Earnings Call Transcript - ORA Q4 2021

Operator, Operator

Good morning, and welcome to the Ormat Technologies Fourth Quarter 2021 Earnings Conference Call. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Sam Cohen with Alpha IR Group. Please go ahead.

Sam Cohen, Investor Relations

Thank you, operator. Hosting the call today are Doron Blachar, Chief Executive Officer; Assaf Ginzburg, Chief Financial Officer; Smadar Lavi, Vice President, Head of Investor Relations and ESG Planning and supporting. 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 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 reasonings for presenting such information are 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 is found on the Investor Relations tab. With all that said, I'd now like to turn the call over to Doron Blachar, who will begin on Slide 3 of today's presentation. Doron, the call is yours.

Doron Blachar, CEO

Thank you, Sam. Good morning, everyone, and thank you for joining us today. The fourth quarter marked a solid finish for the year, and we are encouraged by the year-over-year quarterly growth in revenue, operating income, and adjusted EPS, supported by our growing electricity and storage portfolio. This demonstrated growth drove a number of fourth quarter performance records, including record electricity segment revenues and total adjusted EBITDA for the quarter. We accelerated the revenue growth of our electricity and storage segment by completing expansion of operating power plants, successfully integrating our recent geothermal-acquired assets, and expanding our exploration activities to include a much higher number of drilling campaigns. Notably, this was achieved while navigating the continuing impact of COVID-19, which has caused disruption to our business, mainly on the product side and on construction. We see encouraging increases in demand for geothermal energy. Both California and Nevada, which employ a massive amount of intermediate power, recognize the importance of geothermal with zero emissions, high capacity and resource. In California, this recognition was translated into a new CPUC decision to adopt the portfolio that we believe will result in the acceleration of new geothermal development, and we expect that the increase in demand will result in higher PPA prices. This encouraging development in the US market supports our efforts to grow our portfolio in the US, and we are prepared to build upon the solid foundation laid in 2021 to continue that momentum. This year, we plan to commission a total of 15 new geothermal energy storage and solar PV projects with a total emission-free capacity of 210 megawatts. We remain confident in our long-term plans to increase our combined geothermal energy storage and solar generation portfolio to more than 1.5 gigawatts by the end of 2023. We estimate that we will reach an annual run rate of $500 million in adjusted EBITDA towards the end of 2022. We expect to continue this established growth trajectory as we move forward with the commissioning of new power plants in 2023 and beyond. We will give more details on our future growth plans at our Investor Day being planned on March 3. I will turn the call over to Assaf to review the financial results before I provide further updates on our operations and future plans. Assaf?

