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Innergex Renewable Energy’s (INGXF) CEO Michel Letellier on Q4 2015 Results – Earnings Call Transcript

Innergex Renewable Energy Inc. ( OTC:INGXF ) Q4 2015 Earnings Conference Call February 25, 2016 10:00 AM ET Operator Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy’s Conference Call and Webcast for its 2015 Year End Results and 2016 Objectives. [Operator Instructions] I would like to remind everyone that this conference call and webcast is being recorded today, Thursday, February 25, 2016 at 10 a.m. Eastern Time. I will now turn the conference over to Martine Benmouyal, Senior Advisor, Communications. Please go ahead. Martine Benmouyal Good morning, ladies and gentlemen. If you haven’t done so already and would like to access the webcast, please go to our website at www.innergex.com. 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 welcome to address your questions either in French or in English. I would also like to point out that journalists are invited to call us afterwards if they wish to further address any question. In a minute, Mr. Perron will provide some details on our financial results for the year ended December 31, 2015. Mr. Letellier will then provide an overview of our operating activities in 2015 and our objectives for 2016. We will then open the Q&A session with both senior executives. The financial statements and the MD&A have been filed on SEDAR and are readily available via the Internet. You may also access the press release, financial statements and the MD&A on the Innergex website in the Investor section. During this presentation we will refer to financial measures such as adjusted EBITDA, free cash flow and payout ratios that are not recognized measures according to International Financial Reporting Standards, the IFRS, as they do not have a standardized meaning. Please be advised that this conference call and webcast will contain forward-looking information that reflects the corporation’s expectations with respect to future results or developments. For explanation concerning the principle assumptions used by the corporation to derive this forward-looking information and the principle risks and uncertainties that could cause actual results to differ materially from those anticipated, I invite you to consult the first pages of the webcast presentation, as well as Innergex’s Annual Information Form. I now turn the conference to Mr. Perron. Jean Perron Thank you, Martine. Good morning. The quarterly results for Q4 2015 show production of 94% of long-term average due mainly to below average water flows and wind resources. Production for the year stands at 98% of the long-term average. Revenues for the quarter were $12 million lower than in 2014 mainly due to last year where the production was under 20% of long-term average. Revenues for the year were $5.1 million higher than last year. The increase is attributable mainly to the full year contribution of the SM-1 hydroelectric facility acquired in June 2014 and to the higher wind regimes in Québec, partially offset by lower water flows in British Columbia. Adjusted EBITDA for the quarter was $9.9 million lower compared to Q4 2014 for the reasons explained above. Adjusted EBITDA for the year was $4.2 million higher than in 2014. The increase is mainly due to the higher revenues. Finance costs for the quarter were slightly lower than in Q4 2014, while for the year they are down $3.4 million compared to last year mainly due to the lower inflation compensation interest. During the quarter $51.7 million impairment was recognized on the prospective projects acquired from Cloudworks in 2011. This impairment is due to the lack of visibility on the future RFP following the construction of sites and the decrease in demand that was expected from the construction of new LNGs planned that have been postponed. Innergex servicing the ownership of the license and may eventually develop them in the future. During the year, a total of $1.1 billion of financing was completed and we do not need any additional liquidity to complete the construction of the forward projects, an amount of $180 million remains unused and available on our revolving corporate credit margin of $425 million. During the quarter, we bought back 400,000 shares and for the year a total of 1,190,000 shares at an average price of $10.36. During the year, we also issued a new $100 million convertible debenture at the 4.25% interest rate and convertibles at $15 per share, which is less dilutive than the former convertible debenture that was bearing interest rate of 5.75% and convertible at $10.65 per share and that was partially redeemed from the proceeds of the new debenture. Overall, the slightly below average quarter combined with a very strong first quarter allowed us to be very close to production in various targets for the year, while our operating expenses were lower than expected. As a result, free cash flow for the year reached $74.4 million, compared to $67.7 million in 2014 and our payout ratio improved to 86% from 88% last year. Since the beginning of 2016, our production has been above the long-term average mainly at our hydroelectric facilities in British Columbia. We remain confident in our ability to reach our long-term average production figures year-over-year. This concludes my review of the results. I will be happy to answer your questions later on during the call. And I will turn it back to Michel? Michel Letellier Thank you, Jean. Good morning, everybody. As a little bit of a tradition that we have established in the last two years, this presentation we would like to come back to what we have said in report cards for 2015 and give you what we have actually accomplished give you a little bit of a perspective on our objectives of 2016, give you our run-rate of 2017, and give you a little bit of an overview on our strategy for the next few years. And then we will have the question period. So, if we come back a little bit on what we said in 2015, we said that we wanted to increase the production and revenue by approximately 3% to 5%. We did manage to increase the revenue by 2%, even if the long-term average was a little bit weaker, as Jean mentioned. We did a little bit better on the EBITDA. We have increased 2% our EBITDA. And we have managed to keep our payout ratio at 86%, so, so far, so good. Objectives on the development, that’s where we had a big year in 2017. As you remember, we have the project of Upper Lillooet, Boulder, Big Silver and Tretheway under construction in BC. And we wanted to start the construction on Mesgi’g Ugju’s’n, the 150 megawatt wind farm in Québec. So, I am happy to report and we have a tab in the next page to give you the more – a little bit of more detail. But in a nutshell, we have managed to put the Tretheway on COD a little bit in advance and under budget by $8 million. We have started the construction on Mesgi’g Ugju’s’n project and we have overall facility reduced the construction budget by $28 million. So, if you include the $8 million saving in Tretheway, we are down to $36 million savings over a little bit over $1 billion of projects. I am pretty proud of the team there. So, if you flip on the next page, you see the project, the actual cost now forecast for the COD. And we have moved the COD a little bit in Boulder, in Upper Lillooet due mainly on the last summer fire. We have lost a few months there in the peak of the summer. So, we are managing to have Upper Lillooet and Boulder now moved a little bit further in 2017 instead of the last quarter of 2016. Mind you that Boulder and Upper Lillooet are in a remote area, where the intakes are fairly high in altitude. So, winter revenue for these projects are not big. So, our goal is to make sure that we will be in COD for the spring time, where we get the majority of the revenue. In terms of more specific costs, Boulder and Upper Lillooet have been a little bit more of a challenge, given the tunnel. So we have increased the budget and we think it’s fairly conservative by $17 million. On the other hand, Big Silver has proven to be, I would guess – I would say a very – I wouldn’t say easy project, but we didn’t have any issue with the tunnel. And most of the civil work has been done already. So we are forecasting a reduction in cost by $10 million. And Mesgi’g Ugju’s’n have – we have finalized all the construction. We have also finalized the financing. So we are now very comfortable with a reduction of $35 million. So again, all-in-all I think that I am very proud of the team to have managed a $1 billion of construction and being able to have a reduction of $36 million on their budget, so very happy on that. Financing was also a big year, if you remember last year. We had a project finance I guess portfolio of about $1 billion to be done in 2017. We managed to do all of those with at least favorable – a little bit more favorable terms, conditions. The team has been also very creative in their ability to negotiate with long-term lender to structure the reimbursement of the amortization, so very interesting financing there. We also have issue the convertible debenture of $100 million to replace the old one with more favorable terms. So that’s another plus. We did also the refinancing on Umbata Falls. So all-in-all, we managed to do a little bit more than $1 billion worth of project finance in 2015. So right now as mentioned by Jean, we don’t have any more financing to do. So every project under construction has now the equity and the financing in place with fixed term and fully amortized over the initial terms of the EPA, so quite a good achievement there too. Now, if we are talking about the growth opportunity, we said that we wanted to participate in the Ontario market. We have managed to deposit or to supply – not supply but to file two projects in the RFP with 100% of the points. I don’t know if you are familiar with the Ontario RFP. But there is a possibility of discount in your price submitted to the authority by about 40% if you have 100% of the points that the – and its social acceptance and the advancements of the project. So I am happy to report that we managed to have 100% of the points on both projects that we have submitted. So we will know a little bit later on in March if we are a winner there or not. And we also have signed a Memorandum of Understanding with the Federal Electricity Commission of Mexico, which is the equivalent of Hydro- Québec and/or BC Hydro in Mexico, to develop in cooperation a small hydro opportunity. So we are starting to initiate this meeting and opportunity. So I am quite positive on that outcome as well. Also we said that we wanted to expand internationally or to look outside Canada and to consolidate our leadership in Canada. So I am happy to report that we did another acquisition in BC. We acquired Walden North electricity facility. It’s a 16-megawatt facility, not far from our own portfolio. So we are quite happy to have been able to achieve that. And we are pursuing acquisition opportunities in France and Mexico. We are making very good progress over there. Both teams are very present in France and in Mexico. And we are still very positive on our possibility over there. Now, what we are hoping to do in 2016, we want to grow our production by 6% or 8%, grow our revenue by 9% or 11% and grow our EBITDA between 7% and 9% and obviously trying to maintain our payout ratio below 100%. We want to make sure that we also advance our construction of the three hydro facilities in BC. We want to put Big Silver and Mesgi’g Ugju’s’n project in service by the end of the year. And obviously we want to make sure that we keep on track on Boulder and Upper Lillooet construction. We also want to finalize the negotiation with Hydro-Québec regarding Saint-Paulin and Windsor PPA. And in terms of growth opportunity, we want to make sure that we are still present in Canada when there is opportunity in Canada. We reaffirm our willingness to work in Mexico and France. We want to realize at least one acquisition in one of those two markets. And we are looking into other markets, mainly the U.S. and possibly the Peru market for small hydro. We are maintaining our run rate for 2017. That run rate doesn’t include any acquisition or future development that we could have, except from the projects that we are under construction right now. So our free cash flow, we are maintaining $105 million free cash flow for 2017 and the growth of the installed capacity will go from 708, our net capacity, to about 895. That doesn’t include the acquisition of Walden or any other facilities. So I am very confident about those numbers to 2017. Now the overview of our strategy for 2016 in the next few years, we would like to again reaffirm our commitment to remain exclusively in renewable energy. We want to maintain a very healthy diversification of energy sources. We want to consolidate our leadership position in Canada. So that means that if there is opportunity in Canada, we will be there. We want to develop an international presence in target markets, as we mentioned Mexico, France and possibly the U.S. and Peru markets are still under our focus. Still again, you know us. We want to focus on high quality assets. We want to maintain a low risk business model, maintain a long-term outlook. This is very important for us. We want to focus on partnership, especially with First Nation in Canada. I think that has been a very