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Top 5 Smart Beta FAQs

In the first half of 2015 we’ve seen many of our smart beta predictions fulfilled. In particular I’m glad to see that there is more consensus around the definition of smart beta, with investors growing more comfortable with the investment strategy that captures aspects of both traditional passive and active investing. However, we are far from the Smart Beta Promised Land. In the meantime, here are a handful of questions I get most often from investors-so I thought I’d share my answers with you. Why is smart beta the topic du jour? Given the prolific attention on smart beta (in the United States alone, the term “smart beta” was searched an average of 7,500 times per month in the past year on Google), you’d think that smart beta is the shiny new bike on the block. We’re the first to admit that many of the concepts behind smart beta are not new – the idea of seeking inexpensive companies (Value investing) or high quality balance sheets (Quality investing) have been part of the active management toolkit for ages. What’s getting everyone’s attention is the ability to capture these potential sources of return in a low cost and transparent form – and we all like the potential to get more for less. How should I choose a smart beta strategy? There are lots of types of smart beta available these days, so the strategy you choose should be driven by the outcome you are trying to achieve. The best forms of smart beta are deliberate and transparent in the exposures they deliver, making it easy for investors to determine what’s under the hood. However not all smart beta strategies deliver “pure” exposure, so being mindful of any unintended risks lurking in the portfolio is always a good idea. Skilled implementation is also critically important. Most smart beta strategies have a higher level of turnover than traditional market cap-weighted indexes, and a slightly less advantageous liquidity profile. Without a skilled portfolio management team in place, transaction costs and tracking error may quickly begin to erode the potential benefits of a smart beta strategy. Smart beta providers talk a lot about transparency. Why is that important? Transparency is a defining attribute of smart beta strategies. Like traditional index strategies, smart beta strategies follow pre-set rules to determine the process for security selection, portfolio construction and rebalancing. Often those rules are published by a third-party benchmark provider. That means investors should have full knowledge of construction rules and portfolio characteristics, enhancing their ability to make deliberate allocations and build more diversified portfolios. Smart beta ETFs have yet another layer of transparency in that daily holdings are publicly available. One thing to note: Those pre-set rules stay set. Those rules have no knowledge of and make no adjustments for changing market conditions. Where would I implement smart beta into my existing portfolio? Many investors struggle to think about how to add smart beta strategies to their existing portfolios. Conceptually it is really no different than blending traditional passive and active strategies. Many smart beta strategies are designed to seek incremental returns. Others provide the potential for less risk (some do both, but let’s start with the simple case). A return-seeking strategy like the iShares® FactorSelectTM MSCI USA ETF (NYSEARCA: LRGF ) can complement traditional active and passive investments as a potential source of incremental return. In contrast, a risk-mitigating strategy like the iShares MSCI USA Minimum Volitility ETF (NYSEARCA: USMV ) can complement your traditional investments as a way to seek potential downside risk protection. Quantifying your desired outcome, such as an after fee incremental return goal, or a certain decrease in max drawdown, can further refine the asset allocation decision. Is smart beta just equities? There are many forms of equity smart beta, but we can apply this way of thinking to any asset class. One of the things I’m most excited about is the work we are doing in fixed income smart beta. As I wrote in my previous post discussing the iShares U.S. Fixed Income Balanced Risk ETF (BATS: INC ), there are many opportunities for smart beta to re-write the rules of fixed income investing. Original Post

NRG Energy (NRG) David Whipple Crane on Q2 2015 Results – Earnings Call Transcript

NRG Energy, Inc. (NYSE: NRG ) Q2 2015 Earnings Call August 04, 2015 8:00 am ET Executives Matt Orendorff – Managing Director-Investor Relations David Whipple Crane – President, Chief Executive Officer & Director Mauricio Gutierrez – Chief Operating Officer & Executive Vice President Kirkland B. Andrews – Chief Financial Officer & Executive Vice President Christopher S. Moser – Senior Vice President-Commercial Operations Kelcy Pegler – President-NRG Home Solar Analysts Dan L. Eggers – Credit Suisse Securities (NYSE: USA ) LLC (Broker) Stephen Calder Byrd – Morgan Stanley & Co. LLC Greg Gordon – Evercore ISI Michael J. Lapides – Goldman Sachs & Co. Julien Dumoulin-Smith – UBS Securities LLC Steven Isaac Fleishman – Wolfe Research LLC Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Operator Good day, ladies and gentlemen, and welcome to the NRG Energy Second Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Matt Orendorff, Managing Director of Investor Relations. Please begin. Matt Orendorff – Managing Director-Investor Relations Thank you, Latoya. Good morning, and welcome to NRG’s second quarter 2015 earnings call. This morning’s call is being broadcast live over the phone and via webcast, which can be located on the Investors Relations section of our website at www.nrg.com, under Presentations & Webcasts. Because this call will be limited to one hour, we ask that you limit yourself to only one question with one follow-up question. As this is the earnings call for NRG Energy, any statements made on this call that may pertain to NRG Yield will be provided from NRG’s perspective. Please note that today’s discussion may contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Such statements are subject to the risks and uncertainties that could cause actual results to differ materially. We urge everyone to review the Safe Harbor statement provided in today’s presentation as well as the risk factors contained in our SEC filings. We undertake no obligation to update these statements as a result of future events, except as required by law. During this morning’s call, we will refer to both GAAP and non-GAAP financial measures of the company’s operating and financial results. For the information regarding our non-GAAP financial measures and reconciliations to the most recently comparable GAAP measures, please refer to today’s press release and this presentation. With that, I will now turn the call over to David Crane, NRG’s President and Chief Executive Officer. David Whipple Crane – President, Chief Executive Officer & Director Thank you, Matt, and good morning, everyone. Thank you for joining us an hour earlier than our usually 9:00 scheduled time. As always, joining me today are Kirk Andrews, our Chief Financial Officer, and Mauricio Gutierrez, our Chief Operating Officer and President of NRG Business. Both of them will be giving part of the presentation. Additionally, Chris Moser, the Head of Commercial Operations; Elizabeth Killinger, the Head of NRG Home Retail; and Kelcy Pegler Jr., the Head of NRG Home Solar are joining me and will be available to answer your questions that pertain to their parts of our business. So, starting with the slide deck on slide 3, if you’re following along with that, I’m pleased to announce today that NRG has continued the positive momentum started in the first quarter of the year by reporting second quarter adjusted EBITDA of $729 million, which gives us $1.569 billion of adjusted EBITDA through the first half of 2015, and keeps us on track to achieve a full year result comfortably within our $3.2 billion to $3.4 billion guidance range, notwithstanding the very challenging commodity price environment that we have been in for the entire year. As noted in our press release, this favorable financial result has been spearheaded by our retail franchise, led by Elizabeth Killinger and her retail management team, who have gone from strength to strength not only preserving healthy retail margins, but also by retaining and acquiring customers at rates that have exceeded both our expectations and previous year’s performance. Of course, this good financial news has been significantly tempered by the fact that, to date at least, our shareholders haven’t benefited from our improvement in year-on-year financial performance, as our share price, like others in our industry, is significantly down since the beginning of the year, and since our second quarter 2014 call 12 months ago. What this means, of course, taking the liberty of converting our adjusted EBITDA to free cash flow off page, is that we are now trading at a price that implies a mid-teen free cash flow yield, actually 16% for 2015. And the good news is that given the consistency of our base load hedging program and the strength of our core wholesale/retail combination, we are confident that were these share prices to persist, we would continue to be realizing mid-teen free cash flow yields, if not higher for the remainder of the decade. As we look ahead over the remainder of the year, we see more reasons for optimism and even bullishness. And those are listed on this page. We expect significantly more proceeds from NRG yield dropdowns, fueling more buybacks, more delevering and more reinvestment in contracted assets. There’s the long awaited PJM auction, occurring in just a few days, that under the new rules places a financial premium on dependability and should favor an operator like ours that operates a fleet, does so reliably and includes power generation facilities not dependent on an interruptible gas supply, like many others in the market. There is our home solar business, which is ramping up quickly, our daily bookings 90% higher at the end of the second quarter than at the first quarter. And we’re achieving almost all that having barely begun to scratch the all-important California home solar market. And finally, there’s the fuel conversions and other fleet repositioning projects that are proceeding at pace and remain on track to come on line over the balance of 2015 and calendar year 2016 with a significant dropoff in capital spend to follow and the commensurate increase in free cash flow yield. All in all, it’s an optimistic picture for NRG that belies the market pessimism arising out of the low commodity-price environment currently gripping the entire NRG commodities complex. Kirk and Mauricio will talk more about these financial results and the stellar operating performance that underpins them. Plus, they will discuss what’s to come in terms of dropdowns, PJM auctions, home solar bookings, and plant conversions. But before I turn it over to them, let me make just a couple more points. Turning to slide 4. Speaking today as we are one day after the president’s announcement of his clean power plan, it seems clear to us that the one true path for an incumbent power provider like us is to build an edifice of new clean energy technologies, capabilities and assets on top of a rock-solid foundation of multi-fuel, multi-market across the (6:51) conventional generation. In doing all this, timing matters. We and the rest of the industry continue to bear the responsibility for keeping the lights on in the short- to medium-term, which in turn depends for the foreseeable future on the sustained excellence we have demonstrated in the reliable operations and maintenance of our conventional fleet. But to prepare for the future as a 21st century