Earnings Call Transcript - ORA Q1 2021

Operator, Operator

Good day and welcome to the Ormat Technologies Q1 2021 Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Rob Fink. Please go ahead, sir.

Rob Fink, Host

Thank you, operator. Hosting the call today are Doron Blachar, Chief Executive Officer; Assaf Ginzburg, Chief Financial Officer; and Smadar Lavi, Vice President of Corporate Finance and Investor Relations. 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. 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 the Risk Factors section as described in Ormat Technologies annual report on Form 10-K and their 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 are set forth in the press release that was issued last night as well as in the slides posted on the company's 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 the slide presentation accompanying this call may be accessed on the company's website at ormat.com under the presentation link that is 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 yours.

Doron Blachar, CEO

Thank you, Rob. And good morning, everyone. Thank you for joining us today. As we indicated in our fourth quarter call a few weeks ago, we view 2021 as a build-up year in which we lay additional groundwork to accelerate the growth of our electricity and our rapidly growing energy storage segments. We made significant progress ramping the generation of the Puna plants in Hawaii. We started the operation of the Vallecito Energy Storage facility in California. And we recently completed the construction of the McGinness expansion in Nevada, which is now in the late stage of startup. At the same time, we are making progress in our efforts to rebuild our backlog, which is still facing the buildup related to the pandemic headwinds. These dynamics explain the low revenue and profitability reported in the fourth quarter compared to last year, with a $9.9 million reduction in the product segment gross profit of the main segment. However, the strength and growth of the electricity and storage segments, which are on track to meet our growth plans, partially compensated for that significant reduction. With ample liquidity combined with the growing pipeline of storage and electricity opportunities and tailwind from government support in renewable energy, we are confident that we can achieve our stated goals of increasing our generating portfolio by 50% to approximately 1.5 gigawatts by 2023, with a significant contribution coming from our energy storage business. 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. Total revenue for the first quarter was $166 million, down 13.4% from the prior year. The driver for the decrease was the product segment, which was impacted by low product backlog as a result of COVID-19. First quarter 2021 consolidated gross profit was $73.6 million, resulting in a gross margin of 44.3%, 170 basis points higher compared to the first quarter of 2020, mainly driven by the storage segment. We delivered net income attributed to the company stockholders of $15.3 million, or $0.27 in the quarter, compared to $26 million, or $0.51 per share during the same time last year. On an adjusted basis, taking into consideration the $8.8 million of after-tax one-time net expense related to the February power crisis in Texas, net income attributed to the company's stockholders was $24.1 million or $0.42 per diluted share, compared to $0.51 per diluted share in the same period last year. Breaking the revenues down, electricity segment revenues increased 1.5% to $145 million supported by contributions from new added capacity at our Steamboat Complex and Puna's resumed operation. This was offset by lower generation in the Olkaria complex in Kenya due to continued curtailment and lower performance of the resource that Doron will discuss shortly. In the product segment, revenue declined 82% to $8.6 million, representing 5.2% of the total revenues in the first quarter. The decline year-over-year is expected to continue throughout 2021, as the continued global pandemic limits the ability to sign new large contracts. Energy storage segment revenue increased nearly 600% year-over-year to $12.7 million in the first quarter, representing 7.6% of our total revenue for the quarter. Excluding the one-time positive impact of $5.4 million revenue related to the revenue incurred