Ormat Technologies, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[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:]

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, future results or trends. Actual future results may differ materially from those projected as a result of certain risk 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.

[Doron Blachar:]

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 late stage of startup. On the same time, we are making progress in our efforts to rebuild our backlog, which is still facing the buildup of the pandemics related headwinds. These dynamics explained the low revenue and profitability reported in the fourth quarter compared to last year with $9.9 million reduction in the product segment gross profit of the main . However, the strength and growth of the electricity and storage segment, which are on track to meet our growth plans, partially compensated 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:]

Thank you, Doron. Let me start my review of our financial highlights on Slide 5. Total revenue for the first quarter were $166 million, down 13.4% from 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 billion resulting in a gross margin of 44.3%, 170 basis points higher during 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 last quarter, same time last year. On an adjusted basis, taking into consideration the $8.8 million of after tax one-time net expense related to 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, 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 to 2021 throughout 2021, as the continued global pandemic limits the ability to sign new large contract. 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 we incurred in 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, 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 ensuring 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 significant reduction in the revenue.

[Doron Blachar:]

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 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 for approximately 20 megawatts. On the field side, we have connected one new injection well during April. And once we will 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 will be successful. Subsequent to the end of the quarter, we will notify 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. A new environmental study campaign 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 currently at significant higher prices than it is in place until the end of 2027.

[Operator:]

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

[Noah Kaye:]

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, 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:]

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. And Puna, as we said, it 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:]

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:]

Yes. So as you know, over the course of the life of a power plant, we – every few years, drill make up wells. And we have the plan that drilling campaign in Olkaria. And the wells didn't came out as strong as we expected them. And our analysis is 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:]

That's very helpful. A question on the storage side. I think, as you mentioned some hedges around Rapid 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:]

So let met start by saying that with respect to Rabbit Hill, the goal was to fix the revenue of the storage facility. And the issue we had is that we lost the 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 will say, in general, are not as advanced of some other commodities that one may be familiar. But I do believe we will see an advance in that – there will be some progress with that. With that being said, we are looking in some cases on a balanced portfolio that will enable us to, for example, 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. And when we look at the next few years, the goal is to do a combination of fixed transaction with the customer, 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, large projects at this point, we are looking to have to reduce exposure into guarantee a minimum return. I will say that the next three years will be probably 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:]

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

[Doron Blachar:]

Thank you, Noah.

[Operator:]

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

[Jeff Osborne:]

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:]

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 investors 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 on a monthly base, 100% of the monthly invoice, which is very encouraging.

[Jeff Osborne:]

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:]

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. And at this point, we don't have a reason to think that it will not continue, according to management.

[Jeff Osborne:]

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:]

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:]

Got it. And then just two last ones…

[Assaf Ginzburg:]

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, $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:]

Got it. Make 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:]

The mechanics is that we had a PPA until end of 2027. But it's not a merchant, it's actually a relatively high PPA that was signed many years back. Based, actually, 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, is actually, 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're waiting. And again, this relates only to the new PPA that comes into effect only after it is approved. So currently, we do have a PPA until the end of 2027.

[Jeff Osborne:]

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:]

You are correct, obviously. The numbers do not add to 50 to 70, 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 gave. These contracts are in two or three different countries. New Zealand is currently not one of them.

[Jeff Osborne:]

Okay. Thank you. That’s all I had.

[Doron Blachar:]

Thank you.

[Operator:]

The next question comes from Mark Strouse with JPMorgan.

[Mark Strouse:]

Yes. Good evening. Thank you very much for taking our questions. A lot of focus on raw material pricing in the market right now. Can you just kind of give us an update on how you're potentially incorporating that into some of these growth projects that you're bidding on?

[Doron Blachar:]

We have seen, as you say, an increase in raw materials and also we've seen the transportation issues across the world. These obviously impact the costs, but it is impacting the entire industry. It's not impacting, specifically Ormat. So, when we are responding to projects, we are pricing them with the current cost that we know, that’s the cost that we expect to incur, but the same does to our competitors. So we're on the same ground here.

[Mark Strouse:]

Yes, that makes sense. And you kind of touched on this. With competition, are you seeing any change in the competitive dynamics? Any new startup companies or anybody else getting more aggressive in the market?

[Doron Blachar:]

Well, we see, on the product side, the same competition as in the past with Turboden and Exergy, these are the two main competitors that we see in the different places that we have always seen them responsive.

[Mark Strouse:]

Okay, thanks, Doron.

[Doron Blachar:]

Thank you.

[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.

[Doron Blachar:]

I'd like to thank you all that participated and thank you for your continued support. And we see 2021 as a very build-up year that will bring us and continue the growth going forward. Thank you very much.

[Operator:]

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