energy company, there are three essential capabilities which we need to continue to strengthen and grow. First, there is retail. There simply is no substitute in the coming age of energy choice in personal energy alternatives to having a positive energy relationship with the end-use energy consumer. And the more end-use energy consumers we can have a relationship with, the better. Second, renewables. And by renewables I mean mainly solar as the future is going to be increasingly solar-powered and increasingly distributed. If you think about it, it’s amazing how quickly we have gone from hearing how prohibitively expensive solar power is just a couple of years ago to how often we don’t hear about how expensive it is now. And third, there’s the yield vehicle, because even with the recent market glut yield paper and the ensuing sell-off, NRG Yield still provides us with a competitive cost of capital to deploy for contracted assets that our immediate competitors cannot match. So while some of our competitors have taken steps in our direction and certainly more will have to follow if they wish to be relevant deeper into the 21st century, at NRG we have been building these capabilities for six years now and are more equipped than anyone to not only address the changes in the industry but to make them our competitive advantage. We have had advances and we have had setbacks, but as we sit here in the middle of 2015, I feel confident that we are advancing on all fronts, gathering momentum as we go. And as we go, our principal focus remains to ensure that our shareholders realize the value of what we have been building and will continue to build in the months and years to come. Finally, on slide 5, I reiterate the principles articulated on our previous earnings call. Quantifying how we are thinking about capital allocation in connection with building a clean energy business on the foundation of a conventional generation platform, we are, as Kirk will talk about later, on track this year to adhere to the 70/20/10 guideline, which governs the balance of our capital reinvestment strategy, between reinvesting in our foundational strength of conventional generation assets and investing in the newer customer-facing, clean energy businesses that we have been building on top of our base. And so with that, I’ll turn it over to Mauricio. Mauricio Gutierrez – Chief Operating Officer & Executive Vice President Thank you, David, and good morning. Following on the good start we had for the year, our integrated portfolio delivered another quarter of strong results, allowing us to reaffirm guidance for the full year. These highlight the strength of our diverse generation portfolio and complementary wholesale/retail model despite the fact that commodity prices remain close to half of what they were last year. The hedging program and risk-management activities executed by our commercial team protected the value of our wholesale business while our retail business outperformed expectations through good margin management and lower supply costs. This quarter is yet again another example of how our complementary business model performs well under adverse price and weather scenarios. During the quarter, we increased our hedge levels in 2016 and 2017, effectively protecting our earnings for the next two years. This is particularly important over the next 18 months as we progress through higher than average CapEx years while executing our asset-enhancement strategy, which I will cover in more detail in a minute. This strategy positions our portfolio to benefit from critical market developments like PJM’s capacity performance, which will be implemented later this month. Moving on to our traditional operational metrics on slide 7. We had another quarter of top quartile safety performance with 151 out of 167 facilities without a single recordable injury. Conventional generation was down 6% versus the same period last year, driven primarily by an unusually active plant outage season and soft commodity prices. The soft prices significantly influenced the units dispatched throughout our fleet, resulting in an 18% decrease to base load generation relative to the same quarter last year. This was partially offset with a 52% increase in our gas and oil fleet output over the same period. On a regional basis, Texas generation was higher by 8% thanks to better performance by STP and our gas portfolio, while the East and South Central were lower due to some faulty gas switching and environmental retrofit outages. The operations team remained focused throughout the spring, completing 173 planned outages, including complex environmental compliance and repairing outages. Despite the reduction in generation and service hours, our base load units availability improved and performed when the market needs them. Slide 8 provides a more detailed update on the progress made on our development and asset optimization efforts. It’s been an important six months. In the first quarter, we completed the environmental retrofit at Big Cajun, Parish and Limestone. This quarter, we completed the coal-to-gas conversion at Big Cajun II Unit 2, just in time for the important summer months, and the environmental retrofit at Waukegan 8, Sayreville and Gilbert. We also restored 388 megawatts of incremental capacity in the premium, lower Hudson Valley capacity zone in New York at very attractive economics. This was the direct result of the market providing the right price signal required to have not only reliable capacity but increased fuel certainty and fuel flexibility in a high-demand zone. Turning to slide 9, the second quarter was another strong quarter for NRG Home where we delivered the best second quarter results for the retail segment since NRG’s purchase of Reliant retail in 2009. Total customer count was in line with expectations with a decline of 18,000 customers, driven by less than expected attrition from the lower-margin, northeast Dominion customers that we acquired last year. When excluding those contracts, the recurring customer count grew in Texas and the East by a total of 19,000 customers, demonstrating the continued strong momentum we achieved in attracting and retaining customers with innovative products and services. One of the reasons for our strong retail performance has been the subdued wholesale prices in ERCOT, our largest retail market. Very little has changed since the last update, as you can see on slide 10. Demand in ERCOT remains strong with close to 2.5% growth for the quarter despite lower oil prices, as you can see on the upper left chart. While we have tempered our expectations for the balance of the year, we have yet to see the impact of on-power demand. On the supply side, there are not many new projects beyond the ones announced on the back of potential capacity market and cost advantage brownfield development. As you can see on the lower left hand chart, both historical and forward spark spreads now expanding over seven years do not support the economics of (14:38) brownfield projects. This will not only make future projects less likely but also puts existing plants at risk of mothball or shutdown. This supply rationalization prompted by economics and potential stricter environmental rules could tighten the fundamentals even more so and increase the probability of scarcity prices sooner rather than later. While our large, low-cost and environmentally controlled portfolio remains competitive and well-hedged for the next two years, we will not hesitate in making the right economic decision on behalf of our shareholders if the market continues to behave in such an erratic way. For now, all eyes are on next week with temperatures rising in Texas over 100 degrees for several consecutive days. Now moving to our hedging disclosures on slide 11, we continue our focus towards the next two years and have significantly increased our hedge levels to 84% in 2016 and 40% in 2017, effectively reducing our commodity risk and cash flow variation for the next two years. On the fuel side, we continue to see decreases in commodity cost, fuel surcharges and transportation cost. We continue to work closely with our coal supply chain partners to layer in additional hedges to balance our power sales. Our commercial team has done a great job in insulating us from the recent drop in gas and power prices and has contributed significantly to our retail outperformance by effectively managing supply cost. They are now focused on the remainder of the summer and getting ready for the upcoming PJM capacity performance auction. So a few words on the PJM auction on slide 12. As you all know, FERC approved the PJM capacity performance proposal in June. While we were disappointed by the delays in the transitional auction, the time line is now set for the base residual auction, with the transitional auctions likely to happen in early September. We have listed some of the main variables that participants will take into consideration during these auctions, which could provide some direction on price expectations. We have not been shy on our support for a stricter capacity market that ensures reliability. As with any competitive market, there will be winners and losers. A characteristic of our portfolio in terms of fuel certainty, reliability, and scale, which allows us to better manage the penalty risk of underperformance, puts us in a great position to significantly benefit from this necessary change in the market and recognizes the value that our portfolio brings to the system. So, to close, the prospects of improved capacity markets, a diverse and environmentally controlled portfolio, complemented by retail and opportunistic risk management activities, has the foundation for strong results during this low commodity cycle and sets us up for even stronger results in the medium to long run. With that, I will turn it over to Kirk. Kirkland B. Andrews – Chief Financial Officer & Executive Vice President Thank you, Mauricio, and good morning, everyone. Beginning with the financial summary on slide 14, NRG delivered a total of $729 million in adjusted EBITDA for the second quarter and over $1.5 billion through the first half of the year. Our second quarter results were highlighted by a record $204 million in adjusted EBITDA from Home Retail, a 30% year-over-year increase, yet again highlighting the success of the integrated business model as results improve due to favorable supply costs. Business and Renew combined for $338 million in EBITDA for the quarter, while NRG Yield, which was impacted by historically low wind speeds which continued through quarter-end, contributed $187 million. Despite the subdued summer power prices and a reduction in expected wind production over the balance of the year, thanks to strong Home Retail performance combined with effective wholesale hedging, we are again reaffirming our guidance ranges of $3.2 billion to $3.4 billion in adjusted EBITDA and $1.1 billion to $1.3 billion in free cash flow before growth for 2015. As the next step towards achieving our objective of $600 million in dropdown offers to NRG Yield during 2015, on July 24, we offered Yield the opportunity to acquire a 75% stake in a portfolio of 12 wind projects, consisting primarily of assets acquired as a part of the EME transaction. Subject to approval by NRG Yield’s independent directors, we anticipate the 75% stake will close by the end of this quarter with the remaining 25% to be offered in 2016. We expect this transaction, combined with completed and ongoing dropdown from business-to-business distributed solar and residential solar to result in approximately $300 million in incremental proceeds from NRG Yield through September 30. Finally, during the quarter, NRG completed $107 million in additional share repurchases, which when combined with our quarterly dividend amounts to $156 million in capital return to shareholders during the quarter. We have $51 million in remaining share repurchase authorization, which we expect to be augmented by an additional $200 million in repurchase capacity or one-third of our targeted $600 million in dropdowns based on our previously announced capital allocation program for NRG Yield Proceeds. Turning to an update on 2015 NRG Capital Sources and Uses on slide 15, and moving from left to right, NRG expects approximately $3.8 billion in cash available to fund capital expenditures, debt repayment and return to shareholders during all of 2015. That cash basically consists of three components. First, excess cash at year-end 2014, which is net of minimum cash reserved for liquidity. Second, 2015 operating cash flow, which is basically the midpoint of our free cash flow guidance prior to deducting maintenance and environmental CapEx. And third, expected cash proceeds from NRG Yield, which we continue to expect to be approximately $600 million. 