Ormat Technologies Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 7, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Ormat Technologies Third Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please note that this event is being recorded. I would now like to turn the conference over to Josh Carroll with Alpha IR.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Hosting the call today are Doron Blachar, Chief Executive Officer Ozzie Ginsberg, Chief Financial Officer and Smadar Lavi, Vice President of Investor Relations and ESG Planning and Reporting. Before beginning, we'd like to remind you that the information provided during this call may contain forward looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward looking as defined in the Private Securities Litigation Reform Act of 1995. These forward looking statements generally relate to the company's plans, objectives and expectations for future operations and are based on management's current estimates and projections, future results or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties.

Speaker 1

For a discussion of such risks and uncertainties, please see risk factors as described in Ormat Technologies' Annual Report on Form 10 ks and core 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. Reconciliation to the most directly comparable GAAP measures and to management's reason 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'd like to remind everyone that a slide presentation accompanying this call may be accessed on the company's website atormat.com under the presentation link that's found on the Investor Relations tab.

Speaker 1

With that said, I would now like to turn the call over to Ormat's CEO, Doran Blochar. Doran?

Speaker 2

Thank you, Josh, and good morning, everyone. Thank you for joining us today. During the Q3, Ormat continued to make significant progress towards achieving its long term growth targets, while also delivering strong financial results. Our financial performance during the quarter was highlighted by 16.3% increase in adjusted EBITDA, driven by the strength of our growing operating portfolio, solid operational performance and increased benefits from PTC generating during the quarter at higher prices. Within our electricity segment, we marked another quarter of consistent EBITDA improvements, which was driven by contributions from our recently acquired Enel assets and the improved operational performance from our Puna facility, which continues to strengthen.

Speaker 2

In our energy storage business, we made significant progress in the Q3 as we transition to a more stable and consistently profitable portfolio, setting the stage for accelerated growth. This progress is highlighted by the signing of 2 tolling agreements in Texas, the signing of an RA agreement in California, and our recent announcement that we have achieved commercial operation for our largest storage facility in our operating portfolio, the 80 Megawatts, 3 20 Megawatts Hour Bottleneck Project in California. From a global macro perspective, we continue to experience strong industry tailwinds in our 3 operating segments, driven by the momentum we see related to the increased demand for renewable energy to support the massive growth of data centers. Our business is very well positioned to continue and capitalize on these trends, which will strengthen our ability to sign additional long term contracts at elevated prices, while continuing to maintain strong product segment backlog. We expect the deal trends should improve our profitability over time and allow us to reach our long term goals of growing our operating portfolio to approximately 2.1 to 2.3 gigawatts by the end of 2026.

Speaker 2

Before I transfer the call to Assi, I would like to share with you good news we recently received. In March 2021, we established a special committee of independent directors to investigate, among other things, certain claims made in a report published by a short seller regarding the company compliance with anti corruption law. We provided information as requested by the Security and Exchange Commission and Department of Justice related to these claims. On October 22, 2024, we were notified by the staff of the SEC that the SEC has concluded its investigation and does not intend to recommend an enforcement action against the company at this time. We are proud of the company's commitment to compliance and the strength of our compliance program, and we are happy to have this behind us so we can devote our full attention to the important work OMA does every day.

Speaker 2

Now before I provide further updates on our operations and plans, I will turn the call over to Assi to review the financial results for the quarter. Assi?

Speaker 3

Thank you, Doron. Let me start my review of our financial highlights on Slide 5. Total revenue for the Q3 was $211,800,000 an increase of 1.8% on a year over year basis. Our consolidated top line expansion was driven by 4.7% growth in our electricity segment, which served as a testament to the segment's solid and predictable revenue. Our March Q3 of 2024 gross profit was $58,900,000 versus $60,000,000 captured in the Q3 of 2023, resulting in a consolidated gross margin of 27.8 percent versus 28.8 percent last year.

