Ormat Technologies Inc (ORA) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Ormat Technologies first-quarter 2013 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. 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, Paula. Hosting the call today are Dita Bronicki, Chief Executive Officer; Yoram Bronicki, President and Chief Operating Officer; Doron Blachar, 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 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 Ormat Technologies' annual report on Form 10-K, filed with the SEC on March 11, 2013.

In addition during this call, statements may include financial measures as defined as non-GAAP financial measures by the SEC, such as adjusted 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 adjusted 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 IR Event and Presentation link that is found in the Investor Relations section.

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

Thank you, Rob, and good morning, everyone, and thank you for joining us on this rainy day in New York for the presentation of our first-quarter 2013 results and outlook for the near future.

Before we start the update on the quarter, I want to welcome a new member on the Ormat management team. I'm pleased to introduce Doron Blachar, who officially joined Ormat as our CFO on April 2. Doron has a long track record as a finance professional, including significant experience with several US listed public companies. Doron will review the financials following Yoram's operational review.

Let me start with slide four that lists some of the major milestones achieved since the beginning of the year and will have a positive impact on our near and longer-term future. Replacement of two of our Standard Offer #4 contracts with higher-rate fixed-price (inaudible) contract. A new PPA for Wild Rose projects [favor returns].

The signature of the Joint Operating Contract and the energy sales contract in Sarulla. The commercial operation for Olkaria Plant 2, which increased our generating capacity to 611 megawatts. And the continued flow of new orders in our Product segment, which brought our backlog to $224 million as of May 7, 2013.

I would like to turn the call over to Yoram to expand on these models and provide a review for operations. Following Yoram, Doron will review the financials, and I will return for closing remarks before opening the call for Q&A. Yoram.

Thank you, Dita, and good morning, everyone. Starting with slide six, the total generation for the first quarter of 2013 was approximately 1.08 million megawatt hours, which is an increase of 4.2% from the same quarter last year. The growth in generation is mainly due to successful completion of McGinness Hills in 2012, a plant and a resource that exceeded our expectations.

Since the beginning of the year, we have been very busy in activities that we expect to positively affect the rest of the year. On the operational side, these activities include pre-peak equipment maintenance and well work in a number of plants. On the project side, we have been working on the Olkaria Plant 2 star up, enhancements of two facilities, Mammoth G1 and Heber 1, continued with the construction of a number of plants, and as we have recently disclosed, we have accomplished some important milestones on the commercial aspects of new projects.

The increase in our generating capacity was masked by the scheduled maintenance activity that was performed this quarter, as well as by some of the unscheduled outages that we have had in some of our power plants. A big factor that affected us this quarter and will continue to affect us in the second quarter is the congestion in the transmission lines that wheel power from Imperial Valley to our customers. This had an effect on both generation and energy prices. We expect this event to end this month, at least through the peak period.

As Dita mentioned, we terminated the old Standard Offer #4 PPAs of G1 and G3 in the Mammoth Complex. And at the beginning of April started to sell power to Pacific Gas & Electric from the G3 plant. G3 is expected to sell 12 megawatts on an annual average and we expect to sell an annual average of six megawatts from G1 once the enhancement is completed later this year.

For an update on our project pipeline, please turn to slide seven. We have recently announced the commercial operation of the 36-megawatt Plant 2 in the Olkaria complex in Kenya. With Plant 2 commercial, we are now working on the 16-megawatt Plant 3 that we expect to complete in 2014.

In Wild Rose, we are in the midst of site construction and, as we have recently disclosed, just completed the 20-year fixed-price PPA with the Southern California Public Power Authority.

In Heber Solar, we continue with construction. As for Heber 1 enhancement, we have completed the resource portion of the work and are now in the procurement phase of the major component that will be used in the power block. Construction of Heber Solar and Wild Rose is expected to be completed in the second half of the year.

On slide eight, you can see a list of projects in various stages of development. The cumulative generating capacity of these projects is approximately 117 megawatts. However, the readiness for continued construction and expected economics will determine the release of each individual project, and we are not planning to invest in all of them this year.

Two additional (technical difficulty) significant commercial (inaudible) in Sarulla. We signed a Joint Operating Contract and energy sales contract. The construction is expected to begin after the Consortium obtains financing, which is expected to take approximately one year. The first phase is scheduled to start up operation in 2016. Two additional phases are planned to be completed in stages within 18 months after the first one.

