Ormat Technologies Inc (ORA) 2022 Q1 法說會逐字稿

Hello everyone and welcome to the Ormat Technologies' First Quarter 2022 Earnings Call. My name is Victoria and I'll be coordinating your call today. (Operator Instructions)

I will now pass it over to your host, Sam Cohen, to begin. Please go ahead.

Thank you, operator. Hosting the call today are Doron Blachar, Chief Executive Officer; Assaf Ginzburg, Chief Financial Officer and Smadar Lavi, Vice President of Investor Relations and ESG Planning and Reporting.

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 off management's current estimates and 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 Technologies' annual report on Form 10-K and quarterly reports on Form 10-Q that are filed with the SEC.

In addition, during the call, the company will present non-GAAP financial measures such as adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures and management's reasons for presenting such information is set forth in the press release that was issued last night as well as in the slides posted on the website. Because these measures are not calculated in accordance with GAAP, they should not be considered in isolation from the financial statements prepared in accordance with GAAP.

Before I turn the call over to management, I would like to remind everyone that a slide presentation accompanying this call may be accessed on the company's website at ormat.com under the presentation link that's found on the Investor Relations tab. With all that said, I'd now like to turn the call over to Doron Blachar. Doron, the call is yours.

Thank you, Sam, and good morning, everyone. Thank you for joining us today. The first quarter marked a good start for the year, delivering strong financial results and operational performance. We are encouraged by the robust growth captured in both the company's top line and adjusted EBITDA, which was driven primarily by solid performance from our leading electricity segment and the strategic capacity addition to our portfolio that we made last year.

I'm pleased to note that the first quarter demonstrated solid growth and advancement towards many of our stated targets discussed at Ormat's recent Investor Day. We benefited from improved performance in our liquidity segment, mostly as a result of the capacity expansion to our operating power plants and the successful integration of our Q3 2021 geothermal asset acquisition. We continue to execute on our growth plans and recently commenced commercial operation of Tungsten Mountain 2 which increase the total generation of the Tungsten complex by 13 megawatts.

In addition, we are on track to complete construction of the 30 megawatt CD4 geothermal power plant, the Tungsten Solar, the Wister Solar and the Steamboat Hills solar facilities by the end of the second quarter. We continue to be encouraged by the increasing demand for geothermal energy, notably in California and Nevada. This increase in demand has already resulted in higher PPA prices compared to what we saw in recent years. This demand driven by legislation and broader migration towards renewable electricity sources will further support our unique business segments. We remain on track to deliver an annual adjusted EBITDA of $500 million on a run rate basis towards the end of 2022.

I will now turn the call to Assaf to review the financial results before I provide a further update on operations and further plan. Assaf?

Thank you, Doron. Let me start my review of our financial highlights on Slide 5. Total revenue for the first quarter was $183.7 million, up 10.4% year-over-year, reflecting substantial growth in both our electricity and product segments. First quarter 2022 consolidated gross profit was $69.9 million. This resulted in a gross margin of 38.1%, down from the gross margin of 44.3% in the first quarter of 2021. The difference in margin performance is driven primarily by a one-time revenue of $5.4 million in the first quarter of 2021 related to the February power crisis in Texas, as well as the impact of the shutdown of the Heber Power Plant in late February. Doron will elaborate on it shortly.

Net income attributed to the company stockholders was $18.4 million or $0.33 per diluted share in the quarter. This compares favorably to the $15.3 million or $0.27 per diluted share in the same quarter last year, representing an increase of 20.8% and 22.2%, respectively. The increase was mainly due to the electricity segment contribution. In addition, in the first quarter of 2021, the company was negatively impacted by the February crisis in Texas that reduced net income by $8.8 million or $0.16 cents, respectively.

Adjusted net income attributed to the company stockholders was $19.9 million or $0.35 cents per diluted share in the quarter. This compare to the $24.1 million or $0.42 cents per share in the same period last year. The decrease was mainly due to higher effective tax rate of 31.4% compared to 14.8% same time last year.

