Tag Archives: construction

Portfolio Construction Techniques: A Brief Review

Summary The mean-variance optimization suggested by Henry Markowitz represents a path-breaking work, the beginning of the so-called Modern Portfolio Theory. This theory has been criticized by some researchers for issues linked to parameter uncertainty. Two main approaches to the problem may be identified: a non-Bayesian and a Bayesian approach. Smart Beta strategies are virtually placed between pure alpha strategies and beta strategies and emphasize capturing investment factors in a transparent way. The article does not determine which strategy is the best, since I believe that the success of an investment technique cannot be determined a priori. Introduction How to allocate capital across different asset classes is a key decision that all investors are required to make. It is widely accepted that holding one or few assets is not advisable, as the proverb “Don’t put all your eggs in one basket” suggests. Hence, practitioners recommend their clients to build portfolios of assets in order to benefit from the effects of diversification. An investor’s portfolio is defined as his/her collection of investment assets. Generally, investors make two types of decisions in constructing portfolios. The first one is called asset allocation, namely the choice among different asset classes. The second one is defined security selection, namely the choice of which particular securities to hold within each asset class. Moreover, portfolio construction could follow two kinds of approaches, namely a top-down or a bottom-up approach. The former consists in facing the asset allocation and security selection choices exactly in this order. The latter inverts the flow of actions, starting from security selection. No matter the kind of approach, investors do need a precise rule to follow when building a portfolio. In fact, the choice of asset classes and/or of securities has to be done rationally. The range of existing strategies is considerably wide. Indeed, one may allocate his/her own capital by splitting it equally among assets, optimizing several functions and/or applying some constraints. Every day in the asset management industry, there are plenty of strategies that are proposed to investors all over the world. The aim of this article is to provide the reader with a comprehensive summary of those. Static and Dynamic Optimization Techniques To begin with, it is worth distinguishing the existing portfolio optimization techniques by the nature of their optimization process. In particular, static and dynamic processes are considered. In the former case, the structure of a portfolio is chosen once for all at the beginning of the period. In the latter case, the structure of the portfolio is continuously adjusted (for a detailed survey on this literature, see Mossin (1968), Samuelson (1969), Merton (1969, 1971), Campbell et al (2003), Campbell & Viceira (2002). Maillard (2011) reports that for highly risk-averse investors, the difference between the two is moderate, whereas it is larger for investors who are less risk averse. Markowitz Mean-Variance Optimization Within the static models, it is common knowledge that the mean-variance optimization suggested by Henry Markowitz represents a path-breaking work, the beginning of so-called Modern Portfolio Theory (MPT). In fact, Markowitz ( 1952 , 1959 ) presents a revolutionary framework based on the mean and variance of a portfolio of “N” assets. In particular, he claims that if investors care only about mean and variance, they would hold the same portfolio of risky assets, combined with cash holdings, whose proportion depends on their risk aversion. Despite of its wide success, this theory has been criticized by some researchers for issues linked to parameter uncertainty. In fact, the true model parameters are unknown and have to be estimated from the data, resulting in several estimation error problems. The subsequent literature has focused on improving the mean-variance framework in several ways. However, two main approaches to the problem may be identified, namely a non-Bayesian and a Bayesian approach. Two Approaches As far as the former is concerned, it is worth reporting several studies. For instance, Goldfarb & Iyengar (2003) and Garlappi et al. (2007) provide robust formulations to contrast the sensitivity of the optimal portfolio to statistical and modelling errors in the estimates of the relevant parameters. In addition, Lee (1977) and Kraus & Litzenberger (1976) present alternative portfolio theories that include more moments such as skewness; Fama (1965) and Elton & Gruber (1974) are more accurate in describing the distribution of return, while Best & Grauer (1992), Chan et al. (1999) and Ledoit & Wolf (2004a, 2004b) focus on methods that aim to reduce the estimation error of the covariance matrix. Other approaches involve the application of some constraints. MacKinlay & Pastor (2000) impose constraints on moments of assets returns, Jagannathan & Ma (2003) adopt short-sale constraints, Chekhlov et al (2000) drawdown constraints, Jorion (2002) tracking-error constraints, while Chopra (1993) and Frost & Savarino (1988) propose constrained portfolio weights. On the other hand, the Bayesian approach plays a prominent role in the literature. It is based on Stein (1955) , who proved the inadmissibility of the sample mean as an estimator for multivariate portfolio problems. In fact, he advises to apply the Bayesian shrinkage estimator that minimizes the errors in the return expectations, rather than trying to minimize the errors in each asset class return expectation separately. In following studies, this approach has been implemented in multiple ways. Barry (1974) and Bawa et al (1979) use either a non-informative diffuse prior or a predictive distribution obtained by integrating over the unknown parameter. Then, Jobson & Korkie (1980), Jorion (1985, 1986) and Frost & Savarino (1986) use empirical Bayes estimators, which shrink estimated returns closer to a common value and move the portfolio weights closer to the global minimum-variance portfolio. Finally, Pastor (2000), and Pastor & Stambaugh (2000) use the equilibrium implications of an asset-pricing model to establish a prior. Simpler Models To attempt portfolio construction throughout optimization is not the only alternative, though. In fact, alongside the wide range of portfolio optimization techniques, it is also worth considering other rules that require no estimation of parameters and no optimization at all. DeMiguel at al (2005) define them as ” simple asset-allocation rules “. For instance, one could just allocate all the wealth in a single asset, i.e., the market portfolio . Alternatively, investors may adopt the 1/N rule, dividing their wealth according to an equal-weighting scheme. At this point, the reader may wonder why one should consider this kind of rules. In fact, techniques that require no optimization should not be optimal according to any measure. However, as far as the naïve 1/N is concerned, some researchers have reported some interesting results. For instance, Benartzi & Thaler (2001) and Liang & Weisbenner (2002) show that more than a third of direct contribution plan participants allocate their assets equally among investment options, obtaining good returns. Moreover, Huberman & Jiang (2006) find similar results. Similarly, DeMiguel et al (2009) evaluate 14 models across seven empirical datasets, finding that none is consistently better than the 1/N rule in terms of Sharpe ratio, certainty-equivalent return or turnover. However, Tu & Zhou (2011) challenge DeMiguel et al. (2009) combining sophisticated optimization approaches with the naïve 1/N technique. Their findings confirm that the combined rules have a significant impact in improving the sophisticated strategies and in outperforming the simple 1/N rule. Moreover, other naïve rules are reported by Chow et al. (2013), such as the 1/σ and the 1/β, included in the so-called low-volatility investing methods. In particular, they report that low-volatility investing provides higher returns at lower risk than traditional cap-weighted indexing, at the cost of underperformance in upward-trending environments. Smart Beta Strategies Finally, it is worth mentioning a special group of strategies that are extremely popular among asset management firms, known as Smart Beta strategies. Smart Beta strategies are virtually placed between pure alpha strategies and beta strategies, and emphasise capturing investment factors in a transparent way, such as value, size, quality and momentum. Examples of these strategies are risk parity, minimum volatility, maximum diversification and many others. Apart from the wide range of these kinds of techniques, it is critical to highlight why they are so diffuse among practitioners. Their enormous success is due to several interesting advantages, including the flexibility to access tailored market exposures, improved control of portfolio exposures and the potential to achieve improved return/risk trade-offs. Final Remarks This article aims to be a summary of the most notorious techniques considered in the existing literature, but the list is far from being complete. Moreover, the article does not analyze which strategy is the best, since I believe that the success of an investment technique depends on several factors, including the time frame considered, the kind of assets, the geography of the examined portfolio, the client’s preferences, and it surely must rely on a quantitative application using real or simulated data.

