Ormat Technologies, Inc. (NYSE:ORA) Q4 2023 Earnings Call Transcript
Ormat Technologies, Inc. (NYSE:ORA) Q4 2023 Earnings Call Transcript February 22, 2024
Ormat Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Ormat Technologies' Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Joshua Carroll with Alpha IR. Please go ahead.
Joshua Carroll: Thank you. Hosting the call today are Doron Blachar, Chief Executive Officer; Assi Ginzburg, Chief Financial Officer; and Smadar Lavi, Vice President of Investor Relations and ESG Planning and Reporting. Before beginning, we'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. For a discussion of such risks and uncertainties, see risk factors as described in Ormat Technologies' annual reports 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 reasons for presenting such information is set forth in the press release that was issued last night, as well as in the slides posted on the website. Because these measures are not calculated in accordance with GAAP, they should not be considered in isolation from 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's found in the Investor Relations tab. With all that said, I would now like to turn the call over to Doron Blachar. Doron, the call is all yours.
Doron Blachar: Thank you, Josh, and good morning, everyone. Thank you for joining us today. Ormat concluded 2023 on a positive note with its fourth quarter results finishing off a successful year. The company reported robust fourth quarter revenue growth with a 17.4% increase compared to the previous year's quarter and commendable 11.5% rise in adjusted EBITDA. Throughout the year, Ormat maintained its momentum with a successful development execution and enhanced operational performance from existing facilities coupled with the promising recovery in the product segment. These factors collectively contributed to a 13% increase in total annual revenues and a 10.6% increase in full year adjusted EBITDA. Throughout 2023 and the beginning of 2024, we successfully augmented our capacity by adding 239 megawatts through development projects and acquisitions.
Among these portfolio additions, 157 megawatts were integrated into the electricity segment comprised of 100 megawatts of geothermal and solar PV assets acquired in January 2024 and 82 megawatts from the addition of 5 new storage facilities to the storage segment. This expansion aligns with our multiyear capacity expansion targets, further strengthening our EBITDA and earnings generation in 2024 and beyond. Since the beginning of 2023, we have signed 4 long term PPAs for a total of 98 megawatts in our electricity segment and 55 megawatts or 180-megawatt hour in our growing energy storage segment. As we continue to successfully execute against our growth strategy, we expect the benefits of improved generation capacity and our team's demonstrated ability to sign PPAs with attractive pricing terms will continue to support solid returns and earnings performance for our shareholders as we head into 2024.
In our product segment, we are encouraged by the recovery we saw in 2023 annual product segment revenues grew $87.3 million versus 2022, and our increased backlog of $152 million is representative of the growing global demand for our geothermal products. We expect this healthy demand combined with our industry leadership position to allow us to continue competing and growing our presence in key strategic regions. Looking ahead to 2024, we expect to continue capturing the benefits of our successful growth strategy. We are on track with our capacity expansion in both the electricity and the storage segments with a potential to reach between 2.1 gigawatt to 2.3 gigawatt across our portfolio by end of 2026. We anticipate a significant increase of 7% and 10% in revenue and adjusted EBITDA respectively for 2024.
We continue to see strong support for renewable energy backed by the IRA benefits including the PTC for geothermal and ITC for storage. We expect this support will continue to create opportunities for new PPAs in both the electricity and storage segment and expect that these benefits will continue to reduce our capital needs and to help fund our growth strategy and enhance our EPS in 2024 and beyond. The current environment carries encouraging tailwinds supporting demand for geothermal and energy storage, driven by global decarbonization efforts and the collective push to utilize the world's renewable energy resources to reduce greenhouse gas emissions and combat the impact of climate change. Now before I provide further updates on our operations and plans, I will turn the call over to Assi to review the financial results.
Assi?
