Ormat Technologies Inc (ORA) 2016 Q3 法說會逐字稿

Good day, and welcome to the Ormat Technologies Third Quarter 2016 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Rob Fink with Hayden - IR. Please go ahead.

Thank you, operator and thank you everyone for joining us today. Hosting the call are Isaac Angel, Chief Executive 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 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 and 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 and uncertainties. For a discussion of such risks and uncertainties, please see risk factors as described in Ormat annual report on Form 10-K filed with the SEC.

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 presenting 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 the financial statements prepared in accordance with GAAP.

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 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 Isaac Angel. Isaac, the call is yours.

Thank you very much, Rob and good morning everyone. Thank you for joining us today for the presentation of our third quarter 2016 results and our outlook for the reminder of the year. Starting with Slide 4, we had another strong quarter with record revenue, double-digit growth as well as increase in profitability, excluding non-recurring expense. Our focus on improving our operational and manufacturing efficiency along with new higher energy rate contracts continues to be a main driver for margin expansion and improved results. Following the strong financial results in the first nine months of 2016, management decided to increase revenue and adjusted EBITDA guidance for 2016.

I'm also pleased that during the quarter, we concluded two significant objectives. We prepaid $250 million high-cost corporate bonds with 7% coupon that were due on August 2017 and successfully issued over $200 million bonds with an average interest rate of 2.2%, which enable us to significantly reduce our ongoing interest expenses. We also signed a certain agreement with respect to the previously-disclosed False Claims Act litigation to avoid the burden, inconvenience and expense of continued litigation with no admission of wrongdoing by Ormat. The total of $16 million one-time expense that we incurred into third quarter will result in significant savings in future expenses. Additionally, we continue to execute our near-term and mid-term growth objectives.

I will elaborate on the progress we made on our plans for the future after Doron reviews the financial results. Doron?

Thank you Isaac and good morning everyone. Let me start by providing an overview of our financial results for the three months ended September 30, 2016. Starting with Slide 6, for the third quarter of 2016, total revenue increased 13.4% to $184.6 million compared to $152.9 million in the third quarter of 2015.

Moving to Slide 7, revenues in the electricity segment increased 12.9% to $109.8 million in the third quarter of 2016, up from $97.2 million in the third quarter of last year. This increase was primarily attributable to the commencement of operation of the second phase of the Don Campbell power plant in Nevada in September 2015 and to the commencement of operations of our plant 4 at Olkaria III complex in Kenya in January 2015. The increase was also result of higher energy rates under Heber 1 new fixed-price PPA commencing on December 2015 and the consolidation of our Guatemala Power Plant --

Guadeloupe.

-- Guadeloupe Power Plant effective July 5, 2016.

In Slide 8 , revenues in the product segment was $74.8 million, an increase of 14% compared to $65.6 million in the third quarter of 2015. The increase was primarily due to an increase of approximately $7 million in revenue recognition from new projects in Turkey, partially offset by other projects in Turkey, several of which were completed in the year ended December 31, 2015. The increase was also due to timing of revenue recognition in a different product.

Moving to Slide 9, gross margin in the third quarter of 2016 increased to 40.3% from 36.4% in the third quarter of 2015. Our electricity segment gross margin increased to 39.4%, largely due to higher efficiency in our operating power plants as well as the lower cost to operate the two new power plants mentioned above. Our product segment generated 41.7% gross margin. This was primarily due to improvements and efficiencies made at our manufacturing facility, as well as the different product mix and margins in the various sales contracts. As we indicated during our last quarterly conference call, gross margin in the product segment during 2016 is higher than normal and we expect them to be lower in the year 2017.

Turning to Slide 10; operating income for the third quarter of 2016 was $48.2 million, up 3.8% compared to $46.5 million in the third quarter of 2015. The increase was primarily attributable to higher gross margins on higher revenues in both of our segments, partly offset by $11 million one-time expense related to the FCA litigation that Isaac mentioned in the opening remarks. Excluding the legal settlement, our operating income increased 27.4%. Operating income attributable to our electricity segment was $23.9 million compared to $28.3 million in the third quarter of 2015. The decrease was primarily due to the one-time expense related to the FCA settlement, which was partially offset by an increase in gross margin. Operating income of the product segment was $24.3 million compared to $18.1 million in the third quarter of 2015, representing 34.1% increase.