Innergex Renewable Energy’s (INGXF) CEO Michel Letellier on Q3 2015 Results – Earnings Call Transcript

Executives Marie-Josée Privyk – Director, Communications and Sustainable Development Michel Letellier – President and Chief Executive Officer Jean Perron – Chief Financial Officer Analysts Rupert Merer – National Bank Financial Sean Steuart – TD Securities Nelson Ng – RBC Capital Markets Ben Pham – BMO Capital Markets Jeremy Rosenfield – Industrial Alliance Securities Innergex Renewable Energy Inc. ( OTC:INGXF ) Q3 2015 Earnings Conference Call November 10, 2015 4:00 PM ET Operator Good day, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy’s Conference Call for the Third Quarter 2015 Results. [Foreign Language] [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Tuesday, November 10, 2015 at 4 p.m. Eastern Time. I will now turn the conference over to Marie-Josée Privyk, Director, Communications and Sustainable Development. Please go ahead. Marie-Josée Privyk Thank you. [Foreign Language] Good afternoon, ladies and gentlemen. I am here today with Mr. Michel Letellier, President and CEO of Innergex and Mr. Jean Perron, Chief Financial Officer. Please note that the presentations will be in English. However, you are welcomed to address your questions either in French or English. [Foreign Language] I would also like to point out that journalists are invited to call us afterwards if they wish to address any questions. In a minute, Mr. Perron will provide some details on our financial results for the third quarter ended September 30, 2015. Mr. Letellier will then provide an overview of our operating activities and outlook and we will then open the Q&A session. The financial statements and the MD&A have been filed on SEDAR and are readily accessible via the Internet. You may also access the press release, financial statements and the MD&A on the Innergex website in the Investors action. During this presentation, we will refer to financial measures such as adjusted EBITDA, free cash flow and payout ratio that are not recognized measures according to IFRS as they do not have a standardized meaning. Please be advised that this conference call will contain forward-looking information that reflects the corporation’s expectations with respect to future results or developments. For explanations concerning the principal assumptions used by the corporation to derive this forward-looking information and the principal risks and uncertainties that could cause actual results to differ materially from those anticipated, I invite you to consult the first pages of the company’s MD&A as well as its Annual Information Form. I now turn the conference to Mr. Perron. Jean Perron Thank you, Marie-Josée. Good afternoon. The quarterly results for Q3 2015 show production of 91% of the long-term average due mainly to below average water flows at the six 50% owned facilities of the Harrison Hydro entered partnership in British Columbia. Production for the first nine months stands at 99% of long-term average. Revenues for the quarter were $3.7 million lower than in 2014 due to the BC facilities. Revenues for the nine months were $17 million higher than last year. The increase is due to higher water flows in Québec and BC, higher wind regimes and to the acquisition of SM-1 in June 2014. Adjusted EBITDA was $3.2 million lower compared to Q3 2014. Adjusted EBITDA for year-to-date was $14.1 million higher than in 2014. The increase is mainly due to the higher production since the beginning of the year. Finance cost for the quarter were similar to Q3 2014 while since the beginning of the year, they are down $2.8 million compared to last year due to the lower inflation compensation interest. During the quarter, the $27 million loss was realized on derivatives financial instruments resulting from the settlement of the MU bond forwards contracts upon closing of $311 million financing of the project. Similar loss were incurred in the previous quarters for the Big Silver, Boulder Creek and Upper Lillooet River bond forwards upon closing the financing of the projects. The realized losses are a result of the decrease in benchmark interest rates between the date the bond forwards were entered into in late 2013 and the settlement dates. It will be compensated by lower restricted fixed interest rates ranging from 2.41% to 4.76% for up to 40 years term loans compared to higher interest rates set at the time of the hedges. These losses were funded with proceeds from the project financings and do not impact the free cash flows. The corporation recognized unrealized gains on derivative financial instruments of $24 million due mainly to the reversal of the unrealized loss accrued upon settlement of bond forward contract of MU. Together with the settlement of the Big Silver, Boulder Creek and Upper Lillooet River, bond forwards in previous quarters resulted in a $79 million unrealized gain since the beginning of the year. The $311 million MU financing was closed in September and was the last one for all of our projects on the construction. In March of this year, we closed the Boulder Creek and Upper Lillooet River $491 million financings and in June, we closed the Big Silver $197 million financing. In August, we issued a new convertible debenture for $100 million bearing interest rate of 4.25%. We used $42 million of the proceeds to repurchase the former convertible debenture bearing an interest rate of 5.75% while $38 million of debenture was converted into 3.7 million common shares. As a result, a total of $1.1 billion of financing was completed since the beginning of the year. We do not need any additional liquidity to complete the construction of our firefight projects. An amount of $160 million remains unused and available on our revolving corporate credit margin of $425 million. We also bought back 700,000 shares as of September 30 and an additional number of 460,000 since then. Overall, the slightly below average quarter combined with a very strong first quarter allowed us to basically be on target since the beginning of the year. As a result and combined with a very good fourth quarter in 2014, our trailing 12 months free cash flow ending on September 30 reached $84 million compared to $51 million for the same period last year and our payout ratio improved to 74% from 113%. Since the beginning of Q4 2014, our production has been somewhat below the long-term average, mainly at our hydroelectric facility in Québec. We remain confident in our ability to reach our long-term average production figures year-over-year. This concludes my review the results. I would be happy to answer your questions later on during the call and I will now turn it back to Michel. Michel Letellier Good afternoon. Thank you, Jean. So, as you learn we have been busy doing our project finance, but we are also quite busy in continuing the construction activities. Very glad to report as of yesterday, we released a press release that Tretheway Creek in BC has been commissioned in the date of the October 27, which we were just waiting for the BC Hydro confirmation and they did that last Friday, so quite happy and also very happy to report that we managed to build it on time and this time under budget. We are basically $7 million under budget. So, that’s about 6%. So, very glad, and I am very proud of the team that managed to do that in BC. On the – still in BC, Upper Lillooet and Boulder, as you remember, we have had the fire this summer. So, we have been quite busy restarting the construction in September. We are engaging with the insurance company to make sure that we are covered for the losses, both material and also some possible delay. So, we are still working the schedule to catch up the loss of time that we had experienced this summer. We wrote in the MD&A that we may slip a few months. Upper Lillooet and Boulder were supposed to be put in COD late in the fourth quarter of next year. So, we may slip a few months either on Upper or Boulder, but we are working very hard in trying to catch up. So, we don’t have a definitive date. And mind you that we are covered for the losses resulting of the fire. So, we don’t think we will have any material financial aspect for any delay. The construction has resumed and is doing fine. We are basically working hard on the tunnel. This is the tunnel or I guess the critical date to finish the projects. Powerhouse in the line, are going very well. Mechanics are being delivered. So all-in-all, the project is going very well, just the silly fire was slowing down – have slowed down the construction during the summer time. Still in BC, we have Big Silver Creek as well. We have been very active this summer in the last few months. A matter of fact, more than 90% of the civil work is done in Big Silver. Tunnel is done, penstock is done. Powerhouse is done at almost 90%. Intake bypass is done as well. All in all, we are quite in advance in terms of civil works, but we still have to receive the mechanics pieces and also finishing the transmission line during winter and spring. So Big Silver looks very good in terms of schedule and also in terms of capital costs along budget. And the project, the MU project, the – if we come back in wind in Quebec, the Gaspé Peninsula the 150 megawatt wind