Together with the JOC, the Consortium also signed an EPC contract in which we are the supplier and expect to recognize revenues of $254 million related to the equipment sale over the construction period. In addition to our role as a supplier, we have a 12.75% equity stake in the project.

Sarulla is expected to obtain construction and term loans under a nonrecourse or limited recourse financing package of direct loans from the Japan Bank of International Corporation, JBIC, and the Asian Development Bank, ADB, as well as loans to be provided by five commercial banks, which we refer to as MLAs. The MLAs are expected to be backed by political risk guarantees from JBIC.

Moving to slide nine, we have 41 prospects in early exploration or where activity has yet to begin.

Slide 10 provides an update on the Product segment. As of May 7, 2013 our product backlog is approximately $224 million. This backlog includes a Thermo 1 project that was started up last month and is now in full commercial operation. We will recognize it as revenue once we get paid.

Before I turn the call to Doron, I would like to stress the high level of activity in our Product segment and the positive effect that Sarulla may have on it for the future years. Doron.

Thank you, Yoram, and good morning to everyone. Before reviewing the financial results for the first quarter of 2013, I would like to take a quick minute to thank the Bronickis, the Board and the extended Ormat family for providing me with this opportunity. Over the last 15 years, I've been working in global companies such as Amdocs, Teva and Shikun & Binui in senior financing positions. My focus has always been an increasing shareholder value through profitable growth, strong control and optimizing the cost of capital.

I am excited for the opportunities that lie ahead; increasing shareholder value is a top priority. In the days, weeks and months ahead I will continue to acquaint myself with all facets of this great company, as well as take active role with the investor effort. I look forward to meeting all of you in the near future.

Now back to the presentation. Beginning on slide 12 with the results for the quarter ended March 31, 2013, total revenue for the first quarter declined 8%, from $132.4 million in the first quarter of 2012 to $121.7 million this year.

In our Electricity segment, as you can see on slide 13, revenues declined from $82.2 million in the first quarter of last year to $71.1 million this quarter. The year-over-year decline was primarily related to the transition to variable SRAC prices and the Standard Offer #4 PPAs that are tied to the natural gas price. Although we see an increase in natural gas prices year over year, the SRAC is still lower than the fixed price we had in the first quarter last year. As a reminder, the Standard Offer #4 PPA in California switched from a fixed rate to a variable rate in May 2012.

At the end of last year, we hedged against gas prices. As you can see, we recorded this quarter a loss of $4.6 million. On a positive note, gas prices are higher this year than last year and if they remain the same way, our financial performance will benefit from the trend in 2014.

Lower rates in Puna and Amatitlan and reduced generation in certain plants also impacted our revenues. The added generation from the McGinness Hills plant, which began commercial operation in July 2012, and higher rates in Tuscarora, which started to receive commercial rates in the second quarter of 2012, partially offset the decrease in revenue.

In the Product segment on slide 14, revenues in the first quarter of 2013 increased slightly year-over-year, from $50.1 million in the first quarter of 2012 to $50.6 million this year. Product segment revenues remain strong as a result of the increase in new customer orders that we secured over the last two years.

Moving to slide 15, the Company's combined gross margin for the first quarter was 22.8% compared to 30.1% in the first quarter of 2012. The Electricity segment gross margin was 19.9% for the quarter compared to 29.6% in the same period last year. In the Product segment, gross margin for the quarter was 26.8% compared to 30.9% in the same period last year. The decrease in the Product gross margin is mainly attributable to a different product mix and different margins in the various sales contracts.

Moving to slide 16, operating income in the first quarter of 2013 was $8.5 million compared to $25.7 million in the first quarter of 2012. The decrease was primarily attributable to the reduction in gross margin as a result of the decline in the Electricity segment revenues I just discussed.

Operating income was also impacted by a one-time early termination fee of $9 million related to the Mammoth Complex contracts replacement. The fee was included in selling and marketing expense and was allocated to the Electricity segment.

Moving to slide 17, interest expenses, net of capitalized interest, for the first quarter was $15.9 million compared to $14.9 million in the same period last year. The $1 million increase is attributable to $0.9 million interest related to the sale of tax benefit and $0.7 million decrease related to the interest capitalized to projects, partially offset due to lower interest related to our net debt.

Moving to slide 18, net loss for the quarter was $1.9 million, or $0.05 per share, compared to net income of $8 million, or $0.17 per share, in the first quarter last year. Net income excluding one-time termination fee of $9 million related to the replacement of the Mammoth PPAs and $4.6 million loss related to the oil and gas derivative instrument was $11.6 million, or $0.26 per share.

