Ormat Technologies, Inc. (NYSE:ORA) Q1 2024 Earnings Call Transcript

Ormat Technologies, Inc. (NYSE:ORA) Q1 2024 Earnings Call Transcript May 9, 2024

Ormat Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Ormat Technologies First Quarter 2024 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Josh Carroll with Alpha IR. Please go ahead.

Josh Carroll: Thank you, operator. With me on 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 & Reporting. Before beginning, we would like to remind you that information provided during this call may contain forward-looking statements relating to current estimates, 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 risk 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 as 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 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’d 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 yours.

Doron Blachar: Thank you, Josh, and good morning, everyone. Thank you for joining us today. During the first quarter, Ormat delivered strong financial results driven by improved operating performance and continued growth across all three segments. This quarter, the company saw a 21% increase in total revenues, a 25.5% rise in earnings per diluted share and 14.4% increase in adjusted EBITDA when compared to the first quarter of last year. The first-quarter results were fueled by organic growth that includes the successful execution of our strategic plan and enhanced operational efficiency at existing facilities, which together contributed more than 50% of the increase in revenues and in EBITDA. In addition, these results were positively impacted by the recent acquisition of assets from Enel Green Power North America.

Our electricity segment continue to drive growth. This quarter, record results reflect an impressive improvement in operational performance at Puna and at our Heber 1 facility which was partially operational during the prior-year quarter. Furthermore, the new capacity we added last year in North Valley and Dixie Valley and the new acquired assets added this year helped grow our electricity segment economics relative to the comparable prior-year period and also offset the impact of business interruption insurance income of $6.7 million included in last year’s first-quarter results. In the storage segment, we experienced a greater degree of stability in revenues from several new projects launched in 2023 that helped improve the segment’s gross margin.

The East Flemington project that came online in the first quarter also contributed to our results, and we expect the Bottleneck project to come online towards the end of the second quarter. In our product segment, our backlog has continued to stay strong due to the growing demand for geothermal products with year-to-date revenues increasing by an impressive 147%. Since the beginning of the year, we added, including the Enel assets, 130 megawatts of new generating capacity. Combined with the potential uplift from our successful drilling campaign in Kenya and the macro drivers, we are confident in meeting both our long-term capacity expansion goals and our financial targets for 2024 and beyond. With a macro base, the global demand for renewable energy continues to grow, driven by increasing environmental concerns, supportive government policies, attractive power purchase agreements, and increased renewable demand including from data center.

Our diverse portfolio of geothermal, solar, and energy storage solution positions us well to capitalize on these favorable tailwinds. Now before I provide further updates on our operations and plans, I will turn the call over to Assi to review the financial results.

Assaf Ginzburg: Thank you, Doron. Let me start my review of our financial highlights on slide 5. Total revenue for the first quarter was $224.2 million, up 21% year over year. This was driven by growth across all three segments. Ormat’s first-quarter 2024 gross profit was $78.8 million, up by 3.6% versus $76.1 million in the first quarter of 2023, resulting in a consolidated gross margin of 35.2%. Net income attributable to company stockholders was $38.6 million or $0.64 per diluted share in the quarter compared to $29 million or $0.51 per diluted share in the first quarter of the prior year. Excluding one-time M&A expenses related to the Enel recent acquisition, our adjusted net income attributable to the company stockholders was $39.6 million or $0.65 per diluted share.

This represents a significant increase of 36.5% in adjusted net income attributable to the company stockholders and 27.5% in EPS compared to the same quarter last year. The solid earnings and EPS growth were mainly the results of the new assets added to the portfolio relative to last year’s first quarter and a lower tax rate as we continue to capture benefit from the IRA tax credits. Adjusted EBITDA of $141.2 million increased 14.4% in the first quarter compared to one $123.5 million in the prior year period. The year-over-year increase in adjusted EBITDA was driven by growth in all three segments with the electricity segment leading the increase largely as a result of better performance of operating assets that led to increased generation, the commercial operation of North Valley last year, the inclusion of the new acquired Enel assets in our portfolio, and a larger contribution from tax equity transactions offset by %6.7 million of business interruption insurance income recorded last year related to Puna.

On slide 5, we break down the revenue performance at the segment level. Electricity segment revenues increased 12.3% to $191.3 million. This increase was largely driven by contributions from the new Enel acquired assets and from Heber 1 which was only partially operational in the first quarter of 2023, improved generation at Puna that is now operating above 30 megawatts, the addition of North Valley Power Plant in April 2023. In the products segment, revenue marked a substantial increase growing by 147.3% to $24.8 million. The growth in our products segment was supported by a higher backlog and the timing of revenue recognition. The common products segment backlog stands approximately one $130 million as of May 8, 2024. Energy storage segment revenue has increased by 66% to $8.1 million in the first quarter, driven largely by the impact of CODs for storage facilities that the company achieved in the second half of 2023.