Assaf Ginzburg, CFO

Thank you, Doron. Let me start my review of our financial highlights on Slide 5. For the first time since the beginning of the pandemic, our quarterly revenue, operating income, and adjusted EBITDA marked an improvement versus prior periods. For the fourth quarter of 2021, Ormat reported an increase of 6.5% in total revenue and 6.3% in adjusted EBITDA as well as approximately 5% improvement in adjusted EPS versus the prior period. For the full year 2021, total revenues were down 6%. Adjusted EBITDA was down 4.5% and adjusted EPS decreased 16%, mostly as a result of the reduction in the product segment contribution. Moving to Slide 6. Breaking the revenues down 8.2% increase in the full year electricity segment revenues and 12.4% increase in the quarter was supported by contributions from our newly acquired Dixie Valley and Beowawe Power plant; the expansion of the McGinness Hills and the recovery of the Puna power plant. This growth-driving expansions were partially offset by some resource challenges in the Olkaria power plant in Kenya and the temporary shutdown of the Bouillante power plant in Guadeloupe, which is now back to full operations. In the Product segment, full year revenue declined approximately 68%, representing 7% of the total revenue in 2021. Quarterly revenues declined 26%. This year-over-year revenue decline was expected as we experienced slowness in backlog recovery and delays in signing new contracts due to the continuing challenges resulting from COVID. In addition, ongoing impacts of the global pandemic resulted in rising raw material costs and additional transportation costs, partially offsetting results for the quarter and for the year. In the energy storage segment, revenue increased 92% year-over-year driven mainly by revenues from the addition of the Vallecito facilities, higher prices in the PGM markets, and a one-time $5.4 million revenue related to the February crisis in Texas. The increase was partially offset by diminishing contributions from the demand response activity inherited from the Viridity acquisition. In the fourth quarter, energy storage segment revenues grew approximately 10% year-over-year. Let's move to Slide 7. The electricity segment gross margin decreased in both full year and fourth quarter, primarily due to lower margins in the national portfolio caused by the previously mentioned challenges in Olkaria and Guadeloupe. In the product segment, gross margin was negatively impacted by lower volume and thus a loss of fixed cost leverage combined with rising costs for raw materials and marine transportation. For the full year 2021, Energy Storage segment gross margin increased to 33% and for the fourth quarter of 2021, it increased to 16.4%. This gross margin expansion in our storage segment was driven by the one-time revenues related to the power prices in Texas as well as increases in power prices in the PGM market. Turning now to Slide 8. The electricity segment generated approximately 95% of the total adjusted EBITDA in the full year 2021 and continues to be the main driver of the company's profitability. The storage segment reported a full year adjusted EBITDA of $10.4 million, including $3.5 million in the fourth quarter. Reconciliation of EBITDA and adjusted EBITDA is provided in the appendix slide. Turning to Slide 9. For the full year 2021, we successfully raised approximately $275 million in the aggregate, including $225 million in net proceeds from bank term loans and $50 million from bank green term loans. Our net debt as of December 31 was just over $1.5 billion. Cash and cash equivalents, including marketable securities as of the end of the year were $387 million. A slight breakdown of the use of cash for the trailing 12 months illustrates our ability to balance our priorities of investing back in our business, servicing our debt and continuing to return capital to shareholders in the form of cash dividends. Our long-term and short-term debt as of December 31 was $1.9 billion, net of deferred financing costs. The payment schedule is presented on Slide 33 in the appendix. The average cost of debt for the company at the end of 2021 was 4.3% versus 4.7% at the beginning of the year. The majority of our debt includes loans that bear fixed interest rates. We have limited exposure to rising interest rates and only $34 million of our loans bear variable interest. Moving now to Slide 10. The significant growth in both our electricity and storage segments will require robust capital investment over the next couple of years. To fund this growth, we have approximately $900 million of cash in the global credit facility. Our total expected CapEx for 2022 includes approximately $500 million of capital expenditure as detailed on Slide 34 in the appendix. Overall, Ormat is well-positioned from a capital perspective with excellent liquidity and ample access to additional capital to fund future growth initiatives. With regards to our international accounts receivable, we are encouraged by the latest payments from KPLC that significantly reduced the overdue amounts to $25.5 million at the end of the year. Additional payments were made between January and February of $22.9 million. On the other hand, in Honduras, we are experiencing some delays in payments, which we believe are due to the recent election in the country. Having said that, we believe the overdue investees will be paid once the political situation stabilizes. On February 23, 2022, the company's Board of Directors declared, approved, and authorized payment of a quarterly dividend of $0.12 per share pursuant to the company's dividend policy. The dividends will be paid on March 23, 2022, to stockholders on record as of the close of business day on March 9, 2022. In addition, the company expects to pay a quarterly dividend of $0.12 per share in each of the next three quarters.