As shown in the following slide, slide 19, adjusted EBITDA for the first quarter of 2013 was $45.8 million (sic -- $45.7 million, see slides) compared to $51.5 million in the same period last year.

Net cash provided by operating activities was $18.2 million in the quarter compared to $41.9 million in the same period last year.

In January, Ormat closed on the transaction with JPMorgan Capital Corporation to monetize the production tax credit for PTCs associated with certain geothermal plants in California and Nevada. Under the terms of the deal, Ormat transferred the plants into a new entity, ORTP. In return for the tax benefit, JPMorgan paid approximately $35.7 million in cash to Ormat at closing and will make additional payments of approximately 25% over the value of the PTCs generated by the portfolio over time. The initial payment and subsequent payments will be treated as cash flow from financing activity.

Accounting-wise on the balance sheet, we have included the liability associated with the sale of the tax benefit in an amount of approximately $30 million and the non-controlling interest in an amount of $5 million. The P&L includes interest expense of around $1 million that represents the interest on the liability and a profit from the sale of the tax benefit in the amount of $2 million.

Moving to slide 20, cash and cash equivalents, marketable securities and short-term bank deposits as of March 31, 2013 was $60.6 million. The accompanying slide breaks down the use of cash during this (inaudible) quarter.

Our long-term debt as of March 31, 2013 and the payment schedule are presented in slide 21 of the presentation. That concludes my financial overview. I would like now to turn the call back to Dita. Dita.

Thank you, Doron. If you could please turn to slide 23, you will see the CapEx requirement for the remainder of 2013. We plan to invest a total of $173 million; $124 million expected to be invested in projects that are fully released for construction, including Mammoth and the Heber enhancement, and an addition of $49 million for development of new projects, exploration, maintenance CapEx and enhancement to the production facility.

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

Turning to slide 24, which presents our revenue focus for 2013, we reaffirm our 2013 guidance and expect total revenues to be between $515 million to $535 million, with Electricity revenues between $335 million and $345 million and Product segment revenues between $180 million and $190 million.

Looking forward, while there are still uncertainties in the regulatory environment in the United States, we believe that the regulatory support for new build in the US will continue. A recent example is the MLPB, a master limited partnership introduced a few weeks ago.

Internationally, we are benefiting from our experience, capabilities and (inaudible) in all aspects of geothermal development to participate in the geothermal development activities in Latin America, Southeast Asia and Africa.

We look forward to keeping you updated on new developments as we achieve additional milestones. We would like to thank you for your support, and at this time, I would like to open the call for questions. Operator.

(Operator Instructions) Dan Mannes, Avondale.

Good morning, everyone, and welcome aboard, Doron.

Thank you.

A couple quick follow-up questions. First, on the mark-to-market on your oil and gas, just so I understand it, this relates to the mark-to-market for the back three quarters for Q2, Q2 Q3 and Q4, and the realized impact of the hedges in the first quarter is not included in that $4.6 million? If you could just clarify, that would be helpful.

The $4.6 million represents the remaining costs that will be in the next few quarters. So Q1 is only the actuals, and the mark-to-market actually looks at the expected oil and gas prices for the next nine months compared to the hedge that we did, and will (inaudible) accounting-wise this expense in the quarter.

So the simple answer is if the gas and oil prices will act as we are expecting, on March 31 there will not be an additional impact in this next quarter.

Got it. So whatever amount that -- whatever losses were incurred on those hedges are included in that $9 million year-over-year variance relative to the SO4 contracts?

Can you repeat that?

So whatever portion of those hedges were realized in the first quarter's losses would be included in the year-over-year variance that was $9.4 million, which was the variance on the SO4 contracts.

Directionally, I think you are correct, Dan, but I think that we need to go over the numbers. I don't know if Smadar can clarify this. I mean, I think that what Dan is asking is -- we basically included -- we included -- when we say that the difference is about $9 million, this is actual rates that we got this quarter compared to the same quarter in 2012.

It does not include the hedge loss.

It does not include the hedge loss, but does include the proceeds from whatever hedging we have done.

It includes the hedging, but in Q1, doesn't include the $4.6 million.

That's exactly what I was asking. And as it relates to your adjusted EBITDA calculation, the $4.6 million, is that included in the adjusted EBITDA or excluded?

We have not adjusted for the $4.6 million because it is not a one-time change, all right?