farm is doing very well as well. We have completed all the base, all the road and we have advanced also on the collector system. So everything we had planned to do this year has been done and the contractor will finalize some work during the next few weeks. But then, we will leave the site for the winter and we will reconvene next spring in order to start the installation of towers and blades and obviously focusing on putting the date for December next year. We have also completed the financing of MU as Jean has spoken and we are very proud of that financing. It helped and we did get a little bit better terms and quite happy with our partner on the financing of MU. If we look towards the post 2016 date, if we look into the international market, I don’t know if you have read our press release, but we are happy to report that we have had a letter of intent with the CFE, which is the federal electricity commission of Mexico. That letter of intent is very interesting in terms of future potential with CFE and trying to develop small hydro. When we say small hydro, the letter mentioned a project 200 megawatt. Again, I think that I have been saying in the past that we have an angle there in Mexico that focused on small hydro. We think it’s interesting because there is not that many player that are present in Mexico for hydro development. So hence, the letter of intent with CFE is a good proxy on what we can try to do in Mexico. Obviously, it’s still a lot of work before having any project done with CFE, but I am quite happy to have been able to sign such a letter. It shows the – I guess, the commitment towards developing hydro from CFE, which is a good thing. We are definitely looking into other possibility in Mexico. We have been traveling quite a bit. We have been meeting with quite a bit of potential partner in Mexico. So we are confident that Mexico will be a good turf for us to develop both hydro and maybe wind as well and solar, so very enthusiastic about Mexico. We are waiting also to learn from the government in the next few weeks what type of RFP there will be coming up. I think one RFP is coming very soon. So we will be watching and we will be trying to take advantage of future RFP definitely in Mexico for 2017. We have been busy also in France mainly, trying to develop contacts and future partnership with local developer. There too, I think we have been successful in meeting with a good potential, still a little bit of work to do in France for us. The market seems to be positive there for the wind development. So our focus will be mainly internationally, again Mexico and France. We are not changing our priority in terms of market. And I guess, giving the project finance that we have done and as Jean has mentioned, we don’t need more equity. We are maintaining the forecast for 2017 of $105 million worth of cash flow. I think that we feel very comfortable with our development progress and construction. It’s important to – for us to deliver those, but they are very advanced. So we feel very comfortable now to focus on the growth and being very active in terms of international development. So on that note, I will take any question. Marie-Josée Privyk Thank you, Michel. So this completes our presentation. We now invite you to ask your questions. Question-and-Answer Session Operator Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions] Your first question comes from Rupert Merer with National Bank Financial. Your line is now open. Rupert Merer Good afternoon everyone. Michel Letellier Hello Rupert. Rupert Merer Can we have a little more color on Mexico and the CFE, how many sites do you think you will analyze with them initially and how long do you think that process would take to come up with a site and if you do come up with a site or some interesting sites, how long do you think it will be before you could have some under construction or even reaching COD? Michel Letellier Well as you know, hydro development project, either in BC or in Mexico takes more time than hydro, a little bit quicker, I guess in Mexico. Development period and then permitting can take let’s say, 18 months to 3 years in Mexico. And construction depending on the complexity of the construction, if we have to make tunnels and anything between 2 years and 3 years is usually how long it takes to build. So if you had those plus a few months to study and so forth, it would be difficult to think that we would have anything in operation in less than 5 years from now. So it’s a long game, but once you have built hydro, I guess you have been for a long time. The nice thing about Mexico is that many places you can own the land. So you then own the facility for eternity. So it’s something we like to have in our portfolio, this type of project, private project versus land, rent. To answer your question how many, there is – it is not limited by I would say, the amount of good potential there. So a lot of hydro potential in Mexico, but we have to focus on project that will be competitive. Hydro, as you know is becoming a little bit more expensive or the reverse being more positive. I guess that wind is becoming more competitive and less costly. So in order to be successful in hydro, we have to be creative. We have to find good sites and also we have to find sites with some potential capacity in terms of pounding or small reservoir. So we are focusing on those. And obviously, that limits the amount of project that we can focus, but there is a lot of potential in Mexico in terms of hydro, certainly enough for us to be happy and grow. But I guess that we have to focus on a few and the perfect size for us is anywhere between 30 to 100 to 125 megawatts. Those are the sweet spot, especially if we can find a little bit of head pond or reservoir. Those would be perfect target for us. Rupert Merer And this first, this stage of the process of your LOI, where you are looking at sites, how long do you think that first stage of the process takes before you are successful in identifying a location? Michel Letellier Well, CFE has already some kind of a list of project that they would like to prioritize. They have shared with us a few watersheds that they think are of, I would say, a best interest. So, we are right now in the process of I guess studying those. It can easily take 6 to 8 months to do a good job in trying to establish priorities and do a little bit of engineering. Rupert Merer Okay, excellent. I will get back into queue. Thank you. Operator Your next question comes from Sean Steuart with TD Securities. Please go ahead. Sean Steuart Thanks. Good afternoon, everyone. Michel Letellier Hi, Sean. Sean Steuart A follow-up question on Mexico, I am wondering if you can just go into a bit more detail on the procurement framework there. I gather it will be competitive RFPs. Are you anticipating these will be hydro-specific procurements or is it more of a general renewable procurement, of which you will submit hydro projects? Maybe just a bit more detail on the procurement framework. Michel Letellier It will be quite, I would say, extensive, the type of possibilities. One will be CFE coming up with RFPs, specifically for what they could describe as clean energy and high efficient combined cycle will probably be accepted in those definition of clean energy but there will be a minimum amount of renewable energy in those call. So, we will know soon how much, but that will be meaningful what I am gathered. So, this is the first, I guess, wave. There will still be the ability for developer to make venture with big customer, local industrial that wants to secure their long-term supply of electricity. We will still be able to go and invest or co-invest or sign the collateral EPA with developers. So, that’s another possibility. And of course, there will be the wholesale market with a system, where you will have green credit attached to the renewable energy component, which is a little bit more difficult to forecast, because the rules are not completely clear yet, but those will be basically the three what is to participate in the Mexican market. Sean Steuart Okay, understood. And as recently as I think a couple of quarters ago, you had mentioned Peru as a country of potential interest. I gather that’s off the table now. Is that the correct assumption? Michel Letellier For the time being, we want to consider more Mexico and France. It doesn’t mean that we wouldn’t come back to Peru, but Peru is a smaller market, has some very good feature of having EPA with – in U.S. dollar, but – and having active small RFP going on. But what we have been doing in Mexico has been proven to so far being I would say of a better interest for the time being. Sean Steuart Okay, thanks for the detail. That’s all I have. Operator [Operator Instructions] Your next question comes from Nelson Ng with RBC Capital Markets. Please go ahead. Nelson Ng Great, thanks. Just one follow-up question on the Mexico opportunities, so can you just clarify is the Mexico potential RFP completely separate from the letter of intent with the CFE or after you identify like attractive hydro sites, would those sites get RFPed or do you have an exclusive arrangement with the CFE to kind of develop and own those assets without a competitive process? Michel