Assi Ginzburg: Thank you, Doron. Let me start my review of our financial highlights on Slide 5. The Q4 marks another strong finish to an overall excellent year in 2023, creating positive momentum as we head into 2024 and positioning us well as we aim to deliver on our multiyear financial and operating targets. Total revenues for 2023 was $829.4 million up 13% year-over-year. And revenue for the fourth quarter was $241.3 million marking 17.4% growth year over year. This fourth quarter and full year results represent solid growth across both our electricity and product segments. Across the full year 2023, our adjusted EBITDA results of $481.7 million increased 10. 6% compared to $435.5 million in 2022. Our record fourth quarter adjusted EBITDA results of $139 million increased 11.5% compared to $124.7 million in the fourth of last year.
Year over year, the growth in adjusted EBITDA was largely driven by an increase in revenue in electricity and product segments combined with a larger contribution from tax equity transactions. In the full year 2023, net income distributed to the company stock holders was $124.4 million or $2.08 per diluted share. This represents an increase of 88.9% and 77.8% versus the prior year, respectively. On an adjusted basis, net income attributable to the company's stockholders was $121.9 million or $2.05 per diluted share, an increase of 32.2% and 25% versus the same period last year respectively. The significant year-over-year earning growth was driven by higher operating income, further supplemented by the impact of the IRA benefit that flow through our tax line.
In the Q4 of 2023, net income attributable to the company's stockholders was $35.7 million or $0.59 per diluted share in comparison to $18 million or $0.32 per diluted share in the same quarter last year. On an adjusted basis, net income attributable to the company's stockholders was $40.5 million or $0.67 per diluted share compared to $41.2 million and $0.73 per diluted share during the fourth of 2022. Quarter-over-quarter earning was impacted by higher effective tax rate. Moving to Slide 6. We break down the revenue performance at the segment level. Electricity segment revenue increased by 5.5% percent to $667 million and 11.3% to $184 million in the year and from fourth of 2023 respectively. This increase was largely driven by the new project that came online in 2022 and the commercial operation of our numerous geothermal solar PV and energy storage project.
This includes the Heber 1 geothermal power plant, which went online in May 2023. The quarter also benefited from improved generation at Puna power plant that had been operating at lower capacity in the first three quarter of 2023. In the product segment revenue marked a substantial increase growing by 87.3% to $133.8 million and by 56.7% to $50.4 million in full year 2023 and in the fourth quarter respectively. The growth in our product segment was primarily due to the new contract that are reflected in a higher backlog and the timing of revenue recognition versus the prior period. Energy Storage segment revenue decreased by 6.8% to $28.9 million in the full year 2023 and by 14% to $7 million compared to last year's fourth quarter. Lower year-over-year segment revenues was driven primarily by lower revenue in the PJM and Kaiser markets as merchant rates were lower than 2022.
New facilities that came online during the year partially offset the impact of a weaker merchant prices. Moving to Slide 7. The gross margin for the electricity segment was 36.6% and 39.5% in 2023 Q4, down 320 basis points and 400 basis points respectively. The decrease in full year margin performance was mainly due to business interruption of $15.6 million recorded in 2022 compared to $6.3 million recorded in Q1 2023 related to the Heber and the Puna power plant as well as revenue at Puna due to lower generation and energy prices. In the quarter, the reduction was mainly driven by $6.4 million of business interruption income recorded in fourth quarter 2022 related to Heber 1. In the Products segment, gross margin was 13.4% and 12.6% in the full year 2023 and the fourth quarter respectively, down 190 basis points and 1,000 basis points.
Margin decreased due to lower profitability associated with contracts that were signed during 2021 2022, partially offset by new contract with higher margin that were signed in 2023. Looking forward, we expect our product segment margin to be between 15% to 20%. The energy storage segment reported a full year gross margin of 6.4% compared to 21% in the prior year. The reduction was driven by significant pullback in merchant prices in the East Coast compared to last year's observed market driven pricing strength. In the Q4 of 2023, margin was negative 8.9% compared to positive 11.7% year-over-year. As we enter 2024, we expect improved margin rising to between 10% to 15% supported by the Pomona 2 PPA that was signed this year and the COD of Bottleneck, which also carry fixed price tolling agreement.
