Ormat Technologies, Inc. (NYSE:ORA) Q2 2023 Earnings Call Transcript

Ormat Technologies, Inc. (NYSE:ORA) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Good morning, and welcome to the Ormat Technologies’ Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please note, this event is being recorded. I would 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’d like to remind you that the information provided during this call may contain forward-looking statements, relating to current expectations, estimates, forecasts and projections about future events that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company’s plans, objectives, and expectations for future operations, and are based on management’s current estimates and projections, future results or trends.

Actual 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 reports 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 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 in 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. In the second quarter, we delivered strong financial results and healthy earnings growth while making several portfolio expansion to drive continued revenue and profitable growth. Asset development is a strategic focus for us as we enhance existing projects, while also commencing operations and achieving commercial operations across our electricity, generation, and energy storage portfolio. This quarter, we commenced operations of approximately 100 megawatts in geothermal, solar, and energy storage assets. We are encouraged by the initial results we’re seeing in our drilling campaigns in Olkaria and Puna, and we expect to see an increase in generation by year-end at both power plants.

Our Products segment has displayed a notable recovery in revenues, resulting in significant margin expansion and revenue growth for the segment. In the Electricity segment, we successfully commenced construction of a 50 megawatt geothermal project in New Zealand, in addition to the 10 megawatt expansion release to our Bouillant power plant in Guadeloupe, following significant progress we made in obtaining the PPA. In addition, we commenced the development of the 42 megawatt Arrowleaf solar project located adjacent to our Brawley geothermal complex, following the signing of a long-term PPA with San Diego Community Power. In our Energy Storage segment, we released for construction three battery storage facilities, the 35 megawatt/140 megawatt hour Arrowleaf project in California and two projects in Texas that have a combined capacity of 120 megawatt/240 megawatts hour.

We expect each of these projects to be operational by the end of 2025, allowing us to take advantage of the recent decline in battery prices. As we look forward, we see the improved economics of our projects, following the recent IRA guidance and the increased demand for our assets. As a result, we are excited to increase our medium-term growth target by approximately 7% to 1.9 gigawatt to 2 gigawatt by year-end 2025, demonstrating our confidence in the company’s growth plan. Now, before I provide further updates on 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 second quarter was $194.8 million, up over 15.2% year-over-year, reflecting substantial growth in our Products segment. Second quarter 2023 total gross profit was $49.5 million. This resulted in gross margin of 25.4%, down from the gross margin of 34.1% in the second quarter of 2022. The reduction in gross margin performance for the quarter is driven by increased Products segment revenue, which is operating historically on lower margin, in addition to lower margin in the Electricity segment. Net income attributable to the company’s stockholders was $24.2 million or $0.40 per diluted share in the second quarter.

This compares favorably to the results of $11.3 million or $0.20 per diluted share in the same quarter last year. Our solid performance, combined with support from the Inflation Reduction Act, helped drive substantial growth in year-over-year net income and earnings per share. This legislation will continue to have a significant positive impact on bottom-line results going forward. Adjusted EBITDA increased by 0.2% to $100.9 million in the second quarter, compared to $100.7 million in the second quarter of last year. We delivered this year-over-year adjusted EBITDA growth, which overcome lower margin in our Electricity segment and Energy Storage segment compared to a year ago, driven by an observed decline mainly in Energy Storage merchant markets.

Breaking the revenue down at a segment level are presented on Slide 6. Electricity segment revenue increased 2.7% to $155.3 million. This increase in the Electricity revenue year-over-year was driven by portfolio expansion at our CD4 and North Valley sites, which successfully came online, and contributed to our revenue in the quarter. This helped overcome lower revenues from Puna due to temporary lower generation and lower energy prices versus last year. In the Products segment, revenue increased by 222% to $33.5 million and represented 17.2% of the consolidated revenues in the second quarter. The year-over-year increase was mainly due to higher backlog. We also saw an improvement in margin capture for the Products segment, driven by the improved contracts that we signed in 2022.

