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Executives

Rob Fink - Vice President of Investor Relations

Yehudit Bronicki - Chief Executive Officer, Director, Chairman of Compensation Committee, Chief Executive Officer of Ormat Industries, President of Ormat Systems, General Manager of Ormat Industries and Director of Ormat Industries

Doron Blachar - Chief Financial Officer

Yoram Bronicki - President, Chief Operating Officer, Director, Member of Nominating & Corporate Governance Committee and Director of Ormat Industries

Analysts

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Gregg Orrill - Barclays Capital, Research Division

Ormat Technologies (ORA) Q3 2013 Earnings Call November 6, 2013 9:00 AM ET

Operator

Hello, ladies and gentlemen, and thank you for waiting. Welcome to the Ormat Technologies third quarter earnings call. [Operator Instructions]

Without further ado, it is my pleasure to turn the floor over to your host Mr. Robert Fink. Mr. Fink, the floor is yours.

Rob Fink

Thank you, and thank you all, 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 operation 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 the Ormat Technologies annual report on Form 10-K filed with the SEC on March 11, 2013.

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 slide posted on our website. Because these measures are not calculated in accordance with U.S. GAAP, it should not be considered in isolation from our financial statement 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 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.

Yehudit Bronicki

Thank you, Rob. Good morning, everyone, and thank you for joining us today for the presentation for our third quarter 2013 results and outlook for the near future.

Starting with Slide 4. We are very happy to report another quarter with good results. In the electricity segments, we continued our ongoing effort to improve operational efficiency and investment return by optimizing existing plants adding [indiscernible] incremental new capacity. The operational improvement, along with the full contribution of the 36-megawatt Olkaria III Plant 2 resulted in an increase in the total gross margin by 75 basis points to 30.4%, as well as an increase of approximately 25% in the adjusted EBITDA for the quarter. This continuous improvement is also reflected in the 9 months adjusted EBITDA with an increase of $25.2 million over the same period last year.

In the product segment, we successfully completed the world's largest binary geothermal plant, the 100 megawatt Ngatamariki in New Zealand and turned it over to our customer. As Doron will discuss later in the call, the results of the project exceeded expectation.

Looking ahead, we have a number of positive developments on the horizon and we bring new capacity online, replaced legacy PPAs with no favorable agreements, and secure new contracts in our product segment.

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 would like -- will return for closing remarks before opening the call for Q&A. Doron?

Doron Blachar

Thank you, Dita, and good morning, everyone. Let me start by providing an overview of our financial results for the quarter ended September 30, 2013. Starting with Slide 7. Total revenues for the quarter reached $130.7 million. In our electricity segment, as you can see on Slide 8, revenues grew 14.7% to $89 million this quarter primarily due to the Olkaria III Plant 2 contribution which started commercial operations at the beginning of May 2013. During the quarter, we continue to take actions to mitigate the impact of natural gas prices on our electricity segment through our hedging activity and entered into swap transaction at the fixed average price of 4.07 medium BTU throughout 2014.

In the product segment on Slide 9, revenues in the quarter decreased 23.6% year-over-year to $41.8 million. The decrease was primarily due to the completion of the Ngatamariki geothermal project in New Zealand earlier this year.

Moving to Slide 10. The company's combined gross margin for the third quarter was 30.4% compared to 22.9% in the third quarter of 2012. In the product segment, gross margin for the third quarter was $12.1 million or 29% compared to $12.6 million or 23% in the same period last year. The increase in the product gross margin is mainly attributable to different margins in the various sales contracts [ph]. In the electricity segment, gross margin for the third quarter was $27.6 million or 31.1% compared to $17.7 million or 22.8% in the same period last year. The increase in the gross margin is mainly due to the successful development and design implemented in the new capacity brought online.

Moving to Slide 11. Operating income in the third quarter was $29.8 million compared to $12.1 million in the third quarter last year. The increase was primarily attributable to the increase in gross margin in electricity segment and the $7.3 million impairment that was recognized in the third quarter of 2012.

Moving to Slide 12. Interest expense, net of capitalized interest for the third quarter, was $18.5 million compared to $15.4 million in the same period last year. The $3.1 million increase is mainly attributable to an increase of $1.9 million in interest expense related to the sale of tax benefits and $0.7 million decrease related to the interest capitalized to projects.

