Ormat Technologies Inc (ORA) 2014 Q1 法說會逐字稿

Good morning and welcome to the Ormat Technologies first-quarter 2014 earnings conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Brad Nelson of KCSA Strategic Communications. Please go ahead.

Thank you, Emily. 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. Before beginning, we would like to remind you that the information provided during this call may contain forward-looking statements related 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, expectations for future operations and are based on management's current estimates and projections, future results, or trends. Actual future results may differ materially from those projected as a result of certain risks (inaudible) 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 February 28, 2014.

In addition during the call we will present non-GAAP financial measures such as EBITDA and adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures and management reasons for preventing such information is set forth in the press release that was issued last night as well as in the slides posted on our website.

Because these measures are not calculated in accordance with US GAAP, they should not be considered in isolation from our financial statements prepared in accordance with GAAP principles. Before I turn the call over to management I would like to remind everyone that a slide presentation accompanying this call may be accessed on the company's website at Ormat.com under the IR events and presentations link that is found on the Investor Relations tab. With all that said, I would now like to turn the call over to Dita. Dita, the call is yours.

Good morning, everyone, and thank you for joining us today for the presentation of our first-quarter 2014 results and outlook for the near future. In addition to the team that is hosting this call, we also have with us today Isaac Angel, who joined Ormat on April 1 and will be succeeding me as CEO when I retire on July 1.

Let's turn to the presentation -- slides 4 and 5 -- to examine the financial and operational highlights for the quarter. Doron will go into the numbers in detail in a minute. We are pleased full financial and operational results for the first quarter. In the electricity segment we've continued to focus on a multistage approach to development. The Olkaria III complex in Kenya, which had a significant contribution to this quarter's results, provide a perfect example of the benefits of this approach.

In February, we completed the Plant 3 at the complex three months ahead of schedule, bringing the total capacity of Olkaria III to 110 megawatts. This staged approach minimizes delay and maximizes efficiency by making sure we completely understand the results we are developing. The product segment continued to be robust in terms of revenue and in terms of margin, and with the expected closing of the solar financing in the next month, the performance of the product segment will gain an important base for the next three years. With that said I would like to turn the call over to Doron to review the financial results. Yoram will then provide a review of our operations, and I will return for closing remarks before opening the call for Q&A.

Thank you, Dita. And good morning, everyone. Let me provide an overview of our financial results for the first quarter of 2014. Starting with slide 7, total revenues for the first quarter of 2014 were $142.4 million, a 19.8% increase over revenues of $108.9 million in the first quarter of last year. In our electricity segment, as you can see on slide 8, revenue grew 38.8%, to $94.8 million in the first quarter of 2014 over $68.3 million in the first quarter of 2013. The increase was primarily due to the new capacity coming online and an increase in generation from our existing portfolio.

In addition, energy rates under the Standard Offer No. 4 contracts and under the new contract signed for Zunil and Mammoth G1 and G3 were higher this quarter compared to 2013. As has been our policy since 2012, we continue to take action to mitigate the impact of natural gas prices on our electricity segment through our hedging activities.

We have entered into derivative transactions at a fixed price of $4.07 per MMBtu for the year 2014 to reduce our exposure to fluctuation of the natural gas prices through December 31, 2014. And we entered into a hedge contract of $4.95 per MMBtu for the period from January 1, 2015, until March 31, 2015.

As a result of our hedging activity for the first quarter, we recorded a net loss on derivative transactions on oil and natural gas prices of $2.4 million compared to $4.6 million during the same period in 2013. The first quarter in 2014, the loss was compensated with higher revenues in the amount of $2.2 million as a result of the higher actual natural gas prices compared to the hedge price. Excluding hedging adjustment, electricity revenues increased 33.3% year over year.

In the product segment on slide 9, revenue to the first quarter of 2014 were $47.6 million. A 5.9% decrease year over year was primarily due to a reduction in new customer orders in 2013 and timing of revenue acquisition.

Moving to slide 10, the Company's combined gross margin for the first quarter 2014 was 37.5% compared to 22.5% in the first quarter of 2013. In the electricity segment, gross margin for the first quarter of 2014 was $37.8 million, or 39.8% compared to $13.2 million or 19.3% in the first quarter of 2013. There are a few reasons for the significant improvement in the gross margin this quarter. This relates mainly to the revenues [adjusted to the] cost of revenue. Yoram will elaborate on this in his part.