good tool for us to develop. Maintain our discipline of acquisition that means that we want to make acquisitions that are accretive to cash flow. So in summary, I am very proud of the evolution of Innergex, from the transition following the merger of the Income Fund and the company. We have as a team, being able and patient, focused on delivering both the growth and overcoming our high payout ratio, which was the heritage of the Income Fund. We have managed to build a very strong, long-term cash flow that are based on a great diversified portfolio of assets, all under long-term PPA. With a majority of these projects being project financed with long-term and fixed rate and that are fully amortized over the first life of the EPA. We have secured the sustainability of our dividend. And finally, we will have a significant amount of free cash flow in 2017. We now have the tools to focus on growing for the future. In a nutshell, we are willing and able to deliver on our strategy. So thank you. And we will take the questions. Martine Benmouyal This concludes our presentation. We now invite you to ask your questions. Question-and-Answer Session Operator Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] And your first question comes from Nelson Ng with RBC Capital Markets. Your line is now open. Nelson Ng Great, thanks. Good morning, everyone. Michel Letellier Hey, good morning, Nelson. Nelson Ng A quick question on the delay in the timing of construction for Upper Lillooet and Boulder Creek like was it entirely due to the forest fires last summer or did the incidents in Upper Lillooet in November contribute to the delay as well? Michel Letellier The incident that you are mentioning very unfortunate incident had delayed about 10 days as well. So, it’s a little bit of a both. We had managed to have a force majeure by BC Hydro for 95 days – 90 days, which is basically the main – if you add up those 10 days, which is mainly the delay. Also the consequences of the fire having burned all the trees and the brushes along the slope had increased also some avalanche risk. So, we have lost a few days on that aspect as well. So, it’s all related to the fire mainly and also the very sad incident, that we had last fall, yes. Nelson Ng I see. So, in terms of the cost increase, was any of like the roughly $17 million cost increase, was any of that related to the delay or was that purely just on technical items? Michel Letellier It’s a little bit of mix. Mind you that it’s still – I think it’s still conservative. What we are doing is that we have kept the risk of the geology on the tunnel. So that means that we have fixed prices for the type of rock that we encounter during the construction, but it depends on a mix of quality of the rocks. We have basically four classes, 1, 2, 3 and 4. And depending on the quality of the rocks, we get to have a different pricing. So, I think that we have been a little bit conservative and rightly so, because we don’t know what’s in front of us in the tunnel, but I think that it’s basically the tunnels that are driving the cost, the overruns. Nelson Ng Okay. So, pushing out construction doesn’t really cause much of an increase? And I guess kind of related to that and if there are any cost increases, would that be recoverable through insurance? Michel Letellier Yes. Well, the delays are bringing some cost, but we are thinking – and we are discussing with the insurance. And hence, the insurance are basically covering all of those delay costs. So, that’s why we are not – and I was not referring to the $17 million being related to delays, because we think it’s – basically it’s a flow-through in terms of cost with the insurance. Nelson Ng I see. Okay. So there would be some costs, but like you said, it’s a flow-through. So, it’s not included in the increase? Michel Letellier No. Nelson Ng Okay. And then kind of more big picture in terms of I guess opportunities and project developments. So, like is it fair to say that like in the absence of an acquisition, was it fair to say that there won’t be – given the kind of lead time to procure projects, there probably won’t be any kind of new projects commissioned either in the second half of 2017 or even 2018 and potentially even early 2019? Would there be a period where there will be like no new projects contributing new revenues? Michel Letellier Well, Greenfield project, because in acquisition we can acquire existing facility or facilities that are just ready for construction. If it’s wind or solar, you can take sometimes only 1 year to build a wind or a solar facility, so that’s also part of our strategy. As I mentioned, always in the past we love to have a good balance between existing facility, facility under construction, facilities that are just at the very late stage of development and permitting are almost ready to build. So, that’s what we are looking into when we are looking into acquisition or a little platform or partner with existing developers, both in France or in Mexico. So, those are the targets. And Nelson, we may see some other projects coming in, in late 2017 or ‘18. Obviously, those would have to be acquisition of projects that are already under development. Nelson Ng I see. Okay. Just one last question, like obviously I think in the past you mentioned that you guys are looking at French wind acquisition as probably one of your priorities, but I guess given that Alberta and Saskatchewan now want to go green and the U.S. extended their renewable tax credits like what are your priorities and also geographies? Michel Letellier Well, obviously Canada is always top priority when there is opportunity. We have been very successful over the years in Canada. Canada is our own turf. There is no exchange rate issue. So, Canada is definitely a place that we want to be present. Alberta is a little bit more complicated. We don’t know exactly what will be the way that they are going to pay for the electricity. So, it’s still a little bit of an unknown. Saskatchewan is definitely of interest for us. There is New Brunswick as well who is having a small call. And Ontario has reaffirmed their willingness to extend the LRP II. So, we will be focusing on Canada. The U.S. is maybe a little bit more, I would say, not necessarily open in terms that there is always competition in the U.S., so in other market, but the yield co has been definitely been challenged in their business models. So, suddenly there is maybe a little bit more room for the Canadian company to participate in the U.S. market. Nelson Ng I see. Thanks. Thanks, Michel. Those are all my questions. Michel Letellier Thank you. Operator Your next question comes from Sean Steuart with TD Securities. Please go ahead. Sean Steuart Thanks. Good morning, everyone. Few questions. There was mention in the MD&A of a 200 megawatt block, wind block, given to the Innu First Nation and I gather you are exploring options to potentially partner with them. Can you give any context on developments there? Michel Letellier Yes, it’s like I said, I mean, I have been very careful to talk about active RFPs in development. So yes, we are interested definitely in the 200 megawatt Innu RFP or development, but it’s competitive. It’s under development right now. So, I won’t comment more, but definitely we are interested. Sean Steuart Okay. And with respect to the MOU in Mexico, wondering if you can give any insight on how everything is progressing there, where you are in terms of specific project development, any more detail you can provide in Mexico? Michel Letellier Yes. We are very, very active in Mexico. We have been meeting with CFE. Right now, the focus on both CFE and ourselves is the first RFP in Mexico. The prequalification for RFP have been happening. So, we are there. We hope to participate in that RFP. So, I guess that CFE is also focused on that first RFP. The date is sometimes late March to deposit the projects. So everybody, I guess the industry is really focused on that right now in Mexico. But we have been meeting with CFE on small hydro development. CFE has the ability to do its own project and not necessarily take all the supply from future RFPs. So, the small hydro project that we would like to do are on that basis is direct negotiation with CFE under potential partnership to build small hydro that will be used for supplying CFE-owned electricity. Sean Steuart Okay, thanks for that detail. And then lastly, any insight you can give on I guess potential resolution around the Québec PPA arbitration process from your perspective? Michel Letellier Alright. It’s tough to call. It’s – the arbitration is ongoing right now. I think that the arbitration – some arbitration are actually happening. I think that the conclusion should be somewhere late fall this year. So we are still hopeful that the arbitration conclusion on a few projects will bring value to the price of electricity. I think that we have a good case, the industry has a good case to come back to the avoided costs. Those projects – what we call the [indiscernible], the pricing was based on the avoided costs of electricity by Hydro- Québec. So we are hopeful that that notion will be retained by the arbitrator. Sean Steuart Okay, that’s all I had. Thanks Michel. Michel Letellier It’s my pleasure. Operator Your next question comes from Rupert Merer with National Bank. Your line is now open. Rupert Merer Hi, good morning everyone. Michel Letellier Hi Rupert. Rupert Merer So we had a dividend increase this quarter and some share buybacks, can you talk a little about how you are thinking about capital allocation, how regularly are you going to review the dividend and how you are going to look at share buybacks going forward? Michel Letellier Well, I think that again that policy or declaring a dividend is the responsibility of the Board. But as we discussed that strategy yesterday, I think that what we want to establish is the sustainability of the dividend and the foreseeable growth of the dividend. We are cautious, as I guess you gather from our development and the type of project that we are doing. So I think that what is important for us is to be able to say that our dividend is sustainable and we want to grow it sustainably. We are going to generate more cash flow in 2017. We will have a payout ratio that is going to be a lot lower than where we are experiencing right now. So again, always the decision between increasing the dividend and making that cash flow to work. We are very confident on what we are seeing abroad and eventually to Canada, to be able to make good investment and good use of that free cash flow. So whenever we are going to have some ability to invest and create value for the company, I think that will be the priority. But I think that the investors have to be rewarded on their patience with us. And creating – increasing the dividend slowly, but surely is probably what we are going to do. Rupert Merer Okay, great. Thanks for that. And then quickly then what was your outlook for Q1, can you talk about how it’s shaping up, given what you can see so far in the quarter? Michel Letellier Well, BC is probably doing the best of the best. It’s raining in lower elevation and we are capturing the rain. And it’s – there is a ton of snow in higher evolutions. So in BC we are well above 100% right now of our long-term average for the year-to-date on all our facilities. The wind in Québec is okay, a little bit over in February, but it was a little bit lower in January. So we are very close to our long-term average in the wind. And the hydro in Québec is also very good and in Ontario as well. So only the solar doesn’t have the full radiation right now. But that’s not so bad. But it’s still very close also to [indiscernible]. So far, the first quarter looks very, very strong. Rupert Merer Okay, excellent. Thank you very much. Michel Letellier It’s my pleasure. Operator [Operator Instructions] Your next question comes from Ben Pham with BMO Capital Markets. Please go ahead. Ben Pham Thank you. There wasn’t any commentary in the MD&A or even in your prepared remarks on Alberta, where do you guys stand on Alberta with renewables? Michel Letellier Well, I would say that for a change Alberta is now focusing on renewable energy. And I don’t want to go politics on that. It’s just that I think and I said in places in public speeches that especially in Canada, coal cannot produce electricity in Canada anymore. There is no way our country should support coal to produce electricity. And Alberta has close to 5,000 megawatts to 6,000 megawatts of installed capacity in coal. So we are hoping to see that market evolving towards future RFP. Alberta is very lucky to have very good wind resources and to some degree very good solar radiation as well. So I think that Alberta, if they have the willingness, they certainly could see a very dynamic IPP sector to produce renewable energy in Alberta. So if there is a good market and if there is some fair market for us to play, we will definitely love to be present in Alberta. Ben Pham Okay. But you don’t – you are more watching in the background now, rather than setting up offices? Michel Letellier We are yet to see how it’s going to evolve in Alberta. What we – why we haven’t been very active in Alberta is that Alberta never really had a long-term PPA that makes sense for us. So depending on what they are going to put forward, we will be aggressive or not in Alberta. Ben Pham Okay. Michel Letellier So we are – basically we are looking for long-term PPA opportunity, so if the renewable energy is again focused on merchant and some green credit, it will be difficult for us to be very aggressive there. Ben Pham Okay. And my second question, I was just wondering perhaps your thoughts about the benefits of scale as you think about 2020, what are you thinking in terms of your asset base and the growth opportunities beyond then, because it seems like most of your peers, and within the sector outside are touting scale and building scale to position for the next wave, I am just wondering your thoughts on that whole situation? Michel Letellier I think that scale is important, yes. I think that our ability to be creative is also very important and flexible and also is to be present in, I would say some good markets. Especially, I would say that we like Mexico, because Mexico is a growing market. They are growing their electricity consumption. In many other markets like the U.S., the electricity consumption is not going higher. It’s just that they are changing the way they are producing electricity. So hence, it’s making a good opportunity for renewable energy. But Mexico has both. You see the growth and you also see a change towards renewable energy and target portfolio to increase their percentage of renewable energy up to about 35% of their total generation capacity. So I see those markets as being very, very interesting for us. Peru has also some long-term contracts for small hydro. And I think we have good expertise there. So we are interested in Peru, although it’s not a big market. It’s a market where I think our expertise can be put to work. And obviously, Europe is interesting. Is Europe going to be as interesting as Mexico on the long-term, maybe not, because they are not growing that much their electricity consumption base. But to come back to the scale, I think that we can certainly have the ability to make a partnership. We have done and we have proved to be able to be a very good partner, a creative partner that has the ability to bring the win-win situation where we bring sometimes the capital. Sometimes we bring the capacity, the knowledge. So I am not so concerned about the scale, because we will never be big enough. I mean, there is always a bigger guy, a bigger fish in the pond. So, what I am focused more on is our ability, our creativity, to create value for our shareholders. That being said, we are not afraid of growing. We are not afraid of making acquisitions. And I think that one of the strategies to grow in foreign markets is to have maybe a local partner and to partner with maybe pension funds. And we have shown that our ability to do that, I think that we can be a good partner for infrastructure funds or a pension fund to acquire existing assets or to grow development projects. Again, the type of partnership that we have signed with CFE in Mexico is a very good example. I think that we are willing to partner with a big, a very big entity in Mexico that somehow has lost the ability to be nimble to develop smaller hydro. Hence, I think this is a win-win situation where we can bring the knowledge and they can bring the long-term PPA. So, those are the places where I feel we can create more value for our shareholders. Just getting bigger and bigger for the sake of getting big, I don’t think is the solution. Ben Pham Okay, that’s helpful. And maybe just a last cleanup question one of your recent projects you put in is the CPA adjustment and trimming the EBITDA down. Does that impact some of your future projects or is it already in the numbers? Are you going to revisit that in ‘17 timeframe? Michel Letellier Which one, I am sorry, Ben, what you are mentioning, you mean the Québec-based contract or? Ben Pham I think it’s on – it was in the contract that’s the Tretheway, the inflation mechanisms lower than your initial expectations. So, is that incorporated in your future backlog too or are you going to revisit it later? Michel Letellier No. Now, it’s already included in our long-term forecast, but the difference was basically what we had forecast during the construction. During the construction in BC, you have 100% of the CPI during the period of the construction or the development of the project. After that, it’s depending. It’s up to 50%. In some cases, we have 30%. Some places we have 50%. But in this case, I think we had forecasted in the construction about 2.2% of inflation and we had 1.5% or 1.6%. So it’s not a big gap though. Ben Pham Okay, alright. That’s helpful. Thank you very much. Michel Letellier My pleasure. Operator Your next question comes from Jeremy Rosenfield with Industrial Alliance. Please go ahead. Jeremy Rosenfield Thanks. Good morning. Just maybe one cleanup question related to the refinancing of the Stardale debt that I think you announced earlier this week. It looks like you are pulling out some equity from that project and you are also lowering your interest expense, so kind of a win-win. But can you just comment more broadly on what I would call capital recycling or raising debt or refinancing projects and taking out equity potentially using that to finance future acquisitions or future projects as you go forward. What’s your outlook there? Michel Letellier Well, Stardale was not done on a long-term basis with life insurance. So, we had the ability to refinance it with the same Japanese Bank. And at the time, solar and the market was not known and basically the spread also on the credit risk for solar was a little bit higher. And well, we just basically take advantage of now the bank – and especially that Stardale has been performing very well as well. So, the lenders were willing to reduce the spread and make more room for a bigger amount. So, I guess that whenever I can put my hand on long-term financing in a range of less than 5% in the range of 4%, why not? So, whenever we would have the ability to do that, we certainly would rather do that than issuing stock and diluting our shareholders. So, I think that this is probably the cheapest type of capital we can get, especially after-tax when you take into account the deductibility of the interest rate. So, do we have a lot of those possibilities? Not necessarily with the new one, because obviously we have put project finance – brand new project finance, with most of the projects are done with life co. So, there is not a lot of flexibility there. But we still have about 14 unconvert facilities and maybe with Walden, it will be 15. So, there is a little bit of room there definitely to – especially after renewing the existing PPA. So, there is maybe a case to put a portfolio together and issue a long-term bond on those, instead of having the corporate loan. So, that might bring also some more liquidity on that aspect. Jeremy Rosenfield Okay. But you don’t have a specific target in terms of the amount that you could resurface, let’s say? Michel Letellier No, we are trying to stay opportunistic. The long-term bonds are very, very attractive. It keeps amazing me to see the 30-year bond below 2%. So, obviously that makes very cheap long-term money when you have a good project to finance, especially in Canada, but no, Jeremy, we don’t have a specific number. I think we are trying to be just opportunistic. For the time being, we don’t need necessarily a lot of equity. As we mentioned, everything is being fully financed. It’s only acquisitions that would require us to have a little bit more equity. I don’t have a fixed target, Jeremy. Jeremy Rosenfield Okay. And thinking about the acquisitions that you are looking at or the potential acquisitions that you are looking at in terms of financing and expected returns on those acquisitions, do you see yourself being able to earn similar spreads in terms of the return versus the cost of capital on the projects that you are looking at or on the potential acquisitions that you are looking at? Michel Letellier It’s a good question. It’s always paramount and it’s difficult to know where the market is going, right? When the 30 years bond are below 2%, one could wonder what type of return is acceptable or not, but I always said that we look at a portfolio a little bit like any equity investor, you have risk reward formula that we are trying to follow, obviously an existing facility with already financing and long-term PPA are worth more and obviously would generate a little bit less return than a Greenfield project. So, we want to make sure that we keep our global return north of 10%. That’s our perceived cost of capital for our equity. But there is reality, there is competition out there, and we want to make sure that we stay competitive in acquiring a facility. We have looked at a lot of opportunity. We have passed on. We have bid. And I think we will be successful in the near future. One thing that we are willing to use as a tool to increase our return is to partner with pension fund, as we did with SM-1 project, where we had increased the internal rate of return for Innergex by using a little bit of debenture and using a little bit of premium to manage the asset. So, that’s one tool that we have to increase a little bit the internal rate of return for our shareholders at the end of the day and manage more portfolio and being I would say active on the M&A market as well. So, that’s definitely one aspect of the capital structure that we are willing to take in order to make a decent return at the end of the day. Jeremy Rosenfield That makes sense. And maybe since you just mentioned it, in terms of opportunities that you have passed on or that you haven’t closed, is there anything specific that you can point to as reasons why you felt either it wasn’t a good fit for Innergex or why you weren’t successful with those deals? Michel Letellier Well, it’s hard. You know, when you know your business, it means that you know how much it costs to manage it. And sometimes we wonder, because there is maybe people that have a more optimistic view on long-term forecasts. We want to make sure that whenever we are taking risk is that – or risk or we are making an acquisition is that we will not be hearing on the too optimistic side on the long-term forecast. So, I rather accept a lower return, but making sure that we are going to make that return. Another way to say it, one can imagine that they can buy an existing facility at 13% internal rate of return, but it depends on the assumption that one can use. So for us, I don’t want to promise my board or lead my investor to think that we would be able to do a bigger return on a very secure asset. Usually, you could do it in a small acquisition here and there, but usually the market is fairly efficient. And I just want to make sure that we stay focused on being a conservative long-term manager and that whenever we are accepting as a return, it will materialize over time. So that means also that whenever we are going outside, we will want to make sure that we hedge and we would not put the company at risk with the foreign exchange rate. One thing that Innergex doesn’t have right now is foreign exchange exposure. And that sometimes people might underestimate the variability of foreign exchange. We take that very seriously in our analysis. And this is one of the challenges we have whenever we are looking into acquiring something in the States or in France or in Mexico. So again, we are taking our time, but whenever we are doing something, I think that we can sleep well at night. You know that I like to sleep well at night. Jeremy Rosenfield Yes, okay. Thanks, Michel. Excellent. Michel Letellier My pleasure. Operator Mrs. Benmouyal, there are no further questions at this time. Martine Benmouyal We have one more question actually from Mr. Jay Ferguson of Ferguson, Andrews Investment Advisers and it goes as follows. With the dislocation of the yield co market in the U.S., are you looking to buy assets from them such as NYLD, NRG Yield, and SUNE? Michel Letellier That’s a very good question. And I was amazed to see how quick the market realized that yield co promises were hard to deliver and we will stay opportunistic. If there is some good opportunity, definitely the U.S. market is on our radar screen. And I agree that the market seems to have evolved from being a little bit crazy to now being more reasonable in yields. Martine Benmouyal Thank you. Alright, if there are no more questions, I will thank everyone for attending this conference. We appreciate the opportunity to provide an update about our company. Please do not hesitate to contact us if you have any other questions. Operator Ladies and gentlemen, that concludes our conference call and webcast. Please note that a replay of the conference call and webcast will be available on the Innergex website. The press release, financial statements and Management’s Discussion 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. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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American Water Works’ (AWK) CEO Susan Story on Q4 2015 Results – Earnings Conference Call Transcript