Perfect. That helps a lot. Real quick -- you mentioned, Dita at the end, on the MLP Bill, I think this is probably a good forum to maybe talk briefly about where this might fit in for you. Do you see the potential if this bill passes that some of your assets would be MLP-eligible, and is that something that could be interesting for you down the road?

To be perfectly honest, we are still analyzing the impact of the MLPB. But what I can share with you -- my understanding of it is that it will definitely provide local capital for future development. Very similar to the tax partnership production that we did or the (inaudible) transaction that we did before. That's another way to take advantage of tax benefits that we cannot take advantage of, and as a result, get lower-cost capital than otherwise available. Is it also an opportunity for the existing assets? This is where we are not 100% clear.

Is that because of the project debt?

It is the project debt. It is the tax monetization of certain of the assets. The structures that are in place, I'm not sure how they can fit with an MLP. We have not done this analysis to be able to respond.

Understood. And then real quick on the operating cost side, it looks like both R&D costs and selling and marketing -- I'm sorry -- and G&A look like they were both down sequentially from the fourth quarter. Anything to read into that? Are we looking at maybe a little bit of a lower overhead during the balance of 2013?

Yes, we are. We have -- we are talking about efficiencies. They are not a huge number yet.

Okay. And then the one last one --

Selling and marketing them is a coincidence. It is not a -- because selling and marketing really depend -- you know, if we not realize the $9 million of the termination fee there, the rest of it is depending what kind of products they order (inaudible) you have in a certain quarter, and what are the selling and marketing expenses associated with this specific product. But G&A has been slightly (inaudible).

Right, so on sales and marketing, we almost want that number to go higher because that means you are selling -- you are probably building more backlog.

Correct.

One last one, just on the Heber and Mammoth repowering. Are those -- is the work on that mostly done, at least on Mammoth, or -- I know Heber, I think, was a little bit longer. Or is there still significant work on those that still needs to be completed?

No, actually, in both cases -- in Mammoth, we have basically removed the old plant and we are now in the process of assembling or installing the new equipment. So quite a bit of work yet.

And on Heber, there are two elements to the enhancement. The first one was developing a new area, a new resource area; so different resource. We have drilled three wells and that work is completed and the wells are successful. And some of them are already flowing into the plant, so this is almost done.

And then the next portion is to redesign the power cycle to match what we believe the long-term properties of the resource will be. And there, engineering is done, but we are in procurement, and so this is a -- this will take us more than 2013 to complete. We are thinking about completion sometime in 2014. So quite a bit of work there.

Okay. Thank you very much.

Scott Reynolds, Jefferies.

Thanks, folks, for taking my question. I just wanted to get a sense of how the margins, especially on the electricity side, are looking to trend at the gross margin level for the next few quarters. Obviously, we have some moving pieces with new contracts and different plants coming online. I was hoping we could get some color on that.

By bringing new plants online, we have the traditional gross margin. We certainly may (inaudible) for the lower gross margin on the Standard Offer #4 contract. And if we look into the future, and we have two contracts with Mammoth that will have traditional gross margin, we have Olkaria with the traditional gross margins. The weight of McGinness Hills that is -- it is already reflected this quarter, but will continue to distribute. So we definitely agree. We definitely expect a higher gross margin than -- a slightly higher gross margin than what we have in this quarter.

Okay, that's fair. And as -- could you give us an update on the solar projects and how that process is progressing? And also, is that -- those should have -- they'll produce somewhat, but overall, they will have a lower generating effect on your overall asset base. So should we expect much of an impact from those and what are the margins in those projects relative to your current asset base?

I think we addressed it in our year-end quarter call, but the only solar activity in Israel is not going to be -- to provide the results that we initially expected there, and we may even discontinue this activity. So we are left with Heber Solar that we are building, and this is a project that makes sense by itself. But that is about all that we have in the solar activity.

Okay. Thank you.

Michael Klein, Sidoti & Company.

Good morning. Can you talk about the performance at North Brawley in the quarter, whether or not it was EBITDA positive, and how its financial performance was versus your expectations?

It was not EBITDA positive. First quarter is a low-rate quarter, and one where we typically do work in preparation for the high rates in the second and third quarter. But no dramatic news in Brawley, either -- not positive, not negative. It is -- as we said, we expect this to be for now a 27-megawatt plant. This is how we operate it. Nothing dramatic or exciting there.

Okay, so you are comfortable with where the plant is now and the outlook going forward -- is that correct?

