Ormat Technologies, Inc.
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Good day, and welcome to the Ormat Technologies Fourth Quarter and Full Year 2020 Earnings Call. . Please note, this event is being recorded. I would now like to turn the conference over to Rob Fink of FNK IR. Please go ahead.

[Rob Fink:]

Thank you, operator. Hosting the call today are Doron Blachar, Chief Executive Officer; Assi 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 factors and uncertainties. For a discussion of such risks and uncertainties, please 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 is 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.

[Doron Blachar:]

Thank you, Rob, and good morning, everyone. Thank you for joining us today. Ormat continues to successfully navigate the challenges of the COVID pandemic, delivering year-over-year improvements in our overall profitability and making significant progress in executing our long-term plan to increase our geothermal, storage and hybrid solar geothermal capacity. For the year, we met our adjusted EBITDA guidance, due in large to improved gross margins within our electricity and storage segments. Importantly, we achieved profitability in our energy storage segment and this part of our business is growing rapidly. We also strengthened our balance sheet through a combination of long-term debt and an equity offering. We achieved this while bringing Puna back online and successfully resolving all pending Kenya tax assessment. These achievements, amidst the global environment facing unprecedented challenges from the COVID pandemic, positioning us for long-term success. This year, we laid a solid foundation to accelerate the growth of our electricity and storage segments. Our expectation is that 2021 will be a significant buildup year as we work to bring new geothermal, energy storage and solar PV projects online. These projects are expected to increase our generation portfolio by 50% to approximately 1.5 gigawatts by 2023, with a significant contribution coming from our energy storage business. This next step-up in the size of our overall portfolio represents approximately 29% increase in our geothermal and solar capacity, and up to approximately 400% increase in our energy storage assets by the end of 2023. As a result of our ambitious plan, we estimate that we will 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. I will turn the call over to Assi to review the financial results before I provide further updates on our operations and future plans. Assi?

[Assaf Ginzburg:]

Thank you, Doron. Let me start my review of our financial highlights on Slide 5. Total revenue for the full year 2020 was $705 million, down 5.5% from prior year. In the quarter, revenues were down 6.8% over last year. Both in the full year and in the quarter, the drivers for the decrease was the product segments, which was impacted by COVID-19. Full year 2020 consolidated gross profit was $276.3 million, resulting in a gross margin of 39.2%, 310 basis points higher than in 2019, same increase noted in the fourth quarter with our growing electricity and Energy Storage segment driving the improved performance. 2020 ended with a net income attributable to the company stockholders of $85.5 million. Diluted EPS for 2020 declined by 4% compared to last year, mainly impacted by a nonrecurring tax benefit recorded in 2019. Excluding this tax benefit, diluted EPS increased by 13%. For the quarter, diluted EPS increased 62.5% to $0.39 per share. Adjusted EBITDA increased 9.3% to $420.2 million in 2020. For the quarter, this was 7% increase compared to 2019.

[Doron Blachar:]

Thank you, Assi. Turning to Slide 12 for a look at our operating portfolio. Power generation in our power plants declined by 3.1% compared to last year. This decline is mainly due to the lower generation at our OREG facilities and increased curtailment in Olkaria power plant. However, revenues of our electricity segment remain unchanged with higher average rate per megawatt hour of $89.6 compared to $86.6 for last year. We adjusted the generation capacity of our existing power plants based on their performance this year, as detailed on the slide, and the current portfolio stands at 932 megawatts compared to 914 megawatts last year. This year, the main addition was 19 megawatts in Steamboat Complex following the completion of the Steamboat enhancement. As noted on Slide 13, Puna resumed operations in November 2020, 2.5 years after the eruption of the Kilauea volcano, currently at low output relative to its generating capacity before the eruption. In November, Puna reached 10-megawatt generating capacity, and now it is operating at 13 megawatts. We continue our field recovery work and drilling of new wells, and we expect Puna to increase power generation during the second quarter of 2021.

[Operator:]

We will now begin the question-and-answer session. The first question comes from Julien Dumoulin-Smith with Bank of America. Please go ahead.

[Anya Shelekhin:]

This is Anya. I'm filling in for Julien here. So first is I wanted to ask about the battery storage pipeline, so you have 33 name prospects. Could you talk a little bit about those opportunities on a risk-adjusted basis by region? How do you think of that? Specifically, how comfortable are you with taking on merchant versus contracted exposure? And then what new U.S. markets are you looking at, given likelihood of a storage ITC?