In the product segment gross margin for the first quarter of 2014 was $15.7 million, or 32.9%, compared to $13.6 million, or 26.8%, in the first quarter of 2013. The increase in the product gross margin is mainly attributable to the different product mix and margin in the various sales contracts that we have.

Moving to slide 11, operating income in the first quarter of 2014 was $42.6 million, or 29.9% of revenue, compared to operating income of $7.7 million, or 6.5% of revenue, in the same period last year. The increase was primarily due to the growth in electricity segment gross margin as well as a $9 million early termination fee that Ormat paid in the first quarter of 2013.

Operating income attributable to electricity segment for the first quarter 2014 was $30.9 million compared to an operating loss of $1.3 million for the first quarter of 2013. Operating income attributable to our product segment for the first quarter of 2014 was $11.7 million compared to a $9 million for the first quarter of 2013.

Moving to slide 12, interest expense net of capitalized interest for the first quarter of 2014 was $20.5 million compared to $15.9 million for the first quarter of 2013. This increase was primarily due to the two new loans Ormat received from OPIC in 2013.

Moving to slide 13, net income attributable to the Company stockholders for the first quarter 2014 was $21.6 million, or $0.47 per diluted share compared to a net loss of $5 million attributable to the Company stockholders for the first quarter of 2013. On March 26, 2014, we signed an agreement with RET Holdings to sell the Heber Solar project in California for $35.25 million. We received the first payment of $15 million with the remainder expected to be paid in the second quarter of 2014 subject to the fulfillment of certain milestones.

Due to certain contingencies in the sale agreement, we deferred the pre-tax gain of approximately $7.5 million until fulfillment of the condition subsequent we should expect it in the second quarter of 2014.

As shown on slide 14, adjusted EBITDA for the first quarter of 2014 was $70.6 million compared to $45.7 million for the first quarter of 2013, representing a 54.4% increase. Net cash provided by operating activities were $68.1 million for the first quarter of 2014 compared to $18.2 million in the first quarter of 2013.

Moving to slide 15, cash and cash equivalents as of March 31, 2014, were $47.9 million. The accompanying slide breaks down the use of cash during the quarter. Our long-term debt as of March 31, 2014, and the payment schedule are presented in slide 16 of the presentation. The average cost of debt stands at 6.1%.

On May 8, 2014, Ormat's Board of Directors approved the payment of the quarterly dividend of $0.05 per share. The dividend will be paid on May 30, 2014, to shareholders of record as of May 21, 2014. We expect to pay a quarterly dividend of $0.05 per share for the next two quarters of 2014.

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

Thank you, Doron, and good morning, everyone. Moving to slide 18, the total generation for the first quarter of 2014 was approximately 1.2 million megawatt hours, which is an increase of 15.5% from last year. The growth in generation is a result of the expansion program for 2012 and 2013 and specifically the contributions of Plants 2 and 3 in Olkaria and the Don A. Campbell Plant in Nevada.

As Doron mentioned, the electricity segment had record revenue and a very high gross margin. The growth in the margin was mainly due to the addition of the new facilities that were described earlier. However, the margin also benefited from the reduction in our specific operating costs from $35 to $30 a megawatt hour. Part of this reduction is lasting and is driven by the addition of the modern plants with the specific characteristics of their well fields and plant design to provide the marginal generation at a lower cost.

Another part of the reduction in the cost in this quarter is driven by the timing, and we expect higher operating expenses in the second quarter of this year.

Moving to slide 19, in the year-end earning call we discussed our future growth plans. As a summary, our budget includes new projects and late stage development projects that should support our growth and may add between 120 and 150 megawatts. Here is an update on the more advanced projects. The work that was completed in McGinness Hills in Phase 2 includes developing all the required geothermal production capacity, equipment manufacturing, and the start of the civil work. The new power plant is expected to come online by mid-2015.

In Honduras, we are getting ready for drilling and we'll spud our first well towards the end of the second quarter. In our operating plants we currently have two significant improvement projects. The Heber 1 upgrade project will enable the complex to maintain 92 megawatts and support the extended contract that we signed earlier this year. Actually, it's late last year. This is a substantial improvement of the plant that was constructed in 1985 that includes a modernized turbine, a modern generator, a modern control system, the addition of new wells and the conversion of some of the old wells.

To allow for this substantial upgrade, the Heber 1 plant went through a scheduled shutdown in late March and the work on the power block and the balance of plant has been progressing. At the time of this call, all the major pieces of equipment have been installed and we're in the process of commissioning the different subsystems with a completion target of no later than June 1.

