Ormat Technologies Inc (ORA) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Ormat Technologies Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I will now turn the conference over to Rob Fink of Hayden IR. Please go ahead.

Thank you, operator. Hosting the call today 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 relating to current expectations, estimates, forecasts and projections about future events that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company's plans, objectives and expectations for future operations and are based on management's current estimates, 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 Technologies annual report filed on 10-K 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's reasons for presenting such information is set forth in the press release that was issued last night as well as in the slides that are posted on the website. Because of these -- because these measures are not calculated in accordance with U.S. 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 presentation link that's 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. Ormat remains on pace for a strong year as we continue to expand our portfolio, improve our operational efficiency and position our business to deliver consistent, profitable growth. In the third quarter, we delivered growth in both revenue and profitability for our electricity segment. This was as expected, partially offset by product revenue fluctuations resulting in significantly lower revenues and margins year-over-year. However, for the full year, we are on track with our revenue and margin expectations. Given our solid results for the first 9 months of the year, and our visibility into the fourth quarter, we remain confident in our full year outlook. We are reaffirming our financial guidance and narrowing ranges of possible outcomes, which I believe -- which I will elaborate later in the call. We are also on course with our growth plans, and towards the end of the third quarter, our Platanares power plant in Honduras commenced operation. We are in the final stages of startup at Tungsten Mountain in Nevada and we expect it to come online before the end of 2017.

We believe that both Platanares and Tungsten Mountain will contribute to 2017 results and undoubtedly will provide a meaningful contribution to 2018 results. I will turn the call over to Doron for a review of the financial results before I provide an update on our operations. Doron?

Thank you, Isaac, and good morning, everyone. Starting with revenues on Slide 6. For the third quarter of 2017, total revenues were $157.2 million compared to $184.6 million last year. This decrease was primarily attributable to a decrease in our product revenue of 40%, which was partially offset by 2.3% increase in electricity segment revenue compared to the corresponding period in 2016.

Moving to Slide 7. Revenues in our electricity segment were $112.3 million in the third quarter of 2017 compared to $109.8 million in the same period last year. This increase was primarily attributable to an increase in generation at our Bouillante power plant in Guadalupe due to the successful improvement of the resource performance and power plant operations. Additionally, at our Puna power plant, the successful improvement of the resource performance also contributed to generations and revenue increase this quarter. The increase was also due to the partial contribution of $1.6 million from the Platanares power plant in Honduras, which commenced operation towards the end of September as well as initial revenue of $1.4 million generated from our demand response and storage activity. The increase in revenue was partially offset by decrease in generation at some of our power plants, which we needed to take off-line to address maintenance issue.

Moving to Slide 8. Third quarter 2017 revenues for our product segment was $44.9 million, down 40% compared to $74.8 million for the same period last year. As Isaac mentioned, quarterly fluctuation in our product segment do occur and may cause lower revenue and probability on a quarterly basis. The decrease is primarily due to lower revenues as a result of new completion of our contracts in Chile and Sarulla in Indonesia and other projects in Turkey, which were completed during 2016. The decrease was partially offset by revenue recognition of $34 million in the third quarter 2017 for projects in Turkey that started this year.

Moving to Slide 9 for a look at our gross margin. For the third quarter, combined gross margin decreased from 40.3% in the third quarter of 2016 to 37.7% in the third quarter of 2017, mainly due to the reduction in the product segment launch.

Our electricity segment gross margin increased to 41.4% in the third quarter of 2017, up from 39.4% in the same period last year, primarily due to the Puna and Bouillante performance and due to our ongoing efforts to improve efficiency.

In our product segment, gross margin decreased from 41.7% to 28.3% in the third quarter of 2017. As we indicated in previous call, we anticipated that for the product segment, the second half would be lower than the first half in both revenues and margins. And for the full year, we are in line with our revenues and margin expectation of normalized level between 30% to 35%.

Moving to Slide 10. Operating income for the third quarter of 2017 was $44 million compared to $48.2 million for the third quarter of 2016, an 8.8% decrease year-over-year. The decrease in operating income was primarily attributable to a decrease in product segment revenue and gross margin, partially offset by a decrease in G&A expenses. The decrease in G&A expenses was mainly due to $11 million expense in the third quarter of 2016 related to a claim settlement, which was partially offset by G&A expenses from demand response and storage activity.