in the February power crisis in Texas, the increase year-over-year was approximately 300%. This growth was mainly driven by revenues from the acquired Pomona Energy asset and the contribution of the Rabbit Hill Texas facility that commenced operation in April 2020. Moving to Slide 6, the gross margin for the electricity segment for the quarter decreased year-over-year to 45%. This was the result of the absence of business interruption insurance processes at Puna and the fact that we are still ramping up the output at Puna. Also, we saw a reduction in revenue in Olkaria power plant in Kenya. In the Product segment, gross margin was 6.6% in the quarter, compared to 22% in the same period last year. The product segment gross margin in 2021 was impacted by the significant reduction in revenue. The Energy Storage segment reported a positive gross margin of 62.4% for the first quarter and a 34.7% adjusted gross margin excluding the one-time impact of the February power crisis in Texas. This was compared to a negative gross margin in the first quarter last year. The improvement was primarily driven by the acquisition of the Pomona Storage in California. Adjusted EBITDA decreased 6.4% to $99.2 million in the first quarter, with the Electricity segment generating 96% of Ormat's total adjusted EBITDA in the first quarter. The Product segment generated 1.3% of Ormat's total adjusted EBITDA for the quarter. The Storage segment reported adjusted EBITDA of $3 million, which represented 3% of the total adjusted EBITDA of the company. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide. Turning to Slide 7, you can see that Q1 2021 results were negatively impacted by the February power crisis in Texas. As we discussed in the last earnings call, in February 2021, extreme weather conditions in Texas caused an abnormal reduction in electricity supply, along with record demand for electricity. This extreme weather condition resulted in a shortage of electricity supply, which caused electricity and RRS prices to reach record levels of thousands of dollars per megawatt hour. Starting February 16 and until February 19, our Rabbit Hill facility could not charge from the grid due to the energy emergency alert, which resulted in limited ability of the Rabbit Hill storage facility to provide any RRS services. In order to reduce our merchant risk and increase our revenue for the sector in 2021, the company started and entered into a hedge transaction for 80% of the revenue capacity, which is currently not in effect. Due to the inability to operate the facility during this time, we recorded in Q1 2021, a net expense of $9.1 million related to the hedge transaction. In addition, we recorded as part of our G&A cost an expense of $3 million related to imbalance charges from the grid operator in respect to our demand response operation that we estimate will probably be unable to collect such receivable. We're currently in discussions with the grid operator with respect to some of the imbalance charges and revenue allocated to our demand response customer response, that may be impacting us positively in the future. Turning now to Slide 8. Our net debt as of March 31, 2021, was $936 million. Cash and restricted cash as of March 31, 2021, was $465 million, compared to $537 million as of December 31, 2020. In addition, we had $28 million of marketable securities. Slide 8 breaks down the use of cash in the three months and illustrates our ability to reinvest in business service mix and return cash to our shareholders in the form of cash dividends, all from cash generated from operations. Our long-term and short-term debt as of March 31, 2021, was $1.4 billion, net of deferred financing cost, and its payment schedule is presented on Slide 28. The average cost of debt of the company is currently 4.9%. On May 5, the company's Board of Directors declared, approved, and authorized the payment of a quarterly dividend of $0.12 per share pursuant to the company's dividend policy. The dividend will be paid on June 1, 2021, to shareholders of record at the close of business on May 18, 2021. In addition, we expect to pay a dividend of $0.12 per share in the next two quarters. That concludes my financial overview. I would like now to turn the call over to Doron to discuss some of the recent developments and our growth plan for the next three years. Doron?