[Doron Blachar:]

So we are looking, we are focusing, as we said, on the 3 main markets, which is mainly California, Texas and PGM. We are also starting to look at other markets like New York. But at this stage, these are the 3 that we are focusing on. The 33 projects that we have has the potential of around 1 gigawatt of energy storage. And we estimate basically weighting them for the next 3 years to be between 200 to 300 megawatts. We have some detailed methodology basically on the development process, whether a site, we've got a land position there, whether we have interconnection. And based on that, we weigh the different projects. Regarding the merchant risk, we see that the portfolio will grow. There will be some kind of a balanced portfolio that will be built on merchant risk, tolling agreements that we see in the market. The RA contracts and hedging contracts that we see across the different states and portfolio. So we'll be building some kind of a balanced portfolio.

[Anya Shelekhin:]

Okay. Just following up on that.

[Doron Blachar:]

We need to take into account that when you look at the end of the day...

[Anya Shelekhin:]

Sorry, go ahead.

[Doron Blachar:]

All right. I was just, wanted to say just one more thing that when you look at Ormat, yes, when you look at Ormat, when you look at each of the separate segments, this is the banner that we see. But when you look in overall in Ormat, we need to remember that the entire geothermal portfolio today is contracted. So on an overall basis, the merchant prices, the merchant percentage is not very high.

[Anya Shelekhin:]

Okay. Okay. Makes sense. And then is there any sort of target you would think about for revenue or EBITDA coming from storage by maybe run rate 2022? Just sort of maximum exposure? Or what are your expectations for storage as a percent of the overall business?

[Doron Blachar:]

We didn't give any specific target for this run rate for 2022 between the different segments, but we do see the storage as a growing segment and the percentage should grow.

[Anya Shelekhin:]

Okay. And just one final one here. Could you provide some more color around the decline in product backlog? What was maybe the cause of delays in signing contracts recently? I mean, I know COVID, but maybe more specifically? And then when do you expect to return to a more normalized run rate? And any estimate of what that run rate would be?

[Doron Blachar:]

We see, globally, we see the pandemic may be a bit slowing down, so we do see some weakening of projects, of potential projects. We see that as part of the tender process that we are participating in, which we now see more of them in Ethiopia, in Indonesia, in the U.S. and in other. The feed-in tariffs in Turkey, which was an important part of our product segment, came out a couple of weeks ago. And now the market is looking into it. And as I said, we hope that, that market will come up again. And also, we see the New Zealand market is also somewhat waking up a bit. So we do expect during the year, that, that could grow up. However, the impact on the P&L has a delay because once we do sign a contract, the revenue recognition is percentage of completion, and that has a little bit longer period of time since we start the contract. But what we see in the last, just to summarize, what we've seen in the last few weeks is awakening of more tenders and more projects that we are responding. And we believe that customers are adapting to the situation and are returning to the previous plans to develop geothermal.

[Operator:]

The next question comes from Noah Kaye with Oppenheimer.

[Noah Kaye:]

Maybe we can just start with maybe understanding a little bit of the walk year-over-year in EBITDA. I believe you mentioned in your prepared remarks that $29 million of business interruption insurance proceeds were received in the year. I assume you are not including any business interruption proceeds in your outlook for 2021. So can you first please confirm that? And also address how much you think could potentially be recovered?

[Assaf Ginzburg:]

No. We appreciate the question. In the $400 million to $410 million, we do have a small amount of up to $10 million that we do believe we will receive in 2021. With that being said, that's one of the reasons we do have a gap between $400 million to $410 million as part of our guidance for the EBITDA for 2021. In general, under the policy that we have in place, we can recover in total north of $30 million, 3-0. And if we do that, and if we receive it during 2021, we will increase the guidance similar to the way we've done it in 2020. So again, there is an upside in our guidance. It may take us more than a year to collect it. With that being said, you are right. If you exclude the $30 million from 2020 and add instead of $10 million, it looks like 2021 results are better than 2020 actual, even when they take into consideration the fact the product segment is down.

[Noah Kaye:]

Well, I think that translates to my next question, which is you can tell us otherwise, but if I just apply a 25% type decremental on close to $90 million lower products revenue and I also add in what you just mentioned on the year-over-year headwind from insurance, it looks like the rest of the business EBITDA is growing around 8% to 9%. And that's without the benefit of much increased contribution from the geothermal portfolio additions during the year, except for Puna, is that correct?

[Assaf Ginzburg:]

Noah, I think you always, I always say to Smadar and Doron that you are one of our smartest analysts. When you look at our portfolio, it looks like electricity and storage is growing very nicely. And we are comfortable that the major levels that you just described of 9%, 10% is something that we can sustain for long term. There is no doubt that the sharp decline in product may not show people -- it's hard for people to see it. But overall, the piece of the business that we do control is actually doing very nicely, and we are confident in our ability by -- towards the end of 2022 to get to a real EBITDA -- run rate of EBITDA of north of $500 million. So as you are saying, 2 years from now, we think Ormat will be in a completely different place. This is a transition year. And if you look in between the numbers that you did, you will see that our guidance is not bad at all.