And we expect Products segment margin to continue and improve throughout the year. Energy Storage segment revenues were $6 million compared to $7.5 million in the second quarter of 2022. The decrease in Storage segment was driven primarily by lower merchant energy prices in the PJM area. Let’s move now to Slide 7. The gross margin for the Electricity segment was 29.6% compared to 36.8% in the same quarter last year. The gross margin reduction was attributed to weaker performance year-over-year at our Puna facility due to lower generation combined with slightly lower energy prices for the period. The step down in gross margin for the segment as compared to the prior-year period was also negatively impacted by the absence of the business interruption insurance proceeds, which helped drive strong margin in last year’s second quarter.

Excluding these two items, gross margin in Q2 2022 was 32%, not materially different than this quarter. We expect improved performance from our Puna power plant towards the end of the year, following a successful drilling campaign, which should help improve our margin going forward. In the Products segment, gross margin was 10.4% in the quarter, notably higher than the 0.2% gross profit margin performance in the second quarter of last year. As inflation continued to abate and costs as seen through commodity prices continue to normalize, we believe that our Products segment will continue to experience growth and produce strong gross margin performance. The Energy Storage segment recorded a gross margin of 1.9%, an improvement from the negative margin recorded during the first quarter of 2023, but lower than the gross margin reported in the second quarter of last year.

Lower merchant energy prices in the East Coast had a significant impact on Energy Storage margin performance. We expect margins to improve as [a lot of] (ph) projects with tolling and capacity agreement will start operation over the next year. Moving to Slide 8. Looking at a consolidated breakdown of adjusted EBITDA results, the Electricity segment generated 97% of Ormat total consolidated adjusted EBITDA in the second quarter. The Storage and Products segment both contributed 1.5% of the company EBITDA during the second quarter. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slides. Let’s go to Slide 9. Before I move to discuss the balance sheet data, I want to spend a few minutes discussing the impact of ITC and PTC on our P&L this quarter and going forward.

We include in our income attributed to the sales tax benefit line in the P&L two types of PTC’s credits. The first one is related to PTC sold under equity tax transaction that we signed previously, and the second is transferable PTC related to new assets that are not yet part of tax equity transaction. In the second quarter, we’ve had five active tax equity transactions, for which we recorded $12.3 million income, while the remaining $2.7 million are related to transferable PTCs from our new geothermal facility that are not yet under tax equity partnerships. The two kinds of the recordable PTCs are included in the adjusted EBITDA. The ITC benefits are equivalent to 30% to 40% of the eligible investments usually in the Storage segment. The ITC benefits are related to our new energy storage facility and are recorded under the income tax provision line in the P&L, hence we can sell them to anyone that needs these credits.

In the second quarter, we recorded $9 million ITC benefits in the income tax line related to the four Energy Storage facilities that came online in the quarter. In the next few years, in line with our growth plans to increase our Energy Storage portfolio, we expect to continually report lower tax rate. Looking at Slide 10. Our net debt as of June 30, 2023, was approximately $1.6 billion. Cash and cash equivalents and restricted cash and cash equivalents as of June 30, 2023, was approximately $395 million, compared to $227 million as of December 31, 2022. This slide breaks down the use of cash for the six months, illustrating Ormat’s ability to reinvest in the business and service our debt. We note that this use of cash has been funded from equity offering, cash generated by operation and strong liquidity profile we maintain.

Our total debt as of June 30 was approximately $2 billion, net of deferred financing costs, and its payment schedule is presented on Slide 29 in the appendix. The average cost of debt of the company stands at 4.13%. Our balance sheet remains strong. And during the second quarter, we paid off [indiscernible] structured loan, which carried a floating interest rate structure, reducing interest rate risk and further setting our balance sheet with nearly all of the remaining debt liabilities in fixed rate forms. Additionally, we saw a material increase in interest income during the quarter as a result of the healthy financial position. Moving to Slide 11. In the first half of 2023, we had invested $247 million in cash CapEx to advance our growth plan.