2015 capital expenditures, as shown in the second column total approximately $1.7 billion, and include both maintenance and environmental CapEx, as well as growth investments, as a part of capital allocation. As we reviewed last quarter, about 70% of these capital expenditures represent reinvestment in our core generation fleet. This includes approximately $800 million in maintenance and environmental CapEx to ensure reliability and environmental compliance across the fleet, while the remainder is allocated toward growth investments, primarily fuel conversions at GenOn to help ensure both ongoing eligibility for capacity payments and environmental compliance. About 20% of 2015 CapEx is being invested in long-term contracted projects, which we expect will ultimately be dropped down into yield. And finally, slightly less than 10% is allocated toward high growth investments like eVgo and our Carbon 360 project in Texas. The remaining $2.3 billion in 2015 capital funds the balance of capital allocation. Over $1.2 billion, or slightly more than half of this amount, is allocated equally towards debt reduction and return of capital to shareholders in 2015. This includes the expected impact from our capital allocation program relative to anticipated proceeds from yield. Over $600 million is expected to be returned to shareholders during 2015, and represents more than half of NRG’s 2015 free cash flow before growth guidance. This consists of NRG’s $200 million annual dividend, nearly $190 million of shares already repurchased with $51 million in remaining authorizations and up to $200 million in expected additional capacity related to the anticipated proceeds received from NRG yield. We expect approximately $900 million of remaining excess capital. $500 million of this excess is at the GenOn level, which we expect will help fund the completion of our fuel conversion projects across that part of the fleet beyond 2015. The remaining capital at NRG will be available either for additional allocation in 2015 or to help support capital commitments in 2016 towards the NRG portion of the 70/20/10 capital mix. Turning to slide 16. I’ve provided an illustration to help underscore a point we first raised during our Investor Day and which has been an ongoing focus of discussions with many of you over the course of the year. In short, the expected decline in NRG’s maintenance and environmental CapEx over the next few years as we complete the Midwest generation environmental projects provides a powerful cushion to help sustain the robust free cash flow which has long been a cornerstone of the NRG story. In order to highlight this point, we have assumed consensus adjusted EBITDA estimates beyond 2015 for illustrative purposes only, which when combined with interest payments remaining relatively constant and the expected substantial decline of over $400 million in annual maintenance and environmental CapEx by 2017, demonstrates NRG’s ability to sustain robust free cash flow despite the near-term decline in EBITDA implied by these consensus estimates. Importantly, our free cash flow is prior to the expected ongoing receipt of drop-down proceeds from NRG Yield, which, based on over $165 million in remaining right of first offer CAFD and an illustrative 8% yield, implies over $2 billion in proceeds from future drop-downs, (24:37) significantly augment this compelling cash flow story. With that, I’ll turn it back to David for Q&A. David Whipple Crane – President, Chief Executive Officer & Director Thank you, Kirk. And Latoya, I think we’ll go directly to answering everyone’s questions. Question-and-Answer Session Operator Thank you. And the first question is from Dan Eggers of Credit Suisse. Your line is open. Dan L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) Hey. Good morning, guys. Just can you maybe help us understand, I guess, when we should expect the board to think about authorization of expansion of the share buyback program? And then that $400 million that Kirk laid out in his slide, how you guys are looking at using that capital? And when do you think you might come to terms with what to do with it this year? Unknown Speaker Kirk, do you want to? Kirkland B. Andrews – Chief Financial Officer & Executive Vice President Well, as to the $400 million, the second half of your question, Dan, as I indicated, that is available for further allocation in 2015. We have, including the anticipated impact from the dropdowns of yield, over $250 million remaining repurchase capacity, which obviously gives us the ability to utilize that towards share repurchase over the balance of the year. As we continue to execute on those share repurchases, we would look at that remaining $400 million as additional capital allocation as we complete those share repurchases either towards additional growth CapEx or, if compelling, to augment our share repurchases subject to approval by the board. It’s also, of course, available to fund the remaining growth capital, which, pursuant to our conversation in the first quarter, is still relatively robust in 2016 in similar amounts as the 2015 numbers across the 70/20/10 complex. Dan L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) Okay. And I guess even if you look at – as you guys showed the mid-teens free cash flow yield on this year’s numbers, how you rank out the return profile of other investments you’re making, whether it be on the more green side of the business, the conventional side, versus the free cash flow yield being offered in the stock particularly as you look out over the forward years where that number seems to get bigger? Kirkland B. Andrews – Chief Financial Officer & Executive Vice President Well, I think our approach certainly through returns on any capital allocation towards growth investments is done on a risk-adjusted return basis. So when we look at contracted assets, which are obviously earmarked for yield, certainly they reflect the lower cost of capital as yield. But specifically and looking at more conventional traditional investments that comport with kind of the core generation portfolio, we do, and then our discussions with the board are informed by our current share price, which I’ve said in past conversations represents an opportunity cost. And so we look and proactively compare the risk-adjusted return on our own portfolio as represented by the opportunity to deploy capital towards repurchases, relative to the risk-adjusted return we see in similar investments on growth investments, and that’s exactly the way we think about that comparison on an apples-to-apples basis on growth investments versus repurchasing or expanding repurchases of our own stock. Dan L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) Okay. So the view is that the investments you’re making are risk-adjusted as compelling as buying back share at the margin today? Kirkland B. Andrews – Chief Financial Officer & Executive Vice President Yes. Dan L. Eggers – Credit Suisse Securities ( USA ) LLC (Broker) Okay. Thank you, guys. Operator Thank you. And the next question is from Stephen Byrd of Morgan Stanley. Your line is open. Stephen Calder Byrd – Morgan Stanley & Co. LLC Good morning. David Whipple Crane – President, Chief Executive Officer & Director Good morning, Stephen. Stephen Calder Byrd – Morgan Stanley & Co. LLC I wanted to talk about Texas a bit. Mauricio, you had mentioned just given the very low prices that we’re currently seeing that, over time, NRG wouldn’t hesitate to make the right decisions for shareholders, but you also noted you’ve got an excellent hedge position. When you think about the pain caused by low prices, there are obviously others that have generation assets in the state. Many of those assets are not in full environmental compliance. When you think about sort of the pain and how that may shake out, how do you think about your portfolio relative to the competition in the state? And sort of over time, would it be likely that others would effectively feel that pain first and there’d be some more rationalization or how should we think about that? Mauricio Gutierrez – Chief Operating Officer & Executive Vice President Hey. Good morning, Stephen. I think as I said on my remarks, and I will re-characterize it again. Our portfolio – the scale of our portfolio, the size of our plants, they are environmentally controlled, and they’re in the low cost of the stack. We think that we are very – pretty well-positioned to weather this low commodity price scenario, and we expect to see other portfolios succumb to these very low prices. Just look at the second quarter as an example. I think you would agree with me that prices were significantly low with gas tinkering around $2.50 per MMbtu. I mean, our generation was higher in Texas quarter-over-quarter from last year to this year. And if you dig deeper, our coal generation was just slightly lower; I would say less than 5%. So we really didn’t see a lot of coal to gas switching in our coal suite. On the other hand, our gas and oil units increased by over 60% in Texas, so that tells you the strength of our portfolio and the cost-competitive advantage that we have. So I guess my point is: look no further to Q2 to just give you a glimpse on how competitive our portfolio is vis-à-vis other portfolios and, yes, while the hedges gives us a runway for two years and protects the financial outlook of our portfolio, keep in mind that we dispatch our units against market prices, not necessarily against whatever hedges we put in place. Stephen Calder Byrd – Morgan Stanley & Co. LLC That’s great color. Thank you. And then, just shifting over to solar. I wanted to talk about the cash drag from growth in solar. You’re making a big push into California. Should we think about the cash drag as subsiding in 2016 as you start to get in – get larger scale and some of those costs start to play (31:18) in your scale increases? How should we think about that cash drag? David Whipple Crane – President, Chief Executive Officer & Director Stephen, well, first of all, you obviously correctly identify, I think, where that extra cost is is that as we look at our options to create a stronger positioning in the California market, which, as you well know is more than 50% of the total Home Solar market in the United States, you could acquire your way in, in which case, based on recent market comparables, you would have to pay an enormous premium, or we chose a different approach, which as you said is to go for a bit of a marketing and surge in. Certainly, as we sit here today, we don’t have reason to believe that that’s a recurring cost that we’ll have to duplicate every year, but we’ll see how it goes. But it was more planned as a one-off just to get the ball rolling to get the momentum. Kirk, did you want to add to that? Kirkland B. Andrews – Chief Financial Officer & Executive Vice