Letellier Twofold. One doesn’t preclude the other meaning that CFE could, theoretically, bid its own project into an RFP or could decide to develop in – I mean in a joint venture for their own needs, because CFE will still be the prime, I guess, supplier for mainly the small industrial individual and small commercials. So, CFE will eventually need its own production as well. So, both, they can supply in – they can submit project together with us in future RFP or they can decide to develop their own project and joint venture to supply their demand for themselves in terms of utility as well, so both can be done, Nelson. Nelson Ng Okay. So, just to clarify, with this letter of intent, you are kind of working with the CFE to assess various sites and then after you determine that those sites are attractive, I guess hydro development opportunities, what you are saying is they might do it on their own or they might work with… Michel Letellier No, meaning that – no, if we work together, we can decide to either submit the project together into an RFP or that the project will be dedicated for CFE own delivery of kilowatts, because CFE has a portfolio that is basically aging and they have all diesel plant that are – will be decommissioned soon. So, they will have to replenish that as well. So, they will do it by RFP and also by own – their own supply. Nelson Ng Okay, got it. And then just moving on to France, I guess, could you just elaborate on the strategy there? I guess, given that some of the wind farms in France are pretty small like how are you going to get critical mass? And I was just thinking if you are successful on one or two wind facilities in France, they might not kind of hit your critical mass if you only own like one or two sites? Michel Letellier Yes, that’s a good point. What we said in the beginning is that we want a foothold there and probably an attractive acquisition for us of some size would be probably the best strategy to enter the market and then after that trying to take advantage of small developer to help develop the market in terms of joint venture. We have seen few interesting proposals. There is an active M&A market in France, which like I said could range from 50 megawatt to 150 megawatt type of volume, where you would have 5, 6 or 7 small 10, 15, 20-megawatt projects. And those are attracting obviously some attention, but not necessarily a huge attention from all the big players that – or the type of attraction we have seen in North America, especially with the yieldco in the U.S. Now, it might change, mind you, but I don’t want to say too much, but we have been active and we have been missing couple of opportunity, but not by far. So, we are adjusting our aim and I think that we will be busy in France. There is project that seems to make sense in terms of acquisition to be accretive for us and to basically provide us with a minimum foothold that would make sense from us to start from there. Nelson Ng I see. And then just in terms of your balance sheet, can you give us an idea of I guess what size of acquisition or development you can potentially do without having to go to the market with equity? Michel Letellier Well, Jean just mentioned that we have a little bit more than let’s say $150 million worth of free margin in our credit line and mind you that soon in 2017, we will have anywhere between $35 million and $40 million so worth of free cash flow from our operation. So I mean, we definitely we cannot do a huge acquisition, but we can certainly start a small acquisition or contribute to commit to you construction project. As we mentioned if we start the construction in Mexico in hydro, we won’t have to put all the money upfront, it’s going to take a few years to build up. So just with our free cash flow from 2017, we can invest the seed money and the early equity money in project development. So unless we find a bigger acquisition, we don’t intend or we don’t have to go to that right away. Nelson Ng Okay, thanks. Just one last question, in terms of MU wind, the project cost is $340 million, does that include the amount that would be refunded from Hydro Quebec? Jean Perron Well, it is net of this amount. Nelson Ng Sorry. It’s net of the amount. Okay, thanks. Operator Your next question comes from Rupert Merer with National Bank. Please go ahead. Rupert Merer Hi. So looking now to 2017, you talked about $35 million to $40 million of free cash flow and that can help support your growth, can you talk us through your current dividend policy and what we can expect to see for target payout ratios for next few years and how are you going to balance between your future investment needs, your dividend policy and maybe your NCIB as well? Michel Letellier Yes. It’s always same question and trying to answer the same way all the time. It’s – I said we have initiated an increase in the dividend in the last 2 years. I am hoping that we can maintain a growth in the dividend. I don’t think that jumping the dividend to a big amount in 1 year would create a trend and would be rewarded right away by the market. But I think that if we can find home for our equity in the development and creating value for our shareholders, my view is trying to raise the dividend on a steady course and increase it over the years, always by providing accretive development to our shareholders. But obviously, by – it’s something that we never had in the recent years. We will have a payout ratio. We will have room in 2017 to take those decisions. Obviously, if we don’t find good home for that equity, we will reward our shareholder by raising the dividend. But I think that if we can find a good growth that creates value for our shareholders, we will balance that. We said that a long-term payout ratio of 80% is maybe a good ratio. How fast are we getting to that 80%? Obviously by 2017, without giving you the right – the exact amount of payout ratio, you guys can calculate it fairly well. We are saying that we are going to have $105 million of free cash flow. And right now, we are paying a little bit over $63 million – let’s say, $63 million of dividend, so quite easy to make the calculation. I think it’s a good problem to have and it’s a – I guess it’s a strategy that we are discussing at the Board all the time. But definitely growing the dividend is very important to us. We understand that for shareholders, it’s important as well. The important thing for us is to grow and to have it sustainable and to show the growth that will be also sustainable. So we have been prudent in the last few years even though our payout ratio was still fairly tight. We have increased the dividend twice by $0.02. Hopefully, we will try to do the same thing going forward and maybe increasing the rate of dividend. But I am still very positive about future outcome. Like I said, we have been focusing in the last few years on delivering our growth portfolio. And I think we have done a good job in doing it. We finalized all the project finance. So $1 billion, a little bit more than $1 billion of financing last year and project finance was taking quite a bit of our internal time. So that once this is done, I think that we will focus and I cannot promise, but we are definitely focused on delivering growth for 2017. Rupert Merer Great. Thanks for the color. Operator Your next question comes from Ben Pham with BMO Capital Markets. Please go ahead. Ben Pham Thank you. And I have a couple of cleanup questions for me. On the payout ratio the last 12 months, pretty low number that you reported, are you expecting to be below 100% for this year? Michel Letellier Yes. On the forecast, yes. Ben Pham Yes. Jean Perron Yes. But I think we need to remember that Q4 2014 was something really above average for production. So the effect, that’s the reason why the payout ratio was so low for now because we are including this next quarter, we are going to be using this Q4 2014 results. Ben Pham Okay. That’s what I was really trying to ask indirectly. The – and I was wondering your buyback program, how should we think about that, is that more to mitigate the DRIP dilution? Michel Letellier Well, the DRIP dilution is a lot less. If you remember, we killed the discount in last quarter. So now the DRIP participation is less than 5% roughly. No, I think it’s – given the fact that we had done the debenture and the conversion and the price was fairly weak, so we thought that it was a good timing to buy some shares. Ben Pham Okay. And I am just wondering you had some early comments about the Mexican hydro strategy in terms of the timing being maybe 3 years to 5 years and that really potentially gives you some visibility in the 2020 timeframe. So I am just wondering what are you guys thinking about ‘17, ‘18, ’19, you have got a lot of cash generation coming up. I mean is that – are you guys banking on a French wind acquisition near-term to really get some growth in that period? Michel Letellier That can certainly be of interest, Ben. But I answered the question for brand new hydro with CFE, meaning that no development whatsoever have – would have been made. But there is some possibility of being partner in Mexico or somewhere else where project have been advanced and maybe it’s only construction periods, so maybe 3 years. So you