Speaker 3

Net income attributable to the company's stockholders was $22,100,000 or $0.36 per diluted share in the quarter compared to $35,500,000 or $0.59 per diluted share in the Q3 of the prior year. The decrease in net income during the quarter was mainly driven by a $9,400,000 tax income recorded in the Q3 of 2023 related to changes in Kenya tax laws. Adjusted net income attributable to the company's stockholders was $26,300,000 or $0.42 per diluted share compared to $28,200,000 or $0.47 per diluted share in the previous year's period. Reconciliations of adjusted net income and EPS are provided in the appendix slide in the back of the presentation. 3rd quarter adjusted EBITDA was $137,700,000 an increase of 16.3% compared to the $118,300,000 generated in the prior year period.

Speaker 3

The extremely strong year over year increase in adjusted EBITDA was driven by contribution from the Enel assets we acquired in the Q1 of 2024, the sale of tax benefits from newly built plants and improved operational performance and higher pricing at our Puna power plant. In addition, our adjusted EBITDA results during the quarter also benefit from compensation we received from a recently negotiated settlement agreement with a battery supplier. As a result, we will recognize this compensation over 24 months started April 2024, whereby a total of $25,000,000 will be recognized as income. This quarter, we recognized $6,250,000 related to the period between April September of 2024. And in the next 6 quarters, we should recognize approximately $3,100,000 each quarter.

Speaker 3

To clarify, these settlement payments will not have an impact on our storage revenues or margin. They will only be recognized as operating income. Turning to Slide 6. We break down the revenue performance at the segment level. Electricity segment revenue increased by 4.7% to $164,600,000 3rd quarter revenue growth was driven by contribution from our acquired Enel assets and the increase in revenues at our Puna complex, following our successful drilling campaign.

Speaker 3

The solid revenue growth in the electricity segment was partially offset by the expected weaker performance at Dixie Valley plant, which was weaker compared to the prior year period due to an unplanned partial outage that started during the Q2 of the year, which we announced in our Q2 earnings call. Doron will provide later an update on Dixie Valley. In the product segment, revenues were still strong, but declined by 6.2% to $37,400,000 versus the same period last year. The current product segment backlog stands at approximately $165,000,000 as of November 5, 2024, similar to the backlog level in the Q2 of this year. As it includes, among other things, a recently signed $24,700,000 contract for geothermal power plant in Portugal, in addition to starting the manufacturing of $6,100,000 new rig facility.

Speaker 3

NFG storage segment revenues declined 11.1% to $9,800,000 in the 3rd quarter. The decline was mainly driven by lower prices in the air coat market. Q3 2023 was positively impacted by spiking prices in the air coat market due to weather events. Moving to Slide 7. Gross margin for the electricity segment was 30.2% in the 3rd quarter, down from 31.8% from the previous year.

Speaker 3

The margin comparison was driven primarily by lower generation at our Dixie Valley facility due to the partial shutdown, which we previously noted during our 2nd quarter earnings call. Breaking down adjusted EBITDA at the segment level on Slide 8. The Electricity segment generated 82% of Romat's total consolidated adjusted EBITDA in the 3rd quarter. The Products segment contributed 10% and the Energy Storage segment accounted for 8% of total adjusted EBITDA. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide in the back of the presentation.

Speaker 3

Moving to Slide 9. In the Q3, we recorded $19,800,000 in income related to tax benefits compared to $14,900,000 last year. This increase is mainly attributable to a transferable PTC related to Biowi power plant, which commenced operation in the Q2 of 2024 and an increase in the value of the PTC. We continue to anticipate that we will receive up to $152,000,000 in cash proceeds related to PTC and ITCs benefits in 2024. During the Q3, we sold and collected $14,000,000 of PTCs we generated from Heber complex.

Speaker 3

And we expect in the Q4 to complete the monetization of the bottleneck ITC and complete the tax equity transactions of Heber complex. While this is our base case expectation, we note that it is possible that the Heber transaction may be pushed to early 2025. As we have noted previously, these proceeds will effectively lower the capital intensity of our multiyear growth strategy. Looking at Slide 10. Our net debt as of September 30, 2024 was approximately $2,200,000,000 equivalent to 4.1x net debt to EBITDA.