Doron Blachar, CEO

Thank you, Assaf. Turning to Slide 11 for a look at our operating portfolio. Power generation in our power plants increased by approximately 2%, compared to last year. In the first quarter, we see the contribution of Steamboat Hill which started operations in mid-2020 and of Puna that is operating still in partial capacity. The new capacity added was offset by lower generation and continued curtailment at our Olkaria power plant. We continue to execute on our goals, bringing McGinness field online as planned, and it is now in the final stages of startup. The McGinness Hills enhancement will provide electricity for approximately 6,000 homes while offsetting 63,000 tonnes of CO2 emissions, providing the highest level of efficiency and safety in the geothermal industry. As noted on Slide 12, Puna resumed operations in November 2020. We have ramped Puna generation to approximately 20 megawatts. On the field side, we have connected one new injection well during April. Once we complete the connection of another well during the second quarter of 2021, we expect, along with repairs to the bottoming turbine unit, to gradually increase generating capacity to near its full levels by mid-2021, assuming connection of the well to the power plant is successful. Subsequent to the end of the quarter, we notified that the new PPA with HELCO is suspended, and we may be required to complete an environmental study. In addition, the PUC ordered the parties to review the PPA rates, which may require a new environmental study lasting one to two years. HELCO filed a motion to reconsider this decision, and we are still considering the impact of the PUC order on our gross debt in Hawaii. I would like to remind you that our current PPA is at significantly higher prices and is in place until the end of 2027. Turning to Slide 13, our revenue in Olkaria is down year-over-year as a result of a combination of the curtailment that continued into the first quarter and the reduction in the performance of Olkaria resource that reduced generating capacity by approximately 25 megawatts. We are operating to restore the company's generating capacity through our drilling campaign in Kenya, and we are optimistic we will see an increase in production in the second half of this year. In Kenya, we are also encouraged by the collection from KPLC that continues to pay its monthly invoices, and as a result, has not increased overdue amounts. Turning to Slide 14 for an update on our backlog. Our product segment has been the part of our business most impacted by the COVID-19 pandemic, with our customers' projects around the world being delayed. However, we believe this is a short-term phenomenon, and we see many opportunities that can mature into signed contracts before the end of this year. As of May 5, 2021, our product segment backlog was $37 million. We anticipate continued weakness in our product revenues during 2021, and as a result, our 2021 guidance for this segment is significantly lower than in recent years. As I discussed on our last earnings call, our business model is resilient, and a key part of it relates to our vertically integrated structure, which enables us to better allocate our manufacturing capacity and resources while focusing on internal initiatives to support our electricity segment growth. Inter-segment revenues increased this quarter by approximately 200% in the first quarter of 2021 compared to 2020. We firmly believe that as the global pandemic abates, we will see increasing demand for our products around the world. Partially offsetting the weakness of the product segment has been a consistent improvement in our energy storage business. Energy storage discussed on Slide 15 continues to evolve, grow, and become more profitable, as Assaf presented in his financial remarks. This quarter, we commissioned the Vallecito 10 megawatt, 40-megawatt hour storage facility in California, which provides local resource adequacy to Southern California Edison under a 20-year energy storage agreement. In addition, the facility provides ancillary services and energy optimization through participation in merchant markets run by the California independent system operator, CAISO. Also, this quarter we released for construction two storage projects in New Jersey, one a 20-megawatt facility and the other a 7-megawatt facility that will both provide services to PJM. Moving to Slide 16, we continue to see further support in renewable energy coming from the new administration in the U.S. Following legislation enacted in December 2020 that extended the PTC and ITC for renewable projects, the first quarter of 2020 has seen renewed efforts to further extend tax credits for renewable projects, including geothermal and energy storage technologies. House Democrats introduced the Green Act in February 2021, a comprehensive clean energy tax proposal, and shortly after, in March 2021, President Biden unveiled the American Jobs Plan, which includes among the proposal a 10-year ITC and PTC extension that will be fully refundable. In April 2021, Senate Democrats introduced the energy tax proposal, the Clean Energy for American Act. This bill seeks to consolidate the 40-plus existing clean energy tax incentives into one tech-neutral incentive and proposes that all zero-emission power projects placed in service after 2022 would qualify for a 10-year of $25 per megawatt hour PTC for clean energy projects, which will be placed in service after 2022 for a 30% investment tax credit that could be paid in cash. Additionally, very important to our growth plan, the Senate did authorize a separate 30% investment tax credit for standalone storage facilities placed in service after 2020. Both the House and Senate proposed bills and the White House proposed plan would benefit