The anticipated net impact of this project on our second-quarter revenue compared to the second quarter of 2013 and net income is about $1.8 million reduction, and this has been incorporated in our revenue guidance for 2014.

Another ongoing project is the refurbishment of the G3 plant at the Mammoth complex in California replacing old units with Ormat-manufactured equipment to optimize the operations of the complex. We expect to complete the refurbishment in 2015 and do not expect it to have any impact on revenue in 2014.

On March 28, 2014, the Sarulla Consortium, of which we hold a 12.75% stake, secured $1.17 billion in project financing for the 330 megawatt project in Indonesia. Closing is expected in the second quarter of 2014, at which point the Consortium will begin construction. The first phase is expected to start operation in 2016. The remaining two phases are scheduled to be in commercial operation within 18 months of the first phase.

As a reminder, we will supply our Ormat energy converters to the power plant and will add the $254 million supply contract to our product segment backlog once notice to proceed is issued. We expect to recognize revenue from the project over the course of the next three to four years, starting in the fourth quarter of 2014.

We have 35 prospects in early expiration or where activity has yet to begin, in the US, Chile, Guatemala, New Zealand, and Indonesia. In addition to adding capacity, we will continue to seek technical and commercial opportunities to improve existing plants.

Slide 20 provides for an update on the product segment. Our backlog remains substantial at the $120.4 million, excluding the 254 Sarulla supply contract. Let me turn to call over to Dita.

Thank you, Yoram. If you could please turn to slide 22 you will see our updated capital requirement for the remainder of 2014. We plan to invest a total of $97 million in capital expenditure on new projects under construction or enhancement. An additional [$93 million] is budgeted for development, exploration activity, maintenance capital for operating projects, and investments in machinery and equipment as well as $68.1 million for debt repayment.

The funding of this program will come from cash on hand at the end of the first quarter 2014, expected cash from operations, annual corporate lines of credit, and from the expected financing of McGinness Hills Phase 2 project which is covered under the existing financing structure from OFC 2 senior secured notes benefiting from the DOE loan guarantee program.

Turning to slide 23, we outline our revenue outlook for 2014. For the full year 2014, we [reiterate] our electricity segment revenue to be between $370 million and $380 million and for the segment revenues to be between $170 million and $180 million. The product segment guidance includes $36 million from the solar projects, subject to the financial close.

As we guided in the year and earnings call, we expect product revenue to decrease beyond the second quarter before strengthening towards the end of the year. The expected release of the solar supply contract later this quarter when the financial closing of the project will occur will garner a continued strong product segment not only in 2014 but also in the next three years.

The first quarter was a very strong quarter. While we expect second-quarter as a whole to be a relatively weak quarter, our expectations are that 2014 as a whole is going to be stronger than 2013, mainly as a result of the new power plants in the electricity segment, which has better power prices and lower operating costs, but also due to the product segment, as explained earlier.

Before opening the call for questions, let we summarize the general business environment we are in. The renewable energy or clean [tech] environment. A huge change has occurred since the IPO of Ormat and also since Ormat started to build geothermal power plants. Total investment in renewable energy, which was minimal 10 years ago, grew to annual number of $191.7 billion in 2013. And so, our debt price is out at $4 to $5 million Btu. Renewable is 5% or 6% of the US power market. Renewable is 70% of all new capacity coming online in United States. Stock market yield is projected for renewable energy companies.

Until storage solutions are developed, the role of geothermal, while a small participant in the development of renewable, is important as it is [baseload] and [can sell] as an integration cost mitigator. Ormat is well-positioned to continue to grow in this positive and encouraging business environment. With that, I would like to thank you for your support, and at this time the call is open for questions. Operator?

(Operator Instructions) Dan Mannes, Avondale.

Good morning, everyone. A couple of follow-up questions just for the call -- I apologize, I miss the first couple of minutes -- could you maybe walk -- can Doron go back over the comments as it relates to, number one, the hedging activities for 2015, and secondly as it relates to the first-quarter energy because my understanding was your hedges were total return swaps. So, I would have thought you would have had a bigger loss in the first quarter given how much natural gas prices went up. So could you may be walk back through those two items for me?

Sure, Dan. Regarding 2015, we hedged Q1 for natural gas prices -- the prices we had at 495 compared to the 470 we have this year. It's a process that we keep on doing looking forward and trying to find the right timing to hedge. Regarding the first quarter, we actually mark to market our hedging contracts, so we mark to market at the end of December, and in Q1 we had a net impact -- the hedge actually was a loss of $2.4 million. We were compensated with $2.2 million that we got from the higher prices. This is a mix between the natural gas and the oil. On the natural gas prices, we had a little bit higher loss and on the oil we got some money back. The net impact was 2.2. The revenue that we got -- additional revenue and a loss of 2.4 on the hedges.