Moving to Slide 11, net income attributable to the Company's shareholders was $12.1 million or $0.24 per diluted share compared to $72.1 million or $1.41 per diluted share. The net income attributable to the Company's shareholders include the $5 million one-time fee related to the prepayment of the Company's senior unsecured bonds, and $11 million of one-time settlement expense related to the False Claims Act. The net income attributable to the Company's shareholders for the third quarter of 2015 include $48.7 million tax benefit and the related expenses relating to tax law change in Kenya.

In the third quarter last year, we recorded an income tax benefit of $49.4 million relating to the release of the valuation allowance for the additional 50% investment deduction for our Olkaria III power plant, based on amendments to the Kenyan Income Tax Act that took effect in September 2015. Excluding the one-time expenses that I mentioned, the net income attributable to the Company's shareholders was $28.1 million or $0.56 per diluted share compared to $23.4 million or $0.46 per diluted share in the third quarter of 2015, an increase of 21.7%. Reconciliation of the net income attributable to the company's shareholders as adjusted and EPS as adjusted are described on the Appendix slide.

Please turn to Slide 12, adjusted EBITDA for the third quarter of 2016 was $85.4 million compared to $79 million in the same period of last year, which represents an 8.1% increase. EBITDA and adjusted EBITDA for the third quarter of 2016 include $3.5 million of income attributable to sales tax benefits relating to OPC and ORTP Tax Equity Transaction, compared to $8.6 million for the third quarter of 2015. Reconciliation of the EBITDA and adjusted EBITDA are described on the Appendix slide.

Turning to Slide 13, cash and cash equivalents as of September 30, 2016 were $90.1 million. The accompanying slide breaks down the use of cash during the first nine months of the year. As you can see in this slide, we generated $158 million in cash from operating activities. Our long-term debt as of September 30, 2016, stands at $818 million, net of deferred financing costs and its payment schedule are presented on Slide 14 of the presentation. The average cost of debt for the Company stands at 5.3%, down from 6.1% in the previous quarter.

As I mentioned in September, we concluded an auction tender for $204 million, aggregate principal amount of two tranches of senior unsecured bond. The Series 2 bonds that totaled to $67 million will mature in September 2020 and bear interest at a fixed rate of 3.7% per annum. The Series 3 bonds totaled $137 million will mature September 2022 and bear interest at a fixed rate of 4.45% per annum. Both series are payable semi-annually. The bonds will be repaid at maturity in a single bullet payment. Both tranches received a rating of ilA+ from Maloot S&P in Israel with a stable outlook. From September 2016, we continued to repurchase from OFC noteholders, a $6.8 million aggregate principal amount of our high-cost OFC senior secured bonds.

In addition, we are currently finalizing the documentation related to the sale of minority interest in the second phase of Don Campbell power plant to Northleaf. Following the closing, Ormat Nevada will contribute Don Campbell to ORPD and Northleaf will buy their interest share for total amount of approximately $43 million. Closing is expected in a few weeks. On November 7, 2016, Ormat's Board of Directors approved payment of the quarterly dividend of $0.07 per share for the third quarter. The dividend will be paid on December 6, 2016 to shareholders of record as of closing of business on November 21, 2016.

That concludes my financial overview, I would like now to turn the call to Isaac for an operational and business update. Isaac?

Thank you Doron. Starting with Slide 17 for an update on operations. We delivered double-digit top and bottom line growth, excluding non-recurring and non-operational items during the third quarter, clearly demonstrating that we are making solid progress against our multi-year strategic plan. Generation increased by 10.8% from [1.1 million] megawatt hours in the third quarter of 2015 to 1.3 million megawatt hours in the third quarter of 2016, mainly to the commencement of the commercial operation of the second phase of Don Campbell power plant in Nevada and our Plant 4 at Olkaria III complex in Kenya, as discussed previously.

In addition, generation was impacted by the consolidation of the Bouillante power plants in Guadeloupe, which we acquired on July 5, 2016 for approximately $20.6 million. Inorganic growth remains a key part of our strategic plan. As Doron mentioned, the acquisition and consolidation of Bouillante contributed to the revenue increase in the third quarter. And with few operational adjustments, we were able to immediately increase the output of this power plant from 10 megawatts to 13 megawatts. Our M&A team continues to look for similar opportunities in the geothermal industry as well as in the storage market.