Moving to Slide 13. Net income attributable to the company's stockholders for the third quarter was $13 million or $0.28 per diluted share compared to a net loss of $0.6 million or $0.01 per share in the third quarter of last year. Net income attributable to the company's stockholders, excluding a net loss related to oil and gas derivative instruments of $0.3 million in the third quarter of 2013, and a loss of $3.7 million in the third quarter of last year or $13.3 million compared to $3.1 million or $0.29 per diluted share compared to $0.07 per share.

As shown in the following slide, Slide 14, adjusted EBITDA for the third quarter 2013 was $60.3 million compared to $48.2 million in the same period last year, an increase of approximately 25% period-over-period.

Moving to Slide 15. Cash, cash equivalents and short-term bank deposit as of September 30 was $35.4 million. The accompanying slide breaks down the use of cash during the past 9 months. Our long-term debt as of September 30, 2013, and the payment schedule are presented in Slide 16 of the presentation. The average cost of debt stands at 6%. On November 5, 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. The dividend will be paid on December 4, 2013, to shareholders of record as of closing of business on November 20, 2013.

This concludes my financial overview. I would like now to turn the call to Yoram for an operational update. Yoram?

Yoram Bronicki

Thank you, Doron, and good morning, everyone. Starting with Slide 18, the total generation for the third quarter of 2013 was approximately 986,000 megawatt hours, which is an increase of 5% from the same quarter last year. The growth in this generation is mainly due to the commercial operation of Plant 2 in Olkaria. An update on our project pipeline is on Slide 9 (sic) [Slide 19]. We continue to make good headway in our organic growth. In the Don Campbell plant, which was formerly called Wild Rose project, we have completed [indiscernible] are in the final stages of construction. As a reminder, we've signed 10-year PPA with the Southern California Public Power Authority at the rate of $99 per megawatt hour. This project is expected to come online by the end of 2013. In Heber Solar, we have installed and begun testing the solar modules. Also in this project, we have already signed a 20-year PPA with the Imperial Irrigation District and expect to begin commercial operation by the end of 2013 subject to the availability of interconnection facilities. At Olkaria, we have completed field development for the 16-megawatt Plant 3 and started to start construction and expect to commence commercial operation in the first half of 2014.

We're in the process of modernizing the facilities of Mammoth and Heber. At Mammoth, we are replacing all the units of G1. And at Heber, we have added new wells and are replacing some equipment. We expect completion of work at Mammoth by the end of 2013 and at Heber in the first half of 2014. We've recently signed a new 10-year PPA for Heber 1. In their contract, which is set to start in December 2015, we'll add $7 million in EBITDA in 2016 compared to 2013, and further reduces our exposure to natural gas prices.

On Slide 20 we present the list of projects in various stages of development. As you can see, we've completed the exploration work in the McGinness Hills site and expect to add a 30-megawatt power plant to the existing facility. In Sarulla, the consortium signed a $229 million agreement for the field development of the project. Limited notice to proceed was issued ahead of the financial close. Cumulative generating capacity of these projects is approximately 147 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. We recently won an award to negotiate an energy conversion agreement for a 30-megawatt project in Kenya as part of the GDC's activity to accelerate the development of geothermal in the country. GDC is a Kenyan company owned by the government. We are a leading partner with 51% interest in the JV that won the award. Finally, we entered into a joint development agreement with eBay to develop a 5-megawatt REG power plant which will supply cleaner electricity to eBay's new data center in Salt Lake City. This project is an example of how companies can reach for sustainability goals in a way that's economical and beneficial to their underlying operation. We plan to provide more details on this project as we continue the development.

Moving to Slide 21. We have 39 prospects in early exploration where activity is yet to begin in the United States, Chile, Guatemala, New Zealand and Indonesia.

Slide 22 provides an update on the product segment. As of November 5, 2013, our product backlog is approximately $173 million of which we expect to recognize more than a $120 million in 2014. Both numbers exclude the supply contract for the Sarulla project. In September, we completed the world's largest binary geothermal plant, the 100-megawatt Ngatamariki plant in New Zealand under $142 million EPC contract. The completion of the plant in less than 24 months from the award with generation at 104% of its designed output is a further testament to our execution capability and the suitability of our technology to large geothermal facilities. And we look forward to providing the same level of results on additional projects in the future.

