Ormat Technologies Inc (ORA) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Ormat Technologies First Quarter 2012 Earnings Call. (Operators instructions.) I would now like to turn the conference over to Mr. Rob Fink of KCSA Strategic Communications. Sir, you may begin your conference.

Thank you very much. Hosting the call today are Dita Bronicki, Chief Executive Officer; Yoram Bronicki, President and Chief Operating Officer; Joseph Tenne, Chief Financial Officer; and Smadar Lavi, Vice President of Corporate Finance and Investor Relations.

Before beginning, we would like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts, and projections about future events that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the Company's plans, objectives, and expectations for future operations and are based on management's current estimates and projection of future results or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties.

For a discussion of such risks and uncertainties, please see risk factors as described in the Company's annual report on Form 10-K filed with the SEC on February 29, 2012.

In addition, during this call statements may include financial measures as defined as non-GAAP financial measures by the SEC, such as EBITDA and adjusted EBITDA. The presentation of financial information is not intended to be considered an isolation or as a substitute for financial information prepared and presented in accordance with GAAP.

Management of Ormat Technologies believes that EBITDA may provide meaningful supplemental information regarding liquidity measurement that both management and investors benefit from referring to this non-GAAP financial measure in assessing Ormat Technologies' liquidity and when planning and forecasting future periods. This non-GAAP financial measure may also facilitate management's internal comparison to the Company's historical liquidity.

Before I turn the call over to management, I would like to remind everyone that the slide presentation accompanying this call may be accessed on the Company's website at Ormat.com under the IR event and presentation link that's found in the investor relations tab.

With all that said, I would now like to turn the call over to Dita. Dita, the call is yours.

Thank you, Rob, and good morning, everyone. Thank you for joining us today for the presentation of our first quarter 2012 results and outlook for the near future. We are very pleased with the financial results of the first quarter, which was strong by just about every measure.

Total revenues increased 35% year-over-year to a record quarterly revenue with electricity and product segment revenues increasing 5% and 156% respectively. Our combined gross margin percentage was 30.1% for the quarter, almost double our gross margin during the same quarter in 2011 and $41.9 million cash flow from operations, the highest [pure] operating cash flow ever. We believe the numbers are a testament to the prudent approach we have taken to growing our business while also ensuring an effective cost control.

In the product segment, 2011 was a record year in booking of new orders. We continue to be involved in new contracts since the beginning of the year. We recorded record-high revenues in Q1 thanks not only to the strength of the product segment but to improved results in the electricity segment as well. By reducing operating costs throughout the fleet, but in particular at North Brawley, results improved in all parameters including gross margin, operating cash flow, net income, and EBITDA.

Let me turn the call over to Joseph for a view of the financials. Yoram will review our operations, and following my remarks, we will open the call for Q&A. Joseph?

Thank you, Dita, and good morning, everyone.

Beginning at slide five, total revenues for the first quarter were $132.4 million, a 35.3% increase over revenues of $97.8 million in the first quarter of 2011. Total cost of revenue increased by 11.7% compared to last year.

In our electricity segment, on slide six, revenues for the first quarter of 2012 were $82.2 million, an increase of 5.1% over revenues of $78.3 million for the same quarter last year. The increase in electricity revenues is due to higher variable energy rates of our Amatitlan and Puna PPAs and increased electricity generation of some of our partners.

In the product segment, on the next slide, revenues for the first quarter increased 156.3% from $19.6 million in the first quarter of 2011 to $50.1 million this year. The increase in product revenues reflects the new customer orders that we secured in 2011.

Moving to slide eight, the Company's combined gross margin for the first quarter was 30.1% versus 15.3% in the same quarter last year. The electricity segment gross margin was 29.6% for the quarter versus 15.8% in Q1 2011. Excluding North Brawley, the electricity segment's gross margin would have been 35/8% compared to 30.5% in 2011.

In the product segment, gross margin for the first quarter was 30.9% versus 13.6% in the same quarter last year. The increase is due to higher revenues, the mix of products sold, and different margins in the various sales contracts, and it is also due to the revenues from the LNG project with no related cost of revenues.

Moving to slide nine, interest expense for the first quarter was $14.9 million compared to $13.1 million in 2011. The increase was principally due to the issuance of the OFC-2 senior secured notes in October 2011 and the full-quarter impact in 2012 of the senior unsecured bonds issued in February 2011.

