Ormat Technologies, Inc. (NYSE:ORA) Q1 2023 Earnings Call Transcript May 10, 2023

Ormat Technologies, Inc. beats earnings expectations. Reported EPS is $0.51, expectations were $0.49.

Operator: Good morning and welcome to the Ormat Technologies’ First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I’d now like to turn the conference over to Alec Steinberg with Alpha IR. Please go ahead.

Alec Steinberg: Thank you, operator. Hosting the call today are Doron Blachar, Chief Executive Officer; Assi Ginzburg, Chief Financial Officer; and Smadar Lavi, Vice President of Investor Relations and ESG Planning and Reporting. Before beginning, we would like to remind that information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward-looking, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the Company’s plans, objectives and expectations for future operations and are based on management’s current estimates and projections, future results or trends.

Actual 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 would now like to turn the call over to Doron Blachar. Doron, the call is all yours.

Doron Blachar: Thank you, Alec, and good morning, everyone. Thank you for joining us today. We’re pleased to report a strong start to the year with impressive net income and adjusted EBITDA growth year-over-year supported mainly by our electricity sector. Our operating income and adjusted EBITDA saw significant improvement of 17.9% and 14.5%, respectively. And our net income increased 57.5% as income tax was positively impacted by the Inflation Reduction Act. We attribute this success to our strategic growth initiatives from last year, as well as our operational performance and the regulatory tailwind that allowed us to maximize shareholder value. Our Electricity segment continued to lead the way with strong performance that demonstrated the benefit of our ongoing portfolio expansion strategy.

In our Product segment, the step-down in revenue compared to the first quarter last year was largely due to the timing we made in recognizing revenue throughout the year, which we expect to accelerate in the remaining of the year. Our storage segment’s quarterly performance was negatively impacted by an overall reduction in energy rates, which impacted our result in the PJM and CAISO facility. As we enter the second quarter, we completed construction and started operation of two new energy storage facilities, and we are near completion of additional two facilities with a total capacity of 64 megawatt, 64 megawatt hour. We expect the overall positive momentum we saw in Q1 to continue in the rest of 2023 with the IRA providing additional benefits to the tax credits available for geothermal energy storage projects, which we expect will positively impact our bottom line.

We remain on track with our full year guidance for 2023 and capacity expansion goals for 2025. As we look to the future, we are confident in the continued demand for renewable energy and we expect to benefit from it in all our three segments. Now, before I provide further updates on our operations and future plans, I will turn the call over to Assi to review the financial results. Assi?

Assi Ginzburg: Thank you, Doron. Let me start my review of our financial highlights on slide 5. Total revenue for the first quarter was $185.2 million, up roughly 1% year-over-year, mostly driven by growth in our Electricity segment. First quarter 2023 total gross profit was $76.1 million. This resulted in a gross margin of 41.1%, up from the gross margin of 38.1% in the first quarter of 2022. Net income attributed to company stakeholders was $29 million or $0.51 per diluted share in the quarter. This compares favorably to the results of $18.4 million or $0.33 per diluted share in the same period last year. The 57.5% increase in net income was mainly the result of a strong increase in operating income, driven by new capacity added in the Electricity segment in the second half of 2022 and the contribution of the IRA benefit to both, our new geothermal and storage facilities.

Adjusted EBITDA of $123.5 million increased 14.5% in the first quarter, compared $107.9 million in the first quarter last year. The increase was largely driven by 17.9% increase in operating income as a result of the new assets added, further supported by the impact of the PTC generated in the quarter. Breaking the revenues down to the segment level. Electricity segment revenue increased 4.8% to $170.3 million. This increase was driven by contribution from Ormat’s portfolio expansion efforts in 2022, mainly from CD4, Tungsten, and solar facility, as well as from the successful repowering of Heber 2 in the Heber complex. These drivers of revenue growth were partially offset by lower energy rates at Puna. In the Product segment, revenue decreased by 31.4% to $10 million and represented 5.4% of the total consolidated revenue in the first quarter.

The year-over-year decline was mainly due to the timing of revenue recognition compared to the prior period. However, we were able to sign three new contracts during the first quarter at a total amount of approximately $40 million. And we reiterate our confidence in our full year segment revenue guidance, which represent up to 89% growth compared to the same time last year. Energy Storage segment revenues were $4.9 million, compared to $6.6 million in the first quarter of 2022. This decrease was driven primarily by the reduction in energy rates in the East Coast of the United States, resulting in lower rates at our PJM facilities. Moving to slide 6. The gross margin for the Electricity segment was 44.4%, compared to 41.8% in the second quarter last year.