Let me now turn the call over to Dita.

Yehudit Bronicki

Thank you, Yoram. If you could please turn to Slide 24, our estimated capital need for the remainder of 2013 include approximately $51 million for capital expenditure of a new project under development of construction, exploration activities, maintenance CapEx for operating projects and machinery and equipment, as well as $31 million for the debt repayment. While our 2014 budget is in the process yet, we estimate our capital expenditure needs in 2014 to be approximately $150 million. As you can see on the right side of the slide, we have additional total of capital to support needs.

Turning to Slide 25, in which we outline our revenue outlook for 2013. We were able 2014 guidance and expect total revenues to be between $525 million to $535 million, with electricity segment revenue to be approximately $330 million and product segment revenue to be between $195 million and $205 million. As we've discussed on prior previous earnings calls, we've been evaluating the viability of adopting a yield cost-type [ph] structure as a way to generate additional shareholder value. At this point, we have not yet concluded our position on our structure. We continue focusing on creating shareholder value by striving to achieve further operational efficiencies, investing in enhancements to our existing plants while seeking new development opportunity globally and securing contracts in our product segment. Like in the past, we are doing this while reducing our cost of capital by taking advantage of various low-interest loans and tax incentives offered by governments and other organizations. We look forward to keeping you updated on new developments as we achieve additional milestones.

Before I open the call for questions, I would like to refer to the announcement last night of my personal plans to retire for my position as CEO of the company with an age of 72 at the end of June next year. I will remain a [indiscernible] director of the company. At the same time, Yoram will receive being the president and CEO of the company and will become the chairman of Ormat Technologies. In this capacity, he will continue to contribute from his knowledge and experience to ensure the continued success of the company. A sales committee for the new CEO, [indiscernible] this is notable by a -- but just wanted to mention it because we decided to do a very orderly. Thank you, for your confidence and I'm now opening the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from JinMing Liu.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

First, about the operational -- operation. Can you give us some updates about the use to be a troubled power plant like North Brawley and Jersey Valley?

Yoram Bronicki

There are no special updates on Brawley. And as far Jersey Valley, I believe that we have reported in our previous earnings calls that we have greatly improved the operation level at that project and it's operating very well at this point.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay. It's not Brawley provide positive EBITDA during the first quarter, did it?

Yoram Bronicki

No. But as we have, I believe, disclosed in the past for the project is now it is, it has a very little effect on the company and our investments and effort in this power plant are really measured by what would be as a potential contribution to the company. So, we don't expect to provide a lot of updates on North Brawley on a go forward basis where it is now, it's just expected to run.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay. Can you comment on the market potential for the REG projects like the one you just announced with eBay, how big the market could be and what kind of benefit you can realize from that?

Yoram Bronicki

Our -- I mean, there are 2 elements there. The potential is fairly substantial in North America. It's -- if you like the mathematical potential is in the hundreds, many, many hundreds of megawatt range. The trouble is, in most places, this is not recognized as renewable energy and does not fall into the RPS. So actually developing projects is a -- it's a competition and it's a question of whether you can develop a relatively small project that sells. If you like the equivalent of brown power, despite the fact that this is not brown power. And so the way that we look at the REG market is that there are a number of nice opportunities. It could nicely complement our activity in North America. But it cannot be a huge market, it's just a very nice adder [ph]. And since we use the same infrastructure and designing the equipment, constructing the sites and also operating the sites, some of these projects could actually have a very, very nice contribution to our EBITDA and to our bottom line.

Operator

[Operator Instructions] The next question comes from Dan Manis.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

First of all, Dita, I think your pending retirement deserves more than just a mention. Congratulations. I know it's been a long time with company that you built from scratch to $1 billion-plus enterprise. So congratulations and then, hopefully, you're going to look for maybe a little bit of relaxation in retirement.

Yehudit Bronicki

Thanks.

Yoram Bronicki

Actually, she'll work on the workover rigs. No rest for her.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

So just a couple of questions -- and I know we still have 8 more months, but I wanted to get that in. A couple questions on the business. First of all, I think you mentioned maybe some wins during the fourth quarter -- during the third quarter on the product side. Anything material or just more small orders on the geothermal side and if you could point us to the geography, that will be helpful as well.