Now moving on to slide ten. Net income for the quarter was $8 million or $0.17 per share, basic and diluted, compared to a net loss of $9 million or $0.20 per share, basic and diluted, for the same quarter in 2011.

As shown in the following slide, slide eleven, EBITDA for the first quarter of 2012 was $51.5 million compared to $27.2 million in the same quarter of 2011, and net cash provided by operating activity was $41.9 million compared to $13.1 million a year ago. The reconciliation of GAAP net cash provided by operating activities to EBITDA, as well as additional cash flow information, is set forth in slide 27.

Moving on to the next slide, cash, cash equivalents, and marketable securities as of March 31, 2012, were $100.3 million, down from $118.4 million as of December 31, 2011. The accompanying slide breaks down the use of cash during the three months. Our long-term debt at the end of the first quarter 2012 and the payment schedule are presented in slide 13 of the presentation. And on the next slide, you can see our dividend policy and recent dividend declaration.

On May 8, 2012, Ormat's Board of Directors approved a payment of a quarterly dividend of $0.04 per share to send to the Company's dividend policy, which targets an annual payoff ratio of at least 20% for the Company's net income. The dividend will be paid on May 30th to shareholders of record as of closing of business on May 21st. The Company expects to pay a dividend of $0.04 per share in the next two quarters.

That concludes my financial overview. I would like now to turn the call to Yoram for an operational update.

Thank you, Joseph, and good morning, everyone.

Starting with slide 16, the total generation in the first quarter of 2012 was 1,040,000 megawatt hours. This represents an increase of 1.2% for the same quarter last year. The steady growth in total generation and the decrease in O&M expense, excluding depreciation, are a result of continued improvement in our operational performance, enhancement of existing plants, and completion of new projects.

On our last earnings call we spent a fair amount of time discussing the impact of the global settlement and the decrease in the forecast that natural gas prices would have on our business in 2012 and 2013. As a reminder, our fixed energy rate under the PPAs of Ormesa, Huber, and Mammoth converted in the beginning of May to a variable rate that is driven by natural gas.

Natural gas prices and the forecast for future prices have been constantly dropping in the past year, and as a result we may have to further reduce our revenue estimate for the year. While we continue to explore alternatives to offset the reduction in electricity revenues, we do not think that we can do much to reduce the impact of this source of reduction in revenues in 2012, but we do expect some relief in 2013.

Furthermore, operational changes that were successfully implemented in the past two years through technical changes, capital investment, and improvements to our supply chain will lessen the impact of the reduction in rates on the overall results of the Company.

Another area where we have continued to make progress is the reduction of operating expenses in North Brawley. The first quarter continues the trend of reduction in the cost to operate the plant and the increase in the production pump life. Generation was increased compared to the fourth quarter of 2011, and we expect it to increase further with the addition of our latest producer.

In April we entered into two swap contracts with the bank to reduce the fluctuations of revenue from Puna for the period from May 2012 until March 31, 2012. The contracts, which did not have upfront cost, have monthly settlement whereby the difference between the fixed price and the monthly average price will be settled on a cash basis. These contracts will not be accounted for as a hedge transaction and will be marked to market with the corresponding gains or losses, which will be recognized within electricity revenues.

For an update on projects under construction, please turn to slide 19. In the table you can see the status and expected completion schedule for each project under construction. We are progressing as planned with the construction of the McGinness Hills project and the Olkaria III expansion. In Mammoth we have not received a construction permit, and this will delay the execution of the project.

In Wild Rose, three wells have been drilled, and we are continuing with drilling activity. At Heber Solar, construction began in the fourth quarter of 2011, and we expect commercial operation in 2013. In Carson Lake we have recently resumed the drilling activity. Overall, we are in the construction phase of seven projects that will add between 144 and 149 megawatt to our portfolio. Four of these projects are expected to be completed by the end of 2013. On slide 20 you can see the detailed list of projects under development that we continue to work on. Turning to slide 21, in addition to the projects under construction and development, we now have 40 prospects in early exploration or where activity has yet to begin.

Turning now to slide 22 for an update on the product segment. 2011 was an exceptionally strong year for the product segment, and we continue to make progress in the first quarter of 2012. We signed new international and domestic contracts for the supply of geothermal power plants and other power generating units.