Yes.

Okay, and can you just talk from a high level what the biggest risks are to bringing these additional plants online by the end of 2013? It seems like you have most of the steps completed at this point. But what are the biggest risks to getting the power online?

Actually, we don't see any substantial risk, other than global issues that we cannot control. We are well a way on the work. The equipment has been manufactured, is mostly on-site. Permits are in hand. Resource work was completed. So there is really nothing major. It all seems to be very, very good.

Okay. Thank you very much.

(Operator Instructions) Mark Barnett, Morningstar.

Good morning. Just a quick -- I actually am not able to access the presentation slides, so pardon me if this is very clear. But aside from the timeframe that you just gave on the Heber and the Mammoth work, are there any other changes that you made to your development time table during this quarter for any kind of projects currently?

No, no changes from the previous presentation.

Okay, thanks. And a quick question on the grid curtailment. Is that still something that -- you had mentioned it might be an issue through the second quarter of this year. Do you have any idea of what the rough financial impact of not being able to sell that power might be for the quarter, or is that a tough number to pin down?

You asked about the congestion on transmission?

Right.

The cumulative impact in the first quarter was about $2 million, a little over $2 million. We do not expect the same impact in the second quarter. It would be really an order of magnitude lower, probably a few dozen thousand dollars or something in that area. I don't have a quite estimate; but not a substantial numbers beyond the nuisance factor of it.

And as far as we know now, there is no -- during the high-low -- the high rate areas periods of the year, we don't expect any of that to continue, not the scheduled maintenance at least. Unscheduled could happen or a failure could happen of course anytime.

Okay. Great. Thank you. And just one last quick question, if I may. I know it's a little bit early in that I think you had mentioned this might take the next year to actually issue the financing. And you had mentioned nonrecourse and some limited recourse financing. Do you have any idea for what the general capital structure might look like? Is that going to be fairly similar to US construction or might that have a slightly different profile?

Our experience from international financing [of reported financing] would be very similar to US financing. Typically, a debt-to-equity ratio of, say, 20% to 30% equity and a similar amount of debt. Maybe in the case of Sarulla, because the financing is very long-term, the equity ratio may be slightly lower, but this is not known yet. And because there is a strong EPC contract, the construction financing is going to be similar to term financing. So we don't expect any major difference on what we know of the project financing as reported.

Okay. Thanks.

Gregg Orrill, Barclays.

Good morning. I was wondering if you could give an update on any additional milestones you are watching for Sarulla.

The next major milestone is close of financing, which is expected to be, as we say, the year after signing the contract, so April of 2014. That is the major milestone.

There are insignificant, if you want, milestones, like signing the actual PPA for the supply contract. We have a signed term sheet, but we don't have an actual PPA. But I don't think that those are major milestones for the development; it is really the work that has to be done.

Thank you.

JinMing Liu, Ardour Capital.

Good morning. Thanks for taking my question. Just a follow-up on the transmission congestion problem. How did that problem affect your average price in the first quarter? And what exactly happened that caused that congestion?

I can't give you the calculation on the average price. The impact was about $2 million, so I think that you can back calculate this. If not, we'll see if we can help -- but if -- Smadar can answer that after I finish.

But the causes, there are few -- there are few lines that export power from the Imperial Valley into the California ISO transmission network. And basically, every project is assigned room on one of the lines. In our case, the line is called Path 42. And this is a line that has been scheduled for maintenance and also for upgrading, both activities that are somewhat related, but not identical.

And when they do the work -- and this is really the extent of my knowledge -- when they do the work, they basically limit -- they don't shut down transmission on that line altogether, but they limit the amount of power that can be exported on that line, and typically it is done in a pro rata way. So all the projects that export power on the line take -- if they need to take off 100 megawatts of capacity from the line, they will prorate each of the projects based on their transmission rights on the line. And at that point, this forces us to reduce generation, adapted to what we are allowed to put on that line. So basically, if you'd like, slow down -- turn down the plants.

Generally, it is not a full outage of the plant. It is just we are able to -- we are required to reduce it to 85% or 90% of capacity. But there were cases where the implications were that we were better off not sending any power on that line. Does that answer the question?

Yes, thanks. So the problem is temporary. It should be resolved before the peak season?

Correct. As far as we know, this should have ended either this week or last week.

Okay, good. Thanks.

At this time, there are no further questions. This does conclude today's conference. Thank you for your participation. You may now disconnect.