Yehudit Bronicki

It's not only on the geothermal side, mainly. The geography is not in the United States. There's nothing coming from the United States, but from the rest of the world.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Understood. So that was the first thing. The second thing is, it sounds like so you're now hedge for 2014. Can you give us a frame of reference, given where your hedges are, would you -- where you expect your existing -- where you expect it to price out relative to '13? Do you expect that to be up or down for the plants that have the SO4 contracts?

Doron Blachar

It's slightly up. In 2013, we hedged based on $4 MMBTU and '14 it's 4.07. It's slightly up.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Okay. And then still with some volatility on the greenhouse gas credits?

Doron Blachar

Yes.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Okay. And then any hedges put in for putting on the oil side for '14?

Doron Blachar

Yes. We also hedged the total to the oil prices. Again, it's slightly better numbers than in 2013.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Great. Real quick on your '14 CapEx budget, the $150 million, can you talk at all about what's included there beyond the Olkaria III Plant 3? Is there was -- because it doesn't like you've committed yet any of the other projects sort of that you're pursuing. Is that sort of just holding place or have you already identified where that money is going?

Yehudit Bronicki

It's -- first of all, the budget is not approved yet, so I prefer to disclose in more details once we have an approved budget. But we did get some requests from some of you to give an outlook for the next year to enable you to do some estimate, and it is the first time that we are doing it without an approved budget. I think one new project that is -- that was just announced by Yoram is the McGinness Phase II which is under development. Nothing yet in construction currently and under a development.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Okay. And on McGinness II, from a development process, how far you are along in terms of proving the incremental resource, number one? And number two, given the work now, will that qualify for the PTC?

Yehudit Bronicki

There is some improvements. I mean, there is no [indiscernible] -- the McGinness II first phase is operating very well and it certainly provide more than the minimum exploration support that we need to release the project. McGinness II is part of the OFC 2 financing package. So with financing, we all saw -- we know where it's going to come. It's going to be eligible under the law to PTC or ITC credit, but not to an ITC Phase 1.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Got it. And then real quick. You mentioned on Kenya, this sounded like a little bit different. This is under GDC's program. Is this one where you would just build, own, operate the plant itself, and they're taking the well field, so this might look a little bit different or is it premature to talk about what you're doing in Kenya there?

Yehudit Bronicki

No. They [indiscernible] is they design the wall, then it's exactly what you said. It's very similar to the Philippine projects that we have been there in the '90s. This is actually where we started this in IPP with the projects where the resource [indiscernible] was not ours and only the [indiscernible] was ours. And this is a similar structure. The GDC is going to own the resource, supply the resource segment there in the tape and we will generate the electricity and sell it to KPLC. But it's in the work. We don't have the contract yet, just to be clear.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Understood. And, again, this is one you would own; this isn't a product sale?

Yehudit Bronicki

It's one that we will own and a joint venture where we will be a 51% owner.

Operator

[Operator Instructions] The next question comes from Gregg Orrill.

Gregg Orrill - Barclays Capital, Research Division

Dita, congratulations on a great career and your transition going forward. I look forward to seeing you soon. In terms of the discussion around Yuleco [ph] you said you're still, I guess, evaluating. What are the things that you're -- what is your thought process there and things you're trying to do and evaluating in terms of the market, et cetera, in terms of going forward?

Yehudit Bronicki

When the evaluation is around 2 things. Number one, and it's wholly the most important one, is what -- is it going to be accretive or dilutive to shareholders? And the analysis is not done. The analysis is assuming or depending on the size of the possibility and we don't know yet what would be the right size or the feasible size of fielco [ph] in our circumstances. And the fact that we -- part of our portfolio is international and part of our portfolio is domestic, part of our portfolio is tax equity and [indiscernible]. And so all this makes the analysis quite complicated.

Gregg Orrill - Barclays Capital, Research Division

Is there a timeline you feel that you're looking at to get your arms around it?

Yehudit Bronicki

No. We're not under any pressure. So we cannot really tell you when we will have a decision.

Operator

[Operator Instructions] It appears we have no further questions at this time.

Yehudit Bronicki

So, thank you. Thank you for your participation and we look forward to the next call in February. Thank you.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your line at this time.

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