We have $920 million of liquidity between our cash balance and available line of credit. Our total expected CapEx remaining for the two quarters of 2023 include $328 million of capital expenditure, as detailed in Slide 30 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 development. On August 2, 2023, our Board of Directors declared, approved, and authorized a payment of quarterly dividend of $0.12 per share to all holders of the company issued outstanding shares of common stock on August 16, 2023, payable on August 30, 2023. In addition, the company expects to pay quarterly dividends of $0.12 per share in the next quarter.

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

Doron Blachar: Thank you, Assi. Turning to Slide 13 for a look at our Electricity segment operating portfolio. Our generation growth continued to be positively supported by the addition of North Valley and the operation of the Brady Solar facility as they provided 25 megawatt and 6 megawatt of capacity respectively, following the COD which occurred during the period. Our Electricity results were impacted by lower generation and lower prices at Puna, but we still managed to increase revenues year-over-year through strategic expansion to the portfolio in operating assets. Turning to Slide 14 for an update on our backlog. We have seen significant improvement from last year and our backlog now stands at approximately $120 million, with approximately $44 million in contracts signed since the beginning of the year.

Moving to Slide 15. The Energy Storage segment was affected by lower merchant energy rates at PJM, as Assi explained earlier. However, four new facilities started operations in the second quarter, which added a combined capacity of 62 megawatt of 62 megawatt hour. In July, we started operation of our Pomona 2, a 20 megawatt/40 megawatt hour facility in California. This will provide ancillary services to the CAISO grid. In addition, we released three new storage projects that will add 155 megawatt/380 megawatt hour in support of 2025 growth targets. Moving to Slide 17 and 18. The overall demand for Electricity and Energy Storage projects remains strong. Combining this with our unique development capabilities, we are well on track to improve our 2025 targets.

We increased our target to 1.9 gigawatt to 2 gigawatt capacity portfolio, representing close to 70% growth at the midpoint compared to year-end 2022. This will be achieved through the addition of 230 megawatts to 260 megawatts of geothermal and solar energy power plants compared to 2022 and 512 megawatts to 582 megawatts of Energy Storage capacity demonstrating significant year-over-year growth. Slides 19 and 20 display the geothermal and hybrid solar PV projects currently underway. We released for construction two geothermal projects, the Topp 2 in New Zealand and Bouillante in Guadeloupe, and the Arrowleaf Solar project in the U.S., following a positive progress we have made in the PPA. Slides 21 and 22 highlight the next layer of our growth plan, the Energy Storage deck.

As presented on Slide 21, and as I mentioned earlier, we successfully commenced the operation of Andover, Upton, Howell, and Bowling Green projects. Additionally, in July, we commenced operation of — on Pomona 2 in California. We have today six projects totaling 275 megawatt/740 megawatt hour actively underway, and combined with the current operating assets, our portfolio will exceed the 1 gigawatt hour. Our energy storage pipeline remains robust and stands at 3.3 gigawatt/11.5 gigawatt hour of capacity. Please turn to Slide 23 for a discussion of 2023 guidance. We are reiterating our guidance, which includes full year revenue to range between $823 million and $858 million, representing a 12% to 17% increase year-over-year. Within the Electricity segment, revenues are expected to be between $670 million and $685 million, a 7% increase at the midpoint.

We also expect Products revenues to be between $120 million and $135 million, an approximately 79% increase at the midpoint. Storage revenue guidance is $33 million to $38 million for the year, which is also a significant increase year-over-year. Adjusted EBITDA for 2023 is expected to be between $480 million to $510 million, a significant improvement from 2022 throughout the range. I will end our prepared remarks on Slide 27. We are pleased with our results in the first half of 2023 and are satisfied with the progress we have made towards our new growth targets, adding approximately 100 megawatt of new generation capacity and starting construction of approximately 260 megawatt of new capacity. We will continue to be the beneficiary of growing demand for renewable and energy storage, and we expect to continue to benefit from PTC and ITC under the IRA.

We look forward to achieving our goal of 1.9 gigawatt to 2 gigawatt by year-end 2025. 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.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your question comes from the line of Noah Kaye with Oppenheimer. Please go ahead.