Looking at Slide 8. The electricity segment generated 94% of Ormat total consolidated adjusted EBITDA in 2023. The products segment generated 4% of and the energy storage segment reported adjusted EBITDA of $9.9 million representing almost 2% of total adjusted EBITDA. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide. Moving to Slide 9. In the Q4, we recorded $18.7 million in income related to tax benefits for which $14.7 million was income related to five active tax equity transaction, while the remaining $4 million is related to transferable PTC, which were recorded in 2023 under the provision of the Flexure Reduction Act. The income related to tax benefit increased this quarter by $11.2 million compared to the same period last year.
For the full year, income related to tax benefit increased by $27.2 million. Also in the fourth quarter and full year 2023, we recorded $1.4 million dollars and $18.7 million of ITC benefit in the income tax line related to new storage facilities that COD this year. For fiscal year 2024, we expect an annual approximately $5 million to $10 million reduction in PTC recorded under the income attributed to the start of tax benefits line of the P&L due to the elimination of one of our tax equity transaction that reached the flip date, offset by new transaction we expect to sign related to Heber and Brawley. We also expect to record $40 million in ITC benefits to our storage facility under the income tax line. The way we plan to record the ITC benefits during 2024 is slightly different compared to 2023.
And instead of recording the entire benefit under the tax line in the quarter that the storage project came online, we expect to reduce our tax rate proportionally throughout the year. We anticipate the receipt of approximately $145 million in cash proceeds related to the PTCs and ITC benefit that will reduce our capital needs for 2024. Looking at Slide 10. Our net debt as of December 31, 2023 was approximately $1.8 billion equivalent to 3.7 times debt to EBITDA. Cash and cash equivalents and restricted cash and cash equivalents as of December 31, 2023 was approximately $288 million compared to $227 million at the end of 2022. Slide 10 breaks our cash for the 12th month illustrating our math ability to reinvest in the business and service our debt obligation while returning capital to our shareholders.
Our total debt as of December 31, 2023, was approximately $2.1 billion net of deferred financing cost. Excluding the short term commercial paper we issued is presented on Slide 33 in the appendix and outline the payment schedule. The average cost of our debt for the company stands at 4.3%. We think it is important to note that nearly all of our debt liabilities remain fixed rate in nature, which we believe will help continue to position Ormat competitively in the rising global interest rate environment. Let's move to Slide 11. We have approximately $741 million of total liquidity. Our total expected capital for 2024 is approximately $550 million as detailed in Slide 34 in the appendix. In 2024, we plan to invest approximately $340 million in electricity segment and construction, drilling and maintenance CapEx and $187 million in our storage assets.
Overall, Ormat is very well positioned execute our strategic growth plans from a capital research perspective, maintaining excellent liquidity and ample access to additional capital as well as cash we expect to receive from the IRA benefit. We expect that each project that reach commercial operation in the next few years in the U.S. will be entitled to between 30% to 40% of funding supported by the new IRA benefit. On February 21, 2024, our Board of Directors declared, approved and authorized payments of quarterly dividends of $0.12 per share to all holders of the company issued an outstanding shares common stock on March 6, 2024, payable on March 20, 2024. In addition, we expect to pay quarterly dividend of $0.12 per share in each of the next three quarters.
Finally, on January 4, 2024, Ormat completed the strategic acquisition of contracted operating geothermal and solar assets from Enel Green Power North America. Ormat paid $272 million for 100% of the equity interest in the portfolio assets. The overall transactions were funded with available cash in combination with new corporate loans in the amount of $200 million that were raised in January 2024. The Enel Green Assets portfolio acquisition is expected to be immediately accretive to both revenue and EBITDA, and we intend to further improve the performance of the acquired portfolio through a series of operational enhancements and optimization initiatives. That concludes my financial overview. I would now like to turn the call over to Doron to discuss some of the recent developments.
