Ormat Technologies, Inc. (ORA) Q4 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the Ormat Technologies Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Sam Cohen with Alpha IR Group. Please go ahead.

Thank you, operator. Hosting the call today are Doron Blachar, Chief Executive Officer; Assaf Ginzburg, Chief Financial Officer; Smadar Lavi, Vice President, Head of Investor Relations and ESG Planning and supporting. 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 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 results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of such risks and uncertainties, please see risk factors as described in Ormat Technologies annual report on Form 10-K and 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 reasonings 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 would 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 is found on the Investor Relations tab. With all that said, I'd now like to turn the call over to Doron Blachar, who will begin on Slide 3 of today's presentation. Doron, the call is yours.

Thank you, Sam. Good morning, everyone, and thank you for joining us today. The fourth quarter marked a solid finish for the year, and we are encouraged by the year-over-year quarterly growth in revenue, operating income, and adjusted EPS, supported by our growing electricity and storage portfolio. This demonstrated growth drove a number of fourth quarter performance records, including record electricity segment revenues and the record total adjusted EBITDA for the quarter period. We accelerated the revenue growth of our electricity and storage segment by completing expansion of operating power plants, successfully integrating our recent geothermal-acquired assets and expanding our exploration activities to include a much higher number of drilling campaigns. Notably, this was achieved while navigating the continuing impact of COVID-19, which has caused disruption to our business, mainly on the product side and on construction. We see encouraging increases in the demand for geothermal energy. Both California and Nevada, which employ a massive amount of intermediate power, recognize the importance of geothermal with 0 emission, high-capacity and resource. In California, this recognition was translated into new CPUC decision to adopt the portfolio that we believe will result in the acceleration of new geothermal development, and we expect that the increase in demand will result in higher PPA prices. This encouraging development in the US market support our efforts to grow our portfolio in the US, and we are prepared to build upon the solid foundation late in 2021 to continue that momentum. This year, we plan to commission a total of 15 new geothermal energy storage and solar PV projects with a total emission-free capacity of 210 megawatts. We remain confident in our long-term plans to increase our combined geothermal energy storage and solar generation portfolio to more than 1.5 gigawatt by the end of 2023. And we estimate that we will reach an annual run rate of $500 million in adjusted EBITDA towards the end of 2022. We expect to continue this established growth trajectory as we move forward with the commissioning of new power plants in 2023 and beyond. We will give more details on our future growth plans at our Investor Day being planned on March 3. 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?

