Earnings Call Transcript - ORA Q1 2024

Operator, Operator

Good morning and welcome to the Ormat Technologies First Quarter 2024 Earnings Conference Call. Please note that today's event is being recorded. I would now like to turn the conference over to Josh Carroll with Alpha IR. Please go ahead.

Joshua Carroll, IR Representative

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 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 of future events and 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 the discussion of such risk and uncertainties, please see risk factors as described in Ormat Technologies annual report on Form 10-K and current 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 financial statements prepared in accordance with GAAP. Before I turn the call over to management, I'd like to remind everyone that a slide presentation accompanying this call may be accessed on the company's website at ormat.com under the presentation link that's found on the Investor Relations tab. With all that said, I would now like to turn the call over to Doron Blachar. Doron, the call is yours.

Doron Blachar, CEO

Thank you, Josh, and good morning, everyone. Thank you for joining us today. During the first quarter, Ormat delivered strong financial results driven by improved operating performance and continued growth across all three segments. This quarter, the company saw a 21% increase in total revenues, a 25.5% rise in earnings per diluted share and a 14.4% increase in adjusted EBITDA when compared to the first quarter of last year. The first quarter results were fueled by organic growth that includes the successful execution of our strategic plan and enhanced operational efficiency at existing facilities, which together contributed more than 50% of the increase in revenues and in EBITDA. In addition, these results were positively impacted by the recent acquisition of assets from Enel Green Power, North America. Our electricity segment continued to drive growth. This quarter, record results reflect an impressive improvement in operational performance at Puna and at our Heber 1 facility, which was partially operational during the prior year quarter. Furthermore, the new capacity we added last year in North Valley and Dixie Valley and the newly acquired assets added this year helped grow our electricity segment economics relative to the comparable prior year period and also offset the impact of business interruption insurance income of $6.7 million included in last year's first quarter results. In the storage segment, we experienced a greater degree of stability in revenues from several new projects launched in 2023 that helped improve the segment's gross margin. The East Flemington project that came online in the first quarter also contributed to our results and we expect the Bottleneck project to come online towards the end of the second quarter. In our product segment, our backlog has continued to stay strong due to the growing demand for geothermal products with year-to-date revenues increasing by an impressive 147%. Since the beginning of the year, we added, including the Enel assets, 130 megawatts of new generating capacity. Combined with the potential uplift from our successful drilling campaign in Kenya and the macro drivers, we are confident in meeting both our long-term capacity expansion goals and our financial targets for 2024 and beyond. On a macro base, the global demand for renewable energy continues to grow, driven by increasing environmental concerns, supportive government policies, attractive power purchase agreements, and increased renewable demand, including from data centers. Our diverse portfolio of geothermal, solar, and energy storage solutions positions us well to capitalize on these favorable tailwinds. Now before I provide further updates on our operations and plans, I will turn the call over to Assi to review the financial results. Assi?