Turning to Slide 18 for an update on projects under construction; we plan to add 150 megawatts to 180 megawatts by the end of 2018 by bringing new power plants on line and expanding existing plants. The expansion plan includes the Platanares geothermal project in Honduras in which construction and drilling activities are ongoing, and part of the equipment is already at site. We expect to reach commercial operation before the end of 2017. We also initiated construction of Tungsten project in Nevada. We expect Tungsten to generate 24 megawatts when it comes on line at the end of 2017. Drilling is ongoing, and we expect site construction to start before year-end.

Dixie Meadows is at earlier stage, drilling is ongoing and this project is expected to generate approximately 15 megawatts to 20 megawatts. We believe that both Dixie and Tungsten may qualify for the production tax credit. In Sarulla, Indonesia, the first phase is currently in the commissioning and fine tuning stage, but commercial operation date is expected to be delayed by a few weeks. The delay is the result of local riots, protesting the EPC contractor that caused a work stoppage. Work has resumed and we currently expect commercial operation of the first phase to begin in January 2017. For the second phase, engineering and procurement have been substantially completed. Site construction is in progress and all of the equipment to be supplied by Ormat was delivered. For the third phase, engineering and procurement is still in progress. For third phase, engineering and procurement is still in progress, construction work at the site is in progress, and manufacturing of equipment to be supplied by Ormat is underway as planned. Drilling activities for the second and third phases are still ongoing. Based on the preliminary estimates, the project has achieved to-date approximately 80% of the required production and injection capacity. The operation of the second and third phases is still expected to commence within the 18 months, after the commercial operation of the first phase.

With respect to Rabbit Hill Energy Storage project in Texas, construction is ongoing, progress and completion is pending battery supply from Alevo. With respect to Carson Lake Project that was on hold for a long time now, we have completed the drilling of one well during the third quarter of this year, and currently analyzing the resource data. The projects I just described as well as additional projects under various stages of development are expected to support our expansion by the end of 2018. Besides the investment in new projects, we are continuing our exploration and business development activities to support future growth.

Turning to Slide 19, we continue to see opportunities and support for geothermal in the US. Recently two members of Los Angeles Council quoted legislation for 100% clean electricity for California's largest city. This may facilitate additional demand for our existing power plants, and for new power plants and may develop or acquire in California and Nevada. Another important development that may support our domestic growth relates to the release of Request For Information in August 2016 by the DOE.

The purpose of the RFI is to gather industry input on options available to the Federal Government for a potential aggregated power purchase of 100 megawatt to 250 megawatt of new construction for geothermal electricity generated in the Salton Sea area in California. The Request For Proposal is anticipated towards the end of 2017. Another aspect of our growth plan is to explore new targets and increase our prospects inventory for future growth. In October, we participated in the BLM geothermal competitive lease sale. We acquired seven new leases in Nevada and Utah. Additionally, we obtained five new private and federal leases in Nevada and California from the beginning of this year.

If you could please turn to Slide 20, you will see that our CapEx requirement for the balance of 2016 stands at approximately $77 million. We plan to invest a total of approximately $57 million in capital expenditure on new projects, under construction and enhancements. An additional, approximately $20 million are budgeted for exploration activities, development of new projects and maintenance CapEx for operating projects. In addition, $21 million will be required to debt repayment in 2016.

Turning to Slide 21 for an update on our product segment. We continue to win orders and strength our backlog, which as of today stands at approximately $204 million. In addition, we are finalizing contract with an aggregated amount of approximately $100 million, for which we already received down payments and set delivery dates. We are also happy to announce that we signed for the first time a contract in China. We entered into a supply contract for a 16 megawatt geothermal project with a local private enterprise. Under this agreement, Ormat will supply air-cooled Ormat Energy Converter to this project, which is expected to be completed at the second quarter of 2017.

In addition for the first time, Ormat will provide conceptual and reservoir engineering as well as geologic services, which will assist our customer to maximize its return on investment. We are very excited to provide our equipment to China and view this contract as another demonstration of our strategic focus in expanding our global footprint to enhance our growth. Being a vertically-integrated company enables us to leverage our capabilities and provide the customer our expertise from exploration and reservoir engineering to power plant design and equipment manufacturing and also supply.