Adjusted EBITDA of $107.9 million, increased 8.7% in the first quarter, compared to $99.2 million in the first quarter last year with EBITDA growth being largely driven by electricity segments.

Break bringing the revenues down at the segment level. Electricity segment level increased 12.1% to $160.5 million supported by contribution from new asset gain through the Terra-Gen acquisition, expansion of our McGinness Hills complex and increasing the operation in Puna, which also benefited from higher electricity prices.

This newly added generation capacity was slightly offset by the impacts of shutting down Heber 1 power plant following the fire in late February. The Heber 1 buyer units are now back in operation. While revenue going forward for the year will be negatively impacted by the prolonged shutdown, we do anticipate recovering the majority of lost income through our business interruption insurance program. As a reminder, expected BI insurance income is not booked as revenue, but will be booked as a reduction to cost of goods sold or in a separate line item if proceeds will top the cost of goods sold.

In the product segment, revenue increased by 70% to $14.6 million and represented 8% of total conservative rate in the first quarter. The increase year-over-year is due to a higher backlog as compared to the first quarter of 2021.

Energy storage segment revenue decreased by 48.5% to $6.6 million when compared to the first quarter of 2021. The difference is driven by the absence of $5.4 million one-time revenue event related to the February power plant power crisis in Texas, as well as by the diminishing contribution of the demand response activity.

Let's move now to Slide 6. Gross margin for the electricity segments for the quarter decreased to 42%, 300 basis points lower than last year. This was mainly the results of the impact of the Heber 1 fire and the impact of the commissioning work we had in the Tungsten plant, which allowed the recent capacity expansion. In the product segment, gross margin was 7%, similar to last year, reflecting the impact of lower volume of revenue and the rising cost of raw material in addition to marine transportation.

The energy storage segment reported the gross margin of 13.5% compared to elevated gross margin of 62.4% in the first quarter last year. The decrease was, again, primary to the absence of a one-time revenue in Q1 2021, which had an outsized impact margin performance in last year first quarter.

The electricity segment generated 95% of Ormat's total adjusted EBITDA in the first quarter. The product segment generated 2% of this and the energy segment reported adjusted EBITDA of $3.8 billion, representing 3% of total adjusted EBITDA. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slides.

Looking at Slide 7, our net debt as of March 31, 2022, was approximately $1.6 billion. Our balance sheet remains very strong and position Ormat well as we work towards achieving our growth targets. In the past, we did indicate that we are likely to pursue some additional financing agreements to fund future growth and expansion of our existing portfolio. During April, we secured $75 million of additional financing through a bank term loan bearing a fixed interest rate of 4.1%, fully supporting our capital needs.

Cash, cash equivalent and marketable securities at fair value, including restricted cash and cash equivalent as of March 31, 2022, was approximately $284 million, down from $387 million at year-end. Marketable securities at fair value was $43 million. The accompanying slide break down the use of cash for the 3 months, illustrating Ormat's ability to reinvest in the business, service debt and return capital to our shareholders in the form of cash dividend or from cash generated by our operation and our strong liquidity profiles that we continue to maintain.

Our total debt as of March 31, 2022, was nearly $1.9 billion net of deferred financing cost and its payment schedule is presented on Slide 26 in the appendix. The average cost of debt for the company in the quarter was 4.38%. We think it is most important to note that as we prepare to deploy capital to fund our multi-year growth targets, nearly all of our debts is at fixed rate in nature, which would help position Ormat competitively in the rising global interest rate environment.

Moving to Slide 8, the significant growth in both our electricity and storage segment will require robust capital investments over the next couple of years. In Q1 2022, we invested approximately $137 million in CapEx to advance our growth. We have $665 million of cash available lines of credit as of the end of the quarter. Our total expected capital for the last 3 quarters of 2022 includes approximately $380 million of capital expenditures as detailed in Slide 27 in the appendix.