Right. So basically since natural gas prices started moving up late last year you're saying a lot of the hedge impact at the fourth quarter last year, rather than this year?

Last year we had a hit of about $2.5 million in Q4.

Okay. Got it. So that was already anticipated somewhat in the swap. That makes sense. Looking real quickly on the development side, could you give us any update on some of the non-main development projects like CD4 and Carson? We have just seen some headlines that looked like there were maybe some challenges as it relates to water for CD4. And I wasn't sure if that was slowing that one down.

CD4 is an air cooled project, so there is no water consumption. We just need to go through the permitting process. The opposing party is the water board. In our mind there is no reason for opposition, so what we need is meticulous and slow process of consensus building and making sure that everybody understands that our projects do not impact -- do not have in impact on fresh water and on the water table in general. So this is why permitting take sometimes takes longer. You need to work with people, educate them, and since fundamentally we help the environment, we think that fundamentally we will prevail.

Okay. And the last thing -- I probably should've asked this first -- margins on the electric side in the quarter were very strong; I think this is probably the strongest first-quarter we've seen. Maybe the strongest quarter we've seen on it from a margin perspective. I know you discussed a little bit about how some of that is due to timing of outages. But as you look over the course of the year, how good it indicator is this of where margins could fall out on a full-year basis?

I think, Dan, the part that we have a little more visibility into is of course generation. Things may happen but our understanding of our well fields is that it's really good, and also the expectation for what ambient temperatures will do. So, I think for us really -- and this is really what we try to stress, the big part of the story here is the fact that we've -- our work -- say Dita's work to push growth resulted in additional plants and our sales are real. This is many more megawatt hours that we sold and actually under good contracts. So, I think that that top line on sales, this is here to stay and is very real.

There is another -- maybe another element to this that is worth stressing and this is that historically -- our plants always made more power in the first quarter, but our historical -- the legacy contracts -- mostly the California contract really favored generation in the summer. So, generation was always high and revenue was not necessarily that high in the fourth and first quarter. But as we move away from the California contracts, as they are less -- have a smaller share in our overall generation, and most of our other contracts are ones that favor generation.

We do see a strengthening of the margins in the fourth and first quarter, where generation is high because of lower ambient temperatures. And I think that's also -- Smadar is a better person to quantify this in detail -- but I think as you think about what changed in Ormat between past and present is additional capacity, good contracts, and actually contracts that favor more generation. This disparity is gone.

Now when it comes to cost, again, the fact that we have a bigger proportion of our plants that had easier will fields to operate this benign, high productivity wells -- all this translates into lower specific cost. And then it's always good to be fortunate. There are some expenses that may not take place at all that were scheduled for the first quarter. Some that moved from first to second quarter, but I think there are very real fundamentals that should cause us and you to be optimistic about the Company going forward.

Okay. No, that's helpful.

But let me be the [quoting person] here. The gross margin of the first quarter is most indicative. I think it's important.

Okay. It's high, but it sounds like the trend is clearly to improvement relative to what we've seen in the past, maybe just not to this level.

Q1, [it is a fairly] -- is higher but we do see on a continuous or comparing to last year and improve the in gross margin in the electricity.

Okay. And my last question here, you know, you did mention, obviously, some shifting of outage timing. Can you maybe talk about which plants? Was this a discretionary decision, given the high price of energy during the first quarter or was this already preplanned?

Actually in terms of outage there wasn't any shifting, because it requires so much planning that it is not -- we typically do not move it for other reasons. But for instance we have an estimate on how many pumps we will have to replace in all of our -- in 100 and some production wells that we have. So, we typically have a plan and a budget that is based on experience. But we rarely pull a pump out of a well unless we need to do this.

So based on the condition monitoring of wells that was done in the first quarter, we did not feel that we needed to do any well work. That was pushed into the future quarters, but since statistics says that we need to go through so many pumps in a year, then the fact that you haven't done much in the first quarter would directionally tell you that you have to do more in the next quarter. So timing issues are of that nature. It's typically we didn't have to spend money at the moment, but it doesn't mean that money won't get spent.

Got it. Thanks for all the color.

(Operator Instructions)

I'm showing no further questions at this time. This will conclude our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Not really a closing remark, but an opportunity to say goodbye because this is my last call. Thank you for your support.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.