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 $224.2 million, up 21% year-over-year. This was driven by growth across all three segments. Ormat's first quarter 2024 gross profit was $78.8 million, up by 3.6% versus $76.1 million in the first quarter of 2023, resulting in a consolidated gross margin of 35.3%. Net income attributable to the company stockholders was $38.6 million or $0.64 per diluted share in the quarter compared to $29 million or $0.51 per diluted share in the first quarter of the prior year. Excluding one-time M&A expenses related to the Enel recent acquisition, our adjusted net income attributable to the company's stockholders was $39.6 million or $0.65 per diluted share. This represents a significant increase of 36.5% in adjusted net income attributable to the company's stockholders and 27.5% in EPS compared to the same quarter last year. The solid earnings and EPS growth were mainly the result of the new assets added to the portfolio relative to last year's first quarter and a lower tax rate as we continue to capture benefits from the IRA tax credit. Adjusted EBITDA of $141.2 million increased 14.4% in the first quarter compared to $123.5 million in the prior year period. The year-over-year increase in adjusted EBITDA was driven by growth in all three segments, with the electricity segment leading the increase largely as a result of better performance of operating assets that led to increased generation, the commercial operation of North Valley last year, the inclusion of the newly acquired Enel assets in our portfolio, and a larger contribution from tax equity transactions, offset by $6.7 million of business interruption insurance income recorded last year related to Puna. On Slide 5, we break down the revenue performance at the segment level. Electricity segment revenues increased 12.3% to $191.3 million. This increase was largely driven by contributions from the newly acquired Enel assets and from Heber 1, which was only partially operational in the first quarter of 2023, improved generation at Puna that is now operating above 30 megawatts, and the addition of North Valley power plant in April 2023. In the Products segment, revenue marked a substantial increase, growing by 147.3% to $24.8 million. The growth in our Products segment was supported by a higher backlog and the timing of revenue recognition. The common products segment backlog stands approximately $130 million as of May 8, 2024. The Energy Storage segment revenues increased by 66% to $8.1 million in the first quarter, driven largely by the impact of CODs for storage facilities that the company achieved in the second half of 2023, East Flemington that came online this year and a higher merchant rate in the PGM region. Moving to Slide 6. The gross margin for the electricity segment was 39% in the first quarter, down from 44.4% from the previous year. The reduction in margin was driven by the absence of business interruption insurance proceeds that flowed through our last year's cost of revenues. In the product segment, gross margin was 14.8% in the first quarter, up 790 basis points compared to the first quarter of 2023. Margin increased due to the increased profitability of our recently signed contracts. The Energy Storage segment reported the first quarter gross margin of 7.5% compared to negative 3.6% in the prior year. The increase in gross margin was driven by the new projects that were launched in 2023, the commercial operation achieved at East Flemington and better merchant prices, mainly in PGM. Breaking down adjusted EBITDA, the electricity segment generated 92% of Ormat's total consolidated adjusted EBITDA in the first quarter of 2024. The product segment generated 5% and the Energy Storage segment reported adjusted EBITDA of $3.7 million, almost 3% of total adjusted EBITDA. Reconciliations of EBITDA and adjusted EBITDA are provided in the appendix slides.

Doron Blachar, CEO

Thank you, Assi. Turning to Slide 11 for a look at our electricity segment operating portfolio. As previously mentioned, generation growth in our core electricity segment was positively impacted by several CODs that occurred last year after the first quarter and the COD of Steamboat Solar this year. In addition, generation grew from the contribution of the newly acquired geothermal and solar assets. Our Puna complex also helped drive generation growth during the quarter as its generating capacity continued to ramp up relative to last year, running at 30 megawatts over the last two quarters. This further accomplished by increased generation at Heber 1. In total, we added 110 megawatts since the beginning of the year to the electricity segment portfolio and grew the generation by 7.9%. Turning to Slide 12 for an update on our operating footprint. At our Olkaria power plant in Kenya, our operational teams are continuing to work to increase capacity and we are currently operating at close to 130 megawatts. Our drilling campaign in Olkaria has continued to show positive results and we continue to believe that the connection of the new wells will both support generation upside and improve future performance. In Guadeloupe, as announced before, we signed a 30-year PPA with EDF for the development of a new 10-megawatt geothermal power plant, which helps support our capacity growth target and strategically expand our presence in the attractive Caribbean region. The new geothermal plant will be added to our existing 50 megawatts Bouillante. This and the expected 10-megawatt Dominica power plant currently under development will bring our total geothermal capacity in the Caribbean region to 35 megawatts once the plants become operational in 2025. And on the strategic front, on Slide 13, we announced in January that we completed the acquisition of the portfolio of geothermal and solar assets for Enel Green Power, North America. The contribution of the new assets to first quarter revenues and EBITDA is in line with our expectations. We have identified new opportunities to enhance the acquired assets on top of the upgrades that we already initiated and we are currently evaluating the potential contribution. Turning to Slide 14. Our Product segment backlog stands at $130 million. We are encouraged by the worldwide tailwind for geothermal that should allow us to continue maintaining a strong backlog. Moving to Slide 15. The Energy Storage segment delivered a strong quarter that was supported by new projects, which contributed to our results as well as the long-term tolling agreement for our Pomona 2 facility in California, which helped create a stable and profitable revenue stream for the Energy Storage segment. Also, we saw better merchant rates in the PGM region that supported Q1 profitability. As Assi mentioned, we have also continued to benefit from ITC with both our East Flemington and Bottleneck facilities that are eligible for tax credit, which reduced our tax expense in the quarter. Moving to Slide 17 and 18. We continue to see an increase in the demand for our electricity and Energy Storage segments. The successful and steady execution of our growth strategy has given us the confidence to maintain our targets to reach between 2.1 to 2.3 gigawatts of portfolio capacity by year-end 2026. Slide 19 and 20 display the geothermal and hybrid solar PV projects that we currently have underway. We continue to remain on pace to complete 3 geothermal development projects in 2024, which includes Beowawe Repowering in the U.S., Zunil in Guatemala, and Ijen in Indonesia. Combined, these projects will help increase our energy generating capacity by 26 megawatts. In our solar PV portfolio, Steamboat Hill Solar completed COD during the first quarter and during April, we achieved COD for North Valley Solar. Slide 21 and 22 highlight the third layer of our growth plan, the Energy Storage segment. We completed the East Flemington 20 megawatt-hour facility and currently have 6 Energy Storage projects under development that will add 335 megawatts or 1,040 megawatt-hours to our storage portfolio by the end of 2025. At our Bottleneck facility in California, we are currently in the commissioning stage and we anticipate that the 80 megawatts or 320 megawatt-hour storage facility will begin operating towards the end of the second quarter of this year. Please turn to Slide 23 for a discussion of our 2024 guidance. We continue to expect total revenues to increase by 7% year-over-year at the midpoint and to be between $860 million and $910 million, with electricity segment revenues between $710 million and $730 million, an increase of 8% compared to 2023 results. We have spent between $115 million and $135 million in the Products segment. And Energy Storage revenues are expected to be between $35 million and $45 million. We expect adjusted EBITDA to increase by approximately 10% at the midpoint to range between $515 million and $545 million. We expect annual adjusted EBITDA attributable to minority interest to be approximately $18 million. I will end our prepared remarks on Slide 24. We remain on track to achieve our long-term growth targets. We believe that our compelling and differentiated portfolio, unique growth strategy, and our track record to develop compelling projects with long-term PPAs position us well to improve profitability as demand continues to increase for renewable energy and drive significant shareholder value. Supporting these are the favorable macro drivers, such as the increasing demand for renewable energy from data centers, attractive power purchase agreements, and declining battery prices. We look forward to meeting and speaking with our shareholders, analysts, and broader stakeholders at our upcoming Analyst Day in June 20. This concludes our prepared remarks. Now I would like to open the call for questions. Operator, please.