As of May 8, 2012, our product backlog is of approximately $207 million. It includes revenue for the period between April 1 and May 8, 2012. In the first quarter we were awarded a build-own-transfer project -- build-operate-transfer project by the Geothermal Development Company in Kenya. And as announced a couple of weeks ago, we won a $61.2 million EPC contract. While this contract is currently under a negotiation, we have entered into a $9 million interim agreement with the customer until the full EPC contract is signed. In the backlog we included only $9 million out of the new EPC contract.

I'd now like to turn the call back over to Dita.

Thank you, Yoram. In my remarks, I would like to comment on the recent transaction involving shares of Ormat Industries, the parent of Ormat Technologies, review first quarter financing activity, comment on our capital position, and then conclude with revenue guidance for 2012 before opening the call up for questions.

In March 2012, FIMI, a private equity firm and approximately 10% shareholder in Ormat Industries, entered into an agreement to buy close to 12% of Ormat Industries shares from Bronicki Investments. As a result of this sale, after the closing, which is expected by the end of May, FIMI and Bronicki Investments each will own about 22.5% of the outstanding shares of Ormat Industries. I will continue to be the CEO of the Company. Yoram will continue to be President and COO. And a representative of FIMI, Gillon Beck, a Senior Partner in FIMI, will be Chairman of the Board.

We have continued to actively obtain financing to secure our goals. Most recently, in April we received a $13.8 million cash bond related to our Puna complex under Section 1603 of the ARRA, and earlier in September 2011, we signed a commitment letter with OPIC for up to $310 million to finance and expand our Olkaria III complex located in Kenya. The negotiations with OPIC are ongoing, and we are currently in the documentation.

Please turn to slide 24 where you will see the CapEx requirement for 2012. For the remainder of 212, we plan to invest $146 million in construction of new projects and an additional $34 million for development of new projects. We expect also to invest $24 million in explorations in 2012.

In addition, our capital expenditure budget for maintenance CapEx and enhancements for operating power plants is approximately $64 million. The enhancement projects include investments in Heber, Jersey Valley, and Tuscarora. Approximately $5 million are budgeted for investment in our production facility. The funding of this program will come from cash on hand at the end of the first quarter 2012, cash from operations, unused corporate lines of credit, ITC cash grants, and project finance debt.

Turning to slide 25, you can see our revenue forecast for 2012. We currently expect our 2012 product revenue to be $165 million to $175 million. We are maintaining our electricity forecast of $315 million to $330 million. The wide range is due to the uncertainty of our natural gas prices.

Before I finish my prepared remarks, I would like to announce that we will be hosting an Analyst's Day in New York next month on June 13th that will be webcasted for the benefit of all shareholders. I encourage all analysts and investors who are interested in attending to contact us directly or KCSA Strategic Communications, our investor relations firm, for more information.

In closing, we made significant progress in the first quarter of 2012, and (inaudible) our financial results. Our existing portfolio benefited from improved operating efficiency, new orders are increasing our product segment revenue, and we move forward with strong fundamentals and (inaudible) in excess of $200 million.

I would like to thank you for your support, and at this time I would like to open the call for questions. Operator?

(Operator instructions.) Your first question comes from the line of Dan Mannes with Avondale.

Hi. Good morning, everyone.

Good morning.

A couple of followups. First, and I think Yoram may have gone over this, can you tell us what was either the operating loss or EBITDA contribution, positive or negative, for North Brawley in the quarter?

It was still a slightly negative EBITDA number, about $1.5 million negative. Great improvement over previous numbers.

Okay. Got it. And then quickly, Tuscarora, is that now selling commercially or are you still in start up there?

We are not -- let's say that operationally the plant is not in start-up mode anymore. There are some administrative issues that we need to work with with our off-taker for it to move into the commercial operation phase. And we hope that that will not be too long.

Okay. Any new commentary on Sarulla? I've got to ask every quarter, right?

That's a question for Dita, not for me.

No one wants to take it. Sarulla is making slow progress, but nothing to tell about. If it was making progress, we would have told you. It is making progress slower than expected. I hope that still in our lifetime we'll be able to announce it.

I mean, in your text it still is indicative that you were hoping to have, it looked like, a closing in the second quarter, or in the first half of this year. Does that still hold, or are you sort of hinting that that may already be drifting into the latter part?

Not a closing, but a signing of all the contracts that will lead to the financial closing.

Okay. Okay.

So as we look at the signing of the agreement this year, closing about a year later.

