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Black Hills Corporation’s (BKH) CEO David Emery on Q1 2016 Results – Earnings Call Transcript

Black Hills Corporation (NYSE: BKH ) Q1 2016 Earnings Conference Call May 04, 2016 11:00 AM ET Executives Jerome Nichols – Director, IR David Emery – Chairman and CEO Rich Kinzley – SVP and CFO Analysts Insoo Kim – RBC Chris Ellinghaus – The Williams Capital Group Lasan Johong – Auvila Research Consulting Operator Good day ladies and gentlemen, and welcome to the Black Hills Corporation’s First Quarter 2016 Earnings Conference Call. My name is Andrew, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Jerome Nichols, Director of Investor Relations of Black Hills Corporation. Please go ahead sir. Jerome Nichols Thank you, Andrew. Good morning everyone. Welcome to Black Hills Corporation’s first quarter 2016 earnings conference call. Leading our quarterly earnings discussion today are David Emery, Chairman and Chief Executive Officer, and Rich Kinzley, Senior Vice President and Chief Financial Officer. Before we begin today, I would like to note that Black Hills will be attending the American Gas Association Financial Forum next week in Naples, Florida. Our presentation materials and webcast information will be posted on our website at www.blackhillscorp.com under the investor relations heading. During our earnings discussion today, some of the comments we make may contain forward-looking statements as defined by the Securities and Exchange Commission, and there are a number of uncertainties inherent in such comments. Although we believe that our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. We direct you to our earnings release; slide two of the investor presentation on our website and our most recent Form 10-Q and Form 10-K filed with the Securities and Exchange Commission, for a list of some of the factors that could cause future results to differ materially from our expectations. I will now turn the call over to David Emery. David Emery Thank you, Jerome. Good morning, everyone. Thanks for being with us this morning. For those of you following along on the webcast slide deck, I will be starting on slide 3. We will follow a similar agenda to what we’ve done in previous quarters. I will give a quick overview of the quarter. Rich Kinzley, our CFO will cover the financial highlights for the quarter. I will visit briefly about strategic forward issues and then we will take questions. Moving to slide 4, with the closing of the SourceGas acquisition we’ve largely completed our nearly 12 year transition to a pure-play utility company. We now serve more than 1.2 million customers in eight states, and our utility operations account for the large majority of our earnings, assets and employees. In addition, all of our non-utility businesses either support directly or are being transitioned to provide support directly to our own utility business. As a result and effective this quarter, we made some changes to the way we will now report operating and financial results going forward. Those changes have also been made to previous periods to allow for direct comparisons. Most notably we won’t continue to report by our two major business groups, Utilities and Non-Regulated Energy. Rather we’ll simply have five reporting segments, those are the Electric Utilities, Gas Utilities, Power Generation, Mining and Oil and Gas. We’ll also report Cheyenne Light’s gas distribution results within our Gas Utilities business segment. They were previously reported within the Electric Utilities segment. And then finally, we recently rebranded all of our utilities under the name Black Hills Energy. That’s a name we’ve used since 2008 for many of our utility properties, and we’ve just finished that process with SourceGas and then our two legacy utilities, Cheyenne Light and Black Hills Power. All have been renamed Black Hills Energy. We included a table in both the earnings press release and in the appendix of the webcast presentation that outlines our various utility, subsidiaries, their legal names, and then how we intend to refer to those in our investor materials going forward. So with that, I will move onto slide 6, first quarter highlights. We had a strong first quarter, especially when you consider the mild winter weather that we had, and continued weak oil and gas prices and of course the massive effort that’s has gone into closing and integrating SourceGas. Talking about highlights for the utilities, obviously the most notable one is the fact that we closed the purchase of SourceGas on February 12. That acquisition for $1.89 billion added about 429,000 utility customers in Arkansas, Colorado, Nebraska and Wyoming. Three of those states we already do business in, and of course Arkansas is a new state for our utility operations. Given the February 12 close, obviously financial results have been included for SourceGas from February 12 through March 31, so about half of the quarter. During the quarter, we continued construction on our $65 million, 40 megawatt national gas turbine at the Pueblo Airport Generating Station. That project is on schedule to be completed and placed in service before year end. We filed a request yesterday with the Colorado PUC to increase annual revenue to recover our investments and expenses associated with the new turbine. Construction also commenced during the quarter on the new $109 million, 60 megawatt, Peak View Wind Project also for Colorado Electric, and also expected to be in service by year end. Our South Dakota Electric Utility subsidiary commenced construction on the first segment of a new 144 mile $54 million electric transmission line that will go from Northeast Wyoming to Rapid City, South Dakota. We expect that line to be in service in the third quarter, and then our cost [facility] gas hearings are underway actually this week in the state of Nebraska, and they are set for Iowa, Kansas, South Dakota and Wyoming over the course of the next few months. On April 27, the Colorado PUC dismissed our cost of service gas filing in Colorado without prejudice. In order to provide a little clarity around that decision, I think it’s important to understand that when we filed our regulatory applications for cost of service gas in all six of our states, we proposed that approvals be done in two separate phases. Phase 1 would establish the basic regulatory construct for the program, and phase 2 would provide approval of specific gas reserve properties for inclusion in the program and the associated impact on customers’ cost of gas. Specific to Colorado, although we have not yet received a written order, the Commissioner seemed to indicate a preference for combining the two phases into a single proceeding. So just to be clear, a phase 1 approval will not impact customer rates. It will simply establish the financial and other criteria we need to select properties for inclusion in the program. The phase 2 process will provide approval to include specific gas properties and the associated customer impacts. Now in Colorado, once we receive the Commission’s written order, we will evaluate our options and determine how best to proceed. That may include re-filing with a specific property for Colorado PUC approval and inclusion in the program. Moving on to slide 7, the first quarter highlights continued, our Power Generation segment closed the sale on April 14 of a minority interest in Colorado IPP’s 200 megawatt power plant for $215 million. The proceeds were used to reduce debt. Our Oil and Gas financial results were negatively impacted by continued low oil and natural gas prices during the quarter. On the Corporate front, we reached an agreement with IRS appeals regarding disputed items for prior tax years going all of the way back to 2007, resulting in about $5.1 million of tax benefits. And I will let Rich explain those in a little more detail, when he goes over the financial statements. We declared a quarterly dividend of $0.42 per share, and in March we implemented an at-the-market equity program to sell shares of common stock. On slide eight, the SourceGas integration is going very well. We expect to largely complete all of that activity by the end of the year. Now that’s a very aggressive but also a very achievable goal and we are making great progress. A lot of activity has already been completed or is well underway. The most notable item is, we’ve completed the conversion of our human resources and payroll systems, completed the conversion of our financial systems, a lot of our rebranding activity at least associated with vehicles and uniforms and things have been completed, and we’ve also made a lot of organizational and staffing decisions related to the integration and that’s all well underway. Key items remaining in the year, the largest of which is our customer information system conversion; we expect that to be done in the fall and along with that then we would integrate our bill, print and payment processing along with the change in customer information system. On slide 9, we have a graphical representation of integration progress through April 15. It’s broken into five major categories