Speaker 3

Cash and cash equivalents and restricted cash and cash equivalents as of September 30, 2024 was $176,800,000 compared to $287,800,000 at the end of 2023. Slide 10 breaks down our use of cash for the 9 months illustrating our master's ability to generate cash flows to reinvest in and grow the business while servicing our debt obligation and also consistently returning capital to our shareholders. Our total debt as of September 30, 2024 was approximately $2,400,000,000 net of deferred financing costs and is presented on Slide 29 in the appendix, which outline the payment schedule. The average cost of our debt for the company stands at 4.6.3 percent, And we reiterate that the majority of our debt liabilities are at fixed interest rate. Moving to Slide 11, we have approximately $675,000,000 of total available liquidity.

Speaker 3

Our expected capital expenditure for the remaining of 2024 is approximately $143,000,000 as detailed in Slide 30 in the appendix. We plan to invest approximately $65,000,000 in the electricity segment for construction, exploration, drilling and maintenance. We also plan to invest $75,000,000 for the construction of our storage asset during the remainder of 2024. As we continue to progress with executing on our growth plans, we are consistently increasing our cash generation, which combined with the expected cash from utilizing the tax benefits will fund our CapEx. We continue to maintain excellent liquidity and have ample access to additional capital as needed.

Speaker 3

On November 6, 2024, our Board of Directors declared, approved and authorized payment of quarterly dividend of $0.12 per share paid on December 4, 2024 to shareholders on record as of November 20, 2024. That concludes my financial overview. I would like now to turn the call over to Doron to discuss some of our recent developments.

Speaker 2

Thank you, Ati. Turning to Slide 13 for a look at our electricity segment operating portfolio. In the 9 months ended September 30, 2024, we generated 5,700,000 megawatts hour, a 7.9% generation growth in our leading electricity segment. The increase was positively impacted by our strategically acquired Enel assets and the continued improvement in performance from our Puna complex. Turning to Slide 14 for an update on our operating footprint.

Speaker 2

At our Puna complex, we have observed continuous improvement in the reservoir performance, which has increased capacity and in turn driven generation growth. We also benefited from higher prices this quarter. At our Karya power plant in Kenya, we successfully reached 147 megawatts of capacity following our successful drilling campaign. And while we continue to experience curtailments from our offtaker, this trend was reduced throughout the Q3. As a result, our revenues from Olkaria increased during the Q3 by approximately 4.5% versus prior year.

Speaker 2

As Assi noted earlier, our Dixie Valley facility also experienced lower electricity generation this quarter due to an unplanned outage that occurred during the Q2 of this year. As a result, our revenues and EBITDA were negatively impacted by roughly $4,200,000 $4,100,000 during the Q3 respectively. We are currently in the final stages of completing the shutdown of the facility and expect generation to increase moving forward as a result. On a positive note, our Enel assets have continued to strengthen our Q3 earnings results with the assets generating revenue and EBITDA of $7,500,000 $4,600,000 respectively. We continue to make great progress in enhancing the 3 acquired geothermal assets, which once complete will translate into expanded returns through improved performance.

Speaker 2

Finally, our Crawford II facility in Utah was partially released for initial construction. We anticipate that the 25 to 35 Megawatt power plant will be completed by the end of 2027, larger and earlier than previously expected compared to our position model. Turning to Slide 15. Our product segment backlog stands at $165,000,000 which is similar to the Q2 of 2024. And as you can see on the slide, we added to the backlog total of approximately $33,000,000 of new contracts during the quarter.