President The only thing I’d add is, given what we have in place currently with Yield, which we intend to continue and ramp up the pace of as our pace of installations begins to grow. But proceeds, and more importantly, the comparative proceeds from the combination of NRG Yield and tax equity relative to the capital cost to put those leases in place – as I laid out, that first 13,000 leases results in approximately $100 million of proceeds from those two sources in excess of that capital – building that volume of installation in an order of magnitude so that the aggregate premium proceeds, if you will, meet and then ultimately exceed that overhead cost. And our expectation is that will be the way that that offset or the positive cash flow ultimately comes to pass at NRG, especially as we move into 2016 and our volume and the installations move commensurately higher to offset and exceed that fixed overhead, including marketing and G&A. Stephen Calder Byrd – Morgan Stanley & Co. LLC That’s very helpful. Thank you. Operator Thank you. The next question is from Greg Gordon of Evercore ISI. Your line is open. Greg Gordon – Evercore ISI Thanks. Good morning. David Whipple Crane – President, Chief Executive Officer & Director Good morning, Greg. Greg Gordon – Evercore ISI One ticky-tack question. The free cash flow before growth number hasn’t changed despite the surge in spending in California because there’s a reduction in what you’re – in one of the other line items which was – and so, can you explain what that is, that offset? I’m looking for it in the slides here. Bear with me a second. It was with distribution to non-controlling interests. Sorry. Kirkland B. Andrews – Chief Financial Officer & Executive Vice President Yeah. There is a slight change in distributions to non-controlling. It’s just some of that has to do with timing. Some of it has to do with one of the tax equity facilities that we inherited as a part of the EME transaction. But overall, in 2015, in particular relative to, let’s say, 2014, the benefits we get from the reduction in net working capital, in particular as you’ll recall, we built greater inventories specifically on the oil side, as well as on the coal side moving into 2015. As we move throughout the year, we benefit from the fact that we have less investments in working capital and, in fact, a reduction in working capital, and that helps to serve to offset some of that increase in Home Solar cash flow. Greg Gordon – Evercore ISI Great. And, David, I just wanted to ask you a bigger picture question. It’s on a lot of people’s minds given the significant decline in the share price. I personally think that there’s dis-synergies for doing some sort of aggressive corporate separation to reposition the company to be more attractive to investors who want a pure-play green-co versus, let’s say a pure-play brown-co? I think the sum of the parts are greater than their whole. So I agree with your perspective on it, but how long do you wait before you sort of say, look, the market is not realizing the value and even though there are just synergies to creating pure play, that’s the way we need to go? David Whipple Crane – President, Chief Executive Officer & Director Well, Greg, I mean, you sort of hit the question on the head. The first thing I would say is: I agree with you that there is, while it may not be immediately apparent there, there is actually industrial logic to keeping the conventional side of our business to get the renewable side, together with the renewable side. And I tried to allude to that in my comments. The world of energy is trending green at a very decisive pace, but the one thing that trumps being green for everybody is making sure that the lights stay on, making sure that you have electricity. And the best companies that can do that, given the fundamental intermittency of renewable power, companies are doing both conventional and doing green. So the industrial logic to me favors the path that NRG is on. But we are a public company, and we suffer whether you call it the conglomerate discount or the constant refrain that we hear that we are more complex than some of the people that Wall Street can invest in. So we have to – value maximization for shareholders is what being a public company is about. So I can’t put a precise date on it, Greg. What I would tell you is: it’s a combination of when does it become clear that Wall Street has difficulty digesting the idea of a conventional company going green. But the second half of the equation is having a green company within NRG that not only can survive on its own feet as a public company but can win the battle field, can be as competitive as possible. So what we’re about right now in 2015, and I think we’re making great progress, is building – everything within our portfolio is strengthening every day. And when we get to that point, and I don’t think we’ll get to that point in 2015. And I would say probably in 2016 if we have, as you say, the sum of the parts where each of the parts or some combination of the parts is strong enough and if that’s the path that is going to result in shareholder value maximization, then we’ll take it at that time. So we’re looking at it every day. Everything’s on the table, but right now the instruction within the company that everyone here at this table will say is: the primary focus for everyone is building the strongest business that they possibly can in the area that they compete in. Greg Gordon – Evercore ISI Thank you, David. David Whipple Crane – President, Chief Executive Officer & Director Thank you. Operator Thank you. And the next question is from Michael Lapides of Goldman Sachs. Your line is open. Michael J. Lapides – Goldman Sachs & Co. Yeah. Hey, guys. One question, just trying to think through the hedging detail you provide in the back of the slide deck. You’ve basically increased the amount of hedges kind of pro rata but decreased significantly the hedged price. Is there a scenario where you would just say: you know what, I think the market’s wrong; I’m willing to stay a lot more open than maybe I am currently. And kind of taking more of a directional view relative to continue hedging at what seemed like depressed pricing? David Whipple Crane – President, Chief Executive Officer & Director Michael, it’s a good question and I can always count on you to try and ask another hedging question that you know Mauricio and Chris won’t answer with any specificity. But nonetheless, here they go, not answering your question. Christopher S. Moser – Senior Vice President-Commercial Operations Yes. Sadly, actually, I had an answer to the question. David Whipple Crane – President, Chief Executive Officer & Director Oh, you have an answer. Christopher S. Moser – Senior Vice President-Commercial Operations Yeah. Not to throw a wrench into that, now I don’t know – okay. So what you have to think of, Michael, is, first, yes, of course, we take an opportunistic view on the hedging and we will leave things open if we think it’s not priced very well. But in direct answer to your question, some of the hedging that happened between Q1 and Q2, you have to remember – yeah, between Q1 and Q2, you have to remember that we have assets in a lot of different markets, and some of the markets are higher priced than others. So to the extent that we are hedging in areas which are not as highly priced, you’re going to see the average hedge price come down. Mauricio Gutierrez – Chief Operating Officer & Executive Vice President And Michael, just, I mean, keep in mind that the hedging decisions are not just based on a directional view on the commodities. It’s also a combination of the free cash flow profile that we want to have and, honestly, the absolute level of CapEx. So in the next two years, we’re executing a significant amount of environmental retrofits and repositioning our portfolio to benefit from very positive market developments. We felt compelled to really have more visibility in these two years. But make no mistake, I mean, if – when you go out 2017 and beyond, we’re very open and I think that basically tells you a little bit our point of view in terms of the future of commodity prices. Michael J. Lapides – Goldman Sachs & Co. Understood. One quick environmental CapEx question. We’ve seen one or two of your peers, when talking about long run environmental CapEx, they kind of have the post-MATS skip in the 2017-2018 timeframe but then a little bit of a re-ramp due to coal ash and maybe one or two other items. Can you just give an update on where you stand position-wise for that? Mauricio Gutierrez – Chief Operating Officer & Executive Vice President Yes, Michael. Look, I mean, when you look at the environmental regulations that we know now, MATS, CSAPR, we feel that the CapEx that we have provided to the Street is what we’re going to require to be compliant. When you think about the other rules, and you talked specifically about ash, there’s two things that I should remind you and investors. Number one is it was a very positive development to see EPA not to have ash as hazardous materials. And then, number two, that we at NRG don’t necessarily have final disposal of wet ash in the company. I mean, it’s hard to tell what would be the impact of the ash rule right now. From what I can see now, probably will be in the tens of millions, not in the hundreds of millions, but that’s going to depend on the testing and the monitoring systems that we’re going to put in place or that we’re going to go through in the next two to three years before we need to put a compliance plan or a mediation plan by 2018. So I don’t expect to see the same ramp-up of environmental CapEx that we’ve been through the last couple of years and that we’re going through right now beyond 2017. Michael J. Lapides – Goldman Sachs & Co. Got it. Thanks, guys. Much appreciated. David Whipple Crane – President, Chief Executive Officer & Director Thanks, Michael. Operator Thank you. And the next question is from Julien Dumoulin-Smith of UBS. Your line is open. Julien Dumoulin-Smith – UBS Securities LLC Hi. Good morning. David Whipple Crane – President, Chief Executive Officer & Director Good morning, Julien. Julien Dumoulin-Smith – UBS Securities LLC So, first quick question, maybe to follow up on Greg a little bit. As you’re thinking about the potential to break apart this business, what is the gating item? Is it really going to be a decision around how the Street perceives the company or is it more around reaching maturation in the business itself? So I suppose the key question here is: given the cash burn associated with NRG Home this year, how do you think about the spin of a company that has cash burn this year and prospectively ran south (43:29)? What’s the idea? How much – what’s the ideal timing? How long do we need to wait? David Whipple Crane – President, Chief Executive Officer & Director Well, the specific question about the cash burn, Kirk will add to that. But I mean, the other factors you mentioned, what are we are waiting for or what’s more important in terms of timing, the industrial logic or Wall Street receptivity or lack of receptivity to the company as it is currently structured. It’s really hard to weigh those two since they are both important variables. I’d say there is actually a third variable, Julien, which is how receptive is the company to, let’s call it, a green NRG based on what we see with other companies out there. Because, obviously, there are pure play solar companies out there which sometimes seem to be in great favor and other times it would be seen in less favor. So it’s really those three factors that we have to weigh all at once. I mean, for now, I mean, from our perspective, the key is to get ourselves in a position where we have the option to do something like that in fairly short order and then see how it goes. In