as well as an overall progress report. As you can see, we are making excellent progress on all fronts there. Slide 10; provide highlights regarding our sale of the minority interest in our Black Hills Colorado IPP assets. As I said earlier, we did close that transaction on April 14, generating about $215 million in proceeds. We will continue as the majority owner of that facility and will continue to operate it. There will be no impact to the customers as a result of the transaction. The market conditions related to the sale of this asset really provided a unique opportunity for us to capture tremendous value for shareholders. Slide 11 just provides a reconciliation of our first quarter income from continuing operations as adjusted, compared to the first quarter of last year in 2015. As you can see, we showed some great improvement across many of our business segments with gas utilities demonstrating the largest increase of course due to the addition of the SourceGas property in mid-quarter. That concludes my comments for now. I will turn it over to Rich to cover the financial highlights. Rich? Rich Kinzley Thanks, Dave. Good morning everyone. As Dave indicated, it was a busy first quarter. We’re pleased we closed the SourceGas acquisition on February 12, ahead of expected timing, which allowed us to pick up part of the heating season from those gas utilities. Integration activities around the SourceGas acquisition are progressing as planned as Dave noted, and despite mild weather in the first quarter, we are pleased with our operating results. On slide 13, we reconcile GAAP earnings to earnings as adjusted, a non-GAAP measure. We do this to isolate special items and communicate earnings that better represent our ongoing operating performance. This slide displays the last five quarters and trailing 12 month as of March 31 for each 2016 and 2015. During each of the past four quarters, we incurred significant acquisition expenses related to SourceGas such as advisory fees and financing and other third party costs. We also incurred non-cash ceiling test impairment charges at our Oil and Gas business in each of the past five quarters, due to continued low crude oil and natural gas prices. The acquisition expenses and impairments are not indicative of our ongoing performance, and accordingly we reflect them on and as adjusted basis. Our first quarter as adjusted EPS was $1.23 per share compared to $1.08 per share in the first quarter last year. Comparing Q1 2016 to Q1 2015 at a high level result in 2016 benefited from a partial quarter ownership of the SourceGas Utilities and corporate tax benefits. These positive items were partially offset by increased share count from our November equity issuance, higher interest expense from higher debt balances and milder weather. I’ll detail these items in the following slides. Trailing 12 months as adjusted EPS increased by 7.5% to $3.14 per share. Slide 14 displays our first quarter revenue and operating income. On the left side of the slide, you will note that revenue was only slightly higher in 2016, despite the addition of SourceGas. This is due to reduced revenues at our Gas Utilities from lower pass-through gas costs during the period, given the low natural gas price environment and milder winter weather. On the right side of the slide, you see a 21% increase in total operating income, driven by a $22 million increase at our gas utilities. $21 million of this increase came from 49 days ownership of SourceGas. Power Generation delivered strong performance in the quarter, while our Electric Utilities and Mining segments were flat year-over-year. Despite lower revenue due to lower received crude oil and natural gas prices, Oil and Gas’s operating loss was lower in 2016 driven by lower G&A and lower depletion. The Corporate segment operating loss of $5.4 million was driven by internal labor costs, which supported our SourceGas integration efforts. Excluding the positive impact of the SourceGas acquisition, consolidated operating income in the first quarter of 2016 was essentially flat, compared to 2015 mainly due to milder weather in 2016. Side 15 displays our first quarter income statement. Gross margin, operating expenses and DD&A all increased comparing 2016 to 2015, as a result of the SourceGas acquisition. As I noted on the previous slide, operating income before special items increased by 21% year-over-year. Special items included the Oil and Gas ceiling test impairment and acquisition related costs including bridge financing costs through February 12, when we closed the acquisition. These items amount to $39 million pretax in 2016 or $0.46 per share. Interest expense increased year-over-year related to increased debt associated with the acquisition. You will note we had a very low effective tax rate for the quarter in 2016. This is due to two items; first, during the quarter, we reached agreement with the IRS on disputed items for the tax years 2007 through 2009, resulting in tax benefits of $5.1 million. Second, we changed our methodology for tax depletion at our Oil and Gas subsidiary, during the quarter resulting in a tax benefit of $5.8 million at the Oil and Gas segment. This includes benefits for the years 2007 through 2014 for this change an estimate. Together these tax items amounted to approximately $0.20 of EPS. We did not characterize these items as special adjustments since we accrued tax related to each of them in as adjusted earnings in previous years. Finally, you’ll see the 7.2 million diluted share outstanding increase from the previous year resulting primarily from our equity end unit mandatory issuances in November of last year related to the acquisition. We issued 6.3 million common shares in November and the application of the treasury stock method related to the unit mandatories added approximately 720,000 shares in the quarter. Additionally, we sold 261,000 shares through our at-the-market program as Dave mentioned. That was done the last few days of March; 140,000 of those shares had settled at March 31. For the quarter, as adjusted EPS grew 14% year-over-year, while as adjusted EBITDA increased by nearly 20%. The left side of slide 16 displays our Electric Utilities gross margin and operating income. Comparing 2016 to 2015, gross margin decreased by $1.2 million and operating income decreased by $300,000. Gross margin decreased primarily due to a Q1 2015 $2.1 million one-time settlement with the Colorado PUC on the renewable energy standard adjustment related to our Busch Ranch Wind Farm. This was partially offset by increased writer CapEx related revenue in 2016 and the benefit of an additional day of margin in 2016 due to Leap Year. Weather had a nominal impact on gross margin year-over-year at the Electric Utilities. O&M at the Electric Utilities was $1.9 million lower in the first quarter of 2016 compared to 2015, driven by the increased allocation of central service cost to corporate in 2016 related to SourceGas integration activities. Comparing 2016 to 2015 at our Gas Utilities on the right side of slide 16, gross margin increased by $45 million and operating income increased by $22 million. The gross margin increase was driven by the partial quarter ownership of the SourceGas Utilities, which added 46 million. Gross margin in 2016 also benefited by 1.8 million from our prior year Wyoming acquisitions. Unfavorable weather decreased gross margin at our legacy Black Hills Gas Utilities by 2.8 million, with 23% fewer heating degree days in Q1 2016 compared to Q1 2015. O&M at the Gas Utilities increased by 14.5 million year-over-year, 18 million of this increase is attributable to the addition of SourceGas. The increase in O&M was partially offset by the increased allocation of central service costs to corporate in 2016 related to SourceGas integration activities. Depreciation at the Gas Utilities increased 8.2 million in 2016, primarily due to the addition of the SourceGas assets, which added 7.1 million. Quantifying the impact of weather on our results in Q1 2016 compared to normal, heating degree days at our Gas Utilities including the partial quarter ownership of SourceGas were 11% below normal, negatively impacting gross margins by an estimated $4.6 million. Also, heating degree days at our Electric Utilities were 12% below normal, negatively impacting gross margins by an estimated 1.5 million. Combined, the mild weather compared to normal negatively impacted our EPS by approximately $0.08 in Q1 2016. On slide 17, you will see that Power Gen improved operating income by $900,000 for the first quarter compared to 2015. The main driver in improved operating income was annual increases in power purchase price agreements. O&M and depreciation were comparable to the prior year. Moving to the right, our Mining segment had $100,000 operating income decrease compared to the first quarter of 2015. Year-over-year revenue was $400,000 higher and O&M was $500,000 higher. O&M increased due to our move into higher overburdened areas of this mine. Our cost plus contracts on 50% of our production allowed us to recoup part of the higher mining costs, explaining the bulk of the revenue