Operator Good morning and welcome to American Water’s Fourth Quarter and Year End 2015 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the company’s Investor Relations website. Following the earnings conference call, an audio archive of the call will be available through March 3, 2016 by dialoging 412-317-0088 for U.S. and international callers. The access code for replay is 10079115. The online archive of the webcast will be available through March 25, 2016 by accessing the Investor Relations page of the company’s website located at www.amwater.com. [Operator Instructions] I would now like to introduce your host for today’s call, Greg Panagos, Vice President of Investor Relations. Mr. Panagos, please go ahead. Gregory Panagos Thank you, Kerry. Good morning, everyone. And thank you for joining us for today’s call. We will keep the call to about an hour. At the end of our prepared remarks, we will open the call up for your questions. During the course of this conference call, in both our prepared remarks and in answer to your questions, we may make forward-looking statements to represent our expectations regarding our future performance or other future events. These statements are predictions based upon our current expectations, estimates and assumptions. However, since these statements deal with future events, they are subject to numerous known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements. Additional information regarding these risks, uncertainties and factors is provided in the earnings release and in our 2015 Form 10-K each as filed with the SEC. I encourage you to read our Form 10-K for a more detailed analysis of our financials and other important information. Also reconciliation tables for non-GAAP financial information discussed on this conference call including adjusted EPS and our O&M efficiency ratio can be found in the appendix of the slide deck for this call which is located at the investor relations page of the company website as well as our earnings release. We will be happy to answer any questions or provide further clarification if needed during our question-and-answer session. All statements in this call related to earnings and earnings per share refer to diluted earnings per share from continuing operations. Before I turn the call over to Susan, I would like to take this opportunity to introduce you all to Melissa Schwarzell. Our new Director of Investor Relations. Melissa has been a member of American Water’s finance team in Lexington, Kentucky since 2009. Her experience includes supporting rate cases, infrastructure filings and other regulatory matters in seven of American Waters regulated states. She has worked on most of the company’s cost components and she has tackled challenging recovery issues. She’s also provided rates related financing – excuse me, financial planning support throughout the American Water footprint. I know you will all find Melissa to be very helpful and a pleasure to work with. And now, I will turn the call over to American Water’s President and CEO, Susan Story. Susan Story Thanks, Greg. Good morning, everyone and thanks for joining us. With me today are Linda Sullivan, our CFO, who will go over the fourth quarter and full year financial results; and Walter Lynch, our COO, who will give key updates on our regulated business. On January, the 1st, Walter assumed additional responsibility for operational and safety best practices across our AWE market-based businesses. So periodically, he will give you an update on those efforts as well. The employees of American Water delivered strong results in 2015 for both the fourth quarter and the full year. We invested significant capital into needed upgrade for our system to provide reliable and safe water and wastewater services. We continued our focus on managing costs and deploying technology so that our services remain affordable for our customers and we treated and delivered water that consistently met and surpassed EPA drinking water standards. This includes the lead and copper rule, which has generated a lot of news recently, due to the crisis in Flint, Michigan. American Water samples for lead on a routine basis and our water systems continue to be incompliance with that rule. We expanded our regulated customer base in 2015 by nearly 42,000 metered customers; about 9,000 customers resulted from organic growth in our existing footprint. 24,000 customers joined our system from acquisitions that closed during the year, and additional 9,000 are from acquisitions, where we have written agreements in place and are just awaiting regulatory approval. We also continue to grow our market-based businesses through new contracts and new customers. As you can see on slide seven, we reported operating revenues of $783 million, a 7% increase above fourth quarter 2014. For the full year, operating revenues were nearly $3.2 billion, an increase of about 5% over 2014. Earnings from continuing operations were $0.55 per share for the fourth quarter, a 5.8% increase above fourth quarter 2014. Annual earnings were $2.64 per share, up 8.6% over 2014 adjusted EPS. The fourth quarter includes a $5 million contribution to the American Water Foundation whose work I will discuss briefly before our Q&A session. Turning now to slide eight; you can see that we delivered on our strategies in both the regulated and market-based businesses in 2015. We made about $1.4 billion in total annual investment, the highest in our company’s history. We invested $1.2 billion in our regulated system, which improved our long-term service reliability and water quality for our customers. We’re able to increase our investment at this level because of the expertise of our hardworking employees and our continuous improvement in both O&M and capital deployment efficiency. We’re proud of our ability to deliver on our growth goals and effectively manage every dollar to deliver excellent customer service while we keep our customer bills affordable. Even more importantly, we know that our customers need to be able to trust that the water we provide is clean and safe. So while consistently meeting and surpassing all EPA requirements in 2015, we continued our focus on further strengthening our critical assets. Let me give you a couple of examples. We upgraded two of our company’s largest water treatment plants, which serve over 300,000 customers in St. Louis County, Missouri. In Champaign, Illinois, we upgraded chemical treatment facilities nearing the end of their useful life with improvements that included replacing gas coring facilities with safer technology. In addition to these regulated system investments in 2015, we also grew our customer base organically and through regulated acquisitions. Our market-based businesses continue to grow as well. In December, our Contract Services Group was awarded a 10-year O&M contract in Camden, New Jersey with revenue of approximately $125 million. Our Military Services Group expanded to 12 bases with a successful 50-year contract bid for Vandenberg Air Force Base with revenue of approximately $300 million. Our Homeowner Services Group expanded to 1.6 million service warranty contracts and we grew our utility partnerships by adding Rialto, California and the Orlando Utilities Commission. As you know, we expanded our business through the acquisition of Keystone Clearwater Solutions. So, in summary, we produced excellent results for the year through our ongoing customer growth, highest annual capital investment in our history, and we continued our O&M and capital efficiency. This continues our progress toward achieving our goal of 7% to 10% EPS growth through 2020. Based on our performance, our board declared a cash dividend of $0.34 per share during the fourth quarter, and we are affirming our 2016 earnings guidance range of $2.75 per share to $2.85 per share. And with that, Walter will now give you his update. Walter Lynch Thanks Susan. Good morning, everyone. As Susan mentioned, our regulated businesses had a strong year all around with historic capital investment, smart and strategic acquisitions and continued O&M efficiency gains while balancing customer bill impacts. As you can see on slide 10, 2015 was a good year for growth. Through acquisitions and organic growth, we added in our pending regulatory approval, nearly 42,000 customers in our regulated businesses. In 2015, we completed 14 acquisitions adding nearly 24,000 customers to our existing footprint. Seven of these transactions closed in the fourth quarter including our purchase of the municipal wastewater system in Fairview Township, Pennsylvania. This newly acquired system provides wastewater service to approximately 4,000 customers including more than 200 businesses in commercial accounts, and it’s a perfect fit and as Pennsylvania American Water already owns the water system. This acquisition provides a long-term wastewater solution and a financial relief for the local community. According to the Township’s board of supervisors because of the sale, Township residential received a 50% reduction in real estate taxes in 2016. The proceeds of this sale will also help payoff approximately $21 million in sewer debt and avoid an anticipated $14 million in additional debt that would have been required to complete planned projects. Again this is a great example of how we can bring solution to municipalities struggling to finance the water and wastewater improvements while improving their service and keeping rates affordable for our customers. At the end of 2015, we have 12 pending acquisition agreements that were signed and waiting for regulatory approval. These acquisitions would add approximately 9,000 customers to our customer base if approved and completed. In 2016, we completed a purchase of four of these acquisitions, one of which was Environmental Disposal Corporation in New Jersey. This investor-owned wastewater utility provides service to more than 5,300 customers as well as bulk wastewater treatment services for several nearby communities. Additionally in December, Pennsylvania American Water signed a memorandum of understanding for the potential acquisition of the wastewater assets of the Scranton authority, which serves approximately 31,000 customers. This MOU commits the parties to negotiate in good faith toward executing a final purchase agreement. On the regulatory front, you can see a snapshot of our current activity on slide 11. Our Illinois and Kentucky subsidiaries fought rate request in the first month of 2016. In both space, we’re seeking to recover a significant amount of needed capital investment, offset by reduced or flat O&M expenses. In Illinois, we requested $40 million in additional revenues based on a projected total of $342 million of capital investment between October 2013, and the end of 2017. Our team in Illinois reduced their O&M expenses by about 3% since the last rate case in 2012, continuing the great work by our employees to keep those affordable for our customers. In Kentucky, we request $13.5 million in additional revenues, primarily driven by $79 million of capital investment while keeping operating expenses flat since 2012. Again, this focus on expenses allows us to make critical infrastructure investment continuing the trend of keeping bills affordable for our customers. In Missouri, our case is moving along to the process, and we expect the decision sometime before mid-year. In West Virginia, we have not yet received the rate order, so it will stay at a high level and base my comments from the press release sent out last night by the West Virginia Public Service Commission. The order provides an increase of $18.17 million in water rates and $151,000 in sewer rates. The Commission recognizes that the company reduced its O&M expenses from its last rate case, and the adjustment to base rate is driven primarily by the increased investment we made to ensure reliable water service for our customers. And consistent with our normal process, West Virginia American water will show a press release, once they’ve had a chance to review the order. Moving to California, on February 1st, we received approval from the California Public Utility Commission to extend our cost of capital filing by one year. This will keep our authorized return on equity at 9.99% through 2017 for our California subsidiary. Meanwhile, despite some rainfall from the effects of El Niño, the drought continues in California. Our team continues to demonstrate leadership in dealing with the drought and we’re certainly proud of all other efforts to help our customers during this time. We also continue to make progress on the Monterey Peninsula Water Supply Project. Our test plant well is operational and the results are positive. The project is undergoing environmental and regulatory review by the California Public Utility Commission, and this review is scheduled to be completed by the end of the year. Moving to slide 12; we ended the year with a 35.9% O&M efficiency ratio and we’re on track to meet our 34% target by 2020. I know, we’ve talked a lot about this, most recently, at our Investor Day in December, but I think it’s worth repeating, we’ve really made tremendous progress here. As you can see, the progress is evident by the amount of revenue requirement attributed to capital expenditures versus operating expenses. For the general rate cases, we filed last year, we reduced our O&M expenses by $10 million or 17%. This reduction allowed us to invest approximately $65 million into needed infrastructure upgrades without affecting our customers’ bills. Our employees are doing a great job in this area through leveraging best practices, improved efficiencies, technology and innovation, and this produces results for our customers as well as our company. So, with that, I’ll turn the call over to Linda for more detail on our financial