renewable energy development across the nation. These proposals are currently under consideration for an infrastructure and climate package that we expect will move through Congress this summer and fall. We believe that this enhanced flexibility in the duration of the availability of the tax credits and the options in claiming them will encourage renewable developers to start construction on more projects over the next decade. Moving to Slide 18, as I mentioned at the beginning of this call, 2021 will be a significant build-up year, comprising mainly of geothermal projects. We have a robust growth plan to increase our total portfolio by almost 50% by 2023, with a significant contribution from the energy storage business, as detailed in the following slides. This increase is subject to obtaining all permitting and regulatory approvals required as well as completing the development and construction of these power plants as planned. On Slide 19, you can see that our medium-term goal in the electricity segment is to add between 250 megawatts and 270 megawatts by the end of 2023. In our rapidly growing energy storage portfolio, we are planning to enhance our growth and increase our portfolio by between 200 to 300 megawatts by the end of 2022. This represents an approximately 29% increase in our geothermal and solar capacity and a 400% increase in our energy storage assets by the end of 2022. Achieving this growth target is expected to help us reach an annual run rate of $500 million in adjusted EBITDA towards the end of 2022 that we expect to continue to grow as we move forward with our plans in 2023 and onwards. The next slide displays 14 projects underway that comprise the majority of our 2023 growth plan. We have already secured long-term PPAs for the majority of these projects and affirmed the resource viability. We will provide an update on Puna expansion's new timeline as we evaluate our alternatives. Moving to Slide 21 and 22, the second layer of our growth plans comes from the Energy Storage segment. Slide 21 demonstrates the energy storage facilities that have been announced or started construction. The other projects included in our growth plan are in different stages of development, and their release will require site control and execution of an interconnection agreement, subject obviously to economic justification. As you can see on Slide 22, our energy storage pipeline increased from 1.2 gigawatts to 2 gigawatts as we were able to identify and make progress on new prospects that are expected to mature beyond 2023. Currently, the pipeline includes 49 potential projects. As I mentioned earlier, we believe that we can develop from this potential pipeline between 200 and 300 megawatts by 2023, mainly in Texas, New Jersey, and California. This target excludes any add-ons from M&A activity that we are proactively seeking. Moving to Slide 23. The significant growth in both our electricity and storage segments would require robust capital investments over the next couple of years. To fund this growth, we have over $900 million of cash and available lines of credit. Our total expected capital spend for the remainder of 2021 includes approximately $360 million for capital expenditures for the construction of new geothermal solar and storage projects, enhancement to our existing geothermal power plants that management has released for construction, maintenance of capital expenditures, including our work with the Puna power plant and enhancements to our production facilities as detailed on Slide 29 in the appendix. Overall, Ormat is well positioned with excellent liquidity and ample access to additional capital to fund future initiatives. Please turn to Slide 24 for a discussion of our 2021 guidance. We expect total revenues between $645 million and $680 million, with electricity revenues between $570 million and $580 million. The electricity segment includes $14 million from the Puna power plant in Hawaii, assuming we will meet our plans to bring it close to full operation in mid-2021. We expect the product segment's revenue between $50 million and $70 million. Guidance for the energy storage revenue increased to reflect the additional revenues recorded in Q1 related to Rabbit Hill and is now expected to be between $25 million and $30 million. We expect adjusted EBITDA to be between $400 million and $410 million. We expect annual adjusted EBITDA attributable to minority interest to be approximately $32 million. Before I move the call to the Q&A, I'm sure that you all have questions regarding the short seller report. I'm reminding you that on March 2, 2021, our Board of Directors established a special committee of independent directors to investigate among other things, certain claims made in the report published by the short seller regarding the company's compliance with anti-corruption law. The special committee is working with outside legal counsel to investigate the claims made. All members of the special committee are independent in accordance with our corporate governance guidelines, the New York Stock listing standards, and SEC rules applicable to Board of Directors in general. We are also providing information as requested by the SEC and the DOJ related to the claims, and we are unable to further discuss or answer any questions regarding this issue. As I said in my opening, 2021 is going to be a significant build-up year, accelerating our growth in the storage and electricity segment. With ample liquidity, combined with the growing pipeline of storage and electricity opportunities and tailwinds from government support in renewable energy, I am confident that we will be able to achieve our growth targets. This concludes our prepared remarks. And now I would like to open the call for questions. Operator, please?