increase. Moving to Oil and Gas on slide 18, we incurred an operating loss in Q1 2016 of 4.8 million excluding a $14 million pretax ceiling test impairment charge, compared to an operating loss of 7.2 million in Q1 2015 excluding a 22 million pretax ceiling test impairment charge. First quarter production increased 6% from 2015, driven by a 21% increase in oil sales volume, which resulted from wells drilled in late 2014, early 2015. From an average price received standpoint including hedges, crude oil decreased by 28% and natural gas decreased by 41%, comparing Q1 2016 to Q1 2015. These lower received prices resulted in a revenue decrease of 2.9 million year-over-year. O&M decreased by 1.9 million in Q1 2016, as we’ve diligently managed our cost structure at Oil and Gas. The impairments taken in 2015 and 2016 have driven down our depletion rate lowering DD&A by 3.4 million comparing Q1 2016 to Q1 2015. We are actively transitioning our Oil and Gas business to support our utility cost of service gas initiative, and we are opportunistically evaluating divestitures of properties that do not support that initiative. On slide 19, you see a review of how we paid for the SourceGas acquisition. As I mentioned earlier, last November we issued 6.3 million shares of common stock for net proceeds of $246 million and concurrently we did a unit mandatory issuance for $290 million of net proceeds. In January, we completed a $550 million debt offering ahead of the closing of the acquisition on February 12. At closing on February 12, we assumed 760 million of SourceGas debt, and drew on our revolver for the remaining needed proceeds to cover the $1.89 billion purchase price. This mix of debt and equity to fund the acquisition levered our balance sheet, which brings me to slide 20. At the end of Q1, our net debt-to-capitalization ratio was 69.2%. This is higher than normal and resulted from three things. First, the SourceGas acquisition was funded mostly with debt as I just explained. Second, the $299 million of unit mandatories are reflected as debt on our balance sheet until they convert to equity in 2018. And third, the after tax non-cash ceiling test impairments we’ve taken over the past five quarters have reduced equity by over $170 million. We are focused on de-levering the balance sheet over the next couple of years. We began the process in March by issuing shares through our new at-the-market equity offering program, which we expect to continue through 2016 and into 2017. As Dave mentioned in April, we completed the sale of a minority interest in our Colorado IPP facility and received $215 million, a large portion of which were used to reduce debt in the second quarter. Looking ahead at the strong cash flows and earnings from our businesses, combined with the at-the-market equity program will support our dividend and strong utility focused capital deployment program, while assisting us with de-levering over the next couple of years. We are committed to maintaining our solid investment grade credit ratings and our forward forecasted metrics to support those ratings. All three rating agencies affirmed their ratings of Black Hills in February following the closure of the SourceGas acquisition. Slide 21 lays out our planned near term treasury activity, and slide 22 shows our debt maturity schedule. We are evaluating upsizing our $500 million revolver and initiating a related commercial paper program. We will continue to prudently utilize the at-the-market equity program in 2016 and 2017, and we have nearly 1 billion of debt coming due by mid-2017. The blue bars on slide 22 represent the SourceGas debt we assumed at closing, and provide us with an opportunity to improve on the associated terms given our higher credit ratings compared to SourceGas before the acquisition. We are evaluating refinancing alternatives and plan to refinance much or all of the upcoming maturities later in 2016 or early in 2017. Slide 23 demonstrates our strong track record of growing operating income and EPS. We are making excellent progress integrating SourceGas, and will have the majority of that work done by the end of 2016. We look forward to continuing to build upon our impressive track record of growing shareholder value as we serve our utility customers safely and reliably. Looking ahead, the synergistic qualities of the SourceGas acquisition and our strong utility based capital program will continue to drive an above average growth profile, compared to our utility peers. On slide 24, we are reaffirming our 2016 as adjusted EPS guidance of 2.90 to 3.10 per share. In addition, we are maintaining our preliminary as adjusted EPS guidance for 2017 of $3.35 to $3.65 per share. In 2016, we are focused on effectively managing our businesses, integrating SourceGas, and positioning ourselves for strong earnings growth in 2017 and beyond. I will turn it back to Dave now for our strategy update. David Emery Thank you, Rich. Moving on to slide 26, consistent with our past practice for the last couple of years, we group our strategic goals into four major categories, with the overall objective of being an industry leader in everything we do. Moving on to slide 27, our profitable growth objective; our strong capital spending drives our earnings growth. We forecast a total of more than $1.2 billion of investment from the 2016 through 2018 period, positioning us very well to continue our track record of strong earnings growth. It is important to note that we have not included results from our Cost of Service Gas Program in our earnings guidance or our [cap] expenditure forecasts. While we fully expect to implement a Cost of Service Gas Program, the timing and the specific amount of capital expenditures are difficult to forecast currently. Hopefully, we can provide some updates to that forecast after we get through the regulatory process by the end of the year. Moving on to slide 28, as I mentioned earlier, we continue to make excellent progress, constructing our new $65 million, 40-megawatt gas turbine for Colorado Electric. And as I mentioned earlier, we filed [8-K] yesterday to recover both the investment and the expenses for that turbine. Construction is about one-third complete and progressing very well. Slide 29 related to the $109 million, 60-megawatt Peak View Wind project, which will serve our Colorado Electric Utility customers, construction commenced in February, we expect commercial operation by the end of the year. Again as a reminder, that project is being constructed by a third party, and we will assume ownership upon commercial operation. Slide 30, we continue to actively pursue our utility Cost of Service Gas Program, which if approved by our regulators will provide a long-term stable price for gas for our customers, and also a reasonable expectation of lower long-term gas cost for our customers, while providing opportunities for increased earnings for shareholders. As we’ve said before, it is truly a win-win situation. A lot of detail here on this slide about where we are in the various states related to our activity on Cost of Service Gas. As I said earlier, we hope to finalize our Cost of Service Gas Program approvals and then some details related to our forward program prior to the end of the year. On slide 31, we continue to be very proud of our dividend track record. We’ve increased our annual dividend to shareholders for 46 consecutive years and that trend is one we’re re pretty proud of. Slide 32 talks about our credit ratings. Rich already mentioned this, but as he said, all three agencies affirmed our credit ratings following closing of the SourceGas transaction. We are working hard to maintain those ratings. Slide 33 it really illustrates the focus we place every day on operational excellence and on being a great workplace. We made tremendous progress in several categories; I think safety being one that’s very notable. We are very focused on improving our safety performance. As you can see, we’ve made excellent progress over the last several years. Also now this being the first quarter where we are combined with SourceGas, I would like to take the opportunity to thank our employee team, which is now nearly 3000 people strong for the tremendous effort they have exhibited so far in the successful to-date integration of SourceGas and Black Hills. While there is certainly more work to be done, an absolutely incredible amount has already been accomplished in a very short period of time, so thanks to all of the employees for that. It’s an exciting time to work it Black Hills. Moving on to slide 34, this is our scorecard, this is something we’ve done for several years, it’s our way of holding ourselves accountable to you, our shareholders literally setting forth our goals for the year, at the beginning of the year, and marking our progress as the year progresses. That concludes my remarks. We’d be happy to take questions. Question-and-Answer Session Operator [Operator Instructions] our first question comes from the line of Insoo Kim from RBC. Your line is open. Insoo Kim Just starting off at Cost of Service Gas, in Colorado specifically other than the procedural reason for