Operator, Operator

And your first question comes from the line of Noah Kaye from Oppenheimer.

Andre Stillman Adams, Analyst

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

Doron Blachar, CEO

Thank you. This is Doron. We are performing better than expected with the acquisition. The enhancements we plan to implement by the end of 2025 are on track. We've already begun work on one aspect, the engineering part, and we are finalizing detailed plans for the other two, starting engineering and manufacturing soon after. We are on track as anticipated. We have communicated with our off-taker in Cove Fort, and there is significant demand for additional megawatts. We are collaborating with them to explore increasing the interconnection and the PPA, which is favorable. We believe the existing resources can support more megawatts than we initially projected. If these factors align, we will be able to exceed our expectations. This may accelerate the enhancements by a few months, but they will be completed. These are brownfield projects, and given the strong demand, we think we may also be able to advance the greenfield project, which was initially planned for a few years down the line.

Operator, Operator

Your next question comes from the line of Justin Clare from ROTH MKM.

Justin Clare, Analyst

I wanted to start by noting that you mentioned data centers earlier, and there's a significant demand for reliable renewable power from these facilities. Could you share your thoughts on the opportunities for Ormat to meet this demand, whether through your geothermal operations or your storage solutions?

Doron Blachar, CEO

The market today is experiencing very strong demand from both utilities and data centers. We have already been approached by several data centers looking for green and base load renewable energy. We are currently in discussions with them about how we can connect to provide the green energy they need. I hope to have more updates for you in the coming months, but we are actively engaging with some of these centers. The pricing in that area is quite high. In the past, we discussed pricing from utilities in the $80 range, but now discussions for geothermal energy are in the $90s and even higher. There is significant demand, and we are exploring ways to generate more electricity from our facilities.