Got it. Real quick, on the California contracts, I definitely heard Yoram's comments about they're being difficult to manage 2012. Can you talk maybe a little bit about the $25 million decline that you noted before? How have gas prices changed since you gave that data, and I don't know if you can also give us any color on 2013, the impact on the GHG credit? Can you just sort of update us on both of those topics?

Yes, so it's a moving target, right? Gas has been fluctuating. I mean the issue is not so much that the gas has been fluctuating, but the estimate or the forecast on what the future would be have been fluctuating. And we reran the analysis in mid-April, which I think is when gas was at its lowest, or close to that, and the impact at that point was about another $8 million in reduction in revenues in 2012.

Since then, gas rebound some. I think that it recovered by I think 20% -- increased by 20% from that calculation, so it's a very -- I mean, the calculation is easy to do but it's somewhat meaningless. And therefore, we offer a wide range in terms of our revenue estimates.

We anticipate that we'll be the adder, Greenhouse Gas adder in 2013, which would be a nice addition to the rate itself. This is our understanding, but that's all that we know. I mean, if you'd like, it's an assumption or an estimate at this point. I don't know. There are things that could change.

So the $25 million, does that get you to the midpoint of '12? And secondly, the $25 million for '13, does that include the Greenhouse Gas adder or not?

Yes. The 2013 assessment included the Greenhouse Gas adder. And I'm sorry, Dan, what was the first question?

And the $25 million for 2012, does that get you to the midpoint of the range or is that the lower end of guidance?

I believe that -- you know what, if Smadar can jump in?

Dan, if we look at the natural gas prices that we had when we calculated January impact, they're very similar to what we have in the last two days. Maybe today it's 5% to 6% lower, but you know fluctuations, we see it every day. And we cannot say that's the bottom, but as it looks now as we see the trends in the last two weeks, we hope that we will see higher rates and the 25 will be the low end.

Okay. And then one last question and then I'll let someone else jump in. Your capital expenditures, it looks like they've changed a bit. I think you were 365 for the year as of 12/31. You spent about $60 million in the quarter, and you're now down to 270. Did you cut out some development spending and maybe you replaced it elsewhere, or can you talk a little bit about maybe a change in your planned spending for this year?

Well, you know, there are some -- there's nothing that is dramatic, but there are some modifications, like the fact that we haven't got the permits to expand Mammoth at this point. Obviously we adjust our CapEx plan accordingly.

So I think that this is, really for the most part, probably Mammoth is the biggest change, besides CapEx that went into -- that was contemplated in different exploration program and based on priorities and other findings, we made modification to this. So these are a few million dollars here and there, but not a big impact on a program itself.

Great. Sounds good. Thanks, and nice quarter, guys.

Thank you.

Your next question comes from the line of Gregg Orrill with Barclays.

Thanks very much. Just getting back to the new rate on Ormesa, Heber, and Mammoth. How often is the rate reset and is there a sensitivity that you might be able to provide to gas prices, EBITDA to gas prices?

So the rate will be calculated constantly. It's driven by the short run of what it costs. And I'm sorry, Dita, you want to --?

I was thinking about it when we had the earlier dialogue on gas prices. We always put together something for the Analyst's Day so that we can share with everybody. I realize that that's something that we need to do. We don't have it handy. We will do it for the Analyst's Day, which is in about a month, so it's not a long time to wait. And we'll be able to provide more clarity there.

Okay. Also on the O&M expenses per megawatt hour, down to $35 from $41 in Q1 '11. How much of that related to North Brawley?

Brawley probably had a significant impact. Give me a second, I could probably give you just a rough indication.

Let's move on, and we'll get back to it. (Multiple speakers.)

Yoram, do you want me to take it?

We don't want to give a precise answer, but to give just a directional answer, Gregg, even with our other facilities, I think that we had at least a 10% improvement in our operating expenses outside of Brawley. So in general, although Brawley has a big impact, we see better performance out of the combined fleet, even excluding Brawley.

Is that something that we could -- those expense reductions, is that -- for the rest of the fleet, has that leveled off or are you continuing -- are there initiatives there that could push it down further?

Clearly this is what we need to do. We need to continue and look at ways to operate more efficiently, leverage our buying power, improve design of equipment that is more troublesome, or not troublesome, but more expensive to operate.

There's always an element of good fortune and bad luck in this. When you have the failure of a major piece of equipment, and it does happen on a fleet like ours, then it does -- the cost to operate may spike up during that quarter. So part of what we see is clearly sustainable and based on improvement in how we do things, and part of what we see is that we had a very good quarter.