potentially dismissing the original filing, do you have any color as to your conversations with them on some issues I raised regarding the program? David Emery No, not really. I think the biggest single issue for us so far Insoo is that we have not yet received the written order, so we don’t know specifically if there is any additional issue. Until we see that, it’s kind of hard to speculate. We did certainly get the impression that there might be a preference on the part of the commissioners to consider the two phases in a single proceeding. But other than that, it’s pretty hard to provide any color without reading the written order. Insoo Kim Understood. And could you remind us again for this program to be beneficial to customers around what gas level is needed on a longer-term basis? David Emery You mean percent of gas in the program or –? Insoo Kim No, just the natural gas price level needed for the program to be more beneficial to customers to enter in to this type of program? David Emery I think it’s hard to say exactly, because no one knows exactly what gas prices are going to do. But our interpretation as you know you are at a time now where gas prices are probably certainly at a low compared to any recent history, and likely to stay there for at least a period of time, maybe a year or so, maybe a little longer, and we expect them to stay relatively low. If you can lock in gas prices for customers in $3 to $4 dollar range, I think that’s a tremendous long-term result for customers. When you are locking in for the life of the property that’s a tremendous benefit, and now is an opportune time to do that, perhaps one of the best times in the last decade or more to implement a program. So we are optimistic about that. It’s hard to say exactly what the price will be again, not knowing what the forward strip is going to look like at any given point in time and really emphasizing this is about long-term customer cost of gas, not about beating the market in any individual time period. Insoo Kim Understood, and in the Oil and Gas segment given the recent bounce in oil prices from $30 levels, do you expect to be a little more active in trying to make some non-core asset divestitures near-term? David Emery I don’t know if that in and of itself is going to drive our timing on anything. I would say we are already looking pretty aggressively at especially our smaller properties and non-operated interests. We’re working pretty hard at looking at those and we are trying to divest the ones that really don’t make sense for us to hold onto. I don’t think the little bit of bump in oil price affects our timing much. It certainly would be incrementally positive, but the reality of it is, if we divest all those properties it’s not going to be terribly meaningful from a balance sheet perspective anyway. Insoo Kim Got it, and then just last for me for now, in terms of focusing on de-levering the balance sheet beyond 2017, does that imply that you could potentially see continuing a similar level off on the ATM program? David Emery At this point in to our plan it’s just to utilize that through the end of 2017. In 2018, the unit mandatory converts, we think by then we’re going to be back to pretty close to where we like to be, which is 55% debt-to-total cap range, so we’ll see where we are at, at that point. But right now our intent is to utilize the program through the end of 2017. You can see what we’ve included in our guidance relative to that program, and that’s probably as far as we’d go with it at this point barring some other major acquisition or new activity. Operator Our next question comes from the line of Chris Ellinghaus from Williams Capital. Your line is open. Chris Ellinghaus A couple of questions; Rich, have you got the details on what the bridge financing costs were in the first quarter? Rich Kinzley Yes, it’s on the income statement, you can see it there. It’s lined out on that slide as 1.1 million and that ended when we closed on February 12. That was the end of that. Chris Ellinghaus Right, and I’m curious, obviously there were a lot of different moving parts (inaudible) of what I would call unusual items. I am just curious why, as far as the internal labor cost for the merger, why you don’t exclude that as well? Rich Kinzley That’s just our policy, and I think GAAP or internal labor should not be classified as one-time in nature, that’s cost that we will incur next year. They will be redeployed to other activity. Chris Ellinghaus All right, and on page 4, I’m a little bit confused, you mentioned on page 3 in the corporate section the 5.1 million tax benefit that you also referenced in your remarks. But in the footnote on page 4 for corporate, it says tax benefits of 4.4 million. What’s the difference between those two? Rich Kinzley The $5.1 million is made up of two things, Chris, the $4.4 million, the bulk of it was a life time exchange transaction we did back in 2008 when we sold a bunch of power plants and recognized a big gain but deferred that into the Aquila properties. So that was the main item of contention with the IRS that we settled in the first quarter. The additional 00,000 relates to R&D credits that were also in dispute that we’ve settled, and those are scattered across the business units. Operator Our next question comes from the line of Lasan Johong from Auvila Research. Your line is open. Lasan Johong I’m kind of a little confused here, or maybe I’m not doing the math right. But did somebody actually pay you double the construction cost of your Colorado IPP $2150 per KW? Rich Kinzley Well we constructed that plant for $260 million and placed it in service in 2012, and sold 49.9% of it for $215 million this year. Lasan Johong Okay, so close to your double your construction costs. So somebody actually did pay you that. That’s not a mathematical error or anything? Rich Kinzley No, and you did your math right. Lasan Johong Okay, any more details on those (inaudible)? Seriously, I mean if somebody is willing to pay you that kind of money, why not sell the whole portfolio? Rich Kinzley We don’t really have much left Lasan; you know that that one made sense. We’d received several inbound inquiries about that plant, because it’s contracted and it’s in a great location and it’s very clean, and it’s state-of-the-art, a lot of great attributes to that property and in a great market (inaudible) center, everything else. It’s very important for us to continue to own and operate a chunk of that because it’s in the middle of our plant complex that we operate and serve our customers at Colorado Electric, and we thought it was critical for us to maintain control there. But it made sense especially in the context of the SourceGas transaction to sell a minority interest. Lasan Johong Okay, so you think this plant is fundamental to the operations of your (inaudible)? Rich Kinzley Absolutely. Yeah, we’ve got several units on that complex and our wind is interconnected with it. We use it to firm our wind resource in Colorado. It’s very critical to our operation and we prefer to maintain control. It’s best for our customers I think that we do maintain control of that facility. Lasan Johong On the other hand you could build a plant almost double the size for free. But anyway, that’s another story at another time. Getting back on the Oil and Gas situation, look, I hate to put Jerry on the spot here, but he is painting this (inaudible) shale play as something that is kind of akin to a general giga-normous whale, if you want to put it in terms of in those terms. And it kind of makes the Marcellus look like child’s play with three-times the pay zone, good porosity or reasonable porosity and permeability for a shale play. So there are several ways that you could pursue the development. One is to just do a straight development program like you would normally do in oil and gas program. And the alternative is that if you do your Cost of Service Gas Program, which seems like it’s going to move forward, you could make it part of that program, and I’m kind of wondering which way you’re leaning towards; number one, and number two, I think you and I can agree that right now putting together a Cost of Service Cash Program it’s a slam dunk. It is a no-brainer, right, because gas prices being where they are, fundamentals being where they are, it’s an easy decision. But I think we can both agree that initial setup on the program isn’t where you are going to find problems going forward. It’s when you have to buy reserves at a certain point in time down the road that you’re going to get a lot of pushback in this and that and (inaudible) gas prices happen to be higher that you would want to pursue this. So if that’s the case, then the second part of the question is, if you’re pursuing the Cost of Service Gas Program with the (inaudible) shale play in mind, would it not be prudent to use that asset as kind of a drop-down asset to your Cost of Service Gas Program as opposed to just going on developing the Mancos Shale, as if it were a normal oil and gas play where you would (inaudible) in the open market, and this way you can protect your back-door problem with the Cost of Service