Ormat Technologies Inc (ORA) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Ormat Technologies Second Quarter 2012 Earnings Conference Call. (Operator instructions) Thank you. I would now like to turn the conference over to Mr. Brad Nelson of KCSA Strategic Communications. Sir, you may begin your conference.

Thank you. 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 operation and are based on management's current estimates and projections of future results or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties.

For 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. The presentation of financial information is not intended to be considered in 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 measurements so 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 Events and Presentations Link that's found in the Investor Relations tab. With that all said, I would now like to turn the call over to Dita. Dita, the call is yours.

Thank you, Brad, and good morning, everyone. Thank you for joining us today for the presentation of our second quarter 2012 results and outlook for the near future. The second quarter this year was another strong quarter, both in the financial results of operation and in the progress of our construction activity.

Compared to the second quarter last year, total revenue increased 24% with electricity and product segment revenue increasing 5% and 91% respectively.

Operating income grew significantly as a result of organic growth and improved operations. Both have helped to offset the impact of low gas prices on our energy rates under the Ormesa, Heber and Mammoth SO#4 PPAs in California

In June, the McGinness Hills geothermal plant reached full power and met the requirements under the financing agreement and together with the commercial operation of the Tuscarora plant, both represent an increase of approximately 9% to our portfolio.

With the completion of McGinness and Tuscarora, we have demonstrated the strength of our vertically-integrated structure in moving projects from green field development to operation. In the product segment, with the recently signed $61.4 million EPC contract with ENEL, we were able to maintain an impressive backlog ensuring a high level of revenues through 2013.

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

Thank you Dita, and good morning, everyone. Beginning on slide 5, total revenues for the second quarter were $129.8 million, a 24.1% increase over revenues of $104.6 million in the second quarter of 2011. In our electricity segment as you can see on slide 6, revenues increased 4.7% from $81.2 million in the second quarter of 2011 to $85 million in the second quarter of 2012. The increase in electricity revenues is $4.1 million in revenues from our Tuscarora power plant which commenced commercial operations in January 2012, and which included a $1.3 million retroactive payment for the first quarter of 2012.

Revenue in the second quarter of 2012 also includes $3.8 million net gain from two swap contracts with respect to our Puna complex, and a put-option transaction with respect to our SO#4 PPAs in California, that we entered into in the second quarter of 2012; and, $3.5 million net increase in revenues from other power plants. The increase was offset by a reduction of $7.6 million in revenues from our SO#4 PPAs in California, that their energy rate was converted in the beginning of May to a variable rate driven by natural gas prices.

In the product segment on slide 7, revenues to the second quarter increased 91.4% from $23.4 million in the second quarter of 2011 to $44.8 million this year. The increase in product revenues reflects the new orders that we secured in 2011 and is largely attributed to the $130 million order we received from Mighty River Power Limited for the Ngatamariki geothermal power plant in New Zealand.

Moving to slide 8, the Company's combined gross margin for the second quarter was 30.9% compared to 31.7% in the same quarter last year. The electricity segment gross margin was 31.8% for the quarter compared to 23.4% in Q2 of 2011. The product segment gross margin for the second quarter was 29%. The 60.5% in the second quarter last year was mainly due to the recognition of $7.9 million dollars revenue at the LNG energy recovery unit in Spain with virtually no associated cost of revenues, since the costs have been included in the past in research and development expenses.

Moving to slide 9, operating income for the second quarter increased $6.6 million from $19.4 million to $26 million in the same quarter last year, due to higher revenues and lower maintenance costs in most of our departments and specifically at North Brawley.

Moving to slide 10, interest expense net of calculated interest for the second quarter was $14.3 million compared to $17.4 million in the same quarter in 2011. The increase was primarily due to a $4 million loss on an interest lock transactions relating to the U.S. Department of Energy (DOE) loan guarantee financing, that we recorded in the second quarter of 2011, and which was not accounted for as hedge transactions.

Moving to slide 11, net income for the quarter was $8.7 million or 19 cents per share, basic and diluted, compared to net income of $8.2 million or 18 cents per share, basic and diluted, for the same quarter in 2011.

