Ormat Technologies, Inc. (ORA) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Ormat Technologies Second Quarter 2013 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Rob Fink of KCSA Strategic Communications. You may begin your conference.

Thank you, and thank you, everybody, for joining us today. Hosting the call 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 operations and are based on management's current estimates and projections of future results or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties. For 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 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 believes that EBITDA and 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's liquidity and when planning and forecasting future periods. This non-GAAP financial measure may also facilitate management's internal comparison to the company's historical liquidity. Before I turn the call over to management, I would like to remind everyone that the slide presentation accompanying this call may be accessed on the company's website at ormat.com under the IR Events & Presentations link that's found in the Investor Relations tab. With all that said, I would now like to turn the call over to Dita. Dita, the call is yours.

Thank you, Rob. Good morning, everyone, and thank you for joining us today for the presentation for our second quarter 2013 results and outlook for the near future. Starting with Slide 4. We are pleased with our performance this quarter across all areas of our business. On the electricity side, we continue to see the positive impact from the changes that we have made to our greenfield development process and improved operational efficiencies. On the product side, we generated exceptionally strong revenue, driven by the extensive work that was done this quarter. Electricity generation increased by approximately 13%, mainly as a result of new capacity that came online at the Olkaria complex in Kenya and McGinness Hills in Nevada. Moreover, the success of the recent development in the equipment design in McGinness Hills and Olkaria III complex allowed us to increase their declared capacity by 6 megawatts, bringing our fleet's total generating capacity to 595 megawatts. In light of our earnings expectations for the remainder of the year, the Board of Directors have voted to resume a dividend payment in accordance with the company's dividend policy. I would like to turn the call over to Doron to review the financial results. Yoram will then provide a review of our operation, and I will return for closing remarks before opening the call for Q&A. Doron?

Thank you, Dita, and good morning, everyone. Let me start by providing an overview of our financial result. During the quarter, we sold our stake in the 22 megawatt Momotombo geothermal power plant in Nicaragua. With the explicit exploration of the concession in our assumption that it is unlikely to extend the concession, we concluded that selling our stake maximizes the value of debt. As a result of the sale, in our financial statement, the Momotombo operations are extracted from the consolidated figure for the period and from the comparative figures and are included in discontinued operations as required by GAAP. Starting with Slide 6. Total revenues for the quarter ended June 30, 2013, increased 20.5% from $126.7 million in the second quarter of 2012 to $152.7 million this quarter. In our electricity segment, as you can see on Slide 7, revenues grew 7.1% from $81.9 million in the second quarter of 2012 to $87.7 million this quarter. This increase was the result of the contribution from our Olkaria III Plant 2, which started commercial operations at the beginning of May 2013, and the McGinness Hills power plant, which started commercial operation in July 2012. The transition into desirable energy rate in some of our California contract that occurred in May 2012 did not have a material impact on our segment revenues year-over-year. The impact year-over-year is minimal. However, the variable rate is still significantly lower than the fixed rate we had before May 2012. We were able to mitigate the consequence of this transition mostly by the growth in our other power plants. In the product segment on Slide 8, revenues in the second quarter of 2013 increased 44.9% year-over-year from $44.8 million in the second quarter of 2012 to $65 million this quarter. The exceptionally strong revenue this quarter is a result of us making strong progress on a number of contract we signed in previous quarter. Our backlog as of August 6 stands at approximately $170 million before deduction of revenues recognized in June 30, with approximately $90 million to $100 million for recognition in 2014. Moving to Slide 9. The company's combined gross margin for the second quarter was 33% compared to 30.2% in the second quarter of 2012. The electricity segment gross margin was 33.1% for the quarter compared to 30.9% in the same period last year. In the product segment, gross margin for the second quarter was 32.8% compared to 29.0% in the same period last year. The interest in the product gross margin is mainly attributable to increase in revenues and different margins in the various sales contracts. Moving to Slide 10. Operating income in the second quarter of 2013 was $37.9 million compared to $24.4 million in the second quarter of 2012. The increase was primarily attributable to the increase of gross margins and revenues in both the electricity and product segment. Moving to Slide 11. Interest expense, net of capitalized interest for the second quarter, was $17.5 million compared to $14.3 million in the same period last year. The $3.2 million increase is mainly attributable to an increase of $1.3 million in interest expense related to the sale of tax benefits and a $2 million decrease related to interest capitalized to projects. On Slide 12. On July 15, 2013, we have completed the conversion of the debt facility with OPIC from a floating interest rate to a fixed interest rate. The conversion applies to both branches of the facility, which is being used to finance Olkaria III complex in Kenya. The average fixed interest rate for the total $233 million outstanding principal amount is 6.31%. The annual combined average interest rate on our total debt, 6.2%. Moving to Slide 13. Net income for the quarter was $25.2 million or $0.55 per share compared to a net income of $8.6 million or $0.19 per share in the second quarter last year. Net income, excluding a gain related to oil and gas derivative instruments of $3.6 million in the second quarter of 2013 and $3.8 million in the second quarter of 2012, and excluding a $3.6 million after-tax gain on the sale of Momotombo plant in Nicaragua in the second quarter of 2013, was $18 million compared to $4.8 million or $0.40 per share compared to $0.11 per share. As shown in the following slide, Slide 14, adjusted EBITDA for the quarter -- for the second quarter of 2013 was $69.7 million compared to $50.8 million in the same period last year. Moving to Slide 15. Cash, cash equivalents and short-term bank deposit as of June 30, 2013, were $31.9 million. The accompanying slide breaks down the use of cash during the 6 months. Our long-term debt as of June 30, 2013, and the payment schedule are presented in Slide 16 of the presentation. And as Peter mentioned in the opening remarks, on August 6, 2013, Ormat's Board of Directors approved the payment of a quarterly dividend of $0.04 per share pursuant to the company's dividend policy, which targets an annual payout ratio of at least 20% of the company's net income after satisfying the clawback provision. The dividend will be paid on August 29, 2013, to shareholders of record as of closing of business on August 19, 2013. The company expects to pay a dividend of $0.04 per share in the next quarter. That concludes my financial overview. I would like now to turn the call to Yoram for an operational update. Yoram?