East Flemington has came online this year and a higher merchant rate in the PJM region. Moving to slide 6. The gross margin for the electricity segment was 39% in the first quarter, down from 44.4% from the previous year. The reduction in margin was driven by the absence of business interruption insurance proceeds that flowed through our last year’s cost of revenues. In the product segment, gross margin was 14.8% in the first quarter, up 790 basis points compared to the first quarter of 2023. Margin increased due to the increased profitability of our recently signed contracts. The energy storage segment reported the first-quarter gross margin of 7.5% compared to negative 3.6% in the prior year. The increase in gross margin was driven by the new project that was launched in 2023, the commercial operation achieved at East Flemington, and better merchant prices mainly in PJM.

Breaking down adjusted EBITDA, the electricity segment generated 92% of Ormat’s total consolidated adjusted EBITDA in the first quarter of 2024, the product segment generated 5%, and the energy storage segment reported adjusted EBITDA of $3.7 million, almost 3% of total adjusted EBITDA. Reconciliations of EBITDA and adjusted EBITDA are provided in the appendix slides. Moving to slide 7. In the first quarter, we recorded $17.5 million in income related to tax benefits, an increase of $4.9 million compared to last year. The increase is mainly due to $2.5 million higher transferable PTCs and $1.7 million income related to the new North Valley tax equity transaction signed in Q4 of 2023. Also, in the first quarter, we recorded $11.5 million of ITC benefits in the income tax line related to the storage facility, and we expect proportional quarterly amounts to be recorded throughout the year.

We anticipate during 2024 to receive approximately $150 million in cash proceeds related to the PTC and ITC benefits that will reduce our capital needs, expanding our ability to profitably grow our base of generating assets and ultimately lowering the capital intensity of our growth efforts. Looking at slide 8, our net debt as of March 31, 2024 was approximately $2.1 billion, equivalent to 4.1 times Net debt to EBITDA. Cash and cash equivalent and restricted cash and cash equivalent as of March 31, 2024 was approximately $299 million compared to $288 million at the end of 2023. Slide 8 breaks down our use of cash for the 12 months, illustrating Ormat’s ability to reinvest in the business and service our debt obligation while also consistently returning capital to our shareholders all while growing our business.

Our total debt as of March 31, 2024 was approximately $2.4 billion net of deferred financing costs. It is presented on slide 30 in the appendix, which outline the payment schedule. The average cost of our debt for the company stands at 4.57%. Nearly all of our debt liabilities remain at a fixed rate in nature, which we believe will help continue to position Ormat competitively in a higher and more volatile global interest rate environment. Moving to slide 9, we have approximately $766 million of total liquidity. Our total expected capital expenditure for the remaining of 2024 is approximately $472 million as detailed in slide 31 in the appendix. We plan to invest approximately to $254 million in the electricity segment for construction, drilling, and maintenance CapEx, and $196 million in our storage assets in the remaining of 2024.

Overall, Ormat’s balance sheet and capital position the company well, facilitating our ability to continue executing our strategic growth plan. We have maintained excellent liquidity, and we have ample access to additional capital. On May 8, 2024, our Board of Directors declared, approved, and authorized payment of quarterly dividend of $0.12 per share payable on June 5, 2024 to shareholders of record as of May 22, 2024. We expect to maintain this dividend level for the remaining of the three quarters of the year. That concludes my financial overview. I would like now to turn the call to Doron to discuss some of our recent developments.

Doron Blachar: Thank you, Assi. Turning to slide 11 for a look at our electricity segment operating portfolio. As previously mentioned, generation growth in our core electricity segment was positively impacted by several CODs that occurred last year after the first quarter, and the COD of Steamboat Solar this year. In addition, generation grew from the contribution of the newly acquired geothermal and solar assets. Our Puna complex also helped drive generation growth during the quarter as its generating capacity continued to ramp up relative to last year, running at 30 megawatts over the last two quarters. This further accomplished by increased generation at Heber 1. In total, we added 110 megawatts since the beginning of the year to the electricity segment portfolio and grew the generation by 7.9%.