terms of the impact of the cash burn on the overall decision, Kirk, do you want to specifically address that? Kirkland B. Andrews – Chief Financial Officer & Executive Vice President Well, what I would say is, as I mentioned in response to Greg Gordon’s question earlier, that is: we are focused on the same thing with the Home Solar business with NRG that we would believe any pure play investors should be focused on. And that’s demonstrating the ability to monetize those leases at a compelling premium that meets and exceeds the amount of operating cash flow drag we have there. So we are focused on building those volumes and demonstrating the ability that that pace of installations is on a trajectory and a run rate that will allow us to demonstrate the ability to do exactly that, and that is have the proceeds from monetization exceed the operating cash flow so that the comprehensive cash flow story is a positive and growing one. Julien Dumoulin-Smith – UBS Securities LLC Excellent. And perhaps the follow-up, just to think about the investment, the $175 million in NRG Home, and both in terms of targets, how are you ramping as you think about the expansion in California? How does that jibe relative to what you discussed earlier this year at the Analyst Day? And then separately, related to that, to what extent is your NRG Home disclosures and prospective cash flows coming from these leases somewhat similar? And can we think about it in terms of guiding forward to peers in terms of the cash flow generated by these leases (46:23)? Kirkland B. Andrews – Chief Financial Officer & Executive Vice President Well, on the second component of that question, Julien, if I understand you correctly, partially because we believe given that NRG, as I went through on the final slide of my presentation, is all about free cash flow, that’s part of the reason why we have focused on telling the story around Home Solar as a comprehensive positive cash flow story along the lines of what I just discussed. That is, the receipt of proceeds from monetization of leases exceeding the operating cash flows is what we’re focused on, rather than necessarily focusing on the residual value on a per-watt basis. And so that is the reason why we’ve kind of talked about things in that fashion. And as we move closer, and I’ll ultimately give guidance in 2016, you should expect to see us provide you at least a more comprehensive view as we ramp into higher volumes in 2016 as to how that plays out in that positive cash flow story. I’m not sure if that answered completely your question. I may ask you to repeat the first part of it because I’m not sure I exactly followed what you’re asking in the first piece of it, Julien. Julien Dumoulin-Smith – UBS Securities LLC Yeah. I simply asked: how are you doing relative to the targets you laid out at the Analyst Day given the decision to move into California? David Whipple Crane – President, Chief Executive Officer & Director Well, what I would say, compared to where we were on Analyst Day, and, Kelcy, I don’t know if you want to add to this, is as we disclosed on the last quarter call, I mean, when we were at Analyst Day, we gave sort of a target for the year. Since our business is an East Coast business that – which the strongest sales channel is door-to-door – we got off to a very slow start with the weather situation in the East. So I would say, in terms of achieving the total number of installations or bookings over the year that we talked about in the Analyst Day in January, it’s probably too early to say whether we’ll get fully where we wanted to get because it was a very ambitious goal. So to get there from where we are now is a long putt. But in terms of the rate of growth, our – by the end of second quarter on sort of a daily run rate, we were up 90% over the end of the first quarter. So we’re sort of blowing and going in terms of our momentum. And that’s really before hitting California. And so, California is upside to that. Kelcy, do you want to add to that? Kelcy Pegler – President-NRG Home Solar No, I think what’s been discussed here today is we are a growth business, positioned in this sophisticated corporation. And we’re tasked with building the strongest and most sustainable Home Solar business with what’s complete awareness for our position in the space with our pure play competitors. But really, we’re resolved in building a long-term sustainable approach around some of the competitive advantages that we have and certainly the customer base that exists. I think the past year, what we’ve seen is the top tier has really come into focus. A year ago, if you said: who are the top tier players; there’d probably be double-digit companies that were vying to be included in that. Today, I think what you’ve seen is this top tier, which would be four or five companies, gain share, us included in that. And the rest of the space has moved backwards. So we’re pleased with the success we have, which has mainly been built on our East Coast performance, and we’re excited about a lot of the seeding and developments that we’ve done in half one, that we believe will deliver results. And that conviction is built on best months in business consecutively both June and July. So we have a lot to be optimistic about. Julien Dumoulin-Smith – UBS Securities LLC Great. Thank you. David Whipple Crane – President, Chief Executive Officer & Director Thank you. Operator Thank you. The next question is from Steve Fleishman of Wolfe Research. Your line is open. Steven Isaac Fleishman – Wolfe Research LLC Yeah. Hi. Good morning. Just on the PJM auction and your conversions, do you still have flexibility to kind of adjust your conversion plan in the event the auction goes one way or the other, or are you kind of full bore no matter what? David Whipple Crane – President, Chief Executive Officer & Director The answer to that question, Steve, is the shortest answer I’ve ever given on a – is yes. We have flexibility. And you are right in assuming that the auction represents an important set of indicators for us. So, yes, you’re right. The next month is important and decisions will be made based on what we see. Steven Isaac Fleishman – Wolfe Research LLC Okay. And then, just maybe, I apologize, one other question on the Home Solar. So just the actual individual contracts and leases that you’re signing, just how is that – ignore the customer growth, et cetera. Just how are the pricing and returns relative to what you anticipated? Kirkland B. Andrews – Chief Financial Officer & Executive Vice President From a returns perspective – it’s Kirk. They are in line with our expectations. The dropdowns, for example, the best illustration is the dropdowns that we have achieved during the second quarter are consistent on those leases that we did drop down that were installed, with the overall guidance that we showed on aggregate proceeds relative to capital expenditures. Steven Isaac Fleishman – Wolfe Research LLC Okay. Okay. Thanks. David Whipple Crane – President, Chief Executive Officer & Director Okay. Thank you, Steve. Steven Isaac Fleishman – Wolfe Research LLC Thank you. Operator Thank you. The next question is from Jonathan Arnold of Deutsche Bank. Your line is open. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Good morning. David Whipple Crane – President, Chief Executive Officer & Director Good morning, Jonathan. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. My main question was asked. But I’d like just to follow-up on Home Solar, right? On your slide you say that what you are showing is where you’ve either installed or contracted to install. And one of your main competitors sort of called out the difference between installs and deployment and changed the basis of guidance this quarter. Can you just talk to what’s the – how different would your number be if it was actual installs? And are you also seeing some challenges getting systems up and running when they’re already on the roof, effectively? David Whipple Crane – President, Chief Executive Officer & Director Well, Kelcy will certainly be answering the second part of that question. But I mean – and he probably will answer the first part of the question, too. But I mean it’s a good question that we talk about here often because as you can imagine, when you’re increasing your pace of sales, 90% by quarter-on-quarter, the difference between – and it’s roughly – what, Kelcy, still somewhere between 70 and 100 days to full installation from booking. The number between bookings and installations is dramatically different by quarter. So do you want to start with the second half of this question and move backwards? Kelcy Pegler – President-NRG Home Solar Yeah. What I can say is this also would be a California-centric topic. What you see in California is more market maturity with permit authorities and interconnection utilities. What you see on the East Coast beyond seasonality is some longer time lines. I think we fare well competitively as it refers to time, but we’re committed to time cycle reduction. We used to – a year ago, I think you could say it would be at least 90 days. I think today you see a path to around 75 days is where we’re living on timed install from signature to energization. And as California becomes a more material portion of our business and as we continue to focus on time cycle reductions, both those metrics will continue to improve. David Whipple Crane – President, Chief Executive Officer & Director And just one thing to add to that, and, Kelcy, correct me if I’m wrong, but if you think about how long it takes to get solar energized on your roof from the time you order, there’s almost no consumer decision in America that takes longer to create consumer gratification. So it’s something that we are very focused on, and in fairness to the other people in our industry, they’re very focused on it as well. But the single biggest delay within that period is beyond the control of the solar installer. It’s the time that the utility takes to interconnect. And there’s been some recent study of that in the press that indicates at least one East Coast utility that’s the worst at getting systems energized. And so the more that a light is shined on the fact that that has a potential to hurt customer satisfaction, then I think that’s important. I draw the analogy: it’s like when you ask for the check at the restaurant and you’re anxious to get home and they take half an hour to give you the opportunity to pay for your meal, it’s very frustrating to the customer. So that’s probably the main thing within the time cycle that we’d like to see shortened. And right now, it’s beyond our control. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Just the pace of these kind of energized graphics sort of looks similar though. I guess that’s, in essence, my question. Or is the lag sort of dampening the growth? David Whipple Crane – President, Chief Executive Officer & Director You mean, is this a real inhibitor to sales that when you – Kelcy Pegler – President-NRG Home Solar The graph would look similar. It would trail about a quarter right now, so if you were to look at energized systems graphically, it would show similar to booking. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Sort of a 1,000 to 2,000 lag by the sound of it. Kelcy Pegler – President-NRG Home Solar That’s fair. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. Thank you. David Whipple Crane – President, Chief Executive Officer & Director Well, thank you. And Latoya, we’re very close to the top of the hour. And so, I think we’ll conclude the call here. Again, we appreciate everyone taking the time, starting an hour earlier, and we’ll look forward to talking to you next quarter. Thank you very much. Operator Thank you. Ladies and gentlemen, this concludes today’s program. You may now disconnect. Good day.