As shown in slide 12, EBITDA for the second quarter of 2012 was $50.8 million compared to $47.7 million in the same quarter of 2011. And, net cash provided by operating activity was $30.2 million compared to $26.4 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 to slide 13, cash, cash equivalents and marketable securities, as of June 30, 2012 was $71.9 million, down from $118.4 million as of December 31, 2011. The accompanying slide breaks down the use of cash during these three months.

Our long-term debt at the end of the second quarter of 2012 and the payment schedule are presented in slide 14 of the presentation. And on the next slide, you can see our dividend policy and recent dividend declaration.

On August 1, 2012, Ormat's Board of Directors approved a payment of a quarterly dividend of $0.04 per share, which targets an annual payoff ratio of at least 20% of the Company's net income. The dividend will be paid on August 23, to shareholders of record as of the closing of business on August 14. The Company expects a dividend of $0.04 per share in the next quarter.

That concludes my financial overview. I would like now to turn it over to Yoram for an operations update.

Thank you Joseph, and good morning, everyone. Starting with slide 17, the total generation in the second quarter of 2012 was approximately 994,000 megawatt hours. This represents an increase of 3.9% from the same quarter last year. Steady growth in total generation and the decreasing O&M expense excluding depreciation, reflect continuous progress made over the past years in improving operation and increasing efficiency in our plants, and in this quarter the big improvement in Brawley.

As we recently announced, the 30-megawatt McGinness Hills power plant met the requirement for commercial operation under the OFC 2 loan agreement, and has been operating at full power for almost two months. McGinness Hills demonstrates our ability to develop a successful green field project that was categorized as the blind system. The blind system is a system that has no surface manifestation, either hot springs or fumaroles. The power plant also incorporates new technology that provides an approximately 10% increase in brine utilization efficiency.

The plant is selling electricity at a rate that is approximately half of the full energy price of the PPA. Full energy prices are expected to be paid effectively from the end of June upon NV Energy's approval of the commercial operation date.

NV Energy approved the commercial operation date for the Tuscarora geothermal power plant. We are now receiving full energy prices and as Joseph mentioned in his remarks, we received retroactive payments to January 1.

Another area where we have continued to make progress is reducing operating expenses in North Brawley. The EBITDA this quarter has been very close to break-even and we expect the improvement to continue throughout the rest of the year.

For an update on projects under construction, please turn to slide 19, and in the table you can see the status and expected completion schedule for each project under construction. The Olkaria III expansion is progressing in both field development and plant construction and we expect to have the project online by mid 2013.

Heber Solar construction began in the fourth quarter of 2011 and we expect commercial operation in 2013. In Wild Rose, three wells have been drilled and we are continuing the drilling activity. We currently estimate the generating capacity to be at 16 megawatts and we will update our expectations based on the field development results.

There was no progress on permitting at Mammoth and CD4.

We've already completed about half of the capacity that we planned to bring online before the end of 2013, and it is contributing to our cash flow. An additional 62 megawatts are expected to be added by 2013 from Wild Rose, Heber Solar and Olkaria III expansion.

On slide 20 you can see the detailed list of projects under development that we continue to work on, and the detailed description of our solar photovoltaic projects.

Since it became clear that Wister will not be able to meet the PPA milestones we started discussions with the offtaker on a possible cancellation of the PPA.

There has also been progress, while still slow on Sarulla and the negotiations over the amendments of the JOC, ESC contracts.

Turning to slide 21; in addition to the projects under construction and development we now have 41 prospects in early exploration or where activity has yet to begin.

Turning now to slide 22 for an update on the product segment; during the second quarter we secured more work in this segment and further increased our backlog. In July we closed on a $61.4 million EPC contract with Enel Green Power North America. Under the contract, Ormat will supply two air-cooled Ormat Energy Converter Power Plant to Enel's Cove Fort geothermal project in southern Utah.

As of August 1, 2012, our product backlog is approximately $242 million. It includes revenue for the period between July 1 and August 1, 2012, and the Thermo I $21 million order which will not be accounted as revenue until the customer secures its financing on the project.

Let me turn the call back to Dita.

Thank you, Yoram. In my remarks I would like to comment on second quarter financing activity, our capital position and conclude with all the new revenues guidance for 2012 before opening the call for questions.