Speaker 2

Moving to Slide 16. Despite the lower year over year revenue performance we experienced in our storage segment due to lower, more normalized ERCOT prices, we continue to make great progress in transitioning our storage business into a more predictable portfolio with consistently stronger underlying profitability. This is highlighted by the ARIA agreement we reached with the City of Riverside for our shared 80 Megawatt, 3 20 Megawatt Hour facility, as well as our first two tolling agreements in Texas for our Lower Rio and Belt Rock facilities, each at 60 Megawatts, 120 Megawatt Hour. Additionally, we continue to capture the benefits from some of our facilities that recently came online over the past few quarters, such as our East Lamington facility that became operational earlier this year. Consistent with that theme, I'm also excited to highlight that just a week ago, we announced the commercial operation for 80 Megawatts, 3 20 Megawatts Hour Bottleneck Facility, which is our largest energy storage facility and which will generate stable contracted revenues from a 15 year tolling agreement with San Diego Gas and Electric.

Speaker 2

This is an exciting development format as we expect that the bottlenecks facility will play a key role in improving our energy storage revenue and EBITDA results going forward. Moving to Slide 18. We continue to remain on track to have our portfolio capacity target reach between 2.6 gigawatt to 2.8 gigawatt by year end 2028. As a reminder, we currently expect to see an annual capacity growth rate between 15% to 17%, with the majority of that growth focused on the strong U. S.

Speaker 2

Market. The U. S. Continues to remain the main focus for our growth efforts due to the regulatory support and the increasing demand we are seeing for electricity, which we are well positioned to capture through both our electricity and storage segments. Turning now to Slides 1920, which display our geothermal and hybrid solar PV project we currently have underway.

Speaker 2

We continue to remain on track to complete the Egypt project in Indonesia by the end of 2024. Moving to Slide 21 and 22 to discuss our Energy Storage segment growth. In total, we currently have 6 different storage projects under development that we expect to achieve COD by the end of 2026, which we believe will add a total of 3 55 Megawatts or 9 20 Megawatts Hour to our storage portfolio. As we have previously noted, we are continuing to remain focused on achieving a balanced fit in our storage portfolio of contracted revenues and merchant market price. Please turn to Slide 23 for a discussion of our 2024 guidance.

Speaker 2

In the 1st 9 months of 2024, ORVAS has delivered meaningful year over year growth across our revenues and adjusted EBITDA. Heading into the close of the year, we are narrowing our revenue guidance. We expect full year revenues to range between $875,000,000 $893,000,000 Electricity segment revenues are expected to be between $710,000,000 $715,000,000 Product savings revenues are expected to be between $130,000,000 $138,000,000 and storage revenues between $35,000,000 $14,000,000 We are increasing our adjusted EBITDA guidance to reflect our strong Q3 results and now expect full year adjusted EBITDA performance to range between 540 $1,000,000 $555,000,000 And finally, we expect annual adjusted EBITDA attributed to the minority interest to be approximately $20,000,000 I will end our prepared remarks on Slide 24. To wrap up, we have continued to successfully execute against our strategic objectives over the past 3 quarters as evidenced by the increasing size of our OpEx portfolio and our ability to secure new long term agreement that will drive improved product return to higher PPA pricing and tolling agreements. Additionally, the monetization of both PTC and ITC benefits and the strong cash flow from our operations are positioning us well to support our future growth and drive improved profitability across the enterprise.

Speaker 2

This gives us confidence that we are well positioned to achieve our long term growth target and deliver meaningful value for our stakeholders through improved financial performance in 2025 beyond. Now, I would like to open the call for questions. Operator, please.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Noah Kaye with Oppenheimer. Please go ahead.

Speaker 4

Thanks. I was hoping to start with geothermal development. Maybe you can start by commenting on the results of the BLM land auction. It looks like you won a fair amount there. And it also looks like there's a proposed categorical exclusion to NEPA for geothermal permitting.

Speaker 4

That's something that you'd highlighted at Investor Day as a potential benefit. So just talk to us a little bit about the implications for development. And at the heart of this is really whether you think you can start to speed up some of the new geothermal projects to help capitalize on this really strong demand for baseload 0 emissions power?

Speaker 2

Thanks, Noah. Regarding the BLM auction, we actually acquired all the land that we nominated for the auction. Basically, the way it works is that the companies ask the BLM to nominate lands and then they are open for auction. So we're able to secure all the lands that we nominated as well as additional few sites. So we do have some additional sites, but also sites that we had land position.