Ormat Technologies’ (ORA) CEO Isaac Angel on Q2 2015 Results – Earnings Call Transcript

Ormat Technologies, Inc. (NYSE: ORA ) Q2 2015 Earnings Conference Call August 04, 2015 9:00 am ET Executives Jeff Stanlis – Hayden MS, IR Isaac Angel – Chief Executive Officer Doron Blachar – Chief Financial Officer Smadar Lavi – Vice President of Corporate Finance and Investor Relations Analysts Paul Coster – JPMorgan Dan Mannes – Avondale Partners JinMing Liu – Ardour Capital Ella Fried – Leumi Operator Good day and welcome to the Ormat Technologies Second Quarter 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 Jeff Stanlis MS/Hayden IR. Please go ahead sir. Jeff Stanlis Thank you, operator. Hosting the call today are Isaac Angel, Chief Executive Officer; Doron Blachar, Chief Financial Officer; as well as Smadar Lavi, Vice President of Corporate Finance and Investor Relations. Before beginning, we would like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward-looking, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company’s plans, objectives and expectations for future operations and are based on management’s current estimates and projections, future results or trends. Actual results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of such risks and uncertainties, please see the risk factors as described in Ormat Technologies’ annual report on Form 10-K filed with the SEC. In addition during the call, we will present non-GAAP financial measures, such as EBITDA and adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures and management reasons for presenting such information is set forth in the press release that was issued last night, as well as in the slides posted on the company’s website. Because these measures are not calculated in accordance with U.S. GAAP, they should not be considered in isolation from the financial statements prepared in accordance with GAAP. Before I turn the call over to management, I would like to remind everyone that a slide presentation accompanying this call may be accessed on the company’s website at www.ormat.com, under the Events & Presentations link that’s found on the Investor Relations tab. With all that said, I would like to turn the call over to Isaac Angel. Isaac, the call is yours. Isaac Angel Thank you very much, Jeff, and good morning everyone. Thank you for joining us today for the presentation of our second quarter 2015 results. I’ll start with slide number four. The second quarter was a strong quarter in which we delivered both revenue and profit growth. Similar to the first quarter this year, oil and natural gas prices had a material impact in our electricity segment. However, the new capacity that came online along with the improved efficiency of our operating portfolio mitigated this impact and supported good results in the segment. This is a direct outcome of the enhancements and improvements we are implementing throughout the entire value chain. This quarter, we also had a progress with our expansion plan and began executing our initiatives to set the stage for our next growth phase. As we have stated, our multiyear plan is designed to elevate Ormat from a leading geothermal company to a recognized global leader in the larger renewable energy industry. I’d like now to turn the call over to Doron to discuss our financial results for the quarter. Doron Blachar Thank you, Isaac, and good morning everyone. Let me start by providing an overview of our financial results for the second quarter ended June 30, 2015. Starting with slide six, total revenue for the second quarter of 2015 were $140.5 million compared to $127.6 million in the second quarter of 2014 with 65% of revenue coming from the electricity segment. In our electricity segment, as you can see on slide seven, revenues were $90.9 million in the second quarter of 2015 compared with $91.7 million in the second quarter of last year. The slight decrease was mainly due to lower energy rates resulting from lower oil and natural gas prices that amounted to approximately $9 million. Additionally, we had lower generation at Puna power plant due to the well field maintenance that was required as a result of last summer hurricane. The decrease was partially offset by the contribution from the second phase of McGinness Hills in Nevada. McGinness Hills was also the main driver for the 12.4% increase in our generation project. Following our risk management policy, we recently entered into the derivative transaction to reduce 50% of our exposure to fluctuations in natural gas prices at a fixed price of $3 to MMbtu until December 31, 2015. In the product segment on slide eight, revenues were $49.6 million compared to $35.9 million in the second quarter of 2014, which represented a 38% increase. As many of you already know, our product segment is characterized by fluctuations in quarterly revenue. In the first quarter, we accelerated the construction of the Don Campbell Phase 2 project in order to commence commercial operation by the end of 2015 and in the second quarter we focused on delivering against our backlog to third party. We remain on schedule with our contract with third party customer and on track with our full year guidance. Moving to slide nine, the company combined gross margin for the second quarter was 36.1% compared to 31.3% in the second quarter of 2014. In the product segment, gross margin was 45.2% compared to 43.4% in the prior year’s quarter. I would like to emphasize that the product segment gross margin vary between the quarter and should be analyzed on a yearly basis. In the electricity segment, gross margin was 31.2% compared to 26.6% last year. As Isaac mentioned in this opening remarks, this is mainly a result of increasing efficiency that is translated to higher margins despite the significant impact of the lower oil and natural gas prices on our revenue. Moving to slide 10, second quarter operating income was $38.6 million compared to $22.3 million in the second quarter of 2014. Excluding an $8.1 million write off in the second quarter of last year, we had an increase of 27% in operating income. Operating income attributable to our electricity segment for the second quarter of 2015 was $20.9 million compared to $9.5 million for the second quarter of last year. Operating income attributable for our product segment was $17.7 million compared to $12.8 million in the second quarter of 2014. Moving to slide 11, interest expense net of capital interest for the second quarter of 2015 was $18.9 million compared to $22.1 million last year. This decrease was primarily due to lower interest expense as a result of debt payments partially offset by an increase in interest expense related to a new loan we took in August 2014 to finance the construction of the second phase of McGinness Hills power plant. Moving to slide 12, net income attributable to the company’s stockholders for the second quarter of 2015 was $14.4 million or $0.28 per diluted share in the second quarter of 2015 compared to $9.1 million or $0.20 per share basic and diluted for the second quarter of 2014. The net income includes $1.7 million related to loss from extinguishment of liability resulted from the partial repurchase of OFC Senior Secured Notes as well as $0.4 million expense associated with due diligence related to a potential M&A transaction we weren’t delivering [ph]. After the evaluation, we made a decision not to pursue the transaction. Although this transaction did come to fruition, it demonstrates our intention to identify appropriate and accretive acquisition opportunities. Those expenses are adjusted to our EBITDA. Please move to slide 13. Adjusted EBITDA for the second quarter of 2015 was $67.8 million compared to $61.8 million in the same quarter last year. Turning to slide 14, cash and cash equivalents as of June 30, 2015 was $137.7 million. We generated $112.7 million in cash from operating activities. The accompanying slide breaks down the use of cash during the first half of 2015. Our long-term debt as of June 30, 2015 and the payment schedule are presented on slide 15 of the presentation. The average cost of debt for the company stands at 6.07%. Turning to slide 16 for financing update, during the quarter, we repurchased certain portion of OFC Senior Secured Note of $30.6 million. The repurchase of the OFC loan would save the company in annual interest expense of approximately $2.5 million over the next three years. On Friday, we closed a 12 year limited recourse term loan in the principal amount of $42 million to refinance 20 megawatt of Amatitlan power plant in Guatemala. Under the agreement with Banco Industrial, Guatemala’s largest bank and its affiliate Westrust Bank, Ormat has the flexibility to expand the Amatitlan power plant to which financing to be provided either via equity, additional debt from Banco Industrial or from other lenders. Funding of this loan is expected shortly. This agreement replaces the senior secured project loan from EIG global formally PCW which Ormat signed in May 2009 and prepaid full in September 2014 from corporate funds. On August 03, 2015, Ormat Board of Directors approved payment of the quarterly dividend of $0.06 per share for the second quarter. The dividend will be paid on September 02, 2015 to shareholders of record as of closing of business on August 18, 2015. In addition, the company expects to pay quarterly dividends of $0.06 per share in the next quarter. 