end up being maybe in 2019 or even in 2018 if we are talking about wind somewhere else. So I mean, it’s a mix of that. But definitely existing facility in France with a decent accretion for us could be of an interesting strategy to fill up 2017 growth, Ben Pham Okay, I appreciate the answers. Thank you. Operator Your next question comes from Jeremy Rosenfield with Industrial Alliance Securities. Please go ahead. Jeremy Rosenfield Thanks. Good afternoon guys, just there is a lot of focus I think, on the interim period as Ben was just alluding to the 2017, ‘18, ‘19. What about the possibility of potentially consolidating some ownership interest, where you own maybe 50% or so of an asset, is there an opportunity or do you think that you could look at that type of strategy with maybe more, I would say aggressiveness than you might have looked at in the past? Michel Letellier There is couple of projects as we definitely have a potential partner. Upper Lillooet and Boulder are owned by Creek Power. Our partner is Ledcor. We have options once those projects are ensued the need to buy them back. So, this could be a possibility. Our First Nation partner, we don’t want to buy them back. Well, if they wish to we are always welcome to try to help them, but we strongly believe that having the First Nation on long-term basis is important, especially with the community-based projects. So, the other big partner is Trans-Canada in Québec, who knows if Trans-Canada wants to sell some part of those assets would be welcome – will be certainly interested, but there is plenty, plenty of M&A around small project here and there. And we are seeing all kinds of things. And I think that last year was very difficult for M&A, especially in the U.S. with the yieldco, and it’s difficult to see and to predict how the yieldco will behave, but we certainly saw some reaction right away with some developer that thought that they had a deal and then suddenly the deal is disappearing and they are kind of reaching out. So, I think that there will be a little bit more opportunity in M&A or when we see M&A, small developer that wants to have a partner to start with their construction, because for some reason, they don’t necessarily have all the equity. And I think we have a good reputation to be a good partner in many ways. So, I am not worried about being in 2017 or ‘18. We will find a way. It’s just – maybe that message and it’s still I guess that you guys are concerned that we don’t have anything in the pipeline in those years, but we have been focusing so much on delivering and making sure that the project were online and on time. I think that Innergex is a different company now in terms of cash flow and its ability and I guess our ability now to take a little bit more focused on getting outside Canada will payout soon. We have been very successful in Canada in the past. We have shown that we have been able to compete with many other competitors. So, I don’t see why we cannot compete somewhere else especially that we have a philosophy of being open book with partners. And so far the first contact we had in Mexico and in France have been very, very positive in this way. And we have been very – we have been welcomed in Mexico and France. So, I am very positive about finding the ways and I am not concerned about filling the gap. We are focused, but we are not concerned. Jeremy Rosenfield Okay, good. That’s my only question. Operator And Ms. Privyk, there are no questions at this time. Marie-Josée Privyk Thank you. Thank you everyone. We appreciate this opportunity to provide an update on our company and please don’t hesitate to contact us if you have any other questions. [Foreign Language] Operator Thank you. Ladies and gentlemen, that concludes our conference call. Please note that a replay of the conference call will be available on the Innergex website. The press release, financial statements and the management’s discussions and analysis are also available on the Innergex website at www.innergex.com in the Investors section. Thank you. You may now disconnect your lines.

Ormat Technologies’ (ORA) CEO Isaac Angel on Q3 2015 Results – Earnings Call Transcript

Ormat Technologies, Inc. (NYSE: ORA ) Q3 2015 Results Earnings Conference Call November 04, 2015, 10:00 am ET Executives Jeff Stanlis – Investor Relations, Hayden MS IR Isaac Angel – Chief Executive Officer Doron Blachar – Chief Financial Officer Analysts Paul Coster – JPMorgan Dan Mannes – Avondale Partners Mark Barnett – Morningstar Operator Good day and welcome to the Ormat Technologies Inc. third quarter 2015 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 Jeff Stanlis with Hayden MS, IR. Please go ahead. Jeff Stanlis 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 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, future results or trends. Actual 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. 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 the company’s website. 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 & Presentations 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. Isaac Angel Thank you very much, Jeff and good morning, everyone. Thank you for joining us today for the presentation of our third quarter 2015 results. The third quarter was a very strong quarter for us with record total revenue and adjusted EBITDA driven from the solid performance of both segments. The electricity segment delivered double-digit growth in generation and solid margins despite headwinds related to oil and natural gas prices reflecting our focus on profitable growth from existing operations. We also continued to improve construction lead time and brought online the second phase of Don Campbell plant in Nevada six months earlier than planned. And now we expect earlier completion of plant four in Olkaria, Kenya. In our efforts to promote our strategic initiatives, we achieved a significant milestone by signing a strategic collaboration agreement with Toshiba, the world’s leading supplier of geothermal steam turbine. Through this relationship, we will explore and develop strategic opportunities that will enable us to approach and capture a larger portion of the global geothermal market. I will elaborate on this milestone and other business development in closing remarks. I would like to turn the call over to Doron to discuss our financial results for the quarter. Doron? Doron Blachar Thank you, Isaac and good morning, everyone. Let me start by providing an overview of our financial results for the third quarter ended September 30, 2015. Starting with slide six. Total revenue for the third quarter of 2015 were $162.9 million, up 16.1% compared to $140.2 million in the third quarter of 2014. 60% of the revenue came from the electricity segment. In our electricity segment, as you can see on slide seven, revenues were $97.2 million in the third quarter of 2015 compared with $102.5 million last year. The decrease was mainly due to lower energy rates resulting from lower oil and natural gas prices and a reduction in net gain on derivative contracts. The decrease was partially offset by the contribution from the McGinness Hills Phase 2 power plant and the phase two of our Don Campbell, both in Nevada. These two expansions coming online were also the main driver for the 10% generation growth compared to the third quarter of 2014. Based on our policy, we will manage our economic exposure to natural gas and oil prices in our electricity segment through hedging activities in May went up into derivative transaction until we get 50% of our exposure fluctuation in natural gas prices as fixed price is $3 three per MMbtu until December 31, 2015. As a result of the hedging activity, we recorded a net gain of $0.4 million in the third quarter of 2015 compared to $4 million gain in the third quarter of 2014. In the product segment on slide eight, revenues was $65.6 million compared to $37.7 million in the third quarter of 2014, which represents a 73.9% increase. As many of you already know, our product segment is characterized by fluctuations in quarterly revenue. This segment delivered a strong quarter that was benefited from new contracts, including the EPC contract related the geothermal project in Chile as well as the progress with the solar project in Indonesia. Moving to slide nine. The company’s combined gross margin for the third quarter was 36.4% compared to 39.6% in the third quarter of 2014 and similarly on a sequential basically for the gross margin generated in the second quarter of 2015. In the product segment, gross margin was 36% compared to 38.9% in the prior year quarter. In the electricity segment, gross margin was 36.8% compared to 39.8% last year. The margin in the electricity segment was significantly impacted by approximately $6 million reduction in oil and natural gas prices as well as a $3.6 million net gain from hedging activity compared the third quarter of 2014. Excluding these effects, gross margin increased from 33.2% last quarter to 36.5% this quarter. This reflects the enhancements implemented in our power plants and the improved efficiency of our operating portfolio along with the new capacity that came online. Moving to slide 10. Third quarter operating income was $46.5 million compared