Thank you, Doron. Let me start my review of our financial highlights on Slide 5. For the first time since the beginning of the pandemic, our quarterly revenue, operating income and adjusted EBITDA, marked an improvement versus prior periods. For fourth quarter 2021, Ormat reported an increase of 6.5% in total revenue and 6.3% in adjusted EBITDA as well as approximately 5% improvement in adjusted EPS versus the prior period. For the full year 2021, total revenues were down 6%. Adjusted EBITDA was down 4.5% and adjusted EPS decreased 16%, mostly as a result of the reduction in the product segment contribution. Moving to Slide 6. Breaking the revenues down 8.2% increase in the full year electricity segment revenues and 12.4% increase in the quarter was supported contribution from our newly acquired Dixie Valley and Beowawe Power plant; the expansion of the McGinness Hills and the recovery of the Puna power plant. This growth driving expansions were partially offset by some resource challenges in the Olkaria power plant in Kenya and the temporary [indiscernible] shutdown of the Bouillante power plant in Guadalupe, which is now back to full operations. In the Product segment, full year revenue declined approximately 68%, representing 7% of the total revenue in 2021. Quarterly revenues declined 26%. This year-over-year revenue decline was expected as we experienced slowness in backlog recovery and delay in signing new contracts. Due to the continuing challenges resulting from COVID. In addition, ongoing impacts of the global pandemic results in a rising raw material costs and additional transportation costs, partially offsetting results for the quarter and for the year. In the energy storage segment, revenue increased 92% year-over-year driven mainly by revenues from the addition of the Vallecito [indiscernible] facilities, higher prices in PGA markets and onetime $5.4 million revenue related to the February crisis in Texas. The increase was partially offset by diminishing contribution of the demand response activity inherited from the Viridity acquisition. In the fourth quarter, energy storage segment revenues grew approximately 10% year-over-year. Let's move to Slide 7. The electricity segment gross margin decreased in both full year and fourth quarter. Primarily due to lower margins in the national portfolio caused by the previously mentioned challenges in [indiscernible] and Guadalupe. In the product segment, gross margin was negatively impacted by lower volume and thus a loss of fixed cost leverage combined with rising cost for raw materials and marine transportation. For the full year 2021, Energy Storage segment gross margin increased to 33% and for the fourth quarter of 2021, it increased to 16.4%. This gross margin expansion in our storage segment was driven by the onetime revenues related to the power prices in Texas as well as increase in the power prices in the PGA market. Turning now to Slide 8. The electricity segment generated approximately 95% of the total adjusted EBITDA in the full year 2021 and continue to be the main drivers of the company profitability. The storage segment reported a full year adjusted EBITDA of $10.4 million, including $3.5 million in the fourth quarter. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide. Turning to Slide 9. For the full year 2021, we successfully raised approximately $275 million in the aggregate including $225 million net proceeds from bank term loans and $50 million proceeds from bank green term loan. Our net debt as of December 31 was just over $1.5 billion. Cash and cash equivalents, including marketable securities as of the end of the year were $387 million. The slight breakdown the use of cash for the trailing 12 months and illustrate our ability to balance our priorities of investing back in our business, serving our debt and continue to return capital to shareholders in the form of cash dividends. Our long-term and short-term debt as of December 31 was $1.9 billion, net of deferred financing costs. The payment schedule is presented on Slide 33 in the appendix. The average cost of debt for the company at the end of 2021 was 4.3% versus 4.7% at the beginning of the year. The majority of our debt include loans that bear fixed interest rates. We have limited exposure to rising interest rates and only $34 million of our loans per variable interest. Moving now to Slide 10. The significant growth in both our electricity and storage segment will require a robust capital investment over the next couple of years. To fund this growth, we have approximately $900 million of cash in the global credit facility. Our total expected CapEx for 2022 includes approximately $500 million of capital expenditure as detailed on Slide 34 in the appendix. Overall, Ormat is well positioned from a capital perspective with excellent liquidity and ample access to additional capital to fund the future growth initiatives. With regards to our international accounts receivable, we are encouraged by the latest payments from KPLC that significantly reduced the overdue amounts to $25.5 million at the end of the year. And additional payments were made between January and February of $22.9 million. On the other hand, in Honduras, we are experiencing some delays in payments, which we believe are due to the recent election in the country. Having said that, we believe the overdue investees will be paid once the political situation is stabilized. On February 23, 2022, the company's Board of Directors declared, approved and authorized payment of a quarterly dividend of $0.12 per share pursuant to the company's dividend policy. The dividends will be paid on March 23, 2022, to stockholders on record as of the close of business day on March 9, 2022. In addition, the company expects to pay a quarterly dividend of $0.12 per share in each of the next 3 quarters. Doron?