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, Doron. Starting with slide 18 for an update on operations, our portfolio generation in the second quarter increased by 12.4% from 1 million megawatt hours to 1.2 megawatt hours in the second quarter 2015. This increase is mainly due to contribution of McGinness Hills complex. The generation increase was offset by lower generation in the Puna plant in Hawaii due to well field maintenance related to last year’s hurricane. Moving to slide 19 to other projects, we are on track with the construction of Don Campbell Phase 2 in Nevada and are expecting it online towards the end of this year. In Olkaria, Kenya, we are on schedule with the construction of the 24 megawatt expansion. The fourth plant is expected to bring the complex generation capacity to 134 megawatts and the commercial operation is expected in the second half of 2016. And with regards to Sarulla, Indonesia, engineering, procurement and construction are in progress and infrastructure work has been completed. The construction has successfully drilled part of the plant production wells and drilling of additional production and injection wells is underway. The first phase is expected to commence operation in the second half of 2016 and the remaining two phases are scheduled to commence within 18 months thereafter. The projects I just described as well as additional projects on the various stages of development are expected to add between 90 and 115 megawatts by the end of 2017. Besides the investments in new projects, we are continuing our exploration and business development activities to support further growth. If you could please turn to slide 20, you will see our CapEx requirements for the remainder of 2015. We plan to invest a total of $50 million in capital expenditures or new projects under construction and enhancements. An additional $29 million are budgeted for development and exploration activities, maintenance capital for projects and investments in machinery and equipment. In addition, $37 million will be required for debt repayment. Turning to slide 21 for an update on Product segment, in May, we signed approximately $100 million EPC contract for a geothermal project in Chile. Our backlog as of August 03 stands at $347.5 million and it will support our revenues in the next two to three years. Moving to slide 22 for a regulatory update, we continue to see strong demand for renewable energy. Moreover, jurisdictions around the world are increasingly seeing the positive value of geothermal as a stable based-out renewable technology, and legislation being considered in many countries. We believe that these initiatives will boost long-term demand. The market opportunity in the U.S. was further reinforced yesterday when President Obama announced the U.S. Environment Protection Agency’s final Clean Power Plan. The plan will catch U.S. carbon pollution from the power sector by 870 million tons or 32% below 2005 levels in 2030. While power plants are responsible for approximately one-third of all carbon dioxide emissions in the United States, there were no nation limits on carbon pollution until today. The plan is expect to drive more aggressive investment in clean energy technologies, placing a significant emphasize on the renewable energy resources aimed at cutting wasted energy, improving efficiency and reducing pollution. Under the plan states are required identify tax forward [ph] using either current or new electricity production and pollution control policies to meet the goals of the program. The compliance period begins in 2022, which gives states and utilities seven years for planning and early implementation. We expect that this plan will benefit renewable resource developers and will further support our initiatives to pursue our multiyear plan. Another encouraging development in the United States, two weeks ago, the Senate tax-writing committee passed a bill extending the PTC for geothermal projects that will being construction by 2016 and commencing operation by 2018. The legislation needs to pass the House and the full Senate to become a law. If passes, we anticipate a number of projects to benefit from this legislation. The acknowledgement of renewable benefit and regulation support, as well as the energy shortage in many of the developing countries create opportunities for Ormat. In my opening remarks, I mentioned ongoing effort to evaluate and implement our multiyear plan. This plan has several moving parts and a long-term view and we will share more details in the upcoming calls. I’m confident that we will be able to capitalize on the opportunities before us and believe Ormat is uniquely positioned to succeed in the evolving renewable market. Turning to slide 23, we reiterate our 2015 revenue guidance. Oil and gas prices remain a reducing factor in our electricity revenues and we expect its annual impact to increase and be approximately $28.6 million. We expect the electricity segment revenues to be between $380 million and $390 million and product segment revenues to be between $180 million and $190 million, for that total revenues of between $560 million and $580 million. We reiterate our adjusted EBITDA guidance of $280 million to $290 million for the full year. We expect Northleaf’s portion of the 2015 annual adjusted EBITDA guidance to be approximately $14 million. And that concludes our remarks for today. Thank you for your continued support and now the questions, operator, if you please. Question-and-Answer Session Operator Thank you, sir. [Operator Instructions] And our first question will come from Paul Coster of JPMorgan. Please go ahead. Paul Coster Yeah, thanks very much for taking my questions. So, the first one really relates to oil and gas prices. All of your electricity contracts, did they have some sensitivity to oil and gas prices, perhaps you can give us some color around that and also on a go forward basis, the new PPAs that get signed, are they also expressing sensitivity to oil and gas? Isaac Angel Paul, first of all, thanks for participating in the call. In all our new PAAs, they don’t have any connection to oil and gas prices, we have three old contracts actually that they are – two of them are linked to the gas prices and one of them in Hawaii, Puna is linked to the oil price. One of these gas price linked contract is going away at the end of this year, which means about one-third of our exposure is going – more or less is going away by the end of this year and we will remain with two more – two years? We will have two years and then we will remain only with one of them for a long time to come. Paul Coster On a go forward basis, new PPAs will not include a sensitivity to gas and oil, is that correct statement? Isaac Angel That’s correct. Paul Coster Okay. And then my follow-up question, obviously, you are delivering against a backlog here and the backlog is still pretty healthy, but it’s coming down. I imagine though you’ve got a lot of stuff in your late state pipeline. Can you give us any color regarding the components of the late state pipeline? Is it all sort of the traditional Ormat business or are you starting to see a broader side of renewables in that portfolio, can you give us some sense of what the geographies might be and what kind of timeline before we see it start to enter sort of the contractual state? Isaac Angel Paul, as you mentioned before, we have a very healthy pipeline. We just added $100 million to the power plant a quarter ago, which is a contract we signed in Chile for EPC and we should also remember that we have a serious amount of a pipeline – in the pipeline of Sarulla project that it will be running with us until 2018, which – and we don’t expect every month or every quarter to sign $100 million or $200 million deal. On the other hand, we have small deals that are adding to the pipeline, which will be probably joining us before the end of this year. But from the product sales point of view, the company is concentrating today mainly in few countries, in South America, Africa, and Far East. We are expecting – we have – as you mentioned before, we have a few deals on that is – that are close to fruition. We don’t know if they are going to hit sometime in Q3, Q4, or next year, in any case, we feel very comfortable from the backlog point of view looking forward two to three years. Paul Coster Okay. Thank you very much. Operator Our next question will come from Dan Mannes of Avondale Partners. Please go ahead. Dan Mannes Thanks. Good morning, everyone. Doron Blachar Hi, Dan. Isaac Angel Hi, Dan, thank you for joining. Dan Mannes Of course. The first question for Isaac, you talked a lot about, it’s a regulatory backdrop, but I want to talk about what’s going on real time. I mean we’ve seen a number of Power Purchase Agreements signed in Texas and California and Nevada, that’s in very, very low prices for solar. I was wondering if you could talk at all about geothermals competitiveness in this kind of environment, number one. And number two, maybe cross reference that with some of your initiatives as it relates to direct to consumer sales. Because I guess what I’m trying to figure out with the outlook is for new plants in that kind of environment? Isaac Angel Dan, as you know, we will not – we don’t have the liberty to talk about PPAs which are under discussion or preparation or at the final stage, we only announce them after they are signed. But obviously we are aware of those low price solar PPAs that were signed in the last few weeks, but regardless – you know that there is a huge advantage between an intermediate power, which is affecting the grid and on the other hand, base load power, which is adding to the stability of the grid. There is still more than certain appetite for geothermal PPAs that we are working on and that the most I can say at this stage. I am not worried on the immediate stage in the state. The case can change in the upcoming years but that’s why the company has changed, not changed but added focus in going elsewhere we changed the whole structure of our sales and marketing team with focusing on counties which is outside of the U.S., which is the appetite for geothermal is not necessarily driven against solar prices, but are driven because of other reasons which are availability of the resource access to the resource and frankly lack of energy and other political reasons even in some countries that are driving these requests and those markets in one hand are pushing our product sales and in other end are pushing our ability to build our own power plants and we have new concessions in new African countries that we got and I think overall looking I am very optimistic in the future. Dan Mannes So, if I can just briefly summarize and make sure I understand. So from your perspective even in spite of how well solar may be going, there is still enough of in advantage for being base load that you can get a relative premium price that makes it attractive to continue to develop, both U.S. and abroad right now. Isaac Angel Yes, it is absolutely true at least in the immediate years in the U.S. Dan Mannes Okay. And then two other quick questions. Isaac