to $43.8 million in the third quarter of 2014. Operating income attributable to our electricity segment for the third quarter of 2015 was $28.3 million compared to $32.4 million for the third quarter of last year. Operating income attributable to our product segment was $18.1 million compared to $11.4 million in the third quarter of 2014. Moving to slide 11. Interest expense, net of capitalized interest, for the third quarter of 2015 was $17.7 million compared to $22.5 million last year. This decrease was primarily due to the lower interest expense as a result of debt payment and decrease in interest expense related to the sale of tax benefits. The decrease was partially offset by an increase in interest expense related to a new loan to finance the construction of McGinness Hills Phase 2 project from August 2014. Moving to slide 12. Net income attributable to the company’s stockholders for the first quarter of 2015 was $72.1 million or $1.41 per diluted share in the third quarter of 2015 compared to $16.5 million or $0.36 per diluted share for the third quarter of 2014. The net income includes $48.7 million deferred tax asset and related expenses relating to an investment deduction for our Olkaria 3 power plant in Kenya. In September, Kenya’s Income Tax Act was amended, thus leading to certain provisions of the recently adopted Finance Act. These amendments retain the enhanced investment deduction of 150% and extend the period for deduction of tax losses from five years to 10 years. Previously, we had a valuation allowance reducing our deferred tax asset in Kenya as the utilization portion of the tax losses was not probable within the original five years carry forward period. As a result of the change in legislation and the expected continued profitability during the extended carry forward period, we expect that we will be able to fully utilize the carry forward tax losses within the 10 years period and as such will release the valuation allowance of the additional 50% investment deduction for Olkaria 3 power plant in Kenya, resulting in a $48.7 million of tax benefit and related expenses in the third quarter of 2015. Excluding the deferred tax asset and related expenses, net income attributable to the company’s shareholders was $23.4 million or $0.46 per diluted share compared to $16.5 million or $0.36 per diluted share in the third quarter of 2014. Please move to slide 13. Adjusted EBITDA for the third quarter of 2015, reached a quarterly record of $79 million, an increase of 14.3% compared to $69.1 million in the same quarter last year. Adjusted EBITDA for the nine months ended September 30, 2015 was $212 million compared to $204 million in the nine months ended September 30, 2014. Turning to slide 14. Cash and cash equivalents as of September 30, 2015 was $171.5 million. We generated $120 million in cash from operating activities. The accompanying slide breaks down the use of cash during the quarter. Our long-term debt as of September 30, 2015 and the payment schedule are presented on slide 15 of the presentation. The average cost of debt for the company stands at 6.06% and the net debt amounts to approximately $710 million. On November 3, 2015, Ormat’s Board of Directors approved payment of the quarterly dividend of $0.06 per share for the third quarter. The dividend will be paid on December 2, 2015 to shareholders of record as of closing of business on November 18, 2015. That concludes my financial overview. I would like now to turn the call to Isaac for an operational and business update. Isaac? Isaac Angel Thank you very much, Doron. Starting with slide 17 for an update on operations. Generation in third quarter was 1.1 million megawatt-hours, compared to 1 million megawatt-hours in the third quarter 2014, which represent 10% increase mainly due to the contribution of McGinness complex and also reflecting an initial contribution of our Don Campbell Phase 2. Moving to slide 18. We continued our efforts to grow our electricity portfolio. During the quarter, our Don Campbell Phase 2 began commercial operation, doubling the generating capacity of the complex to 38 megawatts. I am very proud of our execution on this project. We brought this phase online six months ahead of schedule and just 10 months after we broke ground and less than two years after commencing operation of Phase 1. Campbell will sell its power under a 20-year power purchase agreement with the Southern California Public Power Authority, who will resell the entire output of this plant to the Los Angeles Department of Water and Power. Northleaf Capital Partners, our joint venture investor, will purchase 36.75% equity interest in the project which will be added to the existing ORPD joint venture upon completion of certain debts in accordance to the terms of the agreement. Moving to slide 19 for an update on projects under construction. As I mentioned, we continue to improve construction lead time and expect an earlier completion of the 24 megawatt project in Olkaria, Kenya. The project was initially expected in the second half of 2016 and currently planned to be completed in the first quarter of 2016. In Sarulla, Indonesia the engineering, procurement and construction under the EPC contract with Hyundai are in progress. The infrastructure work has been substantially completed and major equipment, including Ormat partial OEC and Toshiba steam turbine arrived in the country. The drilling of production injection wells are also in progress in all three phases. However, the project company is experiencing delays in drilling and EPC milestones as well as the cost overruns, mainly in the field development of second and third phases of the project. All the scheduled milestones on the Ormat supply agreement were achieved and manufacturing work is progressing as planned. The first phase of operation is expected to commence towards the end of 2016 and remaining two phases of operations are scheduled to commence within 18 months thereafter. The project I just described as well as additional projects, including the Menengai in Kenya and Platanares in Honduras are under various stages of development and expected to add between 70 to 95 megawatts by the end of 2017. Besides the investment in new projects, we are continuing our exploration and business development activities to support future growth. If you could please turn to slide 20, you will see our CapEx requirements for the reminder of 2015. We plan to invest a total of approximately $9 million in capital expenditures on new projects under construction and enhancement. An additional approximately $9 million are budgeted for exploration activities, development of new projects and maintenance capital for operating projects. In addition, $31 million will be required for debt repayment. Turning to slide 21 for an update on product segment. Our backlog as of November 3 stands at approximately $282 million. Our backlog together with the new contract that we expect to sign will support our financials in the next two, three years. Moving to slide 22 for a business update. The strategic plan that we laid out on our Analyst Day and in previous calls included several parts. In the near term, we had two main objectives. First, to focus our efforts on profitable growth by enhancing existing operations. And second, to continue diversification of technologies by deepening the geothermal penetration. As you can see in slide 22, we have dramatically reduced the operational cost per megawatt hour. The actions we have taken to improve efficiencies are reflected in the solid margin and in the adjusted EBITDA and we will continue to focus our efforts on profitable growth. The second objective includes diversification of technologies by marketing our binary technology to a wider range of resources as we did in Chile EPC contract, as well as to further expand the high temperature market by offering a wider range of optimal solutions including wind turbine. And as I mentioned in my opening remarks, we achieved a significant milestone by signing the strategic collaboration agreement with Toshiba. Moving to slide 23. This agreement was announced after the third quarter, but has been in development for many months as we work together on different projects. This collaboration will leverage Toshiba’s 49 years of expertise in flash systems and Ormat’s many years of expertise in binary systems to offer an efficient solution that combines the two technologies and meets the technological needs of many geothermal projects around the world. By working together, we expect to approach and capture a larger portion of the geothermal market. To further our strategic long-term goals, Ormat continues to proactively seek M&A opportunities in our existing business lines as well as in the solar power generation and energy storage businesses. Moving to slide 24 for regulatory update. Legislation that will benefit our industry is occurring at the global and regional levels. In early October, California Governor Jerry Brown signed a new law which expanded on its existing renewable portfolio standard or RPF policy. The new law requires that utilities procure 50% of their electricity from renewables by 2030. Already the state mandated that utilities procure 33% of their electricity from