Operator, Operator

Today's first question comes from Noah Kaye with Oppenheimer.

Noah Kaye, Analyst

Good morning, and thanks for taking the questions. If we can start with the electricity segment. You've left guidance unchanged for the year, but we presume there are a few moving parts to that. You mentioned the lower output at Olkaria, and some timing considerations in other parts of the portfolio. Can you maybe just help us bridge a little bit what seems to be maybe going a little bit ahead of plan to offset any potential lower production from Kenya?

Doron Blachar, CEO

Hi, Noah. I'll say, one, the McGinness Hill enhancement came a bit earlier than what we originally anticipated. And in Kenya, we believe that we will be able to bring it back to its capacity during the year and hopefully be able to get back some of the lower revenues that we had. Puna, as we said, is similar to what we've expected. So all in all, balancing between McGinness and Olkaria are the two main items of it.

Noah Kaye, Analyst

That's very helpful. And maybe not to get too technical, but can you help us understand what is causing the lower resource performance? And how do you mitigate that? Some of the potential ways that you can increase the output there, given what I guess is a cooling impact at the Olkaria complex?

Doron Blachar, CEO

Yes. So as you know, over the course of the life of a power plant, we – every few years, drill makeup wells. And we have planned that drilling campaign in Olkaria. The wells didn't come out as strong as we expected them, and our analysis indicates some different temperatures within the resource and by changing the well and the way they would drill and accessing a different reservoir, we think that we'll be able to bring it back to its 150 megawatt capacity.

Noah Kaye, Analyst

That's very helpful. A question on the storage side. I think, as you mentioned, some hedges around Rabbit Hill. Just in general, as you develop your storage portfolio, what are you seeing as sort of the availability of hedges or other instruments to help get more of a fixed revenue on some of these projects? What kind of visibility do you have on revenues for, say, the first three to five years of these projects coming online?

Assaf Ginzburg, CFO

So let me start by saying that with respect to Rabbit Hill, the goal was to fix the revenue of the storage facility. The issue we had is that we lost money on the hedge, but we could not generate the offsetting revenue because the storage facility would not be able to charge itself. Now, when we look at going forward, the markets of RRS and electricity, I would say, in general, are not as advanced as some other commodities that one may be familiar with. But I do believe we will see some progress with that. With that being said, we are looking in some cases at a balanced portfolio that will enable us to, for example, have a tolling agreement. Or capacity agreements to basically fix our revenue with our customers instead of fixing it through a financial hedge. So that's something that we would like to build. When we look at the next few years, the goal is to do a combination of fixed transactions with customers, which can be a capacity payment or a tolling agreement. And then on the other hand, we will have some merchant activity. I don't have the percentage, but again, for large projects at this point, we are looking to reduce exposure to guarantee a minimum return. I will say that the next three years will probably be a big difference between where we are today. I do think there will be more hedging opportunities. I've already seen the ICE market being developed, but it will take time.

Noah Kaye, Analyst

Okay. Thank you very much. I will turn it over.

Doron Blachar, CEO

Thank you, Noah.

Operator, Operator

The next question comes from Jeff Osborne with Cowen and Company.

Jeff Osborne, Analyst

Hey, good afternoon. I had a couple of questions on my end. Back on Kenya, not the facility itself, but I was wondering, the line unfortunately broke up when you were discussing the payments. Can you just talk about the relationship you have with the customer and the status of the accounts receivable would be helpful?

Assaf Ginzburg, CFO

So our relationship with the customer hasn't changed throughout Q1, in line with what we have seen in the last few months. KPLC has paid in full the monthly charges. With that being said, there is still roughly $45 million of prior invoices that haven't been paid yet. We are working with the customers. But we do understand that the situation in Kenya recovery is not easy. They are under quarantine, I believe, until May 15. With that being said, they are paying 100% of the monthly invoice on a monthly basis, which is very encouraging.