Overall, Ormat is very well positioned from a capital perspective, with excellent liquidity and ample access to additional capital to fund future growth initiatives. On May 2, 2022, our Board of Directors declared, approved and authorized payment of a quarterly dividend of $0.12 per share to all shareholders of the company issued and outstanding shares as common stock as of May 16, 2022, and it will be payable on May 31, 2022.

That concludes my financial overview. I would like now to turn the call to Doron to discuss some of the recent developments in our growth plan for the next 3 years. Doron?

Thank you, Assaf. Turning to Slide 11, to look at our operating portfolio. During Q1 2022, power generation in our geothermal power plant increased by approximately 8.6% compared to last year. We are capturing the benefit from the addition of the Dixie Valley and Beowawe plants to our portfolio as well as the increased output from McGinness Hills and Puna. These contributions were partially offset by lower generation at Heber 1 due to a fire outage and also offset by a planned outage at the Tungsten plant, which has required a standard shutdown to complete our successful expansion.

As I mentioned earlier, we successfully commenced operation of Tungsten 2, which added 13 megawatts to the Tungsten complex. This increase was higher than expected, resulting in total of 42 megawatts of geothermal generating capacity. As noted on Slide 12, our Puna geothermal power plant is running and operating at an approximately 25 megawatts level. And currently PPA prices continue to be positively impacted by higher global energy prices as seen in the first quarter and continuing even further into second quarter.

In addition, we are evaluating the positive decision that PUC made to conditionally approve the 46 megawatt PPA with HELCO subject to an environmental assessment process, which may take 1 to 2 years to finalize. We remain on track to drill new wells and expect to further increase generation at the site as the year progresses.

Turning to Slide 13. Let me discuss our plans to improve performance of our assets as the year continues. First, our asset in Guadeloupe returned to full capacity, and now our focus is on advancing the 10-megawatt expansion of the Bouillante project in the island. Second, with respect to our Olkaria power plant in Kenya, which is currently generating approximately 123 megawatts, I'm pleased to announce that we are on track to complete the enhancement of the OEC by the end of the second quarter and expect to gradually increase capacity by 10 megawatts to 12 megawatts and even more. In addition, we are on track to start our drilling campaign in the third quarter of this year, which should enable us to restore capacity further and potentially reach full capacity during 2022.

Next, I'm also glad to report that we successfully brought back to operation approximately 20 megawatts generated by the binary units at our Heber 1 plant. We estimate that the outage of the power plant will reduce 2022 revenues by approximately $15 million. While we are updating our revenue guidance to reflect this reduction, we maintain our EBITDA guidance as we expect proceeds from the business interruption insurance to cover most of the lost income taking into consideration our deductible.

Turning to Slide 14, for an update on our backlog. We saw a 23% increase compared to the same time last year. While we have no new material contracts to announce at this stage, we were awarded over $20 million in project and expect to add them to the backlog once contracts will be signed.

Moving to Slide 15. We provide an update on the energy store segment. As Assaf mentioned, Energy Storage segment revenue decreased due to the prior year one-time revenue event related to the Texas power crisis. As you can see in the chart on Slide 15, revenues from the core storage facility remain stable, while contribution of the demand response activity is diminishing. Also on this slide, adjusted EBITDA of the storage segment decreased nearly 29% compared to the first quarter of last year.

Moving to Slides 17 and 18. As we have communicated, 2022 is a significant buildup year comprised mainly of geothermal projects in development. This buildup support our robust growth plan, which are expected to increase our total electricity portfolio by 19% to 20% by the end of 2023 to reach a portfolio generation of between 1,200 megawatts to 1,213 megawatts.

In our energy storage portfolio, we plan to enhance our growth and increase our current 83 megawatt portfolio by an additional 230 megawatts to 290 megawatts or 550 megawatt to 660 megawatt hour by year-end 2023. This addition will enable us to reach a total storage portfolio of between 313 megawatts and 373 megawatts subject, of course, to our ability to overcome any permitting and supply chain challenges.

Slides 19 and 20 display the 9 geothermal and 6 solar PV projects currently underway, comprising the majority of our 2023 growth goal. We are on track with CD4, Wister Solar, Tungsten Solar 2, and Steamboat Solar, all of which are expected to come online in the second quarter of this year.