In the second quarter we have received $72.2 million ITC cash grant, relating to enhancement of our Puna Geothermal Complex and to our Jersey Valley and Tuscarora geothermal power plants. Substantial progress was made in the documentation of the OPIC loan to refinance or subordinate the existing Olkaria III loan and to finance the construction of the Olkaria III complex extension.

Please turn to slide 24, where you will see the CapEx requirements for the remainder of 2012. We plan to invest a total of $140 million. $90 million is expected to be invested in construction of new projects and an additional $3 million for development of new projects.

We also expect to invest up to $9 million in exploration and budgeted $34 million for maintenance CapEx and enhancements for operating power plant and $4 million is expected to be invested in enhancement to our production facility.

As we can see on the right side of the slide, we have sufficient capital resources to support our plans.

Turning to slide 25, you can see our revenue forecast for 2012. We maintain our 2012 product revenue guidance to be between $165 million and $175 million. We expect the electricity segment revenue to be between $320 million and $330 million.

In closing, we made significant progress in the second quarter of 2012 and achieved strong financial results. Our existing portfolio benefited from the improved operating efficiency. New orders are increasing the product segment revenue and we move forward with backlog in excess of $240 million equal to the highest backlog ever achieved.

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.

[technical difficulty] that you have for both Puna and California in the first quarter, can you at least give us some rules of thumb on how to think of those going forward? I know they were obviously pretty supportive in the first quarter, but we've seen some movement off the natural gas and oil. Are these going to be, are they going to prove to be mark-to-market headwinds potentially in the second quarter, or sorry, in the third quarter through the balance of the year?

So they're different, the California and Puna are different. In the case of California, we will enjoy upside. So, if gas goes up we will benefit from this. In the case of Puna, yes, we have basically set a certain mark at the time of the hedge, and if for some reason oil goes crazy beyond that, we will not benefit from it.

So could you -- so some of the gains that you had in the first quarter, those -- or sorry, in the second quarter, those could turn around later in the year? Potentially?

Not on the gas, and in case of the oils, do you want to --?

Yes, in case of the oil, of course if prices will remain as they are or will it go up, we're not -- or go down, will not -- we can reverse it. But, on the other end, we're getting the cash on a monthly basis. It takes a monthly settlement.

Understood.

It can be a fluctuation because of the accounting which mark-to-market against P&L and not against the comprehensive, other comprehensive income.

Okay. Real quick, a couple other topics. On the product segment, given the nice signing on the Enel contract, I guess I was kind of surprised you didn't raise guidance for the year, because your backlog far swamps what your guidance is for the back half of the year. Can you talk a little bit about maybe the timing of revenue realization, or is there some reason you think maybe more of this will be deferred into '13?

The answer is that when we gave the guidance, we knew about the Enel contract, we had the $9 million advance release earlier in the year so there is the -- some of it is in our planning, and yes, most of the revenue under the Enel contract, which we recognize in 2013. I think that the -- what the -- the analysis should say that 2013 is going to be as strong a year in the products segment as 2012.

Sounds great. And then obviously there's still a lot of time to hopefully book more contracts.

Exactly.

Real quick on the cost structure, we continue to see really impressive results on the power side in terms of your bringing down the cost of your fleet. Are we at a level yet that we can sort of carry forward? Understanding there's some seasonality, that $34/megawatt hour, is that kind of the right ballpark, or? Is there potential to even bring that down further?

We still, there's still an impact, or a drag from Brawley so we need to see more improvement there, and there is -- we will see probably an effect of still some of the new plants coming online that have a lower cost basis than the older plants, so the impact of the future megawatts to come online, is something that we should see on the cost side.

On the margin side, that's also we expect improvement from the projects that are expected to come online, so that would expand potentially the top line.

Great, and two last quick ones. On Wister, on the PPA, any opportunity to maybe shift that to the California contracts and replace the SO#4 or would this be sort of a straight termination?

Unfortunately not the simple way to swap the two, no.

Okay, and then lastly, on the ITC cash grant I noticed as how you got Jersey Valley, Puna and Tuscarora this quarter and it sounds like it'll get, you'll get McGinness soon. Anything left on North Brawley you can go after, or will that sort of wrap up the cash grant program?

Number one, we will submit another application for North Brawley for the additional investment that have been made since. We received the initial application and we expect Wild Rose to get an ITC cash grant, so.