performance. Linda Sullivan Thank you, Walter, and good morning, everyone. In the fourth quarter and for the full year of 2015, American Water continued to deliver strong financial results. As shown on slide 14, earnings per share from continuing operations for the fourth quarter was $0.55, up $0.03 or 5.8% over the same period last year. This slide shows the contribution by business line to our quarterly and annual results. Let me walk through the numbers then I’ll discuss the drivers of the key variances on the next few pages. For the quarter, the regulated businesses contributed $0.54 up $0.01, the market-based businesses contributed $0.06 flat to the fourth quarter of last year and the parent which is primarily interest expense on parent debt was $0.02 better than the fourth quarter of last year. For the full year 2015, earnings per share from continuing operations was $2.64 per share, an increase of $0.21 or 8.6% increase compared to adjusted 2014. The contribution from our regulated businesses was $2.63 per share, up $0.18 or 7.3% over adjusted 2014. The market-based businesses contribution was $0.24, up $0.02 or about 9% over last year. And the parent improved $0.01 per share. These annual increases are consistent with our long-term growth triangle. Turning to slide 15, let me walk through the components of our quarter-over-quarter increase in earnings per share. The primary driver was higher regulated revenue of $0.09 per share from infrastructure surcharges and other rate increases to support our regulated system investments. This was partially offset by higher O&M expense of $0.03 mainly from the timing of maintenance-related work as well as higher claims and pension-related costs. Depreciation, taxes and other increased $0.05 per share driven mainly by our investment growth. The improvement at the parent of $0.02 per share was mainly due to lower taxes from state tax proportionate benefit, partially offset by the $5 million contribution to the American Water Foundation that Susan mentioned. Also, please note that the market-based businesses were flat for the quarter as higher growth in our Military and Homeowner Services Groups was offset by a 2014 tax benefit. Turning to slide 16, let me walk through to the elements of our $0.21 increase in year-over-year adjusted earnings per share from continuing operations. The regulated businesses benefited from higher revenue of $0.18 per share from authorized rate increases to support investment growth as well as increases from acquisitions and organic growth. In addition, there was a $0.05 increase due to mild weather during 2014 and an improvement in O&M costs of $0.02 per share offsetting these improvements, with higher depreciation and taxes of $0.07 per share, driven by our investment growth. Overall, the regulated businesses increased $0.18 year-over-year. The market-based businesses were up $0.02, mainly due to additional construction projects under our military contracts and the addition of Hill Air Force Base and the Picatinny Arsenal in 2014, as well as geographic expansion and Homeowner Services. Parent and other was $0.01 better than 2014, due mainly the lower taxes from state tax proportionate benefits, partially offset by the Foundation donation. Now, let me cover the regulatory highlights on slide 17. As Walter mentioned, we should receive the rate order from the West Virginia rate case soon. And as such, we currently have four general rate cases in process: Missouri, Virginia, Illinois, and Kentucky for a combined annualized rate request of $87.4 million. For rates effective from January 1, 2015 through today and including the $18.3 million for West Virginia we received a total of $98.6 million in additional annualized revenue from general rate cases and infrastructure charges. We encourage you to review the footnotes in the appendix of this slide deck for more information. Slide 18 highlights our improved financial performance across the board. During the fourth quarter of 2015, we made total investments of $386 million primarily for regulated system investments. For the year, we invested a total of $1.4 billion. This includes $1.2 billion for regulated system investments, $64 million for regulated acquisitions and $133 million for the acquisition of Keystone. Excluding the Keystone acquisition, capital investment increased about 27% from 2014. Going forward, we expect to invest $6.4 billion over the next five years of which about $5.5 billion will be to improve water and wastewater systems for our customers, $600 million for regulated acquisitions and $280 million for strategic capital. For the full year, cash flow from operations increased $82 million or 7% to about $1.2 billion mainly due to the increase in net income and our adjusted return on equity for the past 12 months was 9.43%, an increase of 57 basis points compared to last year from continued execution of our strategies. We also announced in the fourth quarter of 2015, a $0.34 common stock cash dividend payable on March 1, 2016. On slide 19, as many of you will recall, during our Investor Day in New York, we gave 2016 earnings guidance of $2.75 to $2.85 per share. Today, we affirm that guidance range. There are certain important factors that could impact our 2016 results. And as we have done in the past, slide 19 outlines those factors that we have included in our earnings guidance range. Swings outside of these ranges could cause results to differ from guidance. Weather is generally the largest variable impacting our earnings. Our range of plus or minus $0.07 represents what we consider to be normal weather variation that we have included in our earnings guidance range. For our regulated businesses, we see variations of plus or minus $0.03 primarily from the timing and outcome of rate cases, the timing of completion of capital projects as well as variations in O&M and production costs. American Water Enterprises variability is driven mostly from the timing of future capital upgrades in Military Services and realization of our expected growth as well as claims costs in Homeowner Services. Variability for Keystone is primarily driven by natural gas prices and drilling activity in the Marcellus and Utica. I would also like to mention that our 2016 earnings guidance range includes estimated legal defense costs of about $0.03 per share related to the 2014 Freedom Industries’ chemical spill in West Virginia. As you may recall, we included $0.02 per share of legal costs in 2015. And lastly, I would like to address the expected impact from the five-year extension of bonus deprecation. From a cash perspective, we are in a federal tax net operating loss position. So, we do not receive a current cash benefit from bonus depreciation. We look at electing bonus depreciation on a state by state basis. In those cases, we’re adopting bonus depreciation would be in our customers’ best interest and where we expect to be able to utilize our NOL, we will do so. Assuming, we elect bonus depreciation in our regulated states, this would increase our NOLs and push out the expected timing of when we would become a cash tax payer by about one year to 2021. From an earnings perspective, while this would be expected to reduce rate base and earnings, we do not see a significant impact to our 2016 earnings guidance range, nor do we see a significant impact to our 7% to 10% compounded annual EPS growth rate for 2016 through 2020 because the rate base impact is largely offset by lower financing needs in 2020. We also have flexibility to mitigate some of the rate base impacts by redirecting a portion of our strategic capital already included in our five-year plan to our regulated businesses, as well as accelerating certain investments that continue to strengthen our critical assets for our customers. And with that, I’ll turn it back over to Susan. Susan Story Thanks, Linda. Before taking your questions, let’s review the American Water investment thesis we shared with you at our Investor Day and briefly discuss the American Water Foundation. On growth, we affirm our EPS growth goal of 7% to 10% for the next five years. We talked about our unprecedented 2015 capital investments, our continued O&M and capital efficiency and our plans for 2016. We know that reputation, operational excellence, reliability, and dependable water quality are critical to our growth. Where and how we expanded our customer base in 2015 leverages these strengths, growing through tuck-in, adding wastewater customers where we are ready to serve water and growing our market-based businesses. Our people have deep utility expertise and diversified experience and they are our biggest competitive advantage. They also care deeply about our customers in the communities in which they live and serve. This was clearly demonstrated about what our employees dealt with in both Missouri and Illinois during the last week in 2015. Record rainfall of up to 12-inches fell during a powerful three day storm across the Midwest, hitting the St. Louis area hard and causing record flooding. Homes and businesses were submerged, highways closed and water and sewer utilities faced extraordinary challenges. Missouri American has two plants on the Merrimack River, supplying water to about 20% of our customers in the St. Louis County area. Thanks to early planning and the construction of a system of temporary pipes and pumps. Our customers never loss service and we maintained excellent water quality throughout the event. Our wastewater teams also worked around the clock during the heavy rain to remove pumps and motors that otherwise would have been lost to flooding. But it’s not just what our Missouri team did for our own customers; it’s what they did for the surrounding communities in need. A local public water district had a flooded plant and lost the ability to serve its 20,000 customers. By opening a connection between the systems, Missouri American was able to help the district, serve many of those without water. Additionally, they worked with the National Guard to fill more than 500 tanker trucks that delivered our water outside of our service area, which brings me to the American Water Foundation funded by American Water’s parent company which keeps the communities we serve and have a better quality of life. One key Foundation partnership is with the Union Sportsmen Alliance, where we have worked with local union members to build walking trails, public access areas and fishing facilities for communities, including projects for special needs kids. The Foundation also has a partnership with a National Recreation and Parks Association in support of building better communities. Here, we focus on building or enhancing nature-based playgrounds for children and educating people on water and environmental stewardship practices. The Foundation also matches employee donations to qualified charitable organizations up to $1,000 per year per employee. Earlier this month, the Foundation made a $50,000 donation to the Flint Child Health & Development Fund to help the children of Flint, Michigan, get the resources they need to deal with the lead exposure many have experienced. These examples of doing good as we do well, demonstrate the dedication, expertise, strong character and the work ethic of the 6,700 people I get the privilege of working with every day. Certainly, our employees’ commitment translates into our strong financial performance, but it also let you know as our investors that we are a company, whose people believe not just in what we do, clean water for life, but also in how we do it. And we believe that it is critical for a company, who wants to be as successful in the coming decades as we are today. So, with that, we’re happy to take your questions. Question-and-Answer Session Operator We will begin the question-and-answer session. [Operator Instructions] Our first question comes from Richard Verdi of Ladenburg. Please go ahead. Richard Verdi Good morning, everyone, very nice quarter and thank you for taking my call here. Just a couple quick and easy questions; first, I guess Susan can you please speak to the strategy for capital raises the next few years to fund your program and how you think about raising the dividend versus buying back stock versus issuing equity? Susan Story Sure, Rich, and thanks for the question. I will start, and then Linda may want to jump in. So, when we look at all of the different uses of our capital in terms of growth, in terms of raising our dividend, in terms of regulated investment, all of those different things, we look at a balance in optimizing those and also where we get the biggest value from every dollar that we spend. So, we look at growth and the returns we get there. We look at regulated investment and let me be clear that in our investment plan, the first thing we do, is we invest whatever is needed in every one of our state to ensure that we provide safe clean water that meets all EPA standards. So, then beyond that is what we refer to as discretionary. But there is a base amount which is significant well over half of our capital that we spend to ensure that we provide those services. Then beyond that, we look at our dividend growth, which is, we have said, we want to keep consistent with our EPS growth. So, we want those to be correlated, so that’s the guidance we’ve given and we have a 50% to 60% payout ratio and currently we’re at the lower end of that range. So, there is room there. When we look at