Justin Clare, Analyst

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

Doron Blachar, CEO

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

Justin Clare, Analyst

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

Doron Blachar, CEO

We definitely notice that the price of batteries is decreasing, which will enable us to initiate more projects with higher returns. We are seeing low double-digit returns on our project IRR for storage. There is competition among battery suppliers, most of whom are from China, as they strive to capture a larger market share. We feel more assured today about securing battery contracts, and the delivery times for batteries have significantly improved. Previously, delivery could take 18 months or even longer, but now it ranges from 12 to 18 months. The battery market has shifted considerably, and we hope to see this trend continue.

Operator, Operator

Your next question comes from the line of Ryan Levine from Citi.

Ryan Levine, Analyst

To follow up on some of the earlier comments, you mentioned opportunities to pursue developments with some of these data center customers at about $10 per megawatt up above previous pricing. What markets are you targeting for that customer base? Is this some of the Western U.S. states or other parts of the world?

Doron Blachar, CEO

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

Ryan Levine, Analyst

And in the slide deck, as highlighted the successful campaign in Kenya. Can you provide a little more color around the markers of that success or what you're seeing from that drilling campaign?

Doron Blachar, CEO

The campaign basically is split into two. On one hand, we drilled into our existing reservoir, which is relatively shallow, which was okay to support the existing generation. But we also drill towards the deep reservoir. Deep I mean, around 10,000 feet, which is the deepest that we've drilled, Ormat has drilled so far. And here, it is a very good reservoir. It has the potential to increase the generation to the area of 140 megawatts. We've seen that for a short period of time, but we need to make some adjustments to the partner in order to be able to accept this strong resource. And we expect that to happen towards the end of the year.

Ryan Levine, Analyst

And last quarter, you had highlighted some trade route redirection to away from the Suez Canal. Is that still going on? Is there a way to quantify the impact to your business from margins or outlook?

Doron Blachar, CEO

The change of route that we mentioned happened and once it happened, it doesn't change to take it into account. So the shipping time is extended by two weeks. And once you aligned all your projects, all your manufacturing and delivery times to that, then it doesn't impact anymore.

Operator, Operator

Your next question comes from Derek Podhaizer from Barclays.

Derek Podhaizer, Analyst

Maybe just to continue the conversation on Kenya. Could you provide us an update on the collections progress and whether you're collecting in USD or not?

Assaf Ginzburg, CFO

As we mentioned last year, we do expect improvement in the collection in Kenya. Over the quarter, you will see it in our cash flow. Our operational cash flow was one of the probably the strongest ever in Ormat history. I think it was close to $120 million received on the presentation. And it was supported by a very good collection in Kenya. We collected in the last four months in addition to the current billing over $25 million. So almost $60 million in four-month collection. I don't think we've seen as much in the last few years. The dollar in Kenya, we do see a shift. They had a very successful bond offering for the government. And as a result, the currency is in a much better situation. And I can tell you that we are very pleased with the situation in Kenya these days.

Derek Podhaizer, Analyst

Maybe just expand on the $150 million you're expecting in cash payments from the PTC ITC. We saw $29 million first quarter. So maybe walk us through how that will step up for the remainder of the year, just as you see it today?

Assaf Ginzburg, CFO

So just to explain, the $150 million is a cash item, not all of it will flow through the P&L. The two largest items in that are two cash equity transactions that we plan to make this year, one for the Heber power plant that is already operating and one for the Beowawe power plant that is basically, as we speak, starting to operate. So those combined will bring close to $100 million of that $150 million. In addition to that, we have two storage assets that are coming online this year. One has already came online, which is East Flemington. And the second one, which is Pomona, which is very close to start operating in the next few weeks. So between those two, we expect to get roughly $35 million to $40 million of cash. So when you combine those, this is almost all of the $150 million. The remaining is PTC transfer, mostly for the Heber power plant that we generated last year, and this year, we're generating around $4 million quarter of PTC over there. So when you think about it, some of it will flow to the P&L, all of the ITC storage would flow to the P&L. All of the PTCs transfer will flow to the P&L. And then the tax equity transactions on the geothermal which is roughly $100 million will flow to the P&L over the next 8, 9 years evenly. But the most important thing is that we're expecting $150 million in cash. When you combine it with our very strong EBITDA this year, it gets us to a point that Ormat almost is fully covering all of its needs, including all the growth CapEx, which we haven't been in that situation for years.

Derek Podhaizer, Analyst

And then maybe just lastly on the CapEx. I noticed in the deck it was revised up $550 million to $570 million for '24. It looks like it's all in storage. So maybe some color on that. What's driving the increase to your CapEx budget for the year?