Turning to slide 12 for an update on our operating footprint. At our Olkaria power plant in Kenya, our operational teams are continuing to work to increase capacity, and we are currently operating at close to 130 megawatt. Our drilling campaign in Olkaria has continued to show positive results, and we continue to believe that the connection of the new wells will both support generation upside and improve future performance. In Guadeloupe, as announced before, we signed a 30-year PPA with EDF for the development of a new 10-megawatt geothermal power plant, which helps support our capacity growth target and strategically expand our presence in the attractive Caribbean region. The new geothermal plant will be added to our existing 50 megawatts [indiscernible] This and the expected 10 megawatt Dominica power plant currently under development will bring our total geothermal capacity in the Caribbean region to 35 megawatts once the plants become operational in 2025.

And on the strategic front. On slide 13, we announced in January that we completed the acquisition of the portfolio of geothermal and solar assets from Enel Green Power North America. The contribution of the new asset to first-quarter revenues and EBITDA is aligned with our expectation. We have identified new opportunities to enhance the acquired assets on top of the upgrades that we already initiated, and we are currently evaluating their potential contribution. Turning to slide 14, our product segment backlog stands at $130 million. We are encouraged by the worldwide tailwind for geothermal that should allow us to continue maintaining a strong backlog. Moving to slide 15. The energy storage segment delivered a strong quarter that was supported by a new project which contributed to our results as well as the long-term tolling agreement for our Pomona 2 facility in California, which helped create a stable and profitable revenue stream for the energy storage segment.

Also, we saw better merchant rates in PJM region that supported Q1 profitability. As Assi mentioned, we have also continued to benefit from ITC with both our East Flemington and Bottleneck facilities that are eligible to tax credit, which reduced our tax expense in the quarter. Moving to slide 17 and 18, we continue to see an increase in the demand for electricity and energy storage segments. The successful and steady execution of our growth strategy has given us the confidence to maintain our targets to reach between 2.1 to 2.3 gigawatt of portfolio capacity year end 2026. Slides 19 and 20 display the geothermal and hybrid solar PV projects that we currently have underway. We continue to remain on pace to complete three geothermal development projects in 2024, which includes Beowawe Repowering in the US, Zunil in Guatemala, and Ijen in Indonesia.

Combined, these projects will help increase our energy-generating capacity by 26 megawatts. In our solar PV portfolio, Steamboat Hills Solar completed the COD during the first quarter, and during April, we achieved COD for North Valley Solar. Slides 21 and 22 highlight the third layer of our growth plan, the energy storage side. We’ve completed the East Flemington 20-megawatt hour facility and currently have six energy storage projects under development that will add 335 megawatts or 1,040 megawatt hour to our storage portfolio by the end of 2025. At our Bottleneck facility in California, we are currently in the commissioning stage, and we anticipate that the 80 megawatts or 320 megawatt hour storage facility will begin operating towards the end of the second quarter of this year.

Please turn to slide 23 for a discussion of our 2024 guidance. We continue to expect total revenues to increase by 7% year over year at the midpoint and to be between $860 million and $910 million, with electricity segment revenues between $710 million and $730 million, an increase of 8% compared to 2023 results. We expect between $115 million and $135 million in the product segment. And energy storage revenues are expected to be between $35 million and $45 million. We expect adjusted EBITDA to increase by approximately 10% at the midpoint to range between $515 million and $545 million. We expect annual adjusted EBITDA attributable to minority interest to be approximately $18 million. I will end our prepared remarks on slide 24. We remain on track to achieve our long-term growth targets.

We believe that our compelling and differentiated portfolio, unique growth strategy, and our track record to develop compelling projects with long-term PPAs position us well to improve profitability as demand continues to increase for renewable energy and drive significant shareholder value. Supporting these are the favorable macro driver such as the increasing demand for renewable energy from data center, attractive power purchase agreement, and declining battery prices. We look forward to meeting and speaking with our shareholders, analysts, and broader stakeholders at our upcoming Analyst Day on June 20. This concludes our prepared remarks. Now I would like to open the call for questions. Operator, please.

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Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line Noah Kaye from Oppenheimer.

Andre Adams: Hi, there. You’ve got Andre Adams on for Noah. So the first question will be you’re seeing good performance so far from the Enel assets. Can you give us a little bit more color on how you’re proceeding with the previously announced capacity upgrades and if you could provide any more detail on the new opportunities you’re pursuing with those assets whether they’re greenfield or brownfield specifically?