Thank you, Doron, and good morning, everyone. Starting with an update on our project pipeline, Slide 18. In Wild Rose, the equipment's fabrication is in advanced stage and site construction is in process. We expect to complete our work before the end of this year. At the Mammoth Q1 plant, we had removed all of the old equipment, and the new equipment is being constructed on site. There's an expectation that this will also be completed by the end of the year. Heber Solar is in construction, and we believe that the actual time line will be dictated by the interconnection facilities, which are done by others, and are currently expected around the end of the year. For 2014, we expect to bring online the 16-megawatt Plant 3 of the Olkaria III complex in Kenya. The equipment is on its way to the site and the field development continues. As for the Heber 1 enhancement, we're in the procurement phase of the components for the [indiscernible] and expect to complete our work in the first half of 2014. On Slide 19, you can see the list of projects in various stages of development. The cumulative generating capacity of these project is approximately 117 megawatts. As we stated before, 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. Moving to Slide 20. We have 41 prospects in early exploration. Forward activity has yet to begin in the U.S., Chile, Guatemala and New Zealand. Slide 21 provides for an update on the product segment. As of August 6, 2013, our product backlog is approximately $170 million. Backlog includes a Thermo 1 project that was successfully completed during the second quarter. Recognition of revenue from this project is based on the client's payment. We expect that a portion of the revenue will be recognized this year, and the rest is expected in 2014. Let me turn the call over to Dita.