Doron Blachar, CEO

Thank you, Assaf. Turning to Slide 13 for a look at our operating portfolio. For the full year, power generation in our power plants increased by 8% compared to last year. This increase is mainly due to our recent enhancements, Puna recovery, and the integration of newly acquired assets. For the year, revenues of our electricity segment increased 8.2%, with an average rate per megawatt hour of approximately $90 both in 2021 and 2020. As noted on Slide 14, Puna resumed operations in November 2020, 2.5 years after the disruption of the Kilauea volcano. In 2020, the power plant reached 10 megawatts capacity. Since that time, we have been able to stabilize it at approximately 25 megawatts. As you know, the energy rate in Puna for the first 25 megawatts is linked to the local utility avoided cost. Therefore, for both 2021 and currently, we are benefiting from the rising oil prices. In 2022, we plan to drill a new well and improve the performance of our existing ones and expect to further increase the generation by year-end. Let me discuss some of the challenges we experienced in a few of our power plants on Slide 15. I will start with the known one in Kenya. Currently, the Olkaria power plant is generating approximately 123 megawatts due to lower performance of the reservoir, which caused a reduction in gross profit of approximately $3 million in the fourth quarter of 2021 and approximately $14 million in the full year 2021 compared to the same period in 2020. We are working to increase the wealthy performance and improve the efficiency of the power plant equipment. We expect the successful results of these actions will gradually increase capacity, raising it to approximately 135 to 140 megawatts by the end of 2022. In the Bouillante power plant in Guadeloupe, we experienced limited injection due to scaling and the partial shutdown of the power plant during the second half of the year. As a result of this operational issue, our gross profit reduced by approximately $2 million in the fourth quarter of 2021 and $7 million for the full year 2021 compared to the same period in 2020. The project is now back to normal operations, and we expect results to align with the trajectory we saw prior to the disruption. In July, we closed the accretive acquisition of Terra-Gen assets. As a reminder, this acquisition added a total net generation capacity of approximately 67.5 megawatts to our portfolio, along with the greenfield development asset adjacent to Dixie Valley and an underutilized transmission line. We acquired the assets just over 6 months ago, and we are now already in the process of enhancing the Dixie Valley power plant to its maximum control capacity of 60 megawatts. In Beowawe, we have a plan to double its capacity by the end of 2023. Moving to Slide 17 for an update on our backlog. We see a 60% increase compared to the same time last year, which we believe will enable us to increase the product segment revenues in 2022 versus 2021. We are also encouraged by the large pipeline of potential projects globally that reflect the continued demand for geothermal power, and we are confident that once COVID-related obstacles are resolved globally, this segment will significantly improve. Moving to Slide 18. The energy storage segment continues to develop into an important part of our consolidated results. This quarter, we saw an increase in our storage facilities revenue, which was up 10% year-over-year as well as a noticeable improvement in operating margin for the segment. Part of the increase was related to higher energy rates received in the PGM region due to the rising natural gas prices. We have increased our pipeline and are releasing new projects for construction as planned. As we continue to develop this segment, we expect our new projects will be of greater magnitude, as evidenced by recently announcing the construction of an 80-megawatt, 320 megawatt-hour project that we plan to build in California. The storage facilities that we plan to bring online in 2022 are expected to generate in today's prices revenues of approximately $6 million in 2022 and approximately $17 million in annual revenue with EBITDA margins of approximately 50% to 60%. Moving to Slide 19. 2021 brought a wave of beneficial legislative support for the renewable energy industry in the United States and globally. The Glasgow climate change conference set an ambitious target to reduce global warming and governments, including the US, made a commitment to reach those targets. We are watching closely the legislative process and its approval in 2022. The bill includes a part from TPC ITC extension, the option to receive tax credits, and also includes storage as eligible for ITC. We are encouraged by the great acknowledgment and support we are receiving from the CPUC. In 2021, the CPUC issued rulings requiring electric load serving entities to procure 1 gigawatt of zero-emission high-capacity power by 2026. We demand that this power is independent of the generated energy rates, which is mainly geothermal. Recently, the CPUC issued its 2021 preferred system plan, which includes a planning target for an additional 1,160 megawatts of new build geothermal capacity beyond 2026 and nearly 15,000 megawatts of battery storage by 2032. This pushes the procurement needs for geothermal in California to 2,160 megawatts by 2032. We believe these recent regulatory tailwinds demonstrate the strategic importance and essential role that geothermal plays in the new zero-emission future. This also illuminates and unlocks the value of geothermal in health advantage as a weather-independent renewable source, enabling us to negotiate PPAs with higher energy rates. Moving to Slides 21 and 22. The buildup we conducted across 2021 supports our robust growth plan, which is expected to increase our total portfolio by more than 40% by the end of 2023 versus 2021. 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 with 550 to 660 megawatt-hour battery capabilities by year-end 2023. These additions will enable us to reach a total storage portfolio of between 330 and 373 megawatts, subject, of course, to our ability to overcome any permitting and supply chain challenges. Slides 23 and 24 display the 12 geothermal projects and six solar PV projects currently underway comprising the majority of our 2022 and 2023 growth plans. As you can see, we added a few names, including the Beowawe repowering I mentioned earlier. We also added a few solar PV as a hybrid addition for our geothermal project. In addition, we are on track with our Dixie Meadows project following the recent decision setting aside an injunction that temporarily halted construction. Moving to Slides 25 and 26. The second layer of our growth plan comes from the energy storage segment. Slide 25 demonstrates the energy storage facilities that have started construction. As you can see from the list, two new projects were released for construction with a total of 100 megawatts, 340 megawatt-hour in California and in New Jersey. The other projects that should help us meet our 2023 growth targets are included in the pipeline and are in different stages of development. The release will require the execution of an interconnection agreement, obviously, all subject to economic justification. As you can see on Slide 26, our energy storage pipeline stands at 2.3 gigawatts with 5.7 gigawatt-hours and currently includes 32 named potential projects, mainly in California, Texas, and New Jersey. Please turn to Slide 27 for a discussion of our full year 2022 guidance. We expect total revenue to increase by approximately 11% year-over-year to between $725 and $750 million, with electricity segment revenues between $645 and $655 million, an increase of 11% compared to 2021. We expect approximately 17% growth in the product segment with revenue between $50 and $60 million, and energy storage revenues are expected to be between $30 and $35 million, an increase of 30% over the 2021 revenue when excluding the one-time $5.4 million revenue related to the Texas freeze in 2021. We expect adjusted EBITDA to increase by 10% and to be between $430 and $450 million. We expect annual adjusted EBITDA attributable to minority interest to be approximately $32 million. Adjusted EBITDA guidance for 2022 includes $9 million in insurance proceeds. I'll end our prepared remarks on Slide 28. As we have mentioned, 2021 was a significant buildup year supporting our growth trajectory, primarily focused on expanding our geothermal and solar portfolio. 2022 will continue this buildup and mark an important step in the exploration activity to support the growth beyond 2023. With 18 geothermal and solar projects and eight storage projects actively underway, we expect a significant increase in our capacity as we move towards our target of more than 1.5 gigawatts by 2023. In fiscal 2022, we expect to deliver meaningful revenue expansion, driving profitable growth of roughly 10% of our adjusted EBITDA. In our product segment, we are encouraged by the large pipeline we have developed, and we believe we are in the process of overcoming some of the external issues that impacted our financial performance in 2021 in this segment. We believe strongly that our strategy, our assets, our advantages cost structure, the strong regulatory tailwinds, and the increased PPA prices we see in the market position Ormat for success and will result in meaningful shareholder value in 2022 and beyond. This concludes our prepared remarks. Operator?