The gross margin expansion was attributed to the new added capacity and higher — insurance proceeds by $4.5 million versus last year related to the Puna plant. In the Product segment, gross margin was 6.9% in the quarter, which was flat compared to the same year ago period. Despite flat segment margin, we believe that the strength of our new contract signed in late 2022 and 2023 so far, will drive higher margin for the segment for the remaining of the year. The Energy Storage segment reported a negative gross margin compared to a gross margin of 13.5% in the first quarter last year. We expect margin improvement, as well as we start to operate the new assets and grow the segment portfolio significantly. The Electricity segment generated 98% of Ormat total consolidated adjusted EBITDA in the first quarter.

The Product segment generated 1.5%. And the Energy Storage segment reported adjusted EBITDA of $0.8 million, representing 0.5% of total adjusted EBITDA for the Company. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slides. Looking at slide 7. Our net debt as of March 31, 2023 was approximately $1.6 billion. Cash and cash equivalents, and restricted cash and cash equivalents as of March 31, 2023 was approximately $522 million compared to $227 million as of December 31, 2022. The slide breaks down the use of cash for three months, illustrating Ormat’s ability to reinvest in the business, service our debt and return capital to our shareholders in the form of cash dividend. We note that this use of cash has been fallen from our equity offering, cash generating by operation, and strong liquidity profile we maintain.

Our total debt as of March 31, 2023 was approximately $2.1 billion, net of deferred financing cost, and its payment schedule is presented on slide 28 in the appendix. The average cost of debt of the Company stands at 4.14%. We think it is important to note as we prepare to deploy capital to fund our multiyear growth target, nearly all of our debt liabilities remain fixed rate in nature, which we believe will help continue positioning Ormat competitively in the rising global interest rate environment. In addition, we expect to finance 30% to 50% of our future U.S. CapEx with the support of ITC and PTC under the new IRA, which we expect will enable us to significantly reduce the funds needed to develop storage and geothermal energy. Moving to slide 8.

In the first quarter of 2023, we invested nearly $107 million in CapEx to advance our growths. We have $1.1 billion of cash and available lines of credit. Our total expected capital for the last three quarters of 2023 includes $494 million of capital expenditure as detailed in slide 29 in the appendix. Overall, we have strong position in terms of capital sourcing, with excellent liquidity and access to additional capital at attractive rates to support our future growth initiatives. On May 9, 2023, our Board of Directors declared, approved and authorized payment of a quarterly dividend of $0.12 per share to all holders of the Company’s issued and outstanding shares of common stock on May 23, 2023, payable on June 6, 2023. In addition, the Company expects to pay quarterly dividends of $0.12 per share in each of the next two quarters.

That concludes my financial overview. I would like now to turn the call over to Doron to discuss some of our recent developments. Doron?

Doron Blachar: Thank you, Assi. Turning to slide 10 for a look at our Electricity segment operating portfolio. Generation growth continues to be positively supported by the addition of CD4, Tungsten, Heber 2 repower and the new solar facilities including with the Wister Solar. This was partially offset by lower generation at our old facilities that are mainly constrained by heat availability from the natural gas pipeline. In addition, to the end of the first quarter, we added 31 megawatts to the Electricity segment from the new North Valley power plant and the completion of the solar facility adjacent to our Brady geothermal power plant and reached total electricity portfolio of 1.10 gigawatts. Moving to slide 11, our Puna geothermal power plant has recently achieved a generating capacity of approximately 28 megawatts, which is a significant improvement from the 23 to 25 megawatts range in the fourth quarter of 2022.

While prices for our electricity generation remain healthy, they were lower than last year. As for the product expansion, we agreed with HELCO on new terms of the PPA that are more favorable to Ormat and we are awaiting approval from the Hawaii PUC. In regard to our Olkaria power plant in Kenya, we have made progress in our ongoing efforts to increase the complex capacity. We have raised the capacity of approximately 127 megawatts, up from 125 megawatts in the fourth quarter of 2022. With respect to Heber 1, the new power plant is nearing completion and expect to be on line by the end of the second quarter. The new facilities together with the repowering of the Heber 2 is expected to bring the total complex capacity to 89 megawatts and improve its efficiency and profitability.