Doron Blachar: Thank you, Assi. Turning to Slide 13 for a deeper glimpse at our operating portfolio. Generation growth in our core electricity segment carried support from our multiple CODs we achieved during 2023, most notably at North Valley in April. Additionally, we brought operation back online at our Heber 1 facility following the replacement of the equipment, allowing higher generating capacity. And we also completed an expansion to the Dixie Valley Plant that we undertook to maximize the value of our existing PPA. Our portfolio capacity also carried additional support from full year operations at CD4 and Tungsten Phase 2, which achieved their respective CODs over the course of 2022. This was partially offset by a reduction in capacity at our Puna facility due to operational issues related to the performance of the well field, which caused us to run the plant at lower capacity rates.
The performance of Puna improved in the Q4 and is currently operating above 30 megawatts. Our current total generating capacity, including the Enel Asset we recently purchased, stands at 1215 Megawatts in the electricity segment compared to 1070 Megawatts in 2022. This marks a 13.6% increase versus prior year level, positioning us well to achieve our multiyear portfolio expansion target. Turning to slide 14. I will give more details on our operating footprint. We are back to normal operating at -- the operation at Puna and have successfully increased generation above 30 megawatts, up from the low 20s we observed earlier in the year. We recently received an approval from the Hawaiian POC for new PPA of the facility and confirmation of the EIS.
The new PPA expands the contracted capacity and carries a fixed energy rate that will remove the volatility of the current avoided cost structure. The PPA will be in effect following the completion of the power plant upgrade expected in 2026 and will carry an average rate per megawatt hour of approximately $1.27 to $137 per megawatt hour, assuming we sell 100% of the generated electricity. At our Olkaria power plant in Kenya, we're currently operating at the 125-megawatt level, up slightly from prior year. Our professional team continued to work to work to increase the capacity of Olkaria. And the drilling campaign we conducted in 2023 has shown successful results that are now being tested. We are optimizing the resource utilization and expect the connection of the new wells to support and improve future performance.
In the Caribbean, we continue with the development of the Bouillante power plant at Guadeloupe and expect to finalize PPA negotiations shortly. At the end of 2023, we signed a new BOT PPA for a new 10-megawatt power plant we expect to build in Dominica near our Bouillante power plant in Guadeloupe. The proximity of these two power plants creates attractive operational synergies that will reduce manpower costs and strengthen the economic potential of the expected new power plants. And on the strategic front on Slide 15, in October, we announced the acquisition of the contracted operating assets portfolio in the United States from Enel Green Power North America. This transaction closed January 2024. The asset portfolio including three geothermal facilities and three solar PV facilities carries consolidated capacity generation of roughly 100 megawatts with a three-year trading average annualized EBITDA contribution of $24 million.
The portfolio also carried the opportunity to expand economics through a targeted series of growth investments, including operational optimization through the replacement of existing equipment with best in class internally manufactured equipment and the option to explore future greenfield projects in Utah and in California. Turning to Slide 16. Our product segment backlog stands at $152 million. This backlog carries roughly $157 million of contract mostly signed in 2023, including the recently signed $95 million geothermal contract for the Ngatamariki project in New Zealand. We see future potential coming from New Zealand, Indonesia and Latin America. Moving to Slide 17 for an update on our energy storage segment. The segment reported lower revenues and gross margin in the fourth quarter, due to lower year-over-year merchant rates, primarily in the PJM and Kaiser markets.
We successfully filled these new projects to add 82 megawatts or 102-megawatt hour in total to our fleet, and we are currently in the final stages to commission the 20-megawatt hour East Flemington facility. We also successfully secured a long-term tolling agreement for Pomona-2 facility. This agreement marks the third tolling agreement in our expanding portfolio following the 2022 Bottleneck contract and 2023 Arrowleaf Solar and Storage Facility. These three agreements contribute to the growth of a stable, profitable and predictable revenue stream for the Energy Storage segment, with over 40% of the segment's revenue expected to be contracted by the end of 2024. Please turn to Slide 19, where we briefly discuss our growth plans. We continue to see an increase in the demand for geothermal energy and the successful and steady execution of our growth strategy has given us the confidence to reiterate our 2026 target that we provided in early 2022.