With respect to our 120 megawatt Dixie Meadows project, which is currently under construction, it is possible we may experience delays or other impacts as a result of a recent endangered species listing by the U.S. Fish and Wildlife Service of toad located near our project. We will continue to work with the relevant agencies to ensure that any additional required processes as a result of the listing are met as we have continuously done throughout the development of this project.

Moving to Slide 21 and 22. The second layer of our growth plan comes from the energy storage segment. Slide 21 demonstrates the energy storage facility that have started construction. We continue to develop this segment and currently have 8 projects under construction with a combined capacity of 189 megawatts or 464 megawatt hour. This project will allow us to double our operating assets year-over-year in the next 2 years.

We have already secured the batteries needed for this project. However, as with the rest of the industry, we are continuing to experience delays in some projects due to supply chain challenges, including delivery time of batteries. Having said that, based on the information we have today, we keep our growth targets intact for 2023. The other projects that should help us hit our 2023 growth targets are included in the pipeline and are in different stages of development.

Please turn to Slide 23 for a discussion of our 2022 guidance. We expect total revenues between $710 million and $735 million, with electricity segment revenue between $630 million and $640 million, reflecting the $15 million impact of Heber 1 shutdown I mentioned before. We expect product segment revenues between $50 million and $60 million. Guidance for energy storage revenues is expected to be between $30 million and $35 million. We maintain our expected consolidated adjusted EBITDA at between $430 million and $450 million. We expect annual adjusted EBITDA attributable to minority interest to be approximately $32 million. Adjusted EBITDA guidance for 2022 includes $15 million in insurance profit for Puna and Heber 1.

I will end our prepared remarks on Slide 24. This was a solid quarter with strong progress, against for our long-term goals. We continue to focus on increasing our capacity and deliver meaningful revenue expansion, which will also improve our bottom line. We are encouraged by the company's ability to turn revenue growth into expanded profitability. Our growing pipeline and numerous projects under development give us confidence in our long-term plan to increase our combined geothermal energy storage and solar generating portfolio to more than 1.5 gigawatts by 2023.

Having said that, the global markets are experiencing shortage in raw materials, batteries and solar panels as well as supply chain disruption has intensified following the Ukraine crisis. This creates uncertainty due to rising cost and project delays that may further impact us as well as many other companies in the power market.

However, the fact that Ormat is fully integrated in the geothermal segment and plays a large role in the development of its storage assets, provide us with significant advantages versus many other renewable energy developments. We believe strongly that our strategy, our assets, our competitive advantage, cost structure relative to the renewable power generation industry and the strong regulatory tailwind and increased PPA prices we see in the market will enable us to mitigate some of these challenges and meet our long-term goals.

This concludes our prepared remarks. Now I would like to open the call for questions. Operator, if you please?

(Operator Instructions) And our first question comes from Noah Kaye from Oppenheimer & Company.

First, a supply chain related question for the electricity segment. I think battery supply and solar panel shortages, all that's well publicized. But for the geothermal expansion, any items to be aware of in terms of gaining factors on supply chain? I know you manufactured a lot of your own equipment for these projects. Are there any supply chain constraints to be aware of there? Or is it really all just permitting and environmental considerations at this point?

I would say -- thank you for the question. As you said, we are vertically integrated. We do manufacture most of our products. But similar to everybody, we generate raw materials. There are challenges on the raw materials. But at least at this stage, what we see, we do not see any material impact due to supply chain issues on our geothermal development.

That's positive. Follow-up on the Heber restoration. So you've got 20 megawatts back. What's your sense of potential timing on those insurance recoveries? And when would you look to actually restore full capacity? Is that in plan?

We had quite a good discussion with insurance adjuster and the insurance companies and we hope that in the coming weeks or months, we will start to see payments for the property damages as well as for the business interruption. Ordering a generator regardless of supply chain issues takes roughly a year. So we don't expect the remaining 20 megawatts to come online in 2022. And that's the reason that we reduced the revenue guidance due to this effect.