Sounds great, thanks so much.

Your next question comes from the line of Jesse Pichel with Jefferies.

Good morning, just a quick one. With McGinness coming online this quarter and the half payments, how should we think about margins in the third quarter in the electricity segment?

I'm not sure that we can answer it now, without typically third quarter margins were higher than the normal, because of the high rate that we will getting beyond the summer months from the standard SO#4 contract. With the natural gas prices where they are and the SRAC where it is, I don't think that we would see the jump that we typically see in the third quarter, and it should probably fall where it did in the prior quarter.

All right, good, and then as far as margins go, in that plant is it up to full utilization and the costs are where you expect them to be going forward?

Sorry, can you repeat the question?

For the McGinness facility, is that -- so the plant's up to full utilization, and are you at your expected cost currently?

If McGinness came in on budget, it is at full utilization. We are not getting yet the full commercial operation rate but we expect to get it retroactively to July 30.

Okay, thank you.

Your next question comes from the line of Carter Driscoll with Capstone Investments.

Good morning. Just a quick question, has there been any of the solar initiatives in Israel that have received a full regulatory approval yet, and if not, what may or may not be the hindrances and potentially the timing? And I have another follow-up.

Unfortunately, not yet. We are very close on three projects, but we are not there yet. Very close, but not there yet, no.

Okay. The other question I just have is the inevitable question about Sarulla. You mentioned some progress, could you maybe give some additional color about what the progress was? Obviously maybe since the analyst day if you could just give it your own qualification? Obviously we've been long awaiting this potential addition on the EPC side.

No, the progress is the progress in resolving the issues, but the main issue I think we explained it on the analyst day, and I'm happy to repeat it, which is the solution to the ownership of the power plants asset during the financing process it, there is a -- the actual solution to it was not yet found. There is a willingness to [technical difficulty] but how exactly to implement the solution was not yet found. But, we are making progress towards such a solution. The milestone that we are expecting is the signature of the JFC/EFC. This has not yet happened.

Okay, and then I'm assuming that you guys had a hard-fought win really to get the PPA rate up. Any further discussion about modification of that, or do you really want to put that to rest and really try to sign the agreement?

No, we are not opening up the rates on Sarulla.

Okay thanks, I'll pass it along. Appreciate it.

Your next question comes from the line of Mark Barnett with Morningstar.

Hey, good morning. Just a couple of quick questions, here. With the Wister PPA situation, if you do end up having to cancel that, what would be your options around that facility? Can you talk about that a little bit?

Yes, there was -- in a situation like this we can go ahead and try to market it again, at the right time. So, provided that there is a way to develop a project there, it's just a matter of timing for finding an offtaker.

Okay, so I guess we'll just have to wait for that. And then the Jersey Valley PPA, do you have any comments on where you stand with resolving that or is it still too early to say?

No, not the PPA, the performance of the plant you mean, right?

Yes, correct, sorry.

The PPA, the PPA is in good shape, there is no issue with the PPA. The plant is underperforming and we are working towards adding additional injection capacity in order to bring the performance of the plant up. We expect a permit to do an injection well in the next couple of weeks, and then we see if we reach the results or not.

Okay, thanks for that.

Your next question comes from the line of Tom Daniels with Stifel Nicolaus.

Good morning, thanks for taking my question. I was hoping maybe you'd talk a little bit more about North Brawley and could you give us, you know, what the megawatt output was during the quarter?

Yes, I think that the output was, the average output in the quarter was 24 megawatts, and if you recall previous presentations our efforts are to gradually increase generation but especially to control costs and we have been very successful in the quarter in doing so.

Okay, was the cost last quarter $7.2 million and now $7.5 million this quarter? Do I have that right?

Yes.

Or is that just increased depreciation?

No. Depreciation didn't increase much, maybe an additional CapEx, but.

Okay, so costs are up a little bit sequentially?

But very, very minor amounts.

Okay, okay. And now, how - how should that cost trend kind of go, going forward? Do you expect to keep bringing it down, or is this $7.5 million kind of a decent run rate for the next several quarters as you figure everything out?

Our expectation is for the costs to, again, within our control, barring unexpected issues we expect the costs to remain at about this level, maybe trend a little bit down for this generation capacity, but the focus would be to increase generation while maintaining this roughly these costs.