Turning to slide 12 for an update on our backlog which stands at $147 million. We were able to sign contracts totaling approximately $40 million during the first quarter. In addition, recently, a new favorable tariff structure was approved in Turkey, which we anticipate will increase demand for new development. Moving to slide 13, the Energy Storage segment was affected by low rate at PJM and CAISO. However, we’ve made progress in this segment by starting at the end of the quarter the operating of two new facilities, nearing completion of two mode, which will add a combined capacity of 54 megawatt, 64 megawatt hour. We anticipate that these projects will help to increase the segment’s revenue for the year. Moving to slide 14 for an overview of the strong tailwind we expect from regulatory initiatives.

On the international side, as I mentioned earlier, the new tariff that was recently introduced in Turkey includes additional incentives that will overall secure development with local manufacturing, a tariff of approximately $118 per megawatt hour. We believe this will reopen the Turkish market for us for new sales opportunity. In the U.S., we already saw this quarter the positive benefit of the Inflation Reduction Act on our results. Transferable PTC related to Heber 2 geothermal and Wister Solar and PTC sold under the CD4 new tax equity transaction increased our adjusted EBITDA by $4.8 million this quarter. In addition, the transferable ITC related to our energy storage facilities reduced our tax expense and thus increased net income. This positive impact will continue through the year and will increase as we add more new projects.

We expect the total cash benefit related to PTC and ITC benefits of approximately $150 million in 2023. This source of cash will enable us to significantly reduce our capital needs for the year, particularly as we look to continue growing our leading geothermal portfolio. Moving to slide 16 and 17. Our growth plans for both Electricity and Storage segments remained firmly on track, despite some minor delays. As we look ahead to 2025, our target of approximately 1.83 gigawatts of added capacity represents an impressive 485% growth at the midpoint compared to the year-end 2022. This will be achieved through the addition of 203 to 260 megawatts of geothermal and solar energy power plants, and 412 to 442 megawatts of energy storage capacity. Slides 18 and 19 display the geothermal and hybrid solar PV projects currently underway.

The Dixie Valley and Heber 1 geothermal power plant and Steamboat Solar are expected to be on line during the second quarter of 2023. Moving to slide 20 and 21, which highlight the third layer of our growth plan, the Energy Storage segment. As presented on slide 20 and as I mentioned earlier, we commenced the operation of Howell and Bowling Green and we are nearing completion of Upton and Andover. In addition, we have two assets that are planned to be online in the second half of 2023. Our energy storage pipeline is robust and we have developed a pipeline of more than 3 gigawatts of capacity in our U.S. pipeline, mainly in California and Texas. Please turn to slide 22 four discussion of our 2023 guide. In the first three months of 2023 Ormat has delivered meaningful year-over-year growth across our revenues, operating income, adjusted EBITDA and net income.

We expect full year revenues to range between $823 million and $858 million which will represent a 12% to 17% increase year-over-year. Within electricity, revenues are expected to be between $670 million and $685 million, a 7% interest at the midpoint. We also expect products revenue to come between $120 million and $135 million, an approximately 79%. Storage revenue guidance is $33 million to $38 million for the year, which is also significant increase year-over-year. Adjusted EBITDA for 2023 is expected to be between $480 million and $510 million, which is a double-digit improvement from 2022 throughout the range. On slide 24, before I close the call, I want to highlight our continued commitment to environmental, social and governance ESG initiatives.

As part of this commitment, we’re working to finalize and publish our 2022 ESG report by the end of August, which would provide a comprehensive overview of our sustainability initiatives, performance and target. Further supporting our ESG initiatives, we have established a new ESG committee within our Board of Directors and next week will be our first global ESG week. I will end our prepared remarks on slide 26. In summary, we are pleased to report another solid quarter with significant growth. Despite some short-term delay, our growth plan remains on track and we’re well positioned to capitalize on the strong global demand for renewable energy solutions. As always, we remain dedicated to delivering sustainable, profitable growth for our shareholders, while also making a positive impact on the environment and the communities where we operate.

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

Q&A Session

Operator: Thank you. [Operator Instructions] The first question is from Noah Kaye with Oppenheimer.

Operator: The next question is from Justin Clare with ROTH MKM.

Operator: [Operator Instructions] The next question is from Julien Dumoulin-Smith with Bank of America.

Operator: The next question is from Jeff Osborne with TD Cowen.

Operator: We have no further questions at this time. I’ll turn it over to the presenters for any closing comments.

Doron Blachar: Thank you, operator. Thank you all for joining us and your continued support. We look forward to continue and deliver to all our shareholders — all our stakeholders a profitable growth. Thank you, all.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.