Turning to Slide 22 for our 2016 guidance. Due to our strong year-to-date performance, we are increasing our 2016 full-year revenue and adjusted EBITDA guidance. For the year, we now expect total revenue to be between $637 million and $647 million. We expect revenue in our electricity segment to be between $422 million and $427 million. For the product segment, we narrow our range in the guidance and we expect revenues to be between $215 million and $220 million. We expect 2016 adjusted EBITDA to be between $318 million and $323 million.

In summary, I'm very pleased with the strong results we delivered in the third quarter, so far in 2016. I'm increasingly confident that Ormat is well positioned for consistent success. We have improved our balance sheet, opened new opportunities to monetize our assets, grown our portfolio and improved operational efficiency to drive higher margins. We have a strong pipeline and a balanced robust portfolio and operational and third-party projects around the world.

Thank you for your continued support. Now, I would like to open the call for questions. Operator?

Thank you. We'll now begin the question and answer session. (Operator Instructions) Paul Coster, JPMorgan.

This is Mark Strouse for Paul. Thanks for taking our questions. So just a couple of questions if we can. Can you just give us an update on the partnership with Alevo for storage? I think the last we heard, we were targeting 10 megawatts of projects in Texas, is there anything new there? And then secondly, can you talk about any developments regarding the relationship with Mitsubishi? Thank you.

First of all the -- first, Rabbit Hill project, it's a frequency regulation project in Texas. It is, as you said, for 10 megawatts, which will go up to 12 megawatts and the expected COD was last week of December 2016. Unfortunately, it's going to be postponed for a few weeks because of late delivery of batteries coming from Alevo. I'm not expecting anything major at this stage. We will of course update if something will happen. So far, it's one of the projects that we are waiting keenly to deliver, because it's our first initiative in storage area. The second question, the joint venture that we have is with Toshiba and not with Mitsubishi, don't forget. We already delivered a few projects together with them during 2016. We are expecting additional projects in the upcoming years. Management is very happy with the joint venture. And these things, they take time until they flourish and as usual I'm very optimistic about that.

Dan Mannes, Avondale.

If you could give me a little bit more color on the products side. Can you walk through maybe some of the contracts awarded during the quarter, plus after the quarter from a structure standpoint, maybe a geography standpoint? And also, is China included in that number, is that incremental?

On the 204, China is included -- -- because it's a signed contract. Old 204 contracts are from New Zealand, Turkey, China and of course, Sarulla, Chile. So there are quite many countries in the 204. Then we have -- which is an abnormal situation for us, we have almost about $100 million of contracts, which those contracts are not yet signed, but they have MOUs and down payments and furthermore, delivery dates are set and we started to work on them even though the contracts are not signed. According to our revenue -- according to our backlog revenue policy, they're not in the 204. But it's the first time in my history in the last 2.5 years that we had so much unsigned contracts at the end of the quarter. So, we felt obligated to put them in a different basket and report them on the score. Obviously, beyond those $100 million that I'm mentioning, we have the normal course of business, we have more contracts in various different stages of negotiation. Those $100 million are mainly from US and Turkey.

And for the $100 million is this primarily EPC or is it primarily equipment or a mix? Turkey is usually equipment only but --

Yes, you're right. But in this particular case, as I mentioned in my previous answer, we also had some combined solutions with Toshiba. So it's a bit different than regular.

A couple other quick questions on the product -- on the power side. In terms of development, any update on Menengai, I know last quarter I think you pulled it kind of out of your short-term expectations, but we're still hearing I guess, GDC expects that to come on, so I don't know if there is any discussion there?

As far as I know, and nothing that I'm saying is 100% confirmed. We never got a steam report that confirms that there is 110 megawatts of steam in Menengai. So, so far without this report being submitted, it is impossible for three providers to provide each 35 megawatts of a power plant. So unless this will happen, and we will be sure that there is enough steam, we will not continue with our investments. But we are doing everything in our power to remain in the game and obviously, we are playing along and the rules of our contract and time will tell. That's where it stands today.

On the incremental development, On the incremental development, you noted that you had picked up some new leases through BLM. Can you maybe remind us how long it's been since you've participated in a lease and can you remind us maybe what's a realistic timeline for you to be able to analyze those, explore and then see if there are any real projects that could come out of them?