Operator, Operator

Our first question goes to Noah Kaye with Oppenheimer. You can go ahead.

Noah Kaye, Analyst

I wanted to ask you a couple about the geothermal project development environment. I'd like to start with pricing, considering the CPUC procurement order and some of the upward inflationary pressures we're seeing on PPA prices and energy prices broadly. Can you comment on the pricing environment? I guess you've got Beowawe where you're looking to double capacity and the PPAs expiring in 2025. Just where do you think new PPA prices for geothermal may be penciling out in this environment?

Doron Blachar, CEO

Thanks for the question. I would say that if you remember, the large portfolio PPA we signed with SCPPA in 2017 had a $75 PPA. After those years from 2017, I think until 2021, we've seen a continuous decline in prices of PPAs. We were able to still develop a project because we were able to be efficient in exploration, reduce costs on CapEx, and reduce O&M costs. However, what we've seen is that prices in California are returning to those previous levels. It is yet to be seen what we will finally sign, but based on the RFPs coming out and the ones that we are responding to, it appears we are getting back to the 2017 level and above.

Noah Kaye, Analyst

And so mid-70s. That's very encouraging. The timing question is really around the term profile. I guess for the PPAs that are already locked in, what kind of cost inflation are you experiencing on projects that are moving towards COD in the next couple of years? And what impact do you expect that to have on IRRs for the projects coming online?

Doron Blachar, CEO

We have noticed cost increases and salary hikes over the last three years, which have affected the cost structure of our developing assets. Nevertheless, the rise in PPA pricing is adequately offsetting these costs. As a result, we anticipate similar or even improved returns on these new projects. It's important to consider that the better bill was not passed, but there are some grandfathering provisions for existing projects. We expect that the new projects coming online will still benefit from PTCs related to the previous business.

Noah Kaye, Analyst

Absolutely. But Doron, just to clarify, you've had PPAs signed for a number of these projects now for over a year. And we've seen the costs of commodities and labor, and you mentioned inflate since then. Should investors be expecting any kind of return compression on the existing projects that are coming online? I get that there's a very favorable environment right now for new PPA pricing. What about those where the PPA is already locked in?

Doron Blachar, CEO

We were able to prepare for this and have manufactured the necessary components. Regarding the Dixie project, which we are beginning construction on now, we feel very confident with the process we've followed with the BLM and the mitigating plans we've proposed. As a result, we believe we will obtain the permit, and we do not anticipate any significant impact.

