million currently.


The company also plans to install a Binary unit which generates power from waste heat, generating 7 MW to 9 MW of output. The unit will cost $25 million and generate an additional $6 million to $10 million in additional EBITDA. This all comes with no drilling risk.




Outside of operational risks like equipment failure the main risk is the company’s reliance on 100% of their revenues from a single foreign jurisdiction, from a single buyer and from a single operating facility. Political or economic instability and changes in government regulations including export controls, higher taxes, or environmental legislation could impact the company. Nicaragua is considered a high risk destination for investments and there is a risk of of non-payment by Nicaraguan power distributors.

There is also a risk that wells drilled do not perform as expected or take longer than expected to bring online. While these would hamper the company’s growth it will not affect their current production or cash flow.



Despite a major restructuring and the resulting positive change in the company's financial standing, Polaris is still underestimated by the market. Its shares are valued at a significant discount to the industry average, expressed in an EV / EBITDA multiple


Polaris is trying to increase the San Jacinto capacity and is also working on commencing development of another property, Casita, which could be accretive to shareholders’ value. Although it will take some time before investors will see the first results of these undertakings.

Polaris’s plant, at San Jacinto, has a contract to sell up to 72 megawatts of power to the national grid operator for set prices. The contract includes a guaranteed price increase of 3 per cent a year. Payment is in U.S. dollars. But the plant is currently producing only 52 megawatts, so there is room for upside. 

In summary, Polaris seems like a decent investment opportunity, with relatively low downward risk, a very good yield and potentially a strong upside if its expansion plans are executed well by the the new management team.




I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


After restructuring, Polaris is in a relatively strong footing both financially and operationally. With only 15 million shares outstanding any further expansion could be very accretive to shareholders. The “guaranteed” revenue provides the opportunity for a safe dividend that should increase as the company becomes confident in production and with additional cash flow from planned expansion. Each additional megawatt of production represents about $1 million of EBITDA, most of which is free cash flow. If all the expansions go according to plan this would be an extra 20 MW of production over the next two years or approximately $27 million. At a 70% payout ratio, this would be $1.21 per share or a 19% dividend yield. Given consistent production, downside is limited.



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