renewables by 2020. This law serves as a significant incentive for utilities in California to seek a long-term power purchase agreement with renewable energy providers. California joined Hawaii, which earlier this year increased its renewable requirement to reach 100%by 2040. As California and Hawaii see the economic and environmental benefits of these of arrangements, we believe other states will follow boosting demand for clean and renewable energy. Turning to slide 25. We increased and narrowed the range of our 2015 total revenue guidance and increased adjusted EBITDA guidance. We expect total revenue of between $570 million and $585 million through the composition to be more heavily weighted towards our product segment. We anticipate stronger performance for our product segment and expect revenue to be between $195 million and $205 million. For the electricity segment, we expect revenues to be between $375 million and $380 million. The electricity segment revenue guidance assumes the continued impact of lower oil and natural gas prices, which translates to approximately $28 million reduction in revenues compared to last year. We expect 2015 adjusted EBITDA guidance of $282 million to $292 million for the full year, which is also impacted by current oil and natural gas prices. We expect annual adjusted EBITDA attributable to minority interest to be approximately $13 million. In summary, I am very pleased by our year-to-date progress and we believe we are well positioned to achieve our long-term goals. Today, Ormat is a leader in the geothermal energy sector with a uniquely differentiated business model, which creates a compelling competitive advantage. As we are looking forward, we expect Ormat to leverage its capabilities to explore growth opportunities and become a leader in the broader renewable energy sector. This concludes our remarks for today. Thank you for continued support. Operator, please? Question-and-Answer Session Operator [Operator Instructions]. Our first question will come from Paul Coster of JPMorgan. Please go ahead. Paul Coster I have a couple of questions actually. The first one is regarding Toshiba partnership. Can you talk just a little bit about the incentives and how much skin in the game you have got in that partnership? When I say skin in the game, I mean have you allocated any capital or resources to partnership? And in terms of incentives, penalties as well as rewards on successful go-to-market? Isaac Angel Hi Paul. Good morning. Paul Coster Good morning. Isaac Angel I will try to elaborate on the contract itself. Contract calls for a partnership which Toshiba and we are basically joining in go-to-market strategy. And by doing so, the both companies, we are going to the whole market of geothermal regardless temperature of the resources, which means if Toshiba, which are providing steam turbine for the higher temperatures, they have a project that calls for a bottoming unit, Ormat will be the preferred partner to provide this unit. On the other hand, on the project that we are approaching which has a higher temperature and calls for as a steam solution, then we will use Toshiba solution as the steam turbine and then we will add out solution as a bottoming, which means that now we have complete solution to the market to provide a better and efficient solution for the customers and obviously a more profitable one for the long-term. Paul Coster How do you get compensated? What’s the incentive here if you sell, for instance, Toshiba solutions? Isaac Angel The idea is not that we are becoming a agent of Toshiba, because the fact that we are building a solution is to include our hardware in a solution and their hardware in a solution. It’s basically providing a much profitable solution. Don’t forget also that Ormat is an EPC company providing an end-to-end solution to the customer and part of the solution can easily be a steam turbine. It was done before by Ormat using different providers and this time the end solution is being tailored to be more efficient and not something that will be done on sporadic basis. Paul Coster Okay. So another question I had is, the backlog has come down several quarters in a row now from a very elevated level, but you have talked of your pipeline and now you have got new partners to go after new business. At what point do you think the backlog starts to rebuild? Thank you. Isaac Angel Paul, we are working very diligently on few large projects. As you know the company, we are working on large projects and those are not coming in on 10 and 15 deals a year. We have large single projects that we are working on and it’s a timing issue. At the end of the day, I am very optimistic with our product segment future. And another thing that you should keep in mind that the we had re-signed year-and-a-half or two years ago, a $256 million project in Sarulla and two quarters ago a $100 million project in Chile and several small projects here and there. And the company is working as we speak on additional projects, by ourselves and with our partners and I am very optimistic that the backlog will pickup again. Paul Coster All right. Thank you very much. Isaac Angel Thank you very much, Paul. Operator The next question will come from Dan Mannes of Avondale Partners. Please go ahead. Dan Mannes Thank you. Good morning, everyone. Isaac Angel Good morning, Dan. Dan Mannes So I guess the first thing I want to ask about is, given the current natural gas price environment, number one, are you considering at all any further hedging for next year? Or given the absolute low level prices, you don’t view significantly more risk as it relates to things getting worse? Doron Blachar Hi Dan, it’s Doron. We are hedging usually our contracts at the beginning of the year with our budget. And then obviously as we get closer to the end of the year to finalize our budget for next year, we will have to see the pricing and the pricing are extremely low. And then we will have to take decision if they can continue to go lower, we want to hedge it and take out this risk. It’s important however to remember that once the full exposure to natural gas goes away in beginning of January, the Heber contract that was signed a few years ago which was an SO contract, it becomes a fixed-price contract, so the impact of natural gas going forward is going to be reduced by $0.01. And if you look at the longer term, we have a Ormessa, which is another one-third contract ends at the end of 2017 and we are optimistic that we will be able to finalize a contract and with an offtaker that will fix the price going forward as well. Isaac Angel Excuse me. I wan to add one thing. Another thing that I think is keep in mind is, we are trying to beef up our electricity segment faster than before. And as more and more megawatts which are in fixed-price coming on line and the percentage wise the effect of the gas prices is going away, regardless one should, just as Doron mentioned, on the one third beginning of next year and another one-third next year. So we are working on it to minimize the risk that we have on the gas prices. And as you probably know, the gas and oil prices are surprising us all, all over again. Dan Mannes Understood how that exposure reduces. I guess the follow-up there as it relates to the Ormesa contract, which you are in negotiations on. With pricing continuing to slip, are you getting any pushback as to the fixed-price level for that contract? Because I think you started negotiating that contract many, many months ago. Is the reset firm or is that still under negotiation in terms of the pricing you will ultimately get? Isaac Angel Let’s I can positively say that I am very optimistic that this is set to a fixed price already and we are in the final stages of finalizing. Dan Mannes Understood. I guess the secondary question is, site given the current low price, does that have any impact on your development activities and the price of negotiating PPAs? And the secondary part here is, competing products against solar and wind are also, we are seeing a much lower price from those products as well on the current environment. Is that impacting you on the development side? Isaac Angel Look, we should be and it’s naïve to say that the solar prices are not having an impact on geothermal prices. But on the other hand, the new RPS is giving us some backwind and there are still utilities in the U.S. that are looking for geothermal solution in reasonable prices. As it stands today, we are negotiating more than several PPA and I am happy with their prices as they stand today. Dan Mannes Okay. If we can follow up on the development side, great progress on Campbell, it sounds like Olkaria 3 also you are executing very well in bringing these plants on time earlier than expected. I guess the second part of that was Platanares and Menengai, we haven’t really heard much about either of those two projects in a couple of quarters. What’s the current confidence level on those two projects or other unnamed projects getting by the end of 2017? Just because we see very little capital spend on those and you haven’t really given us much in terms of our progress reports? Isaac Angel Okay. As you probably know, Dan, we usually report on projects which starts EPC, but