[Noah Kaye:]

I guess one additional question. Obviously, the CapEx guide is very robust compared to past years and ties to your commentary around accelerating the growth. I think in the appendix, you unpacked that a bit. And predominantly, that spend is envisioned for geothermal development. It looks like you've disaggregated into a couple of hundred million dollars for projects that are already basically released with about $150 million in exploration and potential enhancement. So that would obviously be a much bigger number for both, but particularly for the exploration enhancement. Is that really being driven by the PTC renewal by California's potential increased procurement of geothermal? Can you help us understand what's driving your increased exploration spending here?

[Doron Blachar:]

I think, first of all, definitely, the ability to get PTC and to get start of construction in 2021 is driving some of the exploration. But also, if you look on 2019 and 2020, we didn't have a lot of geothermal coming online. So this is a process that we've pushed for a couple of years trying to accelerate the exploration and the permitting. And if you look on the numbers, we have quite a large growth plan for 2021, for 2022 and onwards. So that is kind of a backlog of exploration projects coming to fruition in the U.S. and then afterwards internationally.

[Operator:]

. The next question comes from Jeff Osborne with Cowen.

[Jeffrey Osborne:]

A couple of questions on my end. I was wondering if you could further elaborate on the $11 million charge that you mentioned. Two questions. One, I assume that's the Rabbit Hill storage project. And then also, where in the P&L and the income statement should we be modeling that for Q1?

[Doron Blachar:]

So on the Rabbit Hill in Texas, it relates to the Rabbit Hill project, the 10-megawatt project that we have in Texas that started to work last year. As part, we have a little discussion about merchant versus fixed price. We've decided end of last year basically to hedge 80% of that facility. And we did this hedge last week with the very extreme weather conditions. We weren't able -- the market was basically shut down in Texas due to the emergency alert that ERCOT issued, and we weren't able to operate in the market. However, the hedges, the hedge and the exposure there -- or the potential exposure there, is up to $11 million that we are now analyzing to see what is the actual -- what will be the actual impact from it.

[Assaf Ginzburg:]

With respect to the P&L, we are still looking at the best way to book it. But since this is a nonrecurring item, we will probably adjust it out of our adjusted EBITDA. So I think the best way is, even if you put it on a separate line item on your guidance or your forecast, that will be fine.

[Jeffrey Osborne:]

Got it. And then it was touched on earlier around the product visibility and the lack thereof because of COVID. But with the Turkish feed-in tariff being reinstated but changed, how should we think about your exposure in Turkey, given your facility there? And then as Turkey or assuming turkey rebounds, do you anticipate the margins to be similar to what they were in the past or possibly worse, just given the nature of the feed-in tariff change?

[Doron Blachar:]

The facility that we have in Turkey is a very small facility. We reduced it to the minimum required in order to keep our presence there. So today, it's not a real burden. And part of the feed, the new feed-in tariff, is an increased subsidy to products manufactured in Turkey, and our facility will be an important part of this term. We do expect the Turkish market to rebound in the next few weeks or in the next few months. Margins, it's very hard to say. We hope they'll be similar to what they've been in the past.

[Jeffrey Osborne:]

Got it. And my last question is just on the guidance itself for 2023. If I heard you right, there's no M&A either for geothermal or for the elevated storage outlook. And so that would be upside. If that's correct, can you just talk about what the pipeline is for M&A? Is that something you intend to be active in post the capital raise that you just had?

[Doron Blachar:]

Yes. So it doesn't include any major M&As. It will include, if we buy a product that hasn't been built yet, like Upton, that's part of the focus, where we buy land position or small developers. And on the geothermal, it doesn't include any -- it's a different kind of operation, it doesn't include any M&As. We are active in the field. We see quite a lot of potential deals coming to the market, both in the geothermal and in the storage, and we are looking on both areas. And we do hope that we'll be able to close, to sign basically and after that close the transaction in one or both of these segments.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Doron Blachar for any closing remarks.

[Doron Blachar:]

Okay. Thank you. So thank you all for joining us. We appreciate the support. It's been a very -- as we discussed, a very good year for our electricity segment and storage segment. And the product is the one that is a bit more challenging, but we do see today the beginning of new projects coming online into the -- in our customers. And as I finished in my earlier remarks, we'll likely have an Analyst Day later in May. And thank you, everyone.

[Operator:]

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