Operating income attributable to our electricity segment for the third quarter of 2017 was $36.2 million compared to $23.9 million in the third quarter of 2016. 2016 third quarter operating income attributable to our electricity segment, excluding the $11 million onetime expense, was $34.9 million. Operating income attributable to our product segment was at $7.8 million in the third quarter of 2017 compared to $24.3 million in the third quarter of 2016.

Moving to Slide 11. Our strong financial performance, year-to-date, has enabled us to take specific steps to streamline our capital structure and strengthen our balance sheet. The result is a meaningful decrease in our interest expense. For the third quarter of 2017, net interest expense was $11.7 million compared to $17.1 million for the third quarter of 2016, which represents a 31.8% decrease. This decrease was primarily due to the repayment of $250 million of our senior unsecured bonds in September 2016, with both fixed interest rate of 7%, the issuance of 2 new series of senior unsecured bond, which bear an average interest rate of 4.2%.

The decrease is also due to lower interest expense as a result of principal payments of long-term debt and revolving credit line with bank, as well as deals with a $2.1 million decrease related to an increase in interest capitalized to projects. The decrease was partially offset by interest expense related to Don Campbell I project finance debt.

Please turn to Slide 12. Other non-operating expense, net for the third quarter of 2017, was $1.6 million and includes a make whole premium of $1.9 million on the full prepayment of $14.3 million aggregate principal amount of our OFC Senior Secured Notes and $11.8 million aggregate principal amount of our DEG loan, which bore relatively high interest rate of 8.25% and an average rate of 6%, respectively.

The $5.5 million other nonoperating expense net for the third quarter of 2016 includes prepayment fees of approximately $5 million related to the prepayment of the senior unsecured bonds in September 2016, and a make whole premium of $0.6 million resulting from the repurchase of $6.8 million aggregate principal amount of our OFC Senior Secured Notes.

Please turn to Slide 13. For the of third quarter 2017, net income attributable to the company's stockholders was $19.2 million or $0.38 per diluted share, compared to $12.1 million or $0.24 per diluted share for the third quarter of 2016. Adjusted net income attributable to the company stockholders and diluted EPS, excluding $1.9 million or $0.04 per diluted share related to the make whole premium as I just described, was $21.1 million or $0.42 per diluted share compared to adjusted net income attributable to the company's stockholders of $28.1 million or $0.56 per diluted share in the third quarter 2016.

Please turn to Slide 14. Adjusted EBITDA for the third quarter of 2017 was $76.4 million compared to $85.4 million in the same period last year, which represents a decrease of 10.5%, mainly related to the product revenue results year-over-year. Adjusted EBITDA for the electricity segment was $65.7 million compared to $60.5 million and represents 8.6% increase year-over-year. Reconciliation of the EBITDA and adjusted EBITDA are described on the appendix slide.

Turning to Slide 15. Cash and cash equivalents as of September 30, 2017, were $77.2 million compared to $230.2 million as of December 31, 2016. The accompanying slide breaks down the use of cash year-to-date. As you can see, we generated $166.5 million in cash from operating activities during the first 9 months of 2017.

Our long-term debt as of September 30, 2017, was $906 million, net of the first financing costs. And its payment schedule are presented in Slide 16 of the presentation. The average cost of debt for the company was 5%.

On November 7, 2017, Ormat Board of Directors approved the payment of a quarterly dividend of $0.08 per share for the third quarter of 2017. The dividend will be paid on December 5, 2017, to shareholders of record as of close of business on November 21, 2017.

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

Thank you, Doron. Starting with Slide 18 for an update on operations. Generation this quarter was positively affected from Puna and Bouillante as Doron described, as well as from Platanares coming online. The overall generation of the quarter decreased by 2.2%, mainly due to lower generation at some of our power plants that we needed to take off-line to address maintenance issues.

Turning to Slide 19 for an update on our backlog. As of November 7, 2017, our product segment backlog stands at $182 million. We were able to sign new contracts in Turkey, which continue to represent a significant share of our total backlog. Additionally, for the first time in a decade, we received an order from EDC in the Philippines. We are targeting the Philippines as a market with a potential for our product sales and we believe this order will open the door for more opportunities in the region. The new orders are strengthening and supporting our product segment revenue in 2018.