in this particular case, as you are asking, on the Menengai project we are already in the financing process, which is a very advanced process in the project. GDC already finalized their part. And we are beyond the development projects, at the end of the development project on Platanares. And beyond that we have the Tungsten project, which is also developing more than well. And so we have three projects that they are at a phase that we might come up with announcements with them. Beyond that, don’t forget that we are doing lots of efforts outside of the U.S., such as Menengai and others and we developed a lot by building the infrastructure in some countries such as Indonesia, Kenya, Tanzania and Ethiopia and we are doing, in my opinion, a huge progress there. So I am very, very optimistic if I am looking at our BD efforts. You are right on the CapEx investment this quarter, but again as I said at the beginning, it’s a timing issue. So there are no setbacks, or no more at least, in none of those projects that I have just mentioned and they are actually progressing more than well. Dan Mannes That’s great color. The last question I will ask you is, as it relates to solar and to a lesser extent, batteries. You talked a lot about that during your strategic plan at your annual meeting with our shareholders or with investors. Can you maybe give us an update on what your development plans are in the solar industry? Is this primarily direct development? Have you morphed and are looking more at M&A? Just talk to us about where and what you are doing these days. Isaac Angel One thing I could tell you, Dan and I also mentioned in your conference, we are not going to be a solar developer tomorrow. That’s not the intention. It was never the intention. And the intention is that we will be basically going into projects which they have also solar solutions in the enterprises which is, as you just said, more M&A and project specific that are looking on blended solution which also have a solar solution in it. And it was never the intention that suddenly we are going to become a solar development company. Beyond that, on the solar solutions, we are looking for M&A and we are progressing well, but you realize that this management is in power exactly year-and-a-half and in this year-and-a-half we did lots of restructuring and our first priority was to concentrate on our existing assets and enhancing which we are doing and it’s basically on our gross margin and EBITDA. And this program will, it’s a long process and it will take at least another year to come up with more and more enhanced power plants and I am very optimistic that we will be able to add lots of megawatts to our existing power plants, specifically lots of profitability to our existing power plants. And it’s a big ship. It takes time to turn the ship and most certainly on new initiatives which requires a change of the DNA in recruiting new people which we are doing, but specifically on the store side, I am very optimistic that we will come up with an initial view that will initiate this path and we are almost there. Dan Mannes That’s good color. Thanks a lot. Isaac Angel Thank you. Operator The next question will come from Mark Barnett of Morningstar. Please go ahead. Mark Barnett Hello. Good morning. Isaac Angel Good morning, Mark. Mark Barnett Maybe not morning for you, but — Isaac Angel It’s very morning for us, Mark. We are in Reno. Mark Barnett Okay. You are right. All right, well, good morning again. First question, you had spoken too it a little bit, but I am just curious as to what in particular drove the impressive speed with the completion of the Campbell plant? Six months is obviously a pretty significant acceleration. So maybe if you could talk about that a little bit? And then the flipside, you had mentioned, I had lost the call for a minute, the delay in drilling I believe at the Sarulla project. If you could maybe address maybe the technical issue that’s holding that project up at the moment? Isaac Angel Okay. And here is related to your first question. As we started to restructure, our focus was and still is to look into profitability and in order to do that we had to work on cost issue, restructuring of our EPC department and working diligently in a bit different manner how to expedite each and every process that we are doing, which we successful did and as you just mentioned Don Campbell come online six months earlier and our Olkaria plant will be coming online again almost six months earlier than planned, which we all realize that every day that this thing starts to operate, it’s a lot of profitability for the company. And this we already achieved. But again it’s a working process. Those processes are changing with time and we are becoming more and more efficient everyday that passes I am very proud of our EPC department that really succeeded to work miracles in both projects and now we are expecting to the same also in the upcoming projects. On the Sarulla project, we had to divide it in two parts. In one part, we are a product supplier and we had a contract to supply Hyundai which is the EPC provider of Sarulla project, the hardware. And on this part, we are on progress, we are on time, we are delivering and getting paid and everything is okay. On the other side, if you look at the project itself, which we are an equity partner, small equity partner of 12.75%, we are not running the show. The show is run by a larger equity partner and as any other geothermal project, which we all know and the market recognizes, there are issues. There are issues of drilling, there are issues in civil work, there are issues in what we report as well or is that there are some issues which are delaying the progress of the project and they are being delayed for months. It doesn’t have any effect as of now to our supply agreement and we expect that the partners, with the help of us and others, will overcome this hurdle and at the end of the day, the project will be running. The first phase, I am expecting that the first phase will be pretty much on time. And the second and third phases will be a bit delayed but we should all remember that it’s the biggest geothermal project in the worth of 300 megawatt and those delays and issues were expected on day one. But as we want to be as transparent as we can, we just simply report them. Mark Barnett Okay. I appreciate that. I know it’s obviously a very complex process. Just the last question and maybe tough to answer at this point, but with the new RPS signing in California, obviously you talked a little bit about economics of competing technologies a little bit earlier. When do you think, at this point, we will see the utility RFPs go out for looking for evidence of your competitiveness in the next round of PPAs signed? Isaac Angel Mark, it’s a very good question. But we are asking the same question actually here. But to be serious, we don’t expect in Nevada to new RFP coming, for example, for next two or three years. On the other hand, there are certain RFPs running in California. And we are in PPA negotiations with some utilities based on the new RPS already not necessarily through an RFP process. And don’t forget there are other states in the U.S. that are also looking into geothermal and we are expanding our reach beyond California, Nevada and Hawaii. But most importantly, as we announced about a year ago, we increased our reach elsewhere, which is outside of the U.S., which as we have announced, in Chile, in the fast expansion in Kenya. We are approaching Indonesia very heavily. And we are going into Ethiopia very heavily. So at this time, basically with the announcement in California, it is getting rosier, but if you look six months ago, it was a bit darker than today. So the fact that we are trying to diversify our market and reach and not go ahead only in the U.S., but also elsewhere is basically opening up a lot of opportunities. And we expect to increase the growth rate on BD within the upcoming years. Mark Barnett Okay. Thanks very much for those comments. And that if you listening, just congratulations to Dita as well, a very long and precious career. Thanks, guys. Isaac Angel We certainly join you on the congratulations. Thank you very much, Mark. Operator And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Isaac Angel for his closing remarks. Isaac Angel Thank you very much for your ongoing support and actually I have two things to share with you. The first is that we are very optimistic and we are very pleased with our results and I think that the changes taking place and we can see the light at the end of the tunnel and it’s not a train coming to us. That’s the first thing. The second thing is more personal and I want to really, Dita, which is one of the captains of this industry, has been with the industry and the company for the last 50 years. No doubt that the geothermal industry in the world and Ormat would have never been the same without Dita and Lucien. And we would like to wish them a very bright retirement and thank you very much for what you did for the industry and for the company. And with that thank you very much. Operator The conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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