Thank you, Assaf. Turning to Slide 13 for a look at our operating portfolio. For the full year, power generation in our power plants increased by 8% compared to last year. This increase is mainly due to our recent enhancements, Puna recovery and the integration of newly acquired assets. For the year, revenues of our electricity segment increased 8.2%, with an average rate per megawatt hour of approximately $90 both in 2021 and 2020. As noted on Slide 14, Puna resumed operations in November 2020, 2.5 years after the disruption of the Kilauea volcano. In 2020, the power plant reached 10 megawatt capacity. And since that time, we have been able to stabilize it at approximately 25 megawatts. As you know, the energy rate in Puna for the first 25 megawatts is linked to the local utility avoided cost. And therefore, for both 2021 and currently, we are benefiting from the rising oil prices. In 2022, we plan to drill a new one and improve the performance of our existing one and expect to further increase the generation by year-end. Let me discuss some of the challenges we experienced in a few of our power plants on Slide 15. I will start with a known one in Kenya. Currently, the Olkaria power plant is generating approximately 123 megawatts due to lower performance of the reservoir, which caused a reduction in gross profit of approximately $3 million in the fourth quarter of 2021 and approximately $14 million in the full year 2021 compared to the same period in 2020. We are working to increase the wealthy performance and improve the efficiency of the power plant equipment. We expect the successful results of these actions will gradually increase capacity, and that will raise approximately 135 to 140 megawatts by the end of 2022. In the Bouillante power plant in Guadeloupe, we experienced limited injection due to scaling and the partial shutdown of the power plant during the second half of the year. As a result of this operational issue, our gross profit reduced by approximately $2 million in the fourth quarter of 2021 and $7 million for the full year 2021 compared to the same period in 2020. The project is now back to normal operations, and we expect results to pull back in line with the trajectory we saw prior to the disruption. Turning to Slide 16. In July, we closed the accretive acquisition of Terra-Gen assets. As a reminder, this acquisition added a total net generation capacity of approximately 67.5 megawatts to our portfolio, along with the greenfield development asset, adjacent Dixie Valley and an underutilized transmission line. We acquired the assets just over 6 months ago, and we are now already in the process of enhancing the Dixie Valley power plant to its maximum control capacity of 60 megawatts. And in Beowawe, we have a plan to double its capacity by the end of 2023. Moving to Slide 17 for an update on our backlog. We see a 60% inflex compared to the same time last year, which we believe will enable us to increase the product segment revenues in 2022 versus 2021. We are also encouraged by the large pipeline of potential projects globally that reflect the continued demand for geothermal power, and we are confident that once COVID-related obstacles are resolved globally, this segment will significantly improve. Moving to Slide 18. The energy storage segment continues to develop into an important part of our consolidated results. This quarter, we saw an increase in our storage facilities revenue, which were up 10% year-over-year as well as a noticeable improvement in operating margin for the segment. Part of the increase was related to higher energy rates received in PGM region due to the rising natural gas prices. We have increased our pipeline and are releasing new projects for construction as planned. As we continue to develop this segment, we expect our new projects will be of greater magnitude and as evidenced recently released the construction of an 80-megawatt 320 megawatt hour project that we plan to build in California. The storage facilities that we plan to bring online in 2022 are expected to generate in today's prices revenues of approximately $6 million in 2022 and approximately $17 million in an annual revenue with EBITDA margins of approximately 50% to 60%. Moving to Slide 19. 2021 brought away to beneficial legislationary support of the renewable energy industry in the United States and globally. The Glasgow climate change conference set an ambitious target to reduce global warming and governments including the US made a commitment to reach those targets. We are watching closely the [indiscernible] and hopefully its approval in 2022. The bill includes a part from TPC ITC extension, the option to receive tax credits and also includes storage as eligible for ITC. We are encouraged by the great acknowledgment and support we are getting from the CPUC. In 2021, the CPUC issued rulings requiring electric load service entities to procure 1 gigawatt of 0 emission high-capacity power by 2026. We demand that the this power is independent of [indiscernible], which is mainly geothermal. Just recently, the CPUC issued its 2021 preferred system plan, which includes a planning target for an additional 1,160 megawatts of new build geothermal capacity beyond 2026 and nearly 15,000 megawatts of battery storage by 2032. This pushes the procurement needs for geothermal in California to 2,160 megawatts by 2032. We believe these recent regulatory tailwinds demonstrate the strategic importance and extension role. Geothermal plays in the new zero-emission future. This also illuminates and unlocks the value of geothermal in health advantage as a weather independent renewable source, enabling us to negotiate PPAs with higher energy rates. Moving to Slide 21 and 22. The buildup we conducted across 2021 supports our robust growth plan, which is expected to increase our total portfolio by more than 40% by the end of 2023 versus 2021. In our energy storage portfolio, we plan to enhance our growth and increase our current 83 megawatt portfolio by an additional 230 to 290 megawatts with 550 to 660 megawatt hour battery capabilities by year-end 2023. These additions will enable us to reach a total storage portfolio of between 330 and 373 megawatts subject, of course, to our ability to overcome any permitting and supply chain challenges. Slide 23 and 24 displayed the 12 geothermal projects and 6 solar PV projects currently underway comprising the majority of our 2022 and 2023 growth plans. As you can see, we added a few names, including the Beowawe repowering I mentioned earlier. We also added a few solar PV as a hybrid addition for our geothermal project. In addition, we are on track with our Dixie Meadows project following the 9 circuits recent decision setting aside an injunction that temporarily for construction. Moving to Slide 25 and 26. The second layer of our growth plan crop from the energy storage segment. Slide 25 demonstrates the energy storage facilities that have started construction. As you can see from the list, 2 new projects were released for construction with a total of 100 megawatts, 340 megawatt hour in California and in New Jersey. The other projects that should help us see our 2023 growth targets are included in the pipeline are in different stages of development. The release will require the execution of an interconnection agreement, obviously, all subject to economic justification. As you can see on Slide 26, our energy storage pipeline stands at 2.3 gigawatt with 5.7 gigawatt hour and currently includes 32 named potential projects, mainly in California, Texas and New Jersey. Please turn to Slide 27 for a discussion of our full year 2022 guidance. We expect total revenue to increase by approximately 11% year-over-year to between 725 and $750 million, with electricity segment revenues between 645 and $655 million, an increase of 11% compared to 2021. We expect approximately 17% interest in the product segment with revenue between 50 and $60 million and energy storage revenues are expected to be between 30 and $35 million, an increase of 30% of the 2021 revenue when excluding the onetime $5.4 million revenue related to the Texas freeze in 2021. We expect adjusted EBITDA to increase 10% and to be between 430 and $450 million. We expect annual adjusted EBITDA attributable to minority interest to be approximately $32 million. Adjusted EBITDA guidance for 2022 includes a $9 million insurance proceeds. I'll end our prepared remarks on Slide 28. As we have mentioned, 2021 was a significant buildup year, supporting our lower growth trajectory, primarily focused on expanding our geothermal and solar portfolio. 2022 will continue this buildup and will mark an important step in the exploration activity to support the growth beyond 2023. With 18 geothermal and solar projects and 8 storage projects actively underway, we expect a significant increase in our capacity as we move towards our target of more than 1.5 gigawatt by 2023. In fiscal 2022, we expect to deliver meaningful revenue expansion, driving profitable growth of roughly 10% of our adjusted EBITDA. In our product segment, we are encouraged by the large pipeline we have developed, and we believe we are in the process of overcoming some of the external issues that impacted our financial performance in 2021 in this segment. We believe strongly that our strategy, our assets, our advantages cost structure, the strong regulatory tailwinds and the increased PPA prices we see in the market position Ormat success and will result in meaningful shareholder value in 2022 and beyond. This concludes our prepared remarks. Operator?