Speaker 2

And after initial review by our exploration, the resource team, we've acquired some additional land to secure the full site to be able to develop a project and this definitely will come into our growth portfolio. The category that you mentioned is a big step. We've been working on it for quite a while. It will shorten the development exploration phase and it will enable us to expedite our cohort program and allow us to get permitting for the exploration phase faster. We have done over the last year about 7 core whole campaigns in the U.

Speaker 2

S. All of them actually were successful and we are moving to the next part of the exploration for drilling full size well next year. And in parallel to that, we're going to do some another core whole campaign the entire year for an additional between 4 to 6 sites. And the fact that the process the IMO process has improved and shortened, we believe we'll be able to meet our target definitely and hopefully exceed them.

Speaker 4

Very helpful. Maybe you can comment on what you think. I know it's probably early in the process of setting CapEx budgets for next year. But what does all this mean for how much you might be able to spend in terms of the CapEx for electricity next year? I would think that you'd be lapping some of the development enhancements that you made progress on this year.

Speaker 4

So presumably a bit more dry powder to go after kind of core growth?

Speaker 2

Yes, definitely. I expect next year CapEx to be higher than 2024 CapEx. And I think the biggest difference over there will be on the exploration part. Because as I said earlier, we are moving from a core whole program to a full size drilling. So if a co hole will cost depends how deep you go between $500,000 maybe to $1,000,000 $1,500,000 a full size well is in the range of $4,000,000 to $6,000,000 and we plan to do a few full size wells next year on the core, all that we've done in 20242023.

Speaker 4

Okay. Very good. I'll jump back in queue and ask more questions if we have time.

Speaker 1

Thank you.

Operator

Your next question comes from the line of Justin Clare with Roth Capital. Please go ahead.

Speaker 2

This meeting

Operator

host has enabled Zoom's AI companion technology.

Speaker 5

So I wanted to start off here. With the new administration in the U. S, it does look possible that we could get a change in the IRA legislation. So just wondering how you're thinking about mitigating any potential risk of a policy change. Have you looked at safe harboring geothermal or storage projects to ensure you can qualify for the PTC and ITC?

Speaker 5

So just wondering how you're positioned there?

Speaker 2

Justin, so I would say on the geothermal, the PTCs part, this is something that has been going on for more than a decade. The low ends and then the question whether or not they would extend it and then they extend it. So the concept of safe harbor on the geothermal part is something that we've been operating all along and we are getting prepared that if anything will change for the PTC for geothermal, we will have the safe harbor for all projects that we will develop afterwards. I would say that in the previous Trump administration, they extended the PTC for geothermal. So geothermal, I think, is not in the same category as the other, But still we are definitely looking at safe harbors.

Speaker 2

And the same we are going to apply to the energy storage, the project that we are in construction already. We have secured batteries. We need to see how we bring them into the U. S, if anybody will change anything. But there are still a few months until the change takes place.

Speaker 2

So we are looking also on safe harbor on the energy storage. But on the geothermal, this is how we've been working for the last, I think, more than a decade. And we do hope that the PTCs for geothermal as he's done in his last administration, they will continue. Got

Speaker 5

it. Okay. And then I was wondering if you could also comment on maybe just provide an update on what you're seeing in terms of the trend in PPAs for geothermal projects. Are we seeing pricing continuing to trend upward? And then you do have some capacity that where the PPAs are expiring in 2026, 2027.

Speaker 5

Any sense for when you might extend those contracts and how new PPAs might compare to what you're currently operating under?

Speaker 2

Thanks. So the trend continues and we see pricing today north of $100,000,000 We are negotiating with multiple players on contracting new power plants as well as re contracting the future ones. The PPA for HEBA that expires in 26, we have signed a PPA, re contracting it at similar prices as what I said. We are waiting for the offtaker to finish his approval process and we expect that to happen end of this year, maybe beginning of next year. And we are also in the final negotiations on the extension of the MAMOS G2, we contracting for 20 27 that I expect will be in similar pricing, as I mentioned before.