Assaf Ginzburg, CFO

What we are noticing in storage is two key factors that are enabling us to pre-release projects whose names are not yet public. First, as Doron mentioned earlier in the call, battery prices have decreased by nearly 50% compared to two years ago. This decline has allowed us to move forward with more projects. Secondly, Power Purchase Agreement prices have nearly returned to levels prior to the IRA implementation. There is a strong demand for PPAs, while battery prices are dropping, which means we can pre-release additional projects. Part of this involves procuring batteries for these projects, resulting in some cost increases. However, in the coming quarters, you can expect us to introduce more projects, potentially as soon as the end of this year. We might provide more details at the Analyst Day, as additional projects are becoming available. Importantly, we do not anticipate an increase in the current project capital expenditures; rather, we are actually seeing a decrease, which is attributed to new projects.

Operator, Operator

And your next question is from the line of Jeff Osborne from TD Cowen.

Jeffrey Osborne, Analyst

Just 2 quick ones. I might have missed it, but did you provide an update or could you provide an update on the domestic storage battery supply that you're aiming to achieve? I think that was later this year, early next.

Assaf Ginzburg, CFO

At this point, it seems that the best approach is to focus on purchasing batteries manufactured in China. We are in discussions with several manufacturers to identify who will be the first to begin production in the U.S. to fulfill our needs. This could help us achieve domestic content even when sourcing batteries from China. It is still early in the process, but for instance, it appears that Tesla, which purchases battery cells from outside the U.S., may qualify or could potentially qualify for domestic content. There are two options to consider: first, buying batteries made in the U.S., which have not yet been produced and will likely be a bit more expensive; and second, exploring ways to buy Chinese-manufactured batteries and make enough modifications for them to qualify for the additional 10% incentive. I should also mention that a few weeks ago, new maps identified battery areas that will be eligible for the additional 10% under the energy community concept. This may indicate that some of our current projects, which we thought would have a 30% benefit rate, might actually achieve a 40% benefit due to their locations. There are positive developments on both fronts. I also want to clarify something I mentioned earlier regarding the ITC related to Pomona; the correct reference should be Bottleneck, which is a project that cost us a little over $100 million and qualifies for a 40% ITC.

Jeffrey Osborne, Analyst

And the last one I had is just can you remind us, is there any renewals that you have coming up in the next 2 to 3 years? Certainly, there's a lot of demand for green base load power like you offer just was unclear to me. With the existing assets, do you have any renewals that would be up for potentially signing at a much higher price?

Doron Blachar, CEO

So we have a list of the projects on the presentation that are coming online in the coming years. We have some renewals that are coming on as well as new contracts, Beowawe is one of them, which is an enhancement and change of the contract. We have Heber that is changing in '26. We have the Galena and Steamboat that also expect to change end of PPA and go to the new PPA towards the '26, '27.

Jeffrey Osborne, Analyst

But just to be clear, Doron, I thought many of those weren't those for the 150 megawatts combined that you signed a couple of years ago for LADWP, the Southern California Basin, or no?

Doron Blachar, CEO

Some of the contracts are for LADWP and some for NV Energy. The Heber 1 is not related to those contracts. Currently, we are negotiating a Power Purchase Agreement (PPA) with SCPPA that concludes at the end of 2025, and we are working on a new PPA for an extension. There is significant demand for it. Therefore, I believe we are integrating these into our existing portfolio of PPAs as well as exploring new ones. Additionally, we are looking at ways to optimize the current PPAs we sign to ensure that both partners benefit.

Operator, Operator

And that concludes the Q&A session for today. I will now turn the conference back over to Doron for closing remarks.

Doron Blachar, CEO

Okay. Thank you, everyone, for joining us. The quarter was a very good quarter. The demand that we see in the U.S. from utilities and data centers is very, very strong and increasing and obviously pushing PTA pricing up. We see the improved operations in Puna that is done in the quarter over 30 megawatts and is continuing like that and the success campaign in Olkaria. So we're very encouraged for this year and for the coming years and we look forward to see all of you in New York at our Investors and Analyst Day in June. Thank you.

Operator, Operator

This concludes today's conference call. Thank you all for joining us. Enjoy the rest of your day. You may now disconnect.