things like debt and I’ll let Linda talk about this more, the question we ask is what is best for our customers and our shareholders with the next dollar that we invest or whether we pay down debt or whether we’re able to provide dividend. So, as you know, to have a – to be in a strong financial position as we are, we have a lot of optionality and we’re always looking at how we optimize that optionality. Linda Sullivan And Rich, I would add to that that as we look and as we outlined in our Investor Day, when we look at the capital structure over the next five years, we continue to look at about 45%-55% equity to debt capital structure. Richard Verdi Okay, excellent. Thank you. And next on the O&M and efficiency ratio, clearly, this has been a great part of the story very successful, excuse me, couple of years back the stretch target was 35% for 2018, now the stretch target is 34% for 2020. Its 100 basis points lower in three years. I know a portion of these stretch targets were based on the ERP program a while back. Now they are predicated upon automation technology such as the Badger Meter contract recently announced. Without holding you to it, just trying to get a grasp on what lies beyond 2020, how possible is it that American reduces the O&M efficiency ratio by another 100 basis points by 2022 to 33%. And would automation and technology be the driver of that reaction or is there something underneath the American umbrella that could drive the third phase of O&M efficiency reduction? Walter Lynch Hey, Rich; Walter. I’ll take that question. Thanks for it. We’re not going to forecast beyond 2020 and a 34%, but I can tell you our teams are geared towards continuous improvement and that’s what’s driving this, and technology is going to be a big part of it. As you know, we are about 90% implemented with AMR. We’re also looking at AMI and the technology that we’re buying now is easily transitioned into AMI. So it’s a long-term solution. But I’d tell you looking at the people in our business understand the why and why we are reducing expenses. So we can invest in our infrastructure and provide excellent customer service. So it’s really throughout the business sharing best practices, leveraging our supply chain and reverse auctions and power and chemicals, so it’s a mindset and it’s a commitment by our employees that we’re going to get to where we need to go and they understand the why, and I think that is the key to this whole things, and that’s been the foundation for our success. Richard Verdi Okay. Great, thank you very much, and I appreciate it. And that’s it for me, I’m going to jump in queue, but I just want to say thank you very much for slide 36 and that’s very helpful. Susan Story Thanks, Rich. Operator [Operator Instructions] Seeing no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Susan Story for any closing remarks. Susan Story Well, thank you, Kerry. And thank you all for participating in our call today. If you’ve got any questions, please call Greg and Melissa and they will be happy to help. I’d like to remind everyone that our 2016 first quarter earnings call will be on May, the 4, and our Annual Stockholders Meeting would take place on Friday, May, the 13. Thanks again for listening and we’ll talk to you in May if not before then. Thanks. Operator The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day. 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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Ormat Technologies’ (ORA) CEO Isaac Angel on Q4 2015 Results – Earnings Call Transcript

Operator Good morning and welcome to the Ormat Technologies’ Fourth Quarter and Full-Year 2015 Earnings Conference Call. 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 Mr. Rob Fink of Hayden, IR. Please go ahead. Rob Fink Thank you, operator, and thank you everyone for joining us today. Hosting the call are Isaac Angel, Chief Executive Officer; Doron Blachar, Chief Financial Officer; and Smadar Lavi, Vice President of Corporate Finance and Investor Relations. Before beginning, we’d like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward-looking, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company’s plans, objectives, and expectations for future operations and are based on management’s current estimates and projections of future results or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of 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 our 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 the 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’d now like to turn the call over to Isaac. Isaac, the call is yours. Isaac Angel Thank you very much, Rob, and good morning everyone. Thank you for joining us today for the presentation of our fourth quarter and full-year 2015 results and our outlook for 2016. Starting with Slide 4, this was a very strong conclusion to a very good year for Ormat. Our product segment outperformed our expectations, growing 23% for the year. Balancing headwinds related to the commodity prices with segment revenue in our Electricity segment. Our Electricity segment delivered 8.6% growth in generation that will support our future revenues growth. Despite challenges related to commodity prices, we maintained solid margin levels. This performance peaks to both our balanced business model and our methodical efforts to improve operational efficiency, improve profit margins, and diversify revenue. Our strong financial performance was only a small part of our achievements. In 2015, we took meaningful steps to increase shareholder value by completing the Northleaf and restructuring transactions, building our strategy, and starting to implement it. We continue to enhance all aspects of Ormat’s value chain to improve our performance as well as to progress with near and long-term strategic initiatives in our core geothermal business and in new activities to continue and provide long-term and sustainable growth. I will elaborate on the progress we have made and our plans for the future after Doron will review the financial results. Doron? Doron Blachar Thank you, Isaac, and good morning everyone. Let me start by providing an overview of our financial results for the full-year ended December 31, 2015. Starting with Slide 7, total revenues for 2015 were $594.6 million, up 6.3%, compared to $559.5 million in 2014. The increase was driven by increased revenues in our Product segment of 23.4% compared to 2014 and was partially offset by 1.7% decrease in our Electricity segment, which represented 63.2% of total revenues. In our Electricity segment, as you can see on Slide 8, revenues were $375.9 million in 2015 compared with $382.3 million last year. The decrease in this segment was mainly due to a $30 million reduction in the revenues generated in the power plants that are tied to oil and natural gas prices, as well as lower revenues in Puna power plant having lower generation as a result of last year [indiscernible]. The decrease was offset mainly by additional revenues generated by the second phase of McGinness Hills and Don Campbell power plant in Nevada, which commenced operation in February and September 2015 respectively. In the Product segment, on Slide 9, full-year revenues were $218.7 million, compared to $177.2 million in 2014, which represented 23.4% increase. This increase was primarily due to the increased backlog we had at the beginning of the year and commencing revenue recognition on the new contracts as we signed early in the year. Moving to Slide 10, the Company’s combined gross margins for 2015 was 36.7% compared to 36.4% in 2014. In the Product segment, gross margin was 38.8% compared to 38.4% in the prior year. The increase was driven primarily by a shift in product mix and different margin in the various sales contracts for 2015, and improvements made in our – at our Ormat Manufacturing Facility. In the Electricity segment, gross margin was 35.5%, similar to 2014. Despite, the $30 million decrease in our annual revenues, as a result of lower natural gas and oil prices, we were able to maintain the same margin due to the operational improvements we conducted in our power plant as well as the addition of the second phase power plant in McGinness Hills and Don Campbell that came online in 2015 and in which we benefited from the economical scale. In 2015, 40% of our electricity revenues were tied to oil and natural gas prices. In February, we held our exposure to natural gas for 2016. In the past, we use forward contracts to hedge our revenue and adjusted EBITDA. This year, in light of the low natural gas and oil prices, we decided to hedge on natural gas exposure by setting coal option. This hedging strategy together with a transition to a fixed price PPA for Heber 1 power plant significantly reduces our exposure and we believe revenue and adjusted EBITDA in 2016 will be less vulnerable than in 2015. Moving to Slide 11, 2015 full-year operating income was $164.1 million compared to $143.5 million in 2014. Operating income attributable to our Electricity segment for 2015 was $99.3 million compared to $90.4 million for 2014. Operating income attributable to our Product segment was $64.7 million compared to $53.1 million in 2014. Moving to Slide 12, interest expense net of capitalized interest for 2015 was $72.6 million compared to $84.7 million in 2014, a 14.3% decrease year-over-year. This decrease was primarily due to lower interest expense as a result of principal payment of long-term debt and the revolving credit line with bank, a decrease in interest related to the sale of tax benefits and a slight increase related to interest capitalized to project. The decrease was partially offsets by an increase in interest expense related to a loan received to finance the construction of the second phase of the McGinness Hills power plant. Moving to Slide 13, net income attributable to the Company’s stockholders for 2015 was $119.6 million, or $2.43 per diluted share, compared to $54.2 million, or $1.18 per diluted share for 2014. The net income includes approximately $48.7 million non-recurring and non-cash income tax benefit and related expenses recorded in the third quarter of 2015 relating to new tax law in Kenya, which extended the period of utilizing investment deductions from five years to ten years for our Olkaria 3 power plant in Kenya. Excluding the non-recurring income tax benefit and related expense, net income attributable to the company’s shareholders was $70.9 million, or $1.44 per diluted share, compared to $54.2 million, or $1.18 per diluted share, in the third quarter of 2014. Now, I’d like to go over a few quarterly financial highlights beginning with Slide 14. For the fourth quarter of 2015, total revenues increased 14.6% to $171.1 million, compared to $149.2 million in the fourth quarter of 2014. Revenues in the Electricity segment increased 4.8% to $97.8 million in the fourth quarter of 2015, up from $93.3 million in the fourth quarter of last year. Revenues in the Product segment was $73.3 million, an increase of 31%, compared to $56 million in the fourth quarter of last year. Now on Slide 15; operating income for the fourth quarter of 2015 increased to $49.1 million, compared to $34.8 million in the fourth quarter of 2014, representing 41.1% increase. Net income attributable to the company’s stockholders, for the fourth quarter of 2015, were $23 million, or $0.46 per diluted share, compared to $7 million, or $0.15 per diluted share, in the fourth quarter of 2014. Please turn to Slide 16 on adjusted EBITDA. Adjusted EBITDA for 2015 was $291.3 million, compared to $272.7 million in the same period last year, which represents a 6.8% increase. This increase was despite $22 million reduction in our annual adjusted EBITDA as a result of lower natural gas and oil prices. Adjusted EBITDA for the fourth quarter of 2015 was $79.1 million, compared to $68.3 million in the same quarter last year, which represents a 15.8% increase. Reconciliation of the EBITDA and adjusted EBITDA is described on the appendix slide. Turning to Slide 17, cash and cash equivalents, as of December 31, 2015, was $185.9 million. We generated $190 million in cash from operating activities, and invested $152.5 million in CapEx. The accompanying slide breaks down the use of cash during the year. Our long-term debt, as of December 31, 2015, and the payment schedules are presented in Slide 18 of the presentation. The average cost of debt for the company stands at 5.9%. I would also like to mention that Ormat’s equity passed for the first time the $1 billion mark [ph] in which $1.08 billion. On February 23, 2016, Ormat’s Board of Directors approved the payment of a quarterly dividend of $0.31 per share for the first quarter. The dividend will be paid on March 29, 2016 to shareholders of record as of the closing business on March 15, 2016. In addition, the Company expects to pay a quarterly dividend of $0.07 per share in the next three quarters. 