Gas. So I’m kind of thinking about how you would play the Mancos Shale over a longer period of time. If you could address some of those issues, that would be great. David Emery Sure. I can try to add a little color there. Obviously Lasan one of the things that we are working on is getting through this phase 1 approval process. With that we’ll establish some criteria with the various commissions on what are the properties, the features of a gas property that they would like included in the program and that is step one. I firmly believe that a long term drilling program is a better solution for customers long-term than trying to buy reserves opportunistically. As you know, if you buy reserves in the ground at any given day, the price of those reserves is going to be directly proportional to the forward strip price for natural gas. So right now that’s a good price, and it may make sense for us to buy some properties to kick start if you will the Cost of Service Gas Program. Long-term, we would like to include properties that are similar to the Mancos whether it is the specific Mancos or not but properties like that where you have a good gas resource, very low if almost zero risk of dry holes, very economical, more gas manufacturing if you will, those types of properties are great long-term properties to add for cost of service gas. You can drill them for years; continue to have customers benefit from that program regardless of what the spot price of gas is doing. You are not dependent on the spot price of gas to buy properties to put in the program in any given year. So we like that, we like that feature a lot. Now that being said, the Mancos as a play is not near as mature as the Marcellus. So the production rates, the costs, things like that have not been proven as definitively as the Marcellus. Certainly at the current time the Mancos economics are not as good as the Marcellus so that is part of what we are contemplating is how and when do we propose gradually including the Mancos in a Cost of Service Gas Program if that is what makes sense based on the feedback we get from the commissions going through the process. I do think the Mancos or properties similar to the Mancos make the best long-term sense for customers and that is the direction we prefer to head. We just have to work our way through the regulatory process and get some feedback from the regulators before we make any definitive decision there. Lasan Johong A little curious, because the way it was described to me, the Mancos has 1000 foot pay zone versus the Marcellus, the thickest portion is about 300 feet. Second, your recover reserves per well, I thought was in the 8 to 9 Bcf range versus the Marcellus at a 3 to 5 Bcf range. How is your economics not as good as your Marcellus plays? David Emery Well, there are several things there. The pay thickness isn’t necessarily indicative of how many reserves you’re going to recover, because you can only drain certain vertical area anyway. It may provide an opportunity to vertically stack horizontal wells, because of the pay thickness which isn’t true in the Marcellus. But the Marcellus, some of the initial production rates there and reserve numbers are substantially higher than what we’ve seen in some of our Mancos. Lasan Johong (inaudible) right? David Emery Yeah, and again, it’s a timing thing. There’s only been probably 30, 40 wells drilled in the Mancos in our general area at that depth, and the infrastructure and things aren’t completely built out yet, to where you can really get the economies of scale that they are realizing in the Marcellus right now. I do think a lot of that will come in time, but it is a way off still. Lasan Johong Okay. So it isn’t out of the question that you could use Mancos if developed properly, kind of your solution to longer term replenishment of your Cost of Service Gas reserves? David Emery Yes, it would be a fantastic property for Cost of Service Gas. It’s just a timing issue I think. Lasan Johong Okay, so you’re not thinking of the necessary development of the Mancos as an independent oil and gas play? David Emery No. Operator [Operator Instructions] David Emery Alright, hearing no additional questions, I want to say thanks to everyone for your attendance today. We certainly appreciate your continued interest in Black Hills. We’re excited about what the future holds for us here at Black Hills. We’ve got a lot of great work going on, tremendous growth projects, and a lot of integration activity so stay tuned. We’ve got an exciting year in store. Have a great day. Operator Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program, and you may all (inaudible) your telephone lines at this time. Everyone 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.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

Spark Energy’s (SPKE) CEO Nathan Kroeker on Q1 2016 Results – Earnings Call Transcript

Spark Energy (NASDAQ: SPKE ) Q1 2016 Earnings Conference Call May 05, 2016 11:00 AM ET Executives Andy Davis – Head, Investor Relations Nathan Kroeker – President and Chief Executive Officer Georganne Hodges – Chief Financial Officer Analysts Mike Gyure – Janney Montgomery Scott Dan Fidell – U.S. Capital Advisors Operator Good morning, ladies and gentlemen. Welcome to the Spark Energy, Inc. First Quarter 2016 earnings conference call. My name is Andrew, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes, and this call will be posted on Spark Energy, Inc.’s website. I would now like to turn the conference over to Mr. Andy Davis, Head of Investor Relations for Spark Energy, Inc. Please go ahead. Andy Davis Good morning and welcome to Spark Energy, Inc.’s first quarter 2016 earnings call. This morning’s call is being broadcast live over the phone and via webcast, which can be located under events and presentations in the Investor Relations section of our website at www.sparkenergy.com. With us today from management is our President and CEO, Nathan Kroeker; our CFO, Georganne Hodges; and our Executive Vice President of Retail, Jason Garrett. 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. Management may make forward-looking statements concerning future expectations, projections of our operations, economic performance, and financial condition. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we give no assurance that such expectations will be realized. We urge everyone to review the Safe Harbor statement provided in yesterday’s earnings release as well as the risk factors contained in our SEC filings. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, 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 information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to yesterday’s earnings release. With that, I’ll now turn the call over to Nathan Kroeker, our President and Chief Executive Officer. Nathan Kroeker Thank you, Andy. I’d like to welcome our shareholders and analysts to Spark’s first quarter 2016 conference call. We’ve had a phenomenal quarter and we’ve got some exciting news on the M&A front I want to talk about. And then I will turn he call over to our CFO, Georganne Hodges, to provide some detail on those financial results. We will then conclude with questions from our analysts. Yesterday we announced two significant acquisitions that will nearly double the size of our business to approximately 750,000 RCE. Combined, these two deals will provide us with access to two new states and 24 new markets and approximately $30 million in annual adjusted EBITDA. I will discuss the two transactions in more detail after I talk about the first quarter, which was a record setting one. We earned $21 million in adjusted EBITDA and $40 million in retail gross margin as we continue to see expanded unit margins in both electricity and natural gas driven by the current soft commodity environment. In addition, we saw increased volumes in our electricity segment primarily as a result of CenStar and Oasis acquisition in July of last year. As we previously signaled, our RCE count for the quarter remain flat at 415,000. Our attrition improved to 4.3% for the quarter and continues to trend favorably as we are seeing the benefits of our focus on sales quality. This improvement in attrition combined with our higher quality customer adds allowed us to replenish our attrition at a significantly lower cost than in the past. As you saw last night, Spark announced the dropdown acquisition of Major Energy from our parent National Gas & Electric. Major Energy is a retail energy business with approximately 210,000 RCE serving electricity and natural gas customers in eight states. This acquisition adds 15 new utilities to Spark’s current footprint. Major has a very strong management team that has built a very efficient and profitable business and Spark look forward to working with them to share ideas and grow this business. The purchase price is estimated to be $75 million with $40 million payable to NG&E in Spark stock at closing, $5 million in assumed liabilities and an estimated $30 million in earn-outs that are subject to a variety of performance metrics over the next three years. This transaction is back-to-back with