Angel Has to be true within the next five years. That we don’t know. Dan Mannes In your project development you obviously gave us an update on both OREG 3 as well as Campbell 2, can you may be give us any update on what’s going on at [indiscernible] I know those are kind of the next two projects that you have identified there, I think we still have, hopefully coming online in 2017. Isaac Angel [indiscernible] is still at the lender stage, which means we went beyond certain stages in the process and we have located lenders and we are working to finalize contracts with them and it’s a go project at this stage. Dan Mannes And [indiscernible]? Isaac Angel And [indiscernible] we are in exploration phase, and we have successfully went few exploration phases, but we didn’t finish yet and unfortunately I cannot say it is a go project yet. I am very optimistic and positive, but will let you guys know in due time. Dan Mannes Okay. And then lastly just on the product side, we looked at the margins in the quarter obviously very strong, we know they’re lumpy , can you just confirm was there anything unique in this quarter, I don’t know if you had a project closing out or something that happened that maybe help margins out? Isaac Angel Yes we have few projects in this quarter and the upcoming few quarters, which I don’t want to mention name because of obvious reasons which are more profitable than the others. As Doron mentioned this profitability will not be able to be maintained in the long term of yield, but it will be a – that we can maybe run in this rate a few quarters and then it will be on the regular basis. Doron Blachar I think – it is Doron and if I may add. I think that when you look at the product segment, the best way to look at the margin is to look at the 12 month trailing and see over the last four quarters and then 12 months back and then move back a few quarters, still you can get probably a much more standardized margins in just looking into one quarter or swiftly of just 12 months trailing for the quarter. Dan Mannes Understood. Great we will take a look at that. Thanks guys. Operator [Operator Instructions] The next question will come from JinMing Liu of Ardour Capital, please go ahead. JinMing Liu Good morning. Thanks for taking my question. Isaac Angel Thanks for joining. JinMing Liu No problem. First of all regarding [indiscernible] the EPA clean par announced yesterday, my understanding is that that could well be ultimately enforced by each individual state paving the locations of your facilities, do you kind of lead by the user demand for energy within those space or do you have the ability to export power to other states that are in need of the energy? Isaac Angel It is very individual to a state. There are states that we are – we have the ability to export such as between Nevada and California, but on the other hand there are other states that – the import of power from other states and then you have to look at it on state by state basis. As a matter of fact we have today a few contracts which are interstate as we speak. JinMing Liu Okay, got that. Switch to the Northleaf transaction, it looks like to me a portion of the proceed was allocated to our equity, so what was it that [indiscernible] investments? Doron Blachar It’s Doron, the way the location of the cash was that it is split between two parts both of them in the equity, one is the non-controlling interest that represents the equity part of what they acquire and there was an additional paid in capital increase that represents basically the theoretical profit that Ormat has from this transaction. Today, according to U.S. GAAP unless you sell control you cannot recognize the revenue from selling equity. You put it into additional paid in capital. JinMing Liu Oh, I see. I see, that’s why – okay, I got that. I understand those two will add. Lastly, regarding the cost of electricity in the second quarter is increase slightly against a first quarter, even I back out the benefit from the first quarter. How much was the start-up cost regarding about – from the McGinness Hills second phase? Isaac Angel Give us one second please. JinMing Liu Okay. Isaac Angel You were talking on dollar basis, or negative power base? JinMing Liu Just dollar. Isaac Angel On dollar basis. JinMing Liu Right. Isaac Angel Do we give dollar number basis. Doron Blachar We don’t usually… Isaac Angel We don’t disclose the dollar number per power plant basis, unfortunately. Doron Blachar But obviously you can expect the second phase in a power plant has the relatively lower additional cost compared to the revenue yields. Most of the existing man power, so the additional cost is lower that the new power plant. Isaac Angel But JinMing, I want to mention here something that you should be aware of the fact that since the last three quarters we are basically concentrating on each and every power plant and trying to effect the profitability of those power plants and not necessarily and sometimes even reducing the generated output on the gains increasing profitability. We have few power plants, the generation was simply cut by the fact that we stopped very old steam turbine, which effectively were not profitable. So, you can see now few power plants that the generation went down, but the profitability went up seriously and if you look at our profitability of the electricity segment it is going on quarter on quarter basis. So, just comparing the total generation, quarter after quarter is not necessarily only the addition of the new power plant, but sometimes there is also reduction of some megawatt hours comparing to the quarter before. JinMing Liu Okay got that. All right. Thanks. Isaac Angel Thank you. Operator The next question will come from Ella Fried of Leumi. Please go ahead. Ella Fried Good afternoon. I also have three questions, two of them are follow-up questions. The first one is to Dan’s question, your plans to expand in the solar business. Additional tax I didn’t quite get it, additional tax in terms of expanding in U.S. or outside the U.S., and then how do you view all the recent developments in addition to what you mentioned regarding the base load. Isaac Angel First of all, I want to clarify something. We are not abandoning to geothermal in becoming a solar developer. That was… Ella Fried Yes. It’s clear. Isaac Angel And the idea was that wherever its possible we will be able also to offer a solar solution which we are doing. That mainly relating to C&I customers which are enterprise customers which are looking for a comprehensive solution to their electricity problem if we may call it. And when we are offering them a solution, this solution may also include a solar plant and we have a pipeline of those types of offer that we are working on in the U.S. but mainly outside of the U.S. And as I said before, we will not become a solar developer out of the blue that was not the intention. Ella Fried So it’s more using the existing infrastructure and adding solar megawatts, and then other forms of energy that are available at the location. Isaac Angel Yes and also we are working very diligently which is not easy thing to do, so add solar complimentary power into our existing facility, it is something that we are working on for a long time now and not very successfully so far, but I am optimistic we all realize that from the logical point of view it works unfortunately from the PPA and PUC point of view, it’s a difficult thing to do but we are – I am personally very optimistic yet and we are working on it diligently and that was the idea with the solar. Ella Fried Okay. Thank you. That sounds very interesting. About your exposure to natural gas, I just didn’t catch it. In terms of megawatts, how many megawatts will be left exposed to natural gas in the end of 2015? Isaac Angel We have today about 140 megawatts that are exposed to natural gas, prices out of the almost 650 that we have. Out of this 140, about a third is ending the relationship together we have – we signed already a contract in Heber [indiscernible] at the end of this year. So in 2016, we see about 100 megawatts only tied to natural gas pricing. We have also – when we signed the Heber contracts, we said that – will increase EBITDA about $8 million adjusted changing price. And out of the 100 megawatt that are left, we have about half of that, 50 megawatt. The contract ends at the end of 2017 and the rest is further down the road. Ella Fried Okay. Thank you. And the last question, you mentioned that North Brawley incurred some expenses, does it mean that it’s not – is it breakeven operationally or is it breakeven EBITDA wise or does it incur some more expenses? Isaac Angel North Brawley as illustrated on slide 7 had higher cost in Q2 of last year. This quarter, it had lower cost. The plant is still not profitable and then we are working very hard and diligently to bring it to be profitable. And Again, we made lots of changes in North Brawley. When I arrived to Ormat a bit more than a year ago, this is one of the challenges we took as new management and I am certain that we will be able to overcome this challenge and bring this plant to be profitable. As I said, we did lots of changes in North Brawley during the last two quarters. Ella Fried Okay. Thank you. And one more question to Doron, income tax provision went up about $1 million approximately. Is there an explanation? Doron Blachar I think it basically relates to the higher profit that we have before income tax as a percentage wise I think we went down a little bit. And in addition according to U.S. GAAP, the tax provision is done on forecasted basis basically looking at the entire year we do it, but it went up and profit also went up entirely. Ella Fried Okay. Thank you. And congratulations on great results. Doron Blachar Thank you. Isaac Angel Thank you very much and thanks for joining. Operator And ladies and gentlemen, at this time, we will conclude the question-and-answer session. I would like to hand the call back to management for any closing remarks. Isaac Angel Good morning again, ladies and gentlemen. Thank you very much for your ongoing support and we will be probably seeing you during the quarter on our road shows. Thank you very much. Bye-bye. Operator Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.