Ormat Technologies, Inc. (NYSE:ORA) Q1 2022 Earnings Conference Call May 3, 2022 8:30 AM ET
Samuel Cohen – Alpha IR Group
Doron Blachar – Chief Executive Officer
Assi Ginzburg – Chief Financial Officer
Smadar Lavi – Vice President-Investor Relations and ESG Planning & Reporting
Conference Call Participants
Noah Kaye – Oppenheimer & Co.
Julien Dumoulin-Smith – Bank of America
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 over to your host, Samuel Cohen to begin. Please go ahead.
Thank you, operator. Hosting the call today are Doron Blachar, Chief Executive Officer; Assi Ginzburg, Chief Financial Officer; Smadar Lavi, Vice President of Investor Relations and ESG Planning & 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 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’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 marks a good start for the year, delivering strong financial results in 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 a much recent Investor Day. We benefited from improved performance in our Electricity 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 increased the total generation of the Tungsten complex by 13 megawatt. In addition, we are on track to complete cost structure of the 13 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 increasing 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 Assi to review the financial results before I provide a further update on operations and further plans. Assi?
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 profits 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 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 company's stockholder 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 respectively.
Adjusted net income attributed to the company’s stockholders was $19.9 million or $0.35 per diluted share in the quarter. This compared to the $24.1 million or $0.42 per share in the same period last year. The decrease was mainly due to higher effective tax rates of 31.4%, compared to 14.8% in the 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 segment.
Breaking 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 TerraGen acquisition, expansion of our McGinness Hills complex and increase in 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 binary units are now back in operation, where revenue going forward for the year will be negatively impact by the prolong shutdown. We do anticipate recovering the majority of loss income through our business interruption in 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 process will top the cost of goods sold.
In the Product segment, revenue increased by 70% to $14.6 million and represented 8% of total consolidated revenue 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 segment 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 at Tungsten plant, which allowed the recent capacity expansion.
In the Product segment, gross margin was 77% similar to last year, reflecting the impact of lower volume of revenues 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, primarily to the absence of a one-time revenue in Q1 2021, which had an outside impact margin performance in last quarter – 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 it 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 appending 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 toward achieving our growth targets. In the past, we did indicate that we're likely to pursue some additional financing agreement 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%, further 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 were $43 million. The accompanying slide break down the use of cash for the three 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 multiyear growth targets, nearly all of our debt is at fixed rate in nature, which should help position Ormat competitively in the rising global interest rate environment.
Moving to Slide 8. The significant growth in both the Electricity and Storage segment will require robust capital investment 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 three 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 initiative. On May 2, 2022, our Board of Directors declared, approved and authorized payment of a quarterly division of $0.12 per share to all shareholders of company issued an outstanding shares of 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 and our overall spend for the next three years. Doron?
Thank you, Assi. Turning to Slide 11 to look at our operating portfolio. During Q1 of 2022 power generation in our geothermal power plant increased by approximately 8.6% compared to last year. We’re capturing the benefit from the additional of the Dixie Valley and plants to our portfolio, as well as the increased output from McGinness Hills in Puna. These contributions were partially offset by lower generation at Heber 1 due to a fire outage and also offset by planned outage at the Tungsten plant, which is required – a required standard shutdown to complete our successful expansion. As I mentioned earlier, we successfully commence the operation of Tungsten 2, which adds certain megawatt to a Tungsten complex. This increase was higher than expected resulting in total of 42 megawatt 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 exceeding 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 megawatts PPA with HELCO subject to an environmental assessment process, which may take one to two years to finalize. We remain on track to drill new wells and expect to further improve 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 assets 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 to 12 megawatt 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 2023.
Next, I’m also glad to report that we successfully brought back to operation approximately 20 megawatt generated by the binary units at our Heber 1 plant. We estimated that the outage of the power plant will reduce 2022 revenues by approximately $15 million. While we’re updating our revenue guidance to reflect this reduction, we maintain our EBITDA guidance as we expect proceeds from the business disruption 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 Storage segment. As Assi mentioned, Energy Storage segments revenues decreased due to the prior year one-time revenue event related to the Texas power price. 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 increased nearly 29% compared to the first quarter of last year.