Thank you, Yoram. If you could please turn to Slide 23. Our estimated capital needs for the remainder of 2013 includes approximately $106 million for capital expenditures on new projects under development and construction, exploration activities, operating projects and machinery and equipment, as well as $49.5 million for debt repayment. As you can see on the right side of the slide, we have sufficient capital sources to support needs. Investing in our business to generate additional capacity and impose additional efficiency -- operational efficiency continues to be our top priority. However, the board is closely monitoring recent capital market activity in evaluating all available alternative that may help maximize shareholder value. Given our current generating capacity and the tax attributes of our business, the idea of creating an MLP, [indiscernible] or similar structure is something that interests us. However, we are analyzing the potential opportunity further to determine how specifically this type of structure would benefit our shareholders and fit in with our current capital structure and long-term strategy. While it is still premature for me to comment on this subject any further at this time, it is something that we are exploring and will continue to evaluate. Turning to Slide 24, which presents our revenue forecast for 2013. For the full year 2013, we update our electricity segment guidance following the sale of the Momotombo project, which reduced our expected revenue for 2013 by $11 million. We expect the electricity segment revenues to be between $325 million and $335 million. In the product segment, we are increasing our guidance to be between $185 million and $195 million. The total revenue for the full year 2013 is expected to be between $510 million and $530 million. As we look to the future, the outlook for the international market continues to be promising, as does the outlook for development in the U.S. Two recent developments in particular have increased our optimism for the international market. In June, President Obama announced the Power Africa Initiative, pursuant to which the United States will invest up to $7 billion in Sub-Saharan Africa over the next 5 years with the aim of doubling access to power. The program will partner the U.S. Government with the government of 6 sub-Saharan countries, among them are Kenya, Ethiopia and Tanzania, detailing potential for geothermal energy. We anticipate much of the program would be focused on expanding generation from renewables. This initiative, followed by the previously announced U.S.-Asia Pacific Comprehensive Partnership for a Sustainable Energy, which is committed to increase access to electricity across Asia, contributes to that optimism in the international market. Also in June, President Obama outlined an agenda to reduce carbon emissions, directing the EPA to complete new pollution standards for both new and existing power plants, an initiative that will support continued renewable energy development in the U.S. At the state level, we continue to see government implement legislation to support new [indiscernible] development. In the last legislative session, Nevada passed a series of new laws that are expected to continue to support renewable development in this state by freeing up new capacity from retiring coal plants, updating renewable energy credit requirements, and restructuring tax abatement for local areas. We look forward to keeping you updated on new developments as we achieve additional milestones. I would like to thank you for your support. And at this time, I would like to open the call for questions. Operator?

[Operator Instructions] And the first question comes from Dan Mannes.

So a couple of quick questions here. First of all, I guess in the last quarter, Yoram had noted you'd seen some transmission constraints down in Southern California. Can you comment is that something that impacted you at all in the second quarter? And is that mostly abated, or was that a continuing problem?

The work on the transmission line was completed before summer peak. So there was some impact on -- I guess some impact in April and a little bit, I think, the first week of May. But we -- it was not as substantial as in the first quarter, and so the impact on us was very limited. The work, we don't expect that work to happen during the summer peak months. It may resume during the winter months, but we think that we're better equipped to handle this today.

Got it. Second question on the product side, obviously, very strong quarter from both the revenue and margin perspective. Number one, how much of that is impacted as you get pretty close to closing down the big New Zealand project? And number two, what do you see as the, I guess, the pipeline of opportunities in terms of filling that backlog back up some more for next year and the following years?

I think that in -- I can't provide you with the precise sense here, but I think that although the New Zealand project was very, very large, it's -- if you look at this on a 2-year scale, which is roughly the time line for the project, it amounts to, I don't know, somewhere between 1/4 and -- a 1/4 and 1/3, I think of the overall business, something like that. So I think that, yes there's -- the New Zealand project had an impact, but it's not -- the results are not really driven by that project. I think that we were -- we had very good success on the product side in the last few years. And again, it's -- we constantly said that we don't expect it to be at the same huge volume as we had in previous years. But I think that it's a -- we -- there is reason, too, for optimism that we will be at least at our average, if not a little better going forward. Because in some areas of the world, the market is certainly strong and there is a big project that we hope to work on in the not-too-distant future.

You mean Sarulla or something different?

Yes, yes.

Okay, got it. I don't want to say lastly, but I'd probably drop in queue after this. But, Dita, first of all, thank you very much for commenting on the yield cost [ph] structure. That's obviously something I think the industry and certainly we've been looking at. I was wondering, and I know this is probably an early stage of evaluation, but even at this point, are there either any plants or structure that you currently have that would be problematic? Or are there any obvious red flags as to why this might not work for you as you look forward?