Noah Kaye: Good morning. Thanks for taking the questions. So, just first on Electricity results, maybe just explain what drove that lower Puna generation? To what extent, was this planned, given you’re reiterating the full year Electricity outlook? Just help us understand the cadence of improvement recovery over the back half of the year?

Doron Blachar: Hi, Noah, thank you. It’s Doron. In Puna, as you know, we have been continuously in the drilling campaign. Effectively what happened is it drove generation bit low. One of the well reduced its flow rate on one hand, and the other part that impacted the revenues is the pricing. As you know, we have 25 megawatts in Puna that are tied to the avoided costs. Some of us might not remember, but last year, there was a big war between Russia and Ukraine. That is still ongoing, but now it’s less in the news. And pricing that time were almost $300 per megawatt hour. Today, they stand at about $200, so that was a big impact. However, we finished drilling [indiscernible] and we are connecting it, it should be connected at the beginning of Q4, and the initial outcome or the initial temperature and pressure that we see are very positive.

So, overall, we see that we — despite the impact on Puna in Q2, that we will be within the guidance that we gave at the beginning of the year.

Noah Kaye: Yes. So, it sounds like, to the extent, there is a real pickup there, it would be in the fourth quarter. Okay. And then, upsizing the year-end ’25 portfolio targets, it looks like that’s really all driven by higher storage. So, maybe, you can talk a little bit about the drivers of increasing the storage outlook; your thoughts on treasury guidance around ITC for storage and the implications for Ormat; and just what gives you confidence in sort of strong project economics on the storage developments going forward?

Doron Blachar: You are right. We increased the future guidance due to the storage projects that we’ve already released this quarter and that we expect to continue and release. We see the storage returns today — very good to see projects return somewhere in the high-single digits and equity return that can get to double digits. The IRA guidance that the IRS issued has improved significantly. The view on the ITC is that Storage can sell. It came out with the guidance that they are for cash only. They can be used three years backwards. So, the value of the ITC went up; you cannot trade with them. They have to be between a seller and a buyer. We do see significant impact and that allowed us to this project. Most of the project that were released today are with 40% ITC.

And, that, obviously improved the returns. We also saw in the last quarter the reduction in the battery prices. So, all in all, this quarter between reducing the battery pricing and increasing the ITC allowed us to release more projects. And in reality, the minute we release a project, within a few weeks after that, we should appeal for batteries to confirm or to fix the price that we pay, and that reduces the risk that we have.

Assi Ginzburg: Noah, maybe one more thing. This is Assi. Especially in California, our customers are really scrambling in getting RA contracts. A lot of developers now understand how tough is to get the interconnection. Ormat built over years a pipeline that allow us now to start construction of project, and we actually see RA/tolling prices at even higher level than what we signed with the Bottleneck. And hopefully, Pomona 2 that would just start operating in the next few weeks will sign, I think, the highest tolling that we’ve seen. Again, it’s still under negotiation, but I believe it will be the highest tolling we’ve seen, significantly higher than the one before.

Noah Kaye: Very helpful. And maybe just one more. I think the industry on the geothermal side has been fairly awash in news around new disruptive drilling and sensing techniques, maybe expanding the addressable market. It sounds like kind of early days here, but very interested in your perspective on some of the innovations happening in the industry. And from a technology development perspective, to what extent Ormat is participating in some of that technology innovation?

Doron Blachar: We are — Ormat is the leading company in geothermal. So, any new development that will drive geothermal to be widely spread and increase the ability to build more geothermal facilities is a huge upside for Ormat. As you said, most of these items are still in early stage, have not been fully commercially available, but we are watching it very closely. We have specific people today that are looking at different start-ups to make sure that we see this new technology, that we keep it, and if we will be able to utilize it. And I would say, if there would be an ability to have a geothermal energy everywhere, I assume that would have been the only renewable energy because it’s a 24/7 energy — renewable energy. So, we are looking at it very closely. Unfortunately, we haven’t seen one that have changed the dial so far, and we hope that there will be one that will come soon.