Turning to Slide 20. In September, we commenced commercial operation of our 35-megawatt Platanares geothermal plant in Honduras. Our first in this country. Following the COD, the 15-year BOT contract we signed with a local developer is now in effect. Platanares serves its power under 30-year power purchase agreement with the national utility of Honduras and is expected to generate approximately $33 million in annual revenues. Platanares represents a significant milestone both for Honduras as the first geothermal power plant in the country and to us, in our international growth plans. As in the case with any new project, particularly in a new region, where regulations, standard practices and business customs can be unfamiliar, there are risks and opportunities to be managed. We are working through initial customary matters and thus far, we are very pleased with the plant operations.

Subsequent to the quarter end, we announced that the second unit of Sarulla geothermal power plant commenced commercial operation and expanded the generation capacity of the entire plant to 220 megawatts. Ormat share represents 28 megawatts, which its financial results are recorded under unconsolidated investment. The Sarulla plant includes 3 units of approximately 110 megawatts each, utilizing both stream and brine extracted from the geothermal field to increase the power plant's efficiency. The first unit commenced operation earlier this year, and we expect the third unit to commence operation during the first half of 2018.

Turning to Slide 21. As I mentioned in my opening remarks, we are in the final stages of site construction of the 24-megawatt Tungsten Mountain geothermal project in Nevada. We expect the project to be online before the end of 2017. And upon its commencement, our portfolio will reach 800 megawatts. Also in Nevada, we are developing the Dixie Meadows project, which is in earlier stages of development. Following drilling results, we have concluded that injection well should be located in an area which is currently designated as protected land. We are now petitioning for a change in that designation. We remain on track with our near-term target towards between 150 megawatt and 160 megawatt by the end of 2019. From the third unit of Sarulla in Indonesia; our expansion at Olkaria, Kenya; the third phase of McGinness Hills in Nevada; the expansion in Bouillante, Guadeloupe; and from other projects that are under various stages of development.

We also continued to expand our development inventory and add new prospects to support our future growth. About 2 weeks ago, we participated in the BLM lease auction and won 8 parcels including land that increased existing projects' acreages as well as land for new projects. We are progressing with our storage activity as well. We are participating in RFPs domestically in the East and West Coast as well as internationally. We are focused on expanding our development pipeline in the U.S. and internationally, and we have already released for construction as -- home storage projects of 1-megawatt in New Jersey.

Turning to Slide 22. Our estimated capital needs for the remainder of 2017 include approximately $72 million for construction of new projects and enhancements of our existing power plants. In addition, we estimate approximately $10 million for maintenance CapEx, for operating power plants and for exploration activities. In the aggregate, we estimate total capital expenditures of approximately $82 million. In addition, we expect $16 million for debt repayment for the remainder of 2017.

Please turn to Slide 23 for a discussion of our 2017 guidance. We remain confident in our full year outlook, and we are narrowing our guidance range and slightly increasing the expectations for the total revenue and adjusted EBITDA. Based on increasing visibility into our fourth quarter results, we expect total revenues between $686 million and $696 million. By segment, we expect electricity segment revenues between $463 million and $468 million, and product segment revenues between $223 million and $228 million. We expect adjusted EBITDA between $343 million and $348 million. And we expect annual adjusted EBITDA attributable to noncontrolling interest to be approximately $23 million, consistent with the previous guidance. Long term, as we presented at the analyst and investor day we held in September, we are moving forward with our strategic plan to achieve continued profitable growth as we laid out in our targets for 2022.

I would encourage any investors to listen to the webcast of the event, which is archived on the Investor Relations section of our corporate website.

This concludes our prepared remarks. Now, I'd like to open the call for questions. Operator?

(Operator Instructions) Our first question comes from Paul Coster with JPMorgan.

I do apologize. I missed your comments around the auction that you participated in. Can you just elaborate, please?

Yes. We participated on a BLM auction few weeks ago. And when 8 new parcels, mainly Nevada, and this will be used as our future growth prospect in greenfield.

Okay. Got it. Slight disappointment around electricity revenues for this quarter. Sounds like it's owned to maintenance. What kind of maintenance was it? Is it the kind of maintenance that then subsequently yields higher energy revenues than anticipated? Was it planned maintenance? If you can just give us some color there, that would be helpful.

We had few planned maintenance shutdowns in our few power plants, which were expected. But on top of them, we had also few unplanned issues that were raised in few of our power plants. By now, all of them but one are already solved and the power plants are back to operation. And the last one, we expect to be online by December 1.

Okay. But they won't actually increase the yield relative to the prior?

They will eventually, as we indicated, will bring the expected revenues to the ranges that we indicated during the call.