With the success that we have achieved thus far in our growth efforts supported by the attractive organic and acquisitive growth captured in 2023, we are targeting between 2.1 to 2.3 gigawatts of portfolio capacity by year end 2026. Our critical target markets of California and Nevada recognize the critical role that geothermal resources play in supporting their respective energy grids, are on the forefront of developing and supplementing intermittent power generation with reliable and renewable high-capacity geothermal energy resources with 0 emission. This support has helped sustain and expand the tailwinds for future PPAs. Additionally, it has created adjacent tailwinds for energy storage demand as added storage capacity will be necessary for the region to achieve their goals and further reduce greenhouse gas emissions to supply power to the grid.
As we have discussed previously, the Inflation Reduction Act, which was signed on August 16, 2022 has had a significant positive impact on our ability to develop geothermal and storage asset in the U.S. At higher economics due to lower capital needs. We plan to continue seeking the PTC benefit for our new geothermal power plant and plan to enter into further tax equity transaction, which can fund over 40% of our capital needs for new geothermal plants in the U.S. Moving to Slide 20. We are on track with our long-term target as communicated back in 2022 in our Analyst Day. We expect to increase our total electricity portfolio generation to between 1450 and 1470 megawatts by the end of 2026. In energy storage, we remain on track with our growth plans, and we expect to reach between 700 to 800 megawatts or 1.9-to-2.3-gigawatt hour by year end 2026, marking a more than fivefold expansion from prior capacity levels.
Slides 21 and 22 showcase the geothermal and the hybrid solar PV project currently underway. We are on track with our Beowawe repowering project, which we expect to be complete in the second half of 20224. Later towards the end of 2024, we expect to achieve the commercial commissioning for the Ijen plant in Indonesia, which will add another 15 megawatts of capacity to our growing portfolio. In 2025, we expect to add 20 megawatts in operations in the Caribbean area and one large power plant in New Zealand. In addition, we are planning to upgrade our recently acquired assets and add approximately 17 megawatts between the end of 2025 and 2026. Puna, North Valley and new prospects that will have successful exploration are expected to be operational by end of 2026.
Our project development underway in our solar PV portfolio are weighted towards the first half of the year, as we expect to commission the Steamboat Hills solar by the end of Q1 and North Valley and Beowawe by end of Q2. Moving to Slide 24. The third 3rd layer of our growth plan focuses on the growth and development of our energy storage assets. We currently have 7 projects under development that will add 355 megawatts or 1060-megawatt hour to our storage portfolio by the end of 2025. We are currently in the latest stage of COD in our 20-megawatt East Flemington storage facility in New Jersey. Also, we released for construction the Shield 80 megawatt, 320 megawatt hour storage facility in California that is expected to be online in the second half of 2025.
Our pipeline in energy storage as displayed on slide 25 shows our overall potential future capacity at 3.6 gigawatt or 13.1-gigawatt hour. Geographically, we continue to focus our efforts largely in the core target market of the United States, where we have the ability to benefit from the increased demand for energy storage capabilities. Please turn to slide 26 for a discussion of our 2024 guidance. We expect total revenues to increase by 7% year over year at the midpoint and to be between $860 million and $910 million with electricity segment revenues between $710 million and $730 million an increase of 8% compared to 2023 results. We expect between $115 million and $135 million in the product segment, and energy storage revenues are expected to be between $35 million and $45 million.
We expect adjusted EBITDA to increase by approximately 10% at the midpoint to range between $515 million and $545 million. We expect annual adjusted EBITDA attributable to minority interest to be approximately $18 million. I will end our prepared remarks on Slide 27. This was a strong quarter that capped off a very strong year format. We are confident that our attractive and differentiated portfolio of power generating assets, our unique growth strategy and our demonstrated ability to develop attractive geothermal, solar PV and energy storage projects with attractive long term PPAs position Ormat for successful and will drive significant shareholder value as we progress across 2024. Before I open the call for questions, I'm happy to tell you that we will have our next Investor Day in New York City on June 20, 2024.
This concludes our prepared remarks. Now, I would like to open the call for questions. Operator, please.
Operator: Thank you. [Operator Instructions]. Our first question comes from the line of Justin Clare with ROTH MKM. Please go ahead.
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