Jeff Osborne, Analyst

Got it. And then there seems to be sort of weekly or biweekly news flow there around just the broader power company being pressured by everybody from the top of the government on down about renegotiating power prices to try to improve the profitability. Obviously, COVID is exacerbating that, but are there any ongoing negotiations about newer prices or no?

Assaf Ginzburg, CFO

Ormat has a long-term PPA, and we have not been approached to discuss it. We are seeing what you guys are seeing in the newspapers, and we are aware of it, but nobody approached us. I don't think that geothermal is the one that is the most expensive. As you also know, it is a baseline electricity, and we have the support of the government operating there. I think the best outcome for us is that this will continue. At this point, we don't have a reason to think that it will not continue, according to management.

Jeff Osborne, Analyst

Perfect. I just had one more quick one on Kenya, if you don't mind. Can you quantify the degree of curtailment of the 150 megawatts? Is it roughly 10%, 20% or more meaningful? I just wasn't sure how to put it in perspective.

Doron Blachar, CEO

The curtailment is different between the days and the weekends. Some days you can get to 20% curtailment, others, you get to 10%. It's also usually overnight for a few hours. It's not for the entire day, so it's very hard to average it.

Jeff Osborne, Analyst

Got it. And then just two last ones…

Assaf Ginzburg, CFO

I just want to mention, as you remember, the curtailment doesn't impact the revenue as much, because most of the dollars that we are getting are capacity payments. So I would say, the curtailment last year, probably for the whole year, was $3 million or $4 million. It's not a big amount versus the company's revenue. The key for us is to fix the resource so we can go back to the 150 capacity that we can operate in.

Jeff Osborne, Analyst

Got it. Makes sense. And two other quick ones. So, Puna, with the suspension of the PPA, how does that mechanically work? Are you just paid the merchant price and the facility's still operating? What are the mechanics of that facility?

Doron Blachar, CEO

The mechanics are that we had a PPA until the end of 2027. But it's not a merchant; it's actually a relatively high PPA that was signed many years back. Based on the PUC request, we negotiated a new PPA that could come into effect only after the PUC approved it. In fact, the delays of the PPA are, in the short term, increasing our revenue because the pricing in the existing PPA is higher. At this point we still believe the PPA will be approved. HELCO is the one that approached the PUC to reconsider, and they are reconsidering their decision. So we are waiting. Again, this relates only to the new PPA that comes into effect only after it is approved. Currently, we do have a PPA until the end of 2027.

Jeff Osborne, Analyst

Got it. Okay, thank you for the clarification. The last one I had is just, if you add up what you did in Q1 for the product segment, coupled with, I think it was $37 million in the product backlog, you don't get to the low end of the range. So, you must be assuming, for the year, that there's additional bookings. Can you just talk about A, the confidence in that and then B, geographically where that would come from? Is that New Zealand or some other country?

Doron Blachar, CEO

You are correct, obviously. The numbers do not add to $50 million to $70 million, but we are, over the last few months, negotiating a couple of contracts that we expect to sign. Assuming we will be able to sign them in the next few weeks, they will impact revenue recognition in Q4 of this year. Based on these negotiations, we believe that we will be within the guidance that we provided. These contracts are in two or three different countries. New Zealand is currently not one of them.

Jeff Osborne, Analyst

Okay. Thank you. That’s all I had.

Doron Blachar, CEO

Thank you.

Operator, Operator

At this time, there are no further questioners in the queue, and this ends the question-and-answer session. I would now like to turn the conference back over to Ormat management for any closing remarks.

Doron Blachar, CEO

I'd like to thank you all for participating, and thank you for your continued support. We see 2021 as a very build-up year that will continue our growth going forward. Thank you very much.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.