NG&E’s acquisition of Major, including the earn-out mechanism that de-risks the transaction by lowering the total purchase price and protecting the EBITDA multiple in the event certain performance metrics are not met. Also announced yesterday, Spark has entered into a purchase and sale agreement for the acquisition of all retail business operations of Provider Power LLC representing approximately 125,000 electricity RCEs in Maine and New Hampshire both of which are new states to Spark and include nine new utilities. The purchase price is $28 million plus a potential $4 million earn-out that is subject to performance metrics for the first year. While the Provider transaction was a direct purchase from the third-party sellers, Spark is working closely with its founder in financing the purchase price payable at closing through the issuance of 900,000 primary shares to Retail Co. LLC for a total of $18 million in cash. While our record first quarter results and anticipated midyear closing of two significant acquisitions, renders our earnings guidance somewhat outdated at this point. I will simply say that we are highly confident in achieving our initial 2016 guidance range of $44 million to $48 million. We are currently reevaluating our guidance to reflect the positive changes we’ve discussed. As previously announced, our first quarter dividend of $0.3625 per share will be paid on June 14. And as we’ve stated in the past, we expect to pay this quarterly dividend on a go-forward basis. Thanks for your attention. And with that, I will now turn the call over to Georganne for her financial review. Georganne? Georganne Hodges Thanks, Nathan, and good morning, everyone. The first quarter was indeed a record setting one for us. We are very proud of our results as well as the two M&A transactions that we signed during the quarter. Our adjusted EBITDA surpassed $21 million compared to $10 million last year, as both of our mid-2015 acquisitions continue to contribute above our expectation. Our gas and power unit margins expanded during the quarter, as we continue to optimize our supply cost in this low commodity price environment. And although the weather continue to be mild, our power volume increased of almost 60% year-over-year combined with the strong margins we just talked about lead to a record growth margin of $40 million for the first quarter. On the customer acquisition side, we maintained a flat customer portfolio of 415,000 RCEs on $2.3 million of spend. This optimized spend result was achieved through our declining attrition rate of 4.3% combined with our improved commission structure with our vendors, which is volume based. G&A expenses were up 2.7 year-over-year, increased customer billing and care cost on our 35% larger portfolio are the primary driver of that but we also had to increase our CenStar earn out due to CenStar’s strong performance. That earn out winds up at the end of June this year. The increased costs were offset by bad debt that has returned to normal levels of less than 1% of our revenue as well as the expected savings on our MSA with Retailco that we talked to you about last quarter. In April, our strong rental results allowed us to completely pay off our working capital loan and begin to build cash. In conjunction with the acquisition that we just announced, we are in the process of increasing the size of our working capital facility from $60 million to between $90 million to $100 million to accommodate those acquisitions and we’re hoping to have that rapped up by the end of the month. That is all that I have, so back to Nathan. Nathan Kroeker Thanks, Georganne. As you can see, we’ve had a great start to the year in terms of profitability, sales quality, and attrition improvement, and we are very pleased with the way CenStar and Oasis continue to perform. We do have our work cut out as we move towards closing and integrating our two new acquisitions in the third quarter and hopefully by this time next quarter, we will be giving you an early indication of how they are performing. With that, we’ll now open up the line for questions from our analysts. Operator? Question-and-Answer Session Operator [Operator Instructions] We have one question from the line of Mike Gyure from Janney. Your line is open. Mike Gyure Yes. Good morning. Can you guys talk a little about the metrics you’re using for the acquisitions? I guess big picture when I look at it looking at the purchase price I guess all-in if you include all the earn outs and everything and your EBITDA, it seems like a pretty low multiple which obviously is a good thing but I guess I’m surprised or am I missing anything when I’m taking a look at that? Georganne Hodges Mike, that’s a good question. And the way we look at it is, we are issuing 2 million shares for major 900,000 shares for provider. So 2.9 million shares call it $60 million and we’re buying $30 million of annual EBITDA. So upfront, we are only looking at a two multiple. When you add in the earn outs that are in both transactions, that total purchase price goes up to our estimated $107 million, so that gets you to about 3.5 multiple. In terms of other metrics of these businesses, I mean the earn outs are tied to EBITDA and customer count in the case of major and some gross margin target and customer count in the case of provider. So I feel like we’ve really projected ourselves around that EBITDA multiple range with the way we’ve structured the deal. Mike Gyure Great. And then maybe a quick follow-up. I guess when you look at the potential for $30 million of EBITDA, I guess what you’re thinking of using that EBITDA to do more acquisitions or what you’re thinking for? How you’re going to use that cash flow once these things close ultimately? Georganne Hodges So both transactions have earn-outs in final payments on them, indicates providers for a year in the case of major through three years. So we anticipate funding those additional payments out of the operating cash flows of those businesses. Any additional cash flow that is available will be used for either organic acquisitions or to fund future M&A transactions whether they would be direct purchases or dropdown transaction. Mike Gyure Great. Thanks very much. Georganne Hodges Thanks. Operator [Operator Instructions] We have a question from the line of Dan Fidell from U.S. Capital Advisors. Your line is open. Dan Fidell Good morning guys and congrats on couple of great acquisitions here it looks like and good prices paid certainly. Just one very quick question from me just on major energy, can you – I know they’re across eight states, can you give us some sense maybe not specifically but some sense on customer concentration across those eight states? Are they more lumpy in a few states rather than others? Nathan Kroeker They are all up in the northeast and their markets that we’re very familiar with all of their customers are in ISOs that we currently have operations in. So when we talk about adding 15 new markets, there are new utility service territories that directly overlap or are adjacent to utility and service territory that we already operate in. So we really look at it is being a great complement to our existing footprint. Dan Fidell Sure. Just wondering in terms of the eight states they are about evenly divided in terms of customers or – of all the states there are couple that are just in terms of concentration, are there a few that are lumpier than others just generally? Nathan Kroeker I would say there is not a big concentration in any one market. They are distributed across markets just like we are. Dan Fidell Very good. Okay. That’s all I have. Thanks very much and congrats again. Nathan Kroeker Thank you. Operator Thank you. [Operator Instructions] And it looks like no other questions that we have in the queue at this time. So I would like to turn the call back over to management for closing remarks. Nathan Kroeker Thanks again for participating in today’s call and we look forward to talking to many of you again soon. Operator Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone 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.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

Ormat Technologies’ (ORA) CEO Isaac Angel on Q1 2016 Results – Earnings Call Transcript

