Q1 2023 Ormat Technologies Inc Earnings Call
Participants
Alex Stenberg
Assaf Ginzburg; CFO; Ormat Technologies, Inc.
Doron Blachar; CEO; Ormat Technologies, Inc.
Jeffrey David Osborne; MD & Senior Research Analyst; TD Cowen, Research Division
Julien Patrick Dumoulin-Smith; Director and Head of the US Power, Utilities & Alternative Energy Equity Research; BofA Securities, Research Division
Justin Lars Clare; MD & Senior Research Analyst; ROTH MKM Partners, LLC, Research Division
Noah Duke Kaye; Executive Director & Senior Analyst; Oppenheimer & Co. Inc., Research Division
Presentation
Operator
Good morning, and welcome to the Ormat Technologies First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded. I'd now like to turn the conference over to Alex Stenberg with Alpha IR.
Alex Stenberg
Thank you, Operator. Hosting the call today are Doron Blachar, Chief Executive Officer; Assaf Ginzburg, Chief Financial Officer; and Smadar Lavi, Vice President of Investor Relations and ESG Planning and Reporting. 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 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, 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 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. Blachar Doron, the call is yours.
Doron Blachar
Thank you, Alex, and good morning, everyone. Thank you for joining us today. We are pleased to report a strong start today with impressively, and our net income increased 57.5% as income tax was positively