Moving to Slide 17 and 18. As we have communicated 2022 is a significant buildup, comprised mainly of geothermal project and 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 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 to 290 megawatts or 550 to 660 megawatt hour by year end 2023. This addition will enable us to reach a total storage portfolio of between 313 and 373 megawatts subject of course, to our ability to overcome any permitting and supply chain challenge.
Slide 19 and 20 displays the nine geothermal and six solar PV project currently underway comprising the majority of our 2023 goal. We’re on track with CD4, Wister Solar, Tungsten Solar 2 and Steamboat Hills Solar all of which are expected to come online in the second quarter of this year. With respect to our 12 megawatt Dixie Meadows project, which is currently under construction, it is possible we may experience delays or other impact as a result of a recent endangered species lifting by the U.S. Fish and Wildlife Service of a toad located near Atlantic. 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 eight 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 two years.
We have already secured the better is 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 battery. Having said that, based on the information we have today, we keep our both targets intact for 2023. The other project 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 about 2022 guidance. We expect total revenues between $710 million and $735 million with Electricity segments revenue between $630 million and $640 million reflecting the $15 million impact of Heber 1 shutdown I mentioned before. We expect product savings 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 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 proceeds for Puna and Heber 1.
I will end our prepared remarks on Slide 24. This was a solid quarter with strong progress against 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 prices. 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 asset, 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.
Thank you. We will now start our Q&A session. [Operator Instructions] And our first question comes from Noah Kaye from Oppenheimer & Co. Please go ahead. Your line is open.
Thanks for taking the questions. 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 gating 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 will not see any material impact due to supply chain issues on our geothermal development.
Okay. That’s positive. A 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 capacities? Is that in plan?
We had quite good discussions with insurance, adjuster and insurance companies. And 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 remaining 20 megawatts to come online in 2022. And that’s the reason that will reduce the revenue guidance due to this fair.
Okay. That’s helpful. 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 should be watching for in the meantime?
I would say, the setting the toad an endangered species doesn’t impact the construction. So we believe that there’s no legal basis to stop construction of the plant. We have developed with the BLM, a robust mitigation plan due to these issues with over six years. Okay. So that this project could have come online already six years ago, had we 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 lifting 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, good resolution that will allow us to operate this 12 megawatt facility since the U.S. 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 a global target administration and everybody else targets in order to get more renewable energy, we believe that there should be a solution. We will have the right mitigation plan and operate the power plant over time.
Perfect. Thanks for taking the questions.
Perfect. Thank you, Noah, for your questions. [Operator Instructions] And our next question comes from Julien Dumoulin-Smith from Bank of America. Please go ahead.
Hey, good morning team. Thanks for the opportunity to connect. 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 this specificity, on the latest delays, 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 2022, 2023, just ultimately across the delays in terms of sort of a walk from what you guys had talked about before, if there's a good number to run with there. But ultimately, getting confidence on the timeline is the key here that I'm curious about.
Hi, 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 [indiscernible] that are supposed to come online. 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 that defined time of delivery and we expect them to come online.
So all-in-all the project 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 will move in a month or two, 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 a record prices, if natural gas hit yesterday $7.70 per MMBtu. 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, 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 unchanged, 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.
Got it. Excellent. Thank you, guys. And then just related here on California, there's some headlines around extending nuclear asset life a little bit. I mean, that couldn't pack total procurement. I mean, what are you guys thinking on and seeing any updates on RA procurement. I mean, obviously that kind of extends an early next year to substantive extent, but are you seeing any updates on the overall scale of what the procurement is? Any updates on your position there in on the – I know multiple potential expansions.
We're in definitely excellent market right now, Julien, anything that we will bring in the next five year, will 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.
Got it. All right. Excellent. I'll leave it there. Thank you, guys.
Thank you so much, Julien, for your question. At this time, there are no further questions and I’d 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're focusing on the growth of our company and the capital investment and we look forward to bring from you and seeing you. Thank you.
Thank you everybody for joining today's conference call. You may now disconnect your lines.