It's a little premature for me to comment on it, Dan, because we are still analyzing it. But from a preliminary look at it, the MLP, whether their legislation will pass or not pass, it is not clear that for a renewable energy company with so much tax credits that we have in any way that really we need the MLP in order to demonstrate, if you will, sale of the value or not. But other than that, it's just too early to comment.

Okay. I guess -- the one question I guess was the international assets. I know at least in energy structure, it was, I believe, all domestic. I wasn't sure if there were any constraints you saw on the international side as to these types of vehicles or, again, is that premature?

It's premature, but legally, there are no constraints.

The next question comes from Mark Barnett.

You had mentioned, obviously, the Sarulla project. And with the progress that's being made up to this point, do you expect that that's probably going to be something that shows up more in 2014, or might we begin to see revenues from that project in the second half of this year?

No, not in the second half of this year. The schedule -- first of all, the project is continuing on schedule, and the schedule is to reach financial close in April of 2014. So revenues will be recognized only after financial close.

Great, okay. And then on the generation margins, obviously, those were very strong. And despite the fact that you had a decline in your average rate, is that just more the inclusion of your new or more efficient projects, or is there work that's being done across your fleet to maybe drive some efficiency?

The answer -- the drive for efficiency is always a top priority for us, and we had some successes in this quarter as well. But I think that the biggest driver is the fact that our strategy on project development and the type of power plant construction is one that is supposed to provide us with better margins on the new plants, and this is actually happening. As we add capacity in those areas, we see the positive influence on the margins.

Great. One last small item I guess. But I'm curious about the Amatitlan work that's being done. Will the work over impact capacity going forward in either direction, or is this just keep it at current output?

This is to maintain the existing output.

[Operator Instructions] And the next question comes from Gregg Orrill.

Just a follow-up to the discussion around MLP and other vehicles and your valuations. Just wondering if there is really a time line that you are looking at in terms of the work that you're doing, or is it really determined on external events in the market? Or how are you thinking about that?

It's a -- we're still in the analysis phase, so it's really premature to determine a time line when you are in the analysis place. But as you know us, once we decide to do something, we would do it.

Next question comes from Dan Mannes.

I guess I'm back for more. One thing I was going to ask on is, as it relates to both California and Hawaii, what's the current strategy that relates to hedging as you start think about '14 and beyond, particularly as we've seen a pullback in natural gas prices?

As you know, we are hedged till the end of this year. We are looking in monitoring the oil prices on a regular basis. And once we start our budgeting process for next year, we'll see exactly the photo that we have. And taking into account, obviously, the pricing, we'll see, will determine our hedging policy.

Okay. I guess the follow on to that is, how much of it does that play into whatever discussions you maybe having at least on, I believe it's Eno 1[ph] Of Heber that as a contract rolling off in '15? Any progress there, or do we think we'll have to wait a lot closer to the expiration of that contract before we can start talking about replacement?

So as far as Heber 1, the -- our offtaker disclosed that they have signed a PPA with us. I believe that the details were not disclosed. But for Heber 1, there is a submission at the end of the existing PPA line.

Okay, there's -- so you'll be accepting -- you'll be dealing with variable for the next 18 months and with hedges [indiscernible] again?

Yes. Heber 1 will be affected by whatever happens to Asrac [ph] until the end of its contract in 2015.

Got it. And then the last question on the CapEx side. You guys -- Dita gave us an update on the CapEx schedule. It looks like actually your construction of new projects, it looks like it's down a bit more than we thought. At the end of the first quarter, you expect to spend about $124 million through the balance of the year. Now you're only looking to spend $67 million till the end of June, and I don't think you spent $60 million during the second quarter. So I was wondering if you kind of change your schedule in terms of construction, is something either moved to '14 or sort of come out?

No. No, we didn't say -- certainly, we didn't change in the last quarter. It's the same program. I don't have the math in my head to comment on it, but I don't think there is a reduction.

Okay. I guess the one thing I would add on there is as it relates to Mammoth, I think you've gotten pretty close to getting your permits on Mammoth. I wasn't sure if you were -- if you had a change in schedule on that project?

No, I mean the portion of Mammoth that is under construction right now is the enhancement of G1 and G3. We still don't have the permit for the CD4.

Okay. Sorry, I thought there was some pretty significant progress on the EIS on CD4.

There is progress but not enough.

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