Noah Kaye, Analyst

Okay. And just one more. The CapEx guide is $515 million with significant growth in the project backlog. There is just a ton of growth happening here. So my real question is just about managing leverage considerations in the meantime. I think you're, as you mentioned, 3.8x. If you take that level of CapEx, minus operating cash flow generation, your net debt at the midpoint guidance probably continues to inch up a little bit to maybe just under that 4x. At what point is leverage an issue for you? Where do you feel comfortable in terms of maintaining a leverage target?

Doron Blachar, CEO

I will start and Assaf will follow. I think the increased CapEx that we've initiated is a very good example of the fact that we are vertically integrated, and we can allocate resources between our different segments. When the pandemic started two years ago, we pushed most of our effort internally to develop CapEx. In the last year, we had about $250 million CapEx; next year, we have more than $500 million, and this year, we have more than $400 million. This growth will have a significant impact going forward.

Assaf Ginzburg, CFO

So Noah, as you can see, we ended the year with $1.5 billion of net debt. Yes, with $550 million of CapEx, we do expect next year that the net debt level will go up. However, with the midpoint of our guidance, our EBITDA is also expected to rise by almost 10%. Therefore, the net leverage anticipated for next year, net of this year, is not going to be significantly different from where we are. We feel very comfortable at this level of leverage. I will also remind you that we have available credit facilities and cash on hand. 95% of our EBITDA is generated from assets that have a fixed return, which makes it relatively easy to manage.

Operator, Operator

Our next question goes to Julien Dumoulin-Smith from Bank of America.

Anya Weaving, Analyst

This is actually Anya stepping in for Julien. I guess, first, I was wondering if you could give us some more detail on 2022 EBITDA impact? And just maybe a bridge because from your guidance number for the year-end run rate you were able to maintain the year-end run rate at $500 million despite the $430 million to $450 million guidance. So I guess my question is, how do you see that earnings trajectory over the course of the year? And is that 2022 pressure driven largely by transient issues such as outages and reduced output, or are there any other moving pieces there?

Doron Blachar, CEO

Aanya, great question. There is no doubt that 2022 is a different year for Ormat. We have 15 projects that will actually come online either as enhancements or new projects, many of them towards the end of the year. When you bring projects online, you enjoy the benefits of the project, but at the same time, you also have to account for some shutdowns in order to bring those assets online. The impact of those shutdowns for 2022 can amount to as much as $20 million in revenue. Thus, when we reach the end of the year, the run rate will stabilize at $500 million, and that's why we expect 2023 to be above that level. Also, please remember that we do have the addition of the Beowawe and Dixie assets that in 2021 only operated for 6 months and they will operate for the full year. You will see that we expect improvements across all segments – storage, electricity, and product – showing higher revenue next year. However, on the product side, we do not anticipate very good margins, as discussed on the call. Therefore, the majority of the increase for next year will come from the electricity segment.

Anya Weaving, Analyst

Okay, great. As a follow-up, I just wanted to ask for more detail on the Olkaria status. Can you provide some insights on the issues there and specifically how do you see the pace of the ramp in production by year-end? And how does that impact 2022 EBITDA?

Assaf Ginzburg, CFO

In Olkaria, I'll start with the second part. The ramp-up will start in Q2 and continue through the rest of the year. It's not a one-time event. This will gradually increase capacity. As for the debt collection, we discussed it regarding the PPA discussions with the task force from the President of Kenya. This process is going extremely slow. There isn't really a negotiating team on the other side. They reached out to us once. We responded, but we didn't hear back from them. So it's something that is a long-term process. We believe we can reach a win-win situation with them, similar to what we've done in Hawaii with the PPA there. There are elections in Kenya in the second half of the year, I think it's in August. So unless something occurs just before that, we believe it will be delayed until well after the elections.

Operator, Operator

There are no further questions registered at this time, so I'll turn the conference back over to the management team for any closing remarks.

Doron Blachar, CEO

Thank you. I would like to thank all of you for your support. 2021 was a very strong CapEx buildup year and 2022, as you saw with our guidance of more than $500 million of CapEx, is going to be another significant investment year. In parallel with a very meaningful increase in our revenues and EBITDA. We are very encouraged by the tailwinds from regulatory measures in California and expect to benefit from the exploration and the CapEx that we undertake to meet these regulations and secure new PPAs to all our upcoming projects. Finally, I'd like to remind you of the Analyst Day planned on March 30. It will be a combination of hybrid and in-person in New York. We would be happy to see you all in person or, if not, through Zoom. Thank you all.

Operator, Operator

That concludes today's Ormat Technologies Q4 2021 Earnings Call. Thank you for your participation. You can now disconnect your lines.