Ormat Technologies, Inc. (NYSE: ORA ) Q1 2016 Earnings Conference Call May 05, 2016 09:00 AM ET Executives Rob Fink – Managing Director, Hayden Investor Relations Isaac Angel – Chief Executive Officer Doron Blachar – Chief Financial Officer Analysts Paul Coster – JPMorgan Operator Good morning, and welcome to the Ormat Technologies, Incorporated First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Rob Fink. Please go ahead. Rob Fink Thank you, operator. Hosting the call today are Isaac Angel, Chief Executive Officer; Doron Blachar, Chief Financial Officer; and Smadar Lavi, Vice President of Corporate Finance and Investor Relations. Before beginning, we would like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts, and projections about future events that are forward looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company’s plans, objectives, and expectations for future operation and are based on management’s current estimates, projections, future results, or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of such risks and uncertainties, please see Risk Factors as described in Ormat’s 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’s reason 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 statement 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 would now like to turn the call over to Isaac. Isaac, the call is yours. Isaac Angel Thank you, Rob, and good morning, everyone. Thank you for joining us today for the presentation of our first quarter 2016 results and our outlook for the remainder of the year. Starting with slide 4, the first quarter was a great start to the year for Ormat. We executed well, delivering strong revenue and profitability, and our focus on improving our operational and manufacturing efficiency is the main driver for margin expansion and improved results. Both our product segment and electricity segment delivered improved results year after year. Our electricity segment delivered a 20% increase, reaching $108 million, due to higher electricity generation and new expansions coming on line. Our product segment grew 44%, to $44 million, benefiting from several large contracts signed in the previous years. Overall, total revenue grew 26%, to $152 million, which demonstrates strong growth as we overcome the impact of lower commodity prices which continues to affect a portion of our revenue in our electricity segment. In addition, we achieved high gross margin levels in both segments of our business, supporting significant increases in our overall profitability. This performance is due primarily to two factors: first, our balanced business model being vertically integrated; and second, our methodical efforts to improve operational efficiency. We have been focused on efficiency and operational excellence in every aspect of our business, and that effort is reflected in our numbers. I will elaborate on the progress being made and our plans for the future after Doron reviews 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 three months ended March 31, 2016. Starting with slide 6, for the first quarter of 2016 total revenue increased 26.1%, to $151.6 million, compared to $120.2 million in the first quarter of 2015. Moving to slide 7, revenues in the electricity segment increased 19.9%, to $107.9 million, in the first quarter of 2016, up from $90 million in the first quarter of last year. Slide 8, revenues in the product segment were $43.7 million, an increase of 44.4%, compared to $30.3 million in the first quarter of 2015. Moving to slide 9, gross margin in the first quarter of 2016 increased to 42.1%, from 36.6% in the first quarter of 2015. Our electricity segment gross margin increased to 41%, due largely to new expansions coming on line, improved efficiency at the plant level, and also the transition to a new fixed-rate PPA for our Heber 1 power plant. Part of the increase in gross margin this quarter is driven by timing of operating expenses. We expect a lighter second quarter in the electricity segment with higher expenses that will result in lower margins, on average, in the rest of the year. Our product segment generated 45% gross margin, a particularly strong level for this segment of our business. It was mainly due to the different product mix and different margins in the various sales contracts, improvements made at our manufacturing facility which enables us to shorten lead time, as well as reduction in commodity prices that reduced the cost of raw material in subcontracting. We expect our gross margin in the product segment during 2016 to be higher than normal. The margin should normalize in 2017. Turning to slide 10, operating income for the first quarter of 2016 increased to $50.5 million, compared to $29.9 million in the first quarter of 2015, representing 69.3% increase. Operating income attributable to our electricity segment was $34.8 million, compared to $24 million in the first quarter of 2015, representing a 45.2% increase. Operating income of the product segment was $15.8 million, compared to $5.9 million in the first quarter of 2015, representing 168% increase. Moving to slide 11, net income attributable to the company’s stockholders for the first quarter of 2016 was $29.3 million, or $0.59 per diluted share, compared to $10 million, or $0.21 per diluted share, in the first quarter of 2015. Let me spend a moment speaking on our hedging strategy that is designed to mitigate the impact of changes in commodity prices. We continued to make progress in reducing our exposure to these fluctuations. In December of 2015, the Heber 1 contract was switched to a fixed-rate price, which mitigate our exposure and reduce the portfolio exposed to natural gas prices to approximately 90 megawatts and less than 10% of 2016 expected electricity revenue. Recently, we reduced our economic exposure to fluctuation in the price of oil and natural gas until the end of 2016, by entering into a derivative transaction. We recognized a net loss for this transaction of $0.1 million in the first quarter of 2016, which is recorded within foreign currency translation and transaction gains or losses, compared to a net gain of $0.3 million in the first quarter of 2015 that was recognized in the electricity segment revenue. Please turn to slide 12, adjusted EBITDA. Adjusted EBITDA for the first quarter of 2016 was $80.2 million, compared to $65.3 million in the same period last year, which represents a 22.8% increase. Reconciliation of the EBITDA and adjusted EBITDA is described on the appendix slide. Turning to slide 13, cash and cash equivalents as of March 31, 2016, were $148.5 million. We generated $27 million in cash from operating activities and invested $31 million in CapEx. The accompanying slide breaks down the use of cash during the quarter. Our long-term debt as of March 31, 2016, and the payment schedules are presented on slide 14 of the presentation. The average cost of debt for the company stands at 5.9%. On May 4, 2016, Ormat’s Board of Directors approved payment of a quarterly dividend of $0.07 per share for the first quarter. The dividend will be paid on May 24, 2016, to shareholders of record as of closing of business on May 18, 2016. In addition, the Company expects to pay a quarterly dividend of $0.07 per share in the next two quarters. This 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 16, for an update on operations. In the first quarter, we delivered strong results that demonstrate that we are making solid progress on our multiyear strategic plan. Moving to slide 17, we continue to make improvement in all aspects of our value chain. Specifically, we are focused on reducing manufacturing lead time, improving procurement to lower our material cost, and improving management control. This process translates into a significant improvement in gross margin and adjusted EBITDA margins. Turning to slide 18, another goal was to expand our electricity generation, both organically and inorganically. Electricity generation during the quarter was 1.4 million megawatt hours, an increase of 16.4% compared to the last year. This increase was due to commencement of the second phase of Don Campbell and McGinness Hills, power plants in 2015, as well as Plant 4 of the Olkaria III complex in Kenya which come on line in January this year. Beyond expansion, we continue to make plant-level adjustments designed to optimize our electricity generations. These adjustments include the elimination of older and less efficient components and modifying output based on the underlying resource. The goal is to improve profitability, and we are making meaningful process here, as well. In addition, we are also working to monetize the Don Campbell plant and further strengthen our balance sheet as part of our joint venture with Northleaf Capital Partners. Currently, we are conducting the required power generation tests under the agreement to determine the final terms for closing. Following the closing, Ormat Nevada will contribute Don Campbell 2 to ORPD, and Northleaf will buy their interest share. We expect to close this in the second quarter of 2016. Turning to slide 19, another part of our expansion strategy involves targeted acquisitions. We recently signed definitive agreements to acquire gradually 85% of a geothermal plant in the island of Guadalupe. We expect to close this acquisition during the second quarter. This acquisition will be immediately accretive to Ormat CPS. Turning to slide 20, for an update on projects under construction. We plan to add 160 to 190 megawatts by the end of 2018 by bringing new plants on line, expanding existing plants, as well as adding capacity from the recent acquisitions. The expansion plan includes the Platanares geothermal project in Honduras, which is currently under construction, and we expect to reach commercial operation by the end of 2017. We also initiated development efforts in two projects in Nevada. Tungsten Mountain and Dixie Meadows are each expected to generate 25 to 35 megawatts once they come online in 2017 or 2018. While the drilling activity