And then you mentioned Dixie Meadows. Our understanding is that the protections there last, I believe, it was 240 days. How do you think this will play out? At what point will you be able to proceed with completion? And what should investors be watching for in the meantime?

I would say the setting the tone, I mean, these doesn't impact construction. So we believe that there is no legal basis to stop construction of the plant. We have developed with the BLM a robust mitigation plan due to these issues with the toad over 6 years, okay? So this project could have come online already 6 years ago had not worked with the BLM to develop this mitigation plan. And we think that this mitigation plan is good enough. So we, obviously, with this new listing, we'll of course continue to work with all the agencies, BLM as well as the Fish and Wildlife to address any further concerns that they have.

In the meantime, we continue with the construction. The 240 days that you mentioned is the time for them to finalize this emergency decision that they did. And we hope that we will be able to discuss with them and the BLM a good resolution that will allow us to operate this 12-megawatt facility since the U.S., the Administration and I believe everybody wants renewable energy in order to mitigate the climate crisis and that's what we do. And since this is the target of -- global target, administration and everybody else targets to get more renewable energy. We believe that there should be a solution where we'll have the right mitigation plan and offer the power plant over time.

(Operator Instructions) And our next question comes from Julien Dumoulin-Smith from Bank of America.

I just wanted to follow up on some of the delays here on the project, specifically storage. Can you talk about supplies sourcing at this point, which is what gives you confidence on the specificity on the latest delays? I understand that many of these are, frankly, relatively near term in terms of deployment. Just where do they stand? And then also what is the impact on '22-'23, just ultimately across the delays in terms of sort of a walk from what you guys have talked about before, if there's a good number to run with there. But ultimately, getting confidence on the time line is the key here that I'm curious about.

Hello, Julien, thanks for the question. The one confidence that we have is that all of these projects either have been supplied with the batteries like (inaudible) that are supposed to come online or we've issued already PO and the batteries are due to come. So what we see with the supply chain issues is not getting batteries, but mainly might be some delay in timing-wise. But also that PO has a defined time of delivery, and we expect them to come online. So all in all, the projects that you see here, we feel today very confident that they will come on time, mainly due to the fact that we've ordered the materials. So they'll move in a month or 2, it might happen, but this is where we believe now.

Julien, one more thing to mention. We did keep the storage revenue for the year flat versus our initial year-end guidance of $30 million to $35 million. And please also, I'll remind you that in the East Coast, we are enjoying record prices as natural gas hit yesterday $7.7 per mBtu. So even if we have a slight delay in project on the storage, the other assets are actually functioning very well. And as Doron mentioned, and you can see on the slide deck, we continue to see improvements in the EBITDA margin of the storage. So we really are promoting this business. We think it's important. And we kept the revenue guidance for the year and it wasn't a challenge. We actually see a good tailwind of prices.

Right. So actually, effectively, with that guidance and change, the thought process is that merchant prices are offsetting some of the delay in revenue recognition on new assets?

If that will be the case, that's the mitigating part, yes.

And then just related here on California, there's some headlines around extending nuclear asset life a little bit. I mean, that could impact total procurement. What are you guys thinking on and seeing any updates on RA procurement? I mean, obviously, that kind of extends into early next year to substantive extent. But are you seeing any updates on the overall scale of what the procurement is? Any updates on Euros position therein on the -- I know multiple potential expansions?

We are in definitely a solar market right now, Julien. Anything that we will bring in the next 5 years, we'll be able to contract in the West Coast in very good prices. So we see the same demand that we saw, as we discussed in the recent Investor Day, nothing changed.

At this time there are no further questions. I'd now like to pass back over to Doron Blachar for any final remarks.

Okay. Thank you. So thank you, everyone, for joining us. As you've seen, this was a very solid quarter and a very good start for the year. We are focusing on the growth of our company and the capital investment and we look forward to hearing from you and seeing you. Thank you.

Thank you, everybody, for joining today's conference call. You may now disconnect your lines.