Okay great, the contract with Mighty River Power, the $130 million contract, we saw some disputes I guess between the indigenous Maori and the New Zealand government during the quarter. I just want to make sure that, you know, your project with Mighty River is not at risk at all, is it?

It is not.

It's not.

We are --

Okay. And now you guys are --

The construction is proceeding, we don't have any issues of them here, not any direct issue related to our project.

Okay, great. Now where do you guys see the bidding activity for the products, I mean, is it kind of strong on any specific geography or in general could you kind of speak of the bidding activity?

You know, there has never been any predictability in it and it is -- none today. Geothermal development is site-specific so clearly there is no bidding activity no way in Norway or in Sweden because there is no geothermal there. But, wherever it is, whether it is New Zealand or Indonesia, we cannot -- we cannot predict where - or from where - all those orders are going to come. Turkey is an active market. The US is probably going to slow down after the expiration of the ITC cash grant, but it's very hard to identify a geography.

And then you know, maybe in the geothermal development, the projects under development, I didn't see a status update. Is everything pretty similar in Crump Geyser and Wister? I'm understanding the PPA situation in Wister, and how is permitting in general? Has it become more difficult, just still difficult? How would you guys classify that?

I think that permitting remains difficult. It's both site-specific, county-specific, and state-specific, so some areas in Nevada are very easy to permit, and some areas are more difficult. But, there were no big changes. In Nevada we did make a lot of progress in working better with the different agencies. In other locations there's really no big difference, it does -- our timelines remain about the same as they were before.

Great, thank you, and congratulations on a great quarter.

Thank you.

Thank you.

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

Hey, sorry, a quick follow-up on North Brawley. Can you maybe walk us through what your plan is, both in terms of drilling and in terms of capacity maybe for the next 6, 12, 18 months as you ramp it up?

Well we are, remember we said we will not disclose plans. So, I'm between a rock and a hard place, but I would say that really our focus, immediate focus is, do whatever it takes to extend the run life of the pumps. We have one pump now that exceeded 10,000 hours, and over the first two quarters we have seen really over the last four quarters we have seen, an increase in run life of the pumps. This is the biggest cost driver also affects availability.

We did, and this goes back to presentation in the Analysts Day, we did continue the interpretation of the 3D seismic survey that we have done in the field and correlated it with geological information, and based on this, we believe that we can either re-drill existing wells or drill new wells in locations that are much better and would provide results that were really -- that we were hoping for in a lot of our drilling activity in 2009 and 2010, but never got.

However, it is -- it is a long process and we will do it very gradually so it will be drill a well bit based on the new interpretation of the field, test it for a good number of months to see that indeed we're getting, we're getting the results that we were hoping for, and then drill the next one based on the same theory assuming that the theory proves right.

So, on the cost side an increasing run life of equipment, we have very detailed plans and it's ongoing and we see the benefit from the work that we have done in the past two years. When it comes to expanding the field, we will be on purpose very slow in doing so.

Got it, and then real quick, one other topic going back to the product sales segment. I noticed that you are including the Thermo 1 order in backlog. Are you currently actually providing equipment to Thermo 1, and if so, can you just briefly talk about the accounting? And then secondly, can you talk at all about the status of Lightning Dock?

The Thermo 1 EPC is under construction, the equipment wasn't delivered yet. It is, the project is expected to be online before the end of 2013, and it is under construction. The -- what's the name, the other --

Lightning Dock.

Lightning Dock was not released yet to production. It is the, there are still certain conditions that were not fulfilled, so this one is an different situation. Accounting treatment is simply that even I can explain it, I don't have to pass the call to Joseph. It is going to be included in inventory if you want, or deposit, because we cannot recognize it as revenue as long as we are the lender under the project but we have to hold, we are the EPC contractor and we are the lender. Once the project is complete, it is expected that financing will not be a problem because the risk of it there, it's just the south land that we are heading, and once there is, they've started financing then we will recognize the revenue.

Sounds good, thank you.

There are no further questions at this time. I would like to turn the call over to management for any closing remarks.

Not really closing remarks but a big thank you for your useful questions and we hope to continue with more results in the coming months, thank you.

This concludes today's conference call. You may now disconnect.