Okay. Got it. And then finally, Philippines, which I think, there has been some development, bank activity around the -- perhaps signal that this would happen. Was ORIX involved? And what kind of opportunities are we talking about? You think it's another Turkey like situation? Or do you anticipate getting involved in development and subsequent ownership of projects?

Paul, it is not like in Turkey. But it will be mainly product sales. We are -- in Turkey, as you know, most of the opportunities are greenfield. In the Philippines, we are mainly talking about enhancement of existing power plants and mainly bottoming units that we're working for a long time. But now, this thing is coming into fruition. And as indicated in the call, we already got the early call order from one of the operators in the Philippines. And we expect and we are dedicating a team of people to bring more product revenues from the Philippines for '18 and '19.

(Operator Instructions) The next question comes from Noah Kaye with Oppenheimer.

Start with the project pipeline, I think the timing looks pretty consistent with what you provided in the second quarter. Only difference, you're picturing that as in you called that out in your prepared remarks. Could you touch on how many more projects you've got PPAs for that aren't on this slide and in particular, international projects? That was something you discussed at the Analyst Day, but just some metrics around that would be helpful.

So we are talking about the electricity projects, Noah. Then the Tungsten Mountain, no doubt, is on the SCPPA portfolio and its PPA. Basically, all the projects that I mentioned today are already -- they already have PPA for.

Yes. The question is how many more projects do you have PPAs for that are not on that slide?

Okay. We have to fill 185 megawatts for SCPPA within the next 4 years. So if -- through a quick calculation, we still have a long way to go both through greenfield and brownfield. So the PPA, specifically in the U.S, is not an issue for the upcoming years.

And internationally, can you comment to that?

Internationally, today, the main prospects are: Kenya, that we already have a PPA for the next enhancement; we are working on a new PPA for the expansion of Bouillante; we are expecting very soon a new PPA in Honduras; and as I mentioned before, we're working diligently on a large PPA in Ethiopia.

Great. You know, I think just looking at the quarter, some interesting dynamics around working capital. Maybe that's probably moving Sarulla through, but there was a big step-up in receivables. Can you comment to that, and when you maybe expect working capital to swing back more favorably?

You know, as project evolve -- we don't have today any specific location with things that worry us that require any provision. There is always questions on timing of payment of specific invoices. Sometimes, it come just before the end of the quarter; sometimes, they come a bit after. But on an overall basis, we don't see any specific issue that we're not able to cope with.

Okay. And maybe as a follow-up, you noted that the cash balance was down significantly since the start of the year. You talked in your prepared remarks about kind of the CapEx and debt repayment needs. But can you update us, maybe, a little bit longer term, call over the next 5 quarters, on what you think that your capital needs will be? And what your liquidity position is, ability to fund your plant expansions and the likes?

If you will look in '16 and '17. So In '16, we have a few final things that -- deal that we did. And in 2017, we had only the tax equity transaction at the beginning of the year. We didn't finance, as of now, any projects. And that's why you see the reduction in cash. We are in various discussions on new financing. Our Honduras power plant is not financed yet and we're on the final stages of getting finance for it, which would be a significant amount. And in addition to that, we're working on another financing. In the U.S, though, I would say that in the next few months, maybe 2, 3 months, we should expect 2 significant financing to be done. On capital expenditures, going forward, you saw the plan, the growth plan that we have. So we definitely expect McGinness 3 to seal quite a lot of capital. It's a big power plant similar to Olkaria and Bouillante. I think this year, in general -- the history represents somehow the future. And obviously, we'll come with specific numbers in February.

Okay. Great. And then if I could just sneak one more. You talked about kind of getting closer on the finance. And broadly, for international projects, how should we think about kind of nonrecourse debt rates on geothermal plants?

We -- what we try to do with the financing outside of the U.S. is to work with OPIC, DEG, JBIC and Sarulla, so the financing -- nonrecourse financing has -- when utilizing these institutions -- financial institutions, you know you get lower interest. Obviously, they're much higher than in the U.S. If it's in the U.S. you can finance a project 4.5%; outside of the U.S., it would be higher. But it comes from multinationals.

We also expect some kind of a help coming here from ORIX's shareholders that, obviously, based on our commercial agreement, will be adding some help here.

This concludes our question-and-answer session. I would now turn the conference back over to Isaac Angel for any closing remarks.

Thank you for participating in this morning's conference call. As usual, we remain optimistic for the future. And I thank you very much for your ongoing support and help. Thank you very much.

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