[Operator Instructions]. Our first question goes to Noah Kaye with Oppenheimer. You can go ahead.

I wanted to ask you a couple around the geothermal project development environment. And I'd like to start with pricing, considering the CPUC procurement order and some of the upward inflationary pressures we're seeing on PPA prices and energy prices broadly. Can you comment on the pricing environment? I guess you've got Beowawe where you're looking to double capacity and the PPAs expiring in 2025. Just where do you think new PPA prices for geothermal may be penciling out in this environment?

Thanks for the question. So I would say that if you remember, the large portfolio PPA we signed with SCPPA in 2017 had a $75 PPA. After those years from 2017, I think till 2021, we've seen a continuous decline in prices of PPAs. We were able to still develop a project because we were able to be efficient on exploration and reduce cost on CapEx and reduce O&M costs. But what we've seen is that prices in California are getting back to that those levels. Yet to be seen what we will finally sign, but what we've seen in the RFPs coming out and the ones that we are responding if it were getting back to the 2017 level and above.

And so mid-70s. That's very encouraging. And so the timing question is really around the term profile. I guess for the PPAs that are already locked in, what kind of cost inflation are you experiencing on projects that are moving towards COD in the next couple of years? And what impact do you expect that to have on IRRs for the projects coming online?

Look, we see -- as you said, over the last 3 years, we've seen cost increases and obviously salary increases. So there is some impact on the cost structure on the development of developing assets. But we see that the increased PPA pricing are more than compensating for that. So we do see similar returns some better returns on these new projects. We need also to take into account that the bill -- better bill wasn't passed. There is some grandfathering for projects, and we do expect that the coming projects -- the new projects that will come online will still benefit from PTCs due to the previous business.

Absolutely. But Doron, just to clarify, I mean you've had PPAs signed for a number of these projects now for over a year. And we've seen the cost commodities and labor and you mentioned inflate since then. So should investors be expecting any kind of return compression on the existing projects that are coming online. I get that there's a very favorable environment right now for new PPA pricing. What about those when the PPA is already locked in.

We were able to prepare for this, and we manufacture them. So if we take the Dixie project that we're starting construction now, we were able -- since we feel very comfortable with the process that we've done with the BLM and the mitigating plans that we said, we are very confident to get the permit. So we've already manufactured significant amount of this. So the actual impact, we don't expect it to be material at all.

Okay. And just one more. The CapEx guide, $515 million, the growth in the project back. I mean there's just a ton of growth happening here. So my real question is just about managing to leverage considerations in the meantime. I think you're, as you mentioned, 3.8x. If you take that level of CapEx, minus operating cash flow generation, your net debt at the midpoint guidance probably continues to inch up a little bit to maybe just under that 4x. At what point is leverage an issuer consideration for you? Where do you feel comfortable in terms of maintaining a leverage target?