I will divide my answer into two parts. We all understand that in order to build a project, obviously, we need a lease, but also we need a PPA. So, the first thing will be to look for PPAs and I'm optimistic that contrary to last year, this year I can see that there might be some PPA opportunities in the US, both in California and in other places. That's why we are increasing the availability of greenfields that we have. If we will have -- and then we will start exploring those greenfield, usually, you know and I know that it takes more than two years to develop a greenfield from A to Z. But again, we know that out of the leases that we have, we can build a certain megawatt, the main issue still is to find those PPAs.

And then my final question, it looks like your CapEx for the year, it looks like it trend down a little bit from what you said last quarter, is this just maybe things deferring a little bit into 2017 or any projects kind of changing schedules beyond what you had previously mentioned?

It's mainly timing issues and delaying of few projects. There is nothing that we were planning to do when we decided not to at this stage.

Sorry, one last one. It looks like there was -- it looks like there was a -- it looks like you guys wrote-off some exploration expense this quarter. I know just that's part of exploring, you're occasionally going to write them off, but can you mention what project that relates or projects?

It's Twilight. I'm not sure that you are even familiar with the project. But it's -- we have -- as you know that we still have lots of leases way back from years. We have an initiative recently to go and check and simply wipeout anything that doesn't make sense to us in the future.

Noah Kaye, Oppenheimer.

Thank you for taking my questions and good to be here with you for the first time. So, I would like to if I could just start with the operational improvements. You mentioned increasing the effective capacity at Bouillante by 30% after you acquired it. I guess just generally across the portfolio we're continuing to see that operating leverage here on the power portfolio side. So can you maybe highlight a few key areas where you are seeing the benefit of the productivity focus now? And then maybe some areas that you think have real room for improvement from here?

First, thank you very much for your initiation of coverage, it's pretty much appreciated. And again, we are expecting almost -- we have started an initiative of enhancing our existing assets about two years ago, which is a process that's going on for the last two years. And we have -- a significant number of power plant already went through these enhancement processes, which affected our bottom line in the last two years.

And we expect the same thing also happening in Bouillante for this purpose. In the last quarter, we were unable -- we were able to increase manufacturing by 3 megawatts from 10 megawatts to 13 megawatts. We have an intention to go and enhance this power plant also during 2017 and 2018. As a matter of fact, we also have, in the contract, future earnings and so on based on those enhancements. And we are -- we will continue to do the same thing also in our existing assets that didn't went through the enhancement process yet. So overall, you can expect some kind of synergies coming out of those enhancements for the next few quarters.

And then just sort of for modeling purposes, as we look at 2017 and think about the quarterly cadence of some of the projects coming on line Bouillante, Platanares, Tungsten, when you think we should see a full quarter revenue on those projects?

Bouillante will be an ongoing enhancement during 2017 and 2018. There is a possibility even to reach to -- I think the highest numbers we can reach using the greenfield over there would be, we discussed in our previous call was about 48 -- 45 megawatts. And we are expecting Platanares and Tungsten to operate before the end of 2017.

Okay, before the end of --

Second half.

Second half, okay. And then just the last one I guess on the DOE RFI you mentioned. They published a pretty manageable bogie in terms of target LCOE. You mentioned that the -- in your, in your comments that the RFP would likely be at the end of 2017, can you just help us understand what's giving you visibility into that timetable and how competitive you would expect the bidding to be and where you see potentially your advantages as an incumbent operating in those areas?

It will be -- it will not be something serious for me to say today what will be the prices at 2018 to an RFP coming out at the end of 2017. But we know and you know that prices are affected from many things, mainly from solo development and it's very difficult to anticipate what that would be -- going to be the prices. Obviously, as one of the leading providers in California and Nevada, we are going to be a serious player on that and we will participate in the best. And we have assets -- operating assets as well as greenfield assets that we can bid. You'll realize that a mix of operating and greenfield assets will still enable us to compete on a different pricing.

(Operator Instructions) It seems we have no other questions at this time, so I would like to turn the conference back over to Isaac Angel for any closing remarks.

Good morning again and thank you very much for participating in this call. And as usual, I'm very optimistic and we will meet you all in February. Thank you very much.

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