But as our fleet grows, the opportunities to combine procurement leverage, our buying power, that's very substantial. Our expansion that is done by, if you'd like, areas of influence, so expanding into Eastern Nevada and pretty soon having three power plants operate from that location with shared resources, these are all things that would allow -- and of course, expanding Olkaria, again in the same location. These are all areas that will drive our overall cost per megawatt hour down, and these are all positive trends.

Got it. Thank you.

Your next question comes from the line of Jinming Liu with Ardour Capital.

Thanks for taking my questions. First of all, just some followup questions on North Brawley. What was the effective capacity for North Brawley in the first quarter, and what is your expectation for production for North Brawley in the coming quarters?

So we do not provide forecasts on future generation. The ramp up is something that we have decided we will do very gradually as we find more indications on which wells are better to operate and what are the prudent operating schemes. So I cannot offer this to you.

The average number for the quarter, or the number for the quarter was somewhere between 20 megawatt and 22 megawatt in terms of average production. It's a little low because we have connected a newly-drilled well later in the quarter, so the first part was still a little low. And then as we said on our presentation a little earlier, another well that we believe is very successful has just been connected, so this will drive generation up.

And so we expect better results than the 20 megawatt to 22 megawatt that we had in the first quarter.

Okay. Got that. And regarding the swap contract you entered for the Puna facility, should I, just for modeling purpose, should I use the crude oil price in the first quarter as a benchmark for the future periods?

Yes, within the limitations of local or specific Hawaii variables, but I think that that's good.

And allow for market adjustments.

Okay. Got that. And lastly, my question is for the portable tank project you have, are those projects slated to contribute for revenue some time beyond 2013?

The one that is actively in construction, which is at Heber --

Yes, that's part of California, but I'm more looking at all the other 166 megawatts.

Yes, so the one that is currently in construction we expect to complete in 2013, so we may see some revenue in 2013. The rest of the projects are not yet in construction, and therefore I think that it's prudent to say that it will be post 2013, although there could be good surprises there because these projects are, once you have all the permitting in place, all the approvals, then these are projects that can come up and be online very quickly.

The trouble is that we don't have -- or not the trouble, but the difficulty in forecasting when would they come online is that we don't have all the approvals yet, and the visibility on how long it would take to get them is not very good. But as soon as some of them move into actual construction, we will provide a more detailed forecast on when we could see revenue stream.

Thanks.

(Operator instructions.) Your next question comes from the line of Mark Barnett with Morningstar.

Hi, good morning.

Good morning.

Just a couple of quick questions. Can you provide maybe an update on operations and output at Jersey Valley?

There is nothing major to update on Jersey Valley. We are looking at drilling additional injection. We're working on the permitting on targeting. I believe that nothing dramatic happened in this quarter and it's all work and preparation. The plant is running well at lower capacity of course then desired, but it's running well. And as we find more injection we will ramp up production as well.

In your revenue guidance for the year, is there some flexibility around maybe bringing on some new capacity at that plant, or what are you projecting in the guidance as it is today?

The impact of Jersey on the revenue is very small. We have taken a conservative approach when we did the original guidance, which is no ramp up of Jersey at all. But it's not substantial, and I think that that's a way to look at this. We certainly want the plant to be as close to capacity as possible and we will work hard to do so, but the impact in overall revenue is not huge.

Okay. Thanks. And just one quick further question on the solar capacity figures, just down a little bit. Can you give detail on it may be a project that you're no longer looking to pursue or how those are moving around?

The solar activity needs to be divided in order to understand it into two boats. One is the project that is actually under construction, the 10-megawatt project in Imperial Valley. This one is moving along and we expect it to be online in 2013. The other [awaiting] projects, all of them, and they are still subject to regulatory approval. So while some of them are more advanced and some of them are less advanced, none of them have full regulatory approval, so it's now difficult to predict how many of them and when they will really be in construction. Clearly some of them will reach construction phase soon, but how many is hard to predict. We will --

Okay. Thank you. Thank you for taking my questions.

At this time there are no further questions. I'll now turn the floor over to Dita for closing remarks.

They are not really closing remarks. We are very happy with the quarter. We look forward to a very good year and to a continued cooperation with all of you. Thank you for your interest in the Company, and bye-bye.

Thank you for joining today's conference call. You may disconnect your lines at this time.