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 20 for an update on operations. As I mentioned in my opening remarks, this was a very good year for Ormat, and I would like to elaborate on some of the achievements being accomplished. We have discussed few times in 2015, the joint venture with Northleaf Partners through which we monetize the portion of our portfolio and provided the company with additional capital for expansion. The partnership has progressed exactly as we hoped it would and we expect to add the second phase of Don Campbell power plant with the joint venture in the first half of 2016. We also successfully completed the share exchange transaction with our former parent entity, Ormat Industries. The net result of this transaction increase the public float of our stock from approximately 40% to approximately 76% of our total shares outstanding, which helped to expand and improve our liquidity. This transaction also streamlined and simplified Ormat’s corporate structure. With these two milestones, serving as a foundation, we share with the market a new multi-year strategic plan for long-term sustainable growth at an Analyst Day in March in New York. This plan involved facility optimization to maximize profitability, geographic expansion, and market expansion involving Ormat transitioning from a leader in geothermal energy to a global leader in renewable energy. During the year, we have refined and started to implement a number of the elements of the new plant and pleased to report that we made significant steps to gain each of these components of our strategy. Moving to Slide 21; we made improvements in all aspects of our value chain with using manufacturing lead-time, improving management control and procurement. This process translates into a significant improvement in gross margin and adjusted EBITDA margin, if [indiscernible] on the Electricity segment on Slide 22, generation in 2015 was 4.8 million megawatt hour compared to 4.5 million megawatt hour in 2014, which represents 8.6% increase primarily as a result of the second phase of Don Campbell and McGinness power plants that commenced operation in 2015. We have made planned level adjustments, designed to optimize our electricity generation including the elimination of older or less efficient components with the goal of improving profitability. This progress is evident in the financial results we are reporting today. We see improvement in the adjusted EBITDA per megawatt with the similar levels in 2015 compared to 2014, despite commodity impact on revenues. We see a significant reduction in O&M cost and we see a reduction in CapEx per megawatt from a range of $4.5 million to $5 million per megawatt to a range of $4 million to $4.5 million per megawatt. We believe that new capacity that was recently added from Olkaria power plant in Kenya should further improve operation margins, which will in turn drive higher levels of adjusted EBITDA and profitability. Turning to Slide 23, we also made progress in our geographic expansion goals as evidenced by the recent announcement the signing of binding Memorandum of Understanding to acquire, gradually, 85% of geothermal power plant in the Island of Guadeloupe. As we stated at the Analyst Day, growth through M&A is a key part of our overall strategy. Our strong balance sheet positions Ormat well to execute additional strategic execution – acquisitions. As it relates to our goal of expanding our technological and geographical base in the geothermal market, we announced the milestone collaboration with Toshiba. For nearly five decades, Ormat is focused on and maintain a leadership position with low to medium to the geothermal projects. Toshiba is the recognized leader in the higher-end of the technology. Together, Ormat and Toshiba are well positioned to bid on and win product contracts as well as potential projects based on the combined technologies of these two leaders. Already we are seeing expansion of opportunities related to this collaboration. Finally, looking this market expansion to new activities, we are evaluating several solar PV projects outside the U.S., as well as storage projects in the U.S. Turning to Slide 24 to an operation update. Our current generation capacity increased to nearly 700 megawatts. We made a few adjustments to reflect the updated status of our generating capacity. We increased McGinness Hills and Don Campbell complexes generating capacity to 83 megawatts and 41 megawatts respectively to reflect the enhanced performance of these plants. The generation capacity of Ormesa complex was reduced to 42 megawatts mainly to a permanent shutdown of one of the steam turbines and some of the old OECs not that we optimized plant performance. Turning to Slide 25; we’ve continued to expand our portfolio of geothermal plants. In January, we’ll reach commercial operation of Plant 4 in Olkaria III complex in Kenya. This expansion increased the complex total generation capacity by 29 megawatts to 139 megawatts. Together with the McGinness Hills and Don Campbell second phase in the last 12 months, we commenced commercial operation of three new power plants in an aggregate capacity of over 90 megawatts. All three plants were constructed and start operation well ahead of planned schedule and will contribute to 2016 revenues. We will not have been achieved – we will not have been able to achieve this, if we don’t have an in-house products division. Again reinforcing the importance are vertically integrated and well balanced business model. Moving to Slide 26 for an update on projects under construction. We plan to add 160 megawatts to 190 megawatts by the end of 2018 by bringing new plants online, expanding existing plants as well as adding capacity from a recent acquisition. As part of this expansion plan, we recently announced the commencement of construction of the Platanares geothermal project in Honduras. In December 2015, we concluded the drilling activity as well as extensive tests that support our decision to construct a 35 megawatt project, which is larger than initially estimated. The project expects to reach commercial operation by the end of 2017. We also initiated development of efforts in two projects in Nevada: Tungsten Mountain and Dixie Meadows are each expected to generate 25 megawatts to 35 megawatts, once they come online in 2017 or 2018. We have drilled several exploration wells both sides. And while drilling activities ongoing, we are making progress towards securing PPAs. We believe that these projects may qualify for the production tax credit. In Sarulla, Indonesia, engineering and procurement for the first phase is completed, while in progress for the other two phases. The construction for the first phase is in progress. The infrastructure work has been substantially completed. The major equipment including Ormat’s OECs and Toshiba’s steam turbine for the first phase have arrived to the country, larger portion already at the site. The drilling of production injection wells is also in-progress for all three phases, but currently the project company is experiencing some delays mainly in the meeting some of the drilling milestones as well as few EPC milestones. It should also be noted that project is facing some cost overruns resulting mainly from drilling. The consortium members are examining the significance of these cost overruns and their potential implications for the project’s budgets as well as for the financing of the project since the cost overruns and drillings delays may impact the project’s ability to drove on the debt financing and force additional equity investment by the consortium members. All contracting milestones under Ormat supply agreement were achieved and the manufacturing work is currently progressing as planned. The first phase of operation is expected to commence towards the end of 2016. And the remaining two phases of operations are scheduled to commence within 18 months thereafter. We also expect to close the acquisition of Bouillante Geothermal Power Plant in Guadeloupe Island by May 2016, which will be immediately accretive to Ormat’s EPS. The projects are just described as well as additional projects including Menangai in Kenya are under various stages of development and expected to support our expansion by the end of 2018. Besides the investment in new projects, we are continuing our exploration and business development activities to support future growth. If you could please turn to Slide 27, you’d see that our CapEx requirement for 2016 is approximately $264 million. We plan to invest a total of approximately $83 million in capital expenditures, on new projects, under construction and enhancements and additionally approximately $101 million are budgeted for exploration activities. Development of new project is investment in new activities that reflects expenditure under the new strategic plan and maintenance CapEx for operating projects. In addition, $63 million will be required for debt repayment. Turning to Slide 28 for an update on our Product segment. Our backlog, as of February 23, 2016, stands approximately $256 million. Our backlog together with the new contract that we expect to sign will support our financials. Moving to Slide 29 for a regulatory update. Increasingly, government and private sectors are taking actions to fight climate change and move towards to low carbon resilient and sustainable future. We have seen this in the United States as key states set long-term goals, established minimum requirements and create incentives for the use of renewable energy. As we have previously noted, in October, California expended on its existing renewable portfolio standard or RPS policy. The new low requires that utilities procure 50% of their electricity from renewables by 2030, an increase of 33% required by 2020. Hawaii is an even more aggressive low requiring that 100% of its energy come from renewables by 2045. And in December, the United States Congress agreed to grant extension to the tax credit for geothermal energy as part of the broader production tax credit program. While these programs within the United States are encouraging, in December we also saw action on a global level. In December 2015, 195 countries signed a historic agreement at the Paris Climate Change Conference, held in Paris. For the first time, all countries committed to setting nationally climate targets and reporting on their progress. We believe that submission of national targets in five years cycles signal to investment within technology innovators that the world will demand increased use of renewable energy in the decades to come. This comes after a group of 20 countries including the U.S., U.K., France, China, and India pledged to double their budget for renewable energy technology over the next five years as part of a separate initiatives called mission innovation. World leaders are clearly increasing the focus on renewable energy. Geothermal is based on the energy is uniquely positioned to benefit from this trend and Ormat is focused on remaining a global leader in this space. Turning to Slide 30 for our 2016 guidance. In 2016, we expect total revenue to be between $620 million and $640 million. We expect revenue in our Electricity segment to be between $410 million and $420 million. The Electricity segment revenue guidance assumes current oil and natural gas crisis. For the Product segment, we expect revenues to be between $210 million and $220 million. We expect 2016 adjusted EBITDA from $300 million to $310 million. This estimate includes approximately $9 million of expected income related to tax equity transactions compared to $25 million in 2015. Excluding this demand, the expected increase in adjusted EBITDA should reflect an operational growth of between 9% to 13%. We expect annual adjusted EBITDA attributable to minority’s interest to be approximately $17 million. This amount assumes the inclusion of the second phase of Don Campbell power plant in the joint venture with Northleaf. In summary, 2015 was a very good year for Ormat and I’m excited about our future. The significant declines in the price of oil and natural gas have impacted many industries and we are not immune, while we cannot predict what will happen in the commodity markets during 2016. We can state with growing confidence that the demand for renewable energy is growing. Volatility of fossil fuels only contributes to this demand. This creates an environment where leaders, like Ormat, can grow and expand their market share. It is truly an exciting time to be a part of this great company, and I’m optimistic about the future of Ormat into geothermal industry in general. This concludes our remarks for today and I thank you very much for your ongoing and continued support. Operator? Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Paul Coster of JP Morgan. Please go ahead. Mr. Coster, you may proceed. Paul Coster Sorry I had my mute on there. Thank you very much for taking my questions. Congratulations on concluding an excellent year. So looking forward, I wonder if perhaps you can take us through your sort of cash outlook for the year, it looks to me like you’ll be using in excess of $100 million of your cash balance, unless you tap into new sources of finance. So perhaps you can talk us through that please? Doron Blachar Hi, Paul, thank you. This is Doron. Basically, when we look, we do need – we do have an increased capital plan and increased gross plan. As the PTCs were extended, we are planning to do one or two tax equity transactions. And in addition to that some of the projects that we are constructing like in Honduras or one of the two projects in Nevada that we’re now finishing the exploration phase in Tungsten and Dixie, we will do project finance for them. So the construction will be financed with the specific loan program. Paul Coster Okay. So, you’re not going to be – you don’t anticipate tapping the debt or equity markets this year? Doron Blachar No, to the extent no – unless, we will increase our accelerated growth, which is expected. Paul Coster Right. Can you – you talked to us a little bit about the Toshiba partnership? You alluded to sort of benefiting you already. What is the nature of the benefit you’re seeing? Isaac Angel Hi, Paul. This is Isaac. I think it’s one of the best things happened during the last year. In the last six months, we have exposure to much more projects than we did in the past because of the fact that both companies are approaching a high-end, low-end and middle-end of the projects together. Actually, we have even a win, which I cannot speak about it as of now, but we will talk about it in the very near future. And I’m very, very optimistic that this collaboration will bring in 2016 more and more projects, specifically in other countries mainly in Europe and Southeast Asia. Paul Coster Okay. My last question is looking at your anticipated deployment activity, it looks to me like revenues and I assume EBITDA should accelerate a little bit in 2017, just eyeballing the megawatts that come online. Is that a reasonable assumption to make? Isaac Angel It was a short answer and unfortunately I have a long – it was a short question and I have a long answer. As you realize with the year passing through and we have $256 million contract in Sarulla, which will be ending in sometime during 2017. We have to accelerate our Product segment, but you realize that it will be difficult to staying the same growth in Product segments with this project ending. But on the other hand realizing that and we announced it on March in New York, the company is making tremendous efforts to accelerate the Electricity segment and we believe we will continue – we will sustain growth, but not necessarily it will be divided in the same percentage between products and electricity looking forward. On the other hand, I should say, we’re not giving any outlook for 2017 or 2018, and the only outlook that we’re giving is in 2016. But, in general, if you look within the next five years, we are expecting a step-up function in our Electricity segment, and the company is doing tremendous efforts and as part of the accelerated CapEx that you’re seeing to build more and more power plants internally and also externally. Paul Coster Very good, thank you very much. Isaac Angel Thank you. Operator Our next question comes from Dan Mannes of Avondale Partners. Please go ahead. Dan Mannes Good morning and also congratulations on a strong quarter and a strong year. Isaac Angel Thank you very much, Dan. Dan Mannes A couple of follow-ups. First, the acquisition in Guadeloupe – first, congratulations on getting an acquisition done. Can you give us a little bit more color maybe on the structure of the PPA, they’re number one. And number two, is this – the closing of this transaction included in your guidance for 2016 or not. Doron Blachar Hi, Dan. It’s Doron. For the second part, yes. The guidance includes the acquisition of Guadeloupe response. The first part basically, the PPA in Guadeloupe has a capacity payment and has an energy payment. We cannot – we still don’t own the assets at closing, haven’t happened. So we cannot discuss too much in details, because we still don’t own the power plant, but there is a capacity and an energy payment that grows up – goes up as the generation goes up. Dan Mannes Okay. And maybe could you walk through the structure of the purchase, does it face – you’re going to own all – 85% of all 15 megawatts this year or you own a piece of that and then it grow – then there are multiple payments to them? Could you maybe just walk us through how that works? Doron Blachar We’re going to own upon closing 80% of the facility, and then the investment – the acquisition and the investment structure says that in the next two years from the closing. Recently, Ormat will increase its capital investments to the company and by putting in more cash into the company; the percentages will go up and will reach once all the cash is invested to 85% ownership by Ormat. Since, we are going to have 80% on closing. We will consolidate obviously the company. We are the controlling shareholders. And our people actually have been there already and analyzing the projects to see how we can expand it sooner rather than later. Dan Mannes Got it. A real quick one on Tungsten and Dixie Meadows, it’s great to see you guys are finding some more drilling success. Can you talk at all about the PPA market for those plants, the last several Nevada plants, you’ve sold into California. Alternatively, is this an opportunity to perhaps get a commercial PPA? If you could talk to us about the PPA environment, that would be helpful? Doron Blachar Dan, do you know as I know that the PPA environment in the U.S. is a bit suffering in the last few years. On the other hand, Ormat was – we successfully achieved few PPAs in the last year or so. And even though I cannot talk on the details, but I’m optimistic that our future growth in the Electricity segment will come both from the U.S. and from the other countries. And I’m very optimistic that we will be able to gain PPAs for these two power plants and more in the U.S. Dan Mannes Okay. Doron Blachar But unfortunately, I’m not in a position to talk about terms, numbers and so on. I really hope that this will be an outline very soon. Dan Mannes Okay. Olkaria 3 with the completion of the most recent phase, can you maybe help us to understand the new agreement you have and your ability to expand this and also is this included in the some portion – is another leg of Olkaria 3 included in the 160 megawatts to 190 megawatts that that you’ve laid out through 2018? Doron Blachar Well, no – first of all, no doubt that Olkaria is one of our most successful prospects. And there is an opportunity to increase Olkaria to the third phase as we already have assigned PPA. I don’t know if we disclosed it, but it is 400 megawatts, which 29 of them are already consumed. And there is a possibility to increase it to Olkaria 5, but it is not in the numbers that mentioned in the 180 megawatts – sorry, 160 megawatts to 190 megawatts. Isaac Angel I would like maybe just to add a little bit color. In the 160 megawatts to 190 megawatts, obviously, we have projects that are not finalized or have final PPAs and finish exploration. These are projects that are in the process. And at the end of the day, we don’t know exactly all the projects that will come in. We have seen today, this next phase is not in the numbers, but exploration and resources tend to change over time. And so we might see that there is additional result and may be an addition to increase it or not, so it’s not in the initial estimate, but it can obviously come in, if that is something that will go out or whatever. Doron Blachar Dan, I will reiterate, what I just said to Paul before. We are working very, very diligently to make this step up function as I talked about it in our meeting last year and I think that this will fuel the growth of Ormat in the next upcoming five years or more. And it will come both from the U.S. as I said and elsewhere, specifically from African countries and Southeast Asia. Dan Mannes On that note, one of the major geothermal owners in Southeast Asia at least through some trade publications is reportedly considering selling and this will be a very major asset that could be a step change in terms of your output if you pursed it. Is that – without discussing a particular M&A opportunity, how serious are you on M&A at this point and would you consider kind of assets of that time – type of scope and scale? Isaac Angel Dan, it’s very, very premature way. We got the same teaser yesterday and we are looking into it. Don’t forget that we are talking about an asset of over maybe $2 billion. So, it’s something that we should certainly look into, but it’s very early to talk about it seriously. Dan Mannes Okay. And then my final question, as you look at the Product segment, we’ve been really impressed with the way you’ve been able to maintain margins last year, a lot of that you guys have done internally in terms of improving operations. Historically, you’ve kind of managed expectations as it relates to product margins, maybe a little bit lower than what you put up the last year. Can you maybe help us out a little bit in terms of how to think about sequential margins in the Product segment for 2016 and beyond? And secondarily, as you mentioned your backlog of 260, most of that’s going to go out the door in 2016. It sounds like you have pretty high confidence you’re about to bring in some more material backlog in the fairly near-term? Isaac Angel On the margin sides, we are confident that we will be able to keep somehow the margins on the levels that we are. It might deviate a bit depending on the product mix that in the countries that we are operating in. On the second thing, as I said before, it will be very difficult to maintain the same levels of product going forward when you lose or not lose – losing is not the right word, when you finish successfully a $256 million projects. On the other hand, we are bringing in new products – product constructs. But as I said before, I’m not really worried because our strategy that calls for increasing rapidly the growth in the electricity demand will basically fuel the growth of the Company as a total, and not necessarily we will be able to keep – to maintain the same ratio as we have today, which is pretty high as you have noticed in the last year. So I’m optimistic for the future, but not necessary in the same ratio in numbers. And to conclude I believe that the profitability is sustainable. Dan Mannes Sounds good. Thanks so much for all the color. Isaac Angel Thank you. Operator [Operator Instructions] Our next question comes from Ella Fried of Leumi. Please go ahead. Ella Fried Hey, I also like to congratulate you on the result. I have two questions. First is regarding the Toshiba Corporation, what do you say that it is already reflected in the Product segment or do you see it affecting the product segment beyond Sarulla? Isaac Angel Hi, Ella. Thanks for your congrats. And first of all, it’s not reflected in 2015 numbers, but it is reflected in 2016 and the backlog as it stands now, still not a very substantial number, but we expect that this number will grow looking forward. And to the second part, it’s pretty much the same answer as I gave to Dan and Paul before on the mix of Electricity and the products looking forward. Ella Fried Thank you. And the second question is regarding your hedge for the next year. Could you elaborate basically or maybe give some numbers regarding this hedge? Isaac Angel Basically, what we did – basically in light of the very low oil and natural gas prices and since we have exposure to this commodity and we’ve decided to sell a call option, basically it hedges Ormat on the downside, not 100% on the downside, but it hedges Ormat up to a certain point on the downside and generates additional EBITDA to the company. The main idea of this hedge is to hedge the budget, which is the basis for the guidance. So we can keep it. So it’s a bit of different structure than a simple forward and standard forward has a selling of a call and buying a put, so we actually exercised half of the forward selling at call only. Ella Fried So you had there like most of the cash flow of Puna? Isaac Angel Puna on the oil and on the gas Ormesa and the left part of Heber that is still on – on the gas part. Ella Fried Okay. Well, thank you and again very impressive results. Isaac Angel Thank you very much. Operator Our next question comes from [indiscernible]. Please go ahead. Unidentified Analyst Hi, good morning or good evening. Also congratulations on your great 2015 results. Two questions. First of all with 2015 ahead, are you planning any divestments of power plants like you did or joint ventures like you did with Northleaf. And the second question is what’s going to happen in 2018 when the contract for Ormesa has come to expire? Doron Blachar Okay, Daniel, for us it’s good morning as we are in Reno. And for the first part, we are happy with our partnership with Northleaf and we are pooling in the second part of Don Campbell to the joint venture. We don’t have current partnerships plan in any other power plants and if [indiscernible] obviously we will notify the market on that. And on Ormesa, 2018, I wouldn’t be worried about it. We are working on it since last year and I’m optimistic that we will be able to resign PPA, which will not be linked to the gas prices in Ormesa. Daniel Wasserman And how many CapEx would be necessary in order to keep the reserve or to keep it going? Doron Blachar There is no CapEx required at this stage. We made lots of modifications in Ormesa. Last year, we shutdown a steam turbine part of the older equipment, re-change the structure of the operations. And at the end of the day even though we decreased the output of the power plant, we increased seriously the profitability. And there is – at this stage, there is no serious CapEx – any serious CapEx requirement over there. And Ormesa will serve our growth 2018 and onwards. And again – it will again decrease our exposure to natural gas prices by another one-thirds. Daniel Wasserman Okay, thank you. Doron Blachar Thank you. Operator The conference has now concluded. 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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