Speaker 2

So we see this interest in demand. And I would say that for almost every project we have, we have a few off takers that would like to contract it.

Speaker 5

Okay. I appreciate it. Thank you.

Speaker 2

Thank

Operator

Your next question comes from the line of Mark Strouse with JPMorgan. Please go ahead.

Speaker 6

Yes. Thanks for taking our questions. Is there any color that you can give on the pricing of the new tolling agreements in Texas? Just any color about kind of the margin accretion relative to 2024 levels as that comes online?

Speaker 7

Good morning, Mark. So we won't give specific numbers, but I will say that the numbers for the 2 hours batteries in Texas are basically half of the value that we get for today's environment for 4 hours in California. And California market is around $16,000 to $17,000 for our batteries per month. So the numbers in Texas are around half. It's slightly shorter.

Speaker 7

It's a 7 year transaction. And when we think from a margin expansion, we do believe that our gross margin over the next few years will go towards around 20% to 30% versus flat in the last few months. We should expect recovery margin already in 2025 when we expect a bottleneck that just came online few days ago to operate a full year. So that will be the first step. And then we have in the second half of twenty twenty five one of the Texas projects and then in 2026 we have the next Texas project.

Speaker 7

So eventually we will get closer to 30%, but on the way we're probably going to visit anywhere from 10% to 20%.

Speaker 6

Okay. Thanks, Assi. And then kind of relatedly, can you talk about kind of merchant pricing, where your merchant contracts are operating? What you're seeing with pricing there? Is there reason to be more optimistic kind of on the latest trends compared to what it was earlier this year?

Speaker 6

Thank you.

Speaker 7

I would say that this year, we in general, the U. S. Did not have any weather events that impact our profitability. And as you saw in Q3 last year, it was enough that we had some, I would say, not good weather in Texas with much less assets versus today in Texas, we did additional $2,000,000 in revenue. So I will say that we do expect from time to time those to happen and they can add a few $1,000,000 to our top line.

Speaker 7

So this is where we are. And then on PGM, I will say in general throughout the year, we experienced quite good margins. So we did able to put gross margin positive this quarter in storage even though there was no weather event. But I think the key and you asked that in the first question, everything that is under construction right now besides the Louisa and Montaguer, which are not the largest projects that we have, all of them already have PPAs. So when you think about trajectory for the next few years, bottleneck is 3 20 megawatts, it's fully contracted.

Speaker 7

Lower E and Bordeaux, each one is 120 megawatt hours, fully contracted. And Montague is in the East Coast, and those prices in the East Coast have been trending quite favorable, somewhere around $25 to $30 per megawatt hour throughout the year. We have Airlift coming in the end of 2025 also with a full PPA. So I will say that there is a shift in model in business model. And as a result, volatility will be much less impactful for us.

Speaker 7

I do expect, as I said earlier, from time to time to have some weather events. That's part of the model in Texas. The reason why we're able to secure good contract there is because some people believe that there will be more volatility. We decided to keep some of the volatility and to reduce some of the exposure to the volatility, but we still like the merchant environment in Texas. But as I said, as a geothermal company, we like to balance between the exposures.

Speaker 1

Thank you.

Speaker 7

Thank you, Mark.

Operator

We have no further questions in our queue at this time. I will now turn the call back over to management for closing remarks.

Speaker 2

Okay. Hi. So thank you, everyone. I'd say that as you've seen, Romain continues to grow and develop its profitable operations in the U. S.

Speaker 2

And globally. And I would like to highlight one other item that we did talk about in the script and that is the fact that if you remember that the SEC has told the company formally that it has decided to close its investigation on Ormat Act with no actions. Following to this letter that we received from the SEC, the Board of Directors has decided to this cement a special committee, independent special committee that investigated these issues. So this is a very, very positive act and it demonstrates the company's commitment to comply with all laws wherever we are operating. So thank you everyone for your support and looking to see you in the future.

Speaker 2

Thank you.

Operator

That concludes today's conference call. Thank you for your participation and you may now disconnect.

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