is ongoing in both projects, 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 and second phases has been substantially completed, but it’s still in progress for the third phase. Construction for the first phase is in progress, with major activities related to mechanical and electrical equipment installation. The infrastructure work for the second phase is in progress. Major equipment, including Ormat’s OECs and Toshiba’s steam turbines, for the first phase has arrived at the site and currently installed. The drilling of production and injection wells is also in progress for all three phases. The project is still experiencing delays, mainly in field development of the second phase and third phases and cost overruns. With respect to Ormat’s role as a supplier, all contractual milestones under the supply agreement were achieved and main shipment of the second phase is on its way to the site. Manufacturing of third phase equipment is progressing as planned. The consortium expects that the first phase of operations to commence towards the end of 2016, and the remaining two phases of operations are scheduled to commence within the 18 months thereafter. The projects I just described, as well as additional projects under various stages of development, are 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. On slide 21, let me briefly discuss the recent agreement with Alevo. On March 30, 2016, Ormat signed an agreement with a subsidiary of Alevo Group S.A., a leading provider of energy storage systems, to jointly build, own, and operate the Rabbit Hill Energy Storage Project, which is located in Georgetown, Texas. The storage market is one of the most developing, growing, and exciting areas in the energy industry today, and this agreement moves us for the first time into the energy storage arena. We view this market as key to our long-term growth plan, as it helps us to further diversify revenues and support our position as a leader in the renewable energy industry. Under the terms of the agreement, Ormat will own and fund the majority of the Rabbit Hill Energy Storage Project and will provide engineering, construction services, and balance of plant equipment. Alevo will provide its innovative GridBank inorganic lithium ion energy storage system in conjunction with the power conversion systems. In addition, Alevo will provide ongoing management, operations, and maintenance services for the life of the project. We do not expect this first entry into the storage market to generate material revenues for Ormat. However, we do believe this collaboration will allow us to make significant progress towards our expansion in this field. We continue to actively explore opportunities in this area and remain focused on building relationships and collaboration with established technology providers. We believe that such collaboration can leverage our experience, relationships, and project management, and other capabilities. If you could please turn to slide 22, you would see that our CapEx requirement for the balance of 2016 stands at approximately $245 million. We plan to invest a total of approximately $75 million in capital expenditures on new projects under construction and enhancements. And additional approximately $170 million are budgeted for exploration activities, development of new projects, investment in new activities that reflects expenditure under the new strategic plan, and maintenance CapEx for operating projects. In addition, $51 million will be required for debt repayment. Turning to slide 23, for an update on our product segment. Our backlog as of May 4, 2016, stands at approximately $214 million. Moving to slide 24, for a regulatory update. We shared with you the tremendous efforts Ormat’s team is investing in order to accelerate growth of the electricity segment to increase its portion in the future. In addition to shortening the manufacturing construction lead time, we are also investing efforts to shorten the development process. One of the hurdles in the geothermal development is obtaining key permitting in order to test prospect viability. We have been supporting and lobbying the geothermal components of Senator Dean Heller’s Geothermal Exploration Opportunity Act to simplify geothermal exploration review process in the future. Under the Energy Policy Modernization Act of 2015, which passed the U.S. Senate on April 2016, an agreement was reached to approve 29 amendments, including Senator Heller’s Public Land Renewable Energy Development Act, which streamlines permitting for renewable energy projects on federal land. If the bill will pass the House unchanged, it will be significant achievement in improving ability to assess potential geothermal resources faster than before and, by that, to accelerate the development process. Turning to slide 25, for 2016 guidance. We are reiterating our 2016 full-year guidance. For the year, 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. For the product segment, we expect revenues to be between $210 million and $220 million. We expect 2016 adjusted EBITDA to be between $300 million and $310 million. I’m very pleased with our performance. The first quarter represents a strong start to what we believe will be another great year for Ormat. And that concludes our remarks for today, and I thank you very much for continued support. Operator? Question-and-Answer Session Operator [Operator Instructions]. The first question comes from Paul Coster from JPMorgan. Please go ahead. Paul Coster Yes, thanks, few quick questions. First up, you’ve made tremendous progress in the electricity segment in terms of improving the yield of the existing assets. How far are we, though, from sort of the point of diminishing returns in terms of that focus? Isaac Angel Hi, Paul. Thanks very much. What was the last part of your question? Paul Coster I’m just wondering have you got to the point of having realized the efficiencies at this point, do you still have further opportunities ahead? Isaac Angel Paul, as we explained last year, this is going to be a very long journey, and we barely touched only part of the efficiencies that we have planned. We’re working on a [indiscernible] basis, and we still have a long way to go until we will actually finish all the efficiencies that we are planning to do. Paul Coster Okay. The backlog is continuing to come down. Is there anything being added in to backlog? Or, are we just simply depleting it as a result of the Sarulla project? Isaac Angel First of all, you realize that the $256 million Sarulla project is a very large project and, obviously, it affects the backlog. On the other hand, as I said last conference call, we are making a tremendous effort, and we are in the middle of a journey to increase our electricity segment which will continue to grow faster than in the past. But if we are looking forward, I would not be worried about the backlog. And there is also another thing that you should take into consideration. We decreased seriously our delivery time, for something like from 20 months to less than 12 months, which means that projects that we are signing which used to be for the year after, now they are kicking in within the next 12 months, which makes a difference in the calculation of the backlog. Paul Coster So, in other words, you’re expecting backlog to plateau soon and maybe even start rebuilding? Does that sound – is it possible that would happen within the 2016 timeline? Isaac Angel I’m writing this down, Paul, and I hope it’s going to happen. Paul Coster Okay. My last question is oil and gas prices have actually ticked up a bit recently. Is there any way in which you might start to capture the benefit of a positive inflection in prices before the point at which you move as many of these projects as possible to a fixed rate? Isaac Angel We still have about one-third of our exposure in oil and two-thirds in natural gas, which is barely moving. On the one-third which is going up, it is not something that’s going to change in the near future, which is our Puna power plant, and we hope we are going to catch the increase. And maybe Doron would like to add here something. Doron Blachar Hi, Paul. We took a different approach to the hedging due to the very, very low prices at the beginning of the year. So, we actually are able to enjoy some of the increase in the oil prices, not all of it, but some of it. And on the gas, if the gas prices are relatively stable to the beginning of the year, there isn’t much change. But as prices goes up, it gives a potentially better performance next year with the higher prices on the oil and natural gas prices. Paul Coster Very good. Thank you so much. Isaac Angel Thank you Paul. Operator [Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Isaac Angel for any closing remarks. Paul Coster Okay. Thanks a lot operator. Thank you very much for your continued support during the year, and we are very optimistic, management here in Ormat. And see you next conference call. Operator The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect. 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. 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