I will start and Assaf will follow. I think the increased CapEx that we've done is a very good example of the fact that we are vertically integrated and that we can allocate resources between our different segments. And when we saw 2 years ago, the pandemic starting, we pushed most of our effort internally to develop the CapEx. And if we had in the last year is about $250 million CapEx next year, we have more than $500 million. And this year, we have more than $400 million so this growth will have a significant impact going forward.

So Noah, as you can see, we ended the year with $1.5 billion of net debt. And yes, with $550 million of CapEx, we do expect next year that the net debt level will go up. But as you can see with the midpoint of our guidance, our EBITDA only also go up by almost 10%. So when you look at the net leverage expected of next year, net of this year is not going to be significantly different from where we are. And we think that at this level, we don't have any issue to operate. I will also remind you that we do keep available credit facilities and cash on hand. So we feel very comfortable with this level of leverage. And as you know, 95% of our EBITDA is generated from an asset that has a fixed return. And that's why it's really easy to manage it.

Our next question goes to Julien Dumoulin-Smith from Bank of America.

This is actually Anya stepping in for Julien. So I guess, first, I was wondering if you could give us some more detail on 2022 EBITDA impact? And just maybe a bridge because from your guidance number for the year-end run rate because you were able to maintain the year-end run rate at $500 million despite the $430 million to $450 million guidance. So I guess my question is, how do you see that earnings trajectory over the course of the year? And is that 2022 pressure driven largely by transient issues such as outages reduced output? Or are there any other moving pieces there?

Aanya, great question. There is no doubt that 2022 is a different year for Ormat. We have 15 projects, 15 that will actually come online either to enhance men or new projects, many of them towards the end of the year. When you bring projects online, you enjoy the benefits of the project, but at the same time, you also have to take some shutdowns in order to bring those assets online. And the impact of those shutdowns for next year or for 2022 can be as much as $20 million in revenue. And therefore, when we go to the end of the year, the run rate will stabilize at $500 million, and that's why we expect 2023 to be above that level. Also, please remember that we do have the additional of the Beowawe and Dixie assets that in 2021, only operated for 6 months and they're going to operate for full year. And at the same time, you will see that we expect some improvements in all of the segments, both storage, electricity and product are showing higher revenue next year. With that being said, on the product side, we do not anticipate very good margins, as we mentioned on the call. And therefore, the majority of the increase for next year will come from the electricity segment.

Okay. Great. And as a follow-up, I just wanted to ask maybe some more detail if you could provide on Olkaria status. Just some of the issues there. And then more specifically, how do you see the pace of the ramp in production by year-end? And how does that impact 2022 EBITDA?

In Olkaria, I'll start with the second part. The ramp-up will start in Q2 and continue through the rest of the year. It's not a one-time event. This will bring capacity up. So this is a gradual interest of starting sometime in Q2 into -- through the end of the year. The other part in Olkaria regarding the debt collection, we discussed it regarding the PPA discussions with the task force from the President of Kenya. This is something that is going extremely slow. There isn't really a negotiating team on the other side. They did reach out to us once. We responded. We didn't hear back from them. So it's something that is a long-term process, I believe. We know that we can get to a win-win situation with them where they would enjoy some benefit and we will enjoy benefits similar to what we've done in Hawaii with the PPA over there. There are elections in Kenya in the second half of the year, I think it's in August. So unless something happens just before that, we believe it will be delayed until well after the elections.

There are no further questions registered at this time. [Operator Instructions]. There are no further questions registered at this time, so I'll turn the conference back over to the management team for any closing remarks.

Thank you. So I would like to thank all of you for the support. 2021 was a very strong CapEx buildup here and 2022, as you saw with our guidance of more than $500 million of CapEx is going to be another significant investment here. In parallel to a very meaningful increase in our revenues and EBITDA. We are very encouraged with the tailwind from the regulatory in California and we expect to enjoy the exploration and the CapEx that we do, the exploration of the CapEx that we do to benefit from these regulations and get some new PPAs and basically be able to sign PPAs to all of our coming up projects. And finally, I'd like to remind you on the Analyst Day that we plan on March 30. It's going to be a combination of hybrid and in person in New York conference. Happy to see you in person, all of you and if not, through the zoom. Thank you all.

That concludes today's Ormat Technologies Q4 2021 Earnings Call. Thank you for your participation. You can now disconnect your lines.