Doron Blachar: So the Enel, as we said, are performing a little better than what we expected as part of the acquisition. The enhancement that we plan to have by the end of ’25 are on track. We actually started already in one of them the engineering part. And with the other two, we’re finalizing our detailed plan, and we’ll start the engineering and manufacturing immediately afterwards. So things are on track as we expected. The improved a enhancement that we see, we actually have spoken with our off-taker and in [indiscernible] and there is a very strong demand for additional megawatts, and we are working with him and to see if we can increase the interconnection and the PPA, which he is very much in favor. We do believe the resource can support more — existing resource can support more megawatts than what we anticipated originally.

And so that these three stars will align, we’ll be able to do more than what we’ve expected. It might move the enhancement a few months forward, but it will be more done. So these are brownfield, and since we do see this very strong demand over there, we believe that we might be able to expedite also the greenfield, which was a forecast period down the road, but we might be able to bring it a little bit earlier.

Operator: Your next question comes from the line Justin Clare from Roth MKM.

Justin Clare: So I wanted to start off here. Just you had mentioned data centers earlier, and there’s obviously pretty strong demand for firm renewable power from data centers. So wondering if you could just speak to the opportunity that you’re seeing there for Ormat to serve that need whether from the geothermal side of your business or from the storage side of your business?

Doron Blachar: Well, as you’ve said, the market today very, very strong demand from the utilities but also from the data centers. We’ve been approached already by a few data centers that are looking for green baseload renewable energy. We are discussing with them. Geothermally, there’s specific sites. We are discussing with them exactly how we can connect to them to make sure that they can get the green energy that they are looking for. And I hope that in the next few months, we’ll have some more updates to you. But we are in discussion with some of them. The pricing over there are very high. The pricing that we see in the [indiscernible] from the utilities, if we talked in the past in the 80s, I can say today the discussions for geothermal are in the 90s and above that even. So there’s a lot of demand, and we’re trying to see how we can generate more and more electricity from our facilities.

Justin Clare: Okay, great. And then maybe shifting over, you did mention that you’ve had success in the drilling campaign with your Olkaria facility, and there’s potential upside to the generation there. I was wondering if you could just speak to the timeframe at which we could potentially anticipate more capacity coming online. And then can you remind us, do you need to update the PPA as you increase capacity there? And is there any potential change to the PPA pricing either for the existing capacity or for the new capacity?

Doron Blachar: First, I’ll start with our PPA for 150 megawatts with the existing pricing. This is what we have signed and that’s what we can reach. Above 150, we’ll obviously need to negotiate an additional PPA. The drilling campaign was very, very successful. We’re able to drill to the deep reservoir which is effectively a new reservoir for us. We see on occasional days a very, very high generation above or close to 140 megawatt, but it’s not yet it’s stable. We expect that towards the end of the year, we will be able to make some adjustment to the power plant. And hopefully by that time, we’ll be able to generate closer to 140 megawatts. But we’re very, very encouraged with the campaign that we did. It went to a totally new reservoir, and it was very successful.

Justin Clare: And then just one more on storage. We’ve heard the pricing for batteries continues to trend lower here. So just wondering if you could update us on what you’re seeing. We’ve also heard that there is potentially more favorable terms being offered from suppliers, and wondering could this affect your CapEx expectations moving forward here? And I guess maybe could you also comment on the project returns for storage and how attractive those might be?

Doron Blachar: So we definitely see the price of batteries going down. It will help us to release more projects with higher returns. We are able to see low double-digit returns on our project, project IRR on the storage. We do see between the battery supplier though where most of them are from China, competition between them where they are trying to get more market share between one another. But we definitely feel — we feel more comfortable today with securing batteries contract. The delivery times with batteries has become much faster than in the past. In the past, it would have been 18 months, sometimes even more that. Today, you can get between 12 to 18 months delivery time. So definitely, the market on the battery side has changed significantly, and we hope and expect it to continue.

Operator: Your next question comes from the line Ryan Levine from Citi.

Ryan Levine: To follow up on some of the earlier comments, you mentioned opportunities to pursue development for some of these data center customers at $10 per megawatt above previous pricing. What markets are you targeting for that customer base? Is this some of the western US states or other parts of the world?

Doron Blachar: At this stage, we’re targeting purely the western part of the US. We had some discussions about supplying somebody that will build a data center someplace in the international front. But we see this as very early. But if somebody will decide to develop a data center in Guatemala or Kenya, we’ll be very happy to supply him with green energy from our facilities over there.

Josh Carroll: Great. And in the slide deck, it was highlighted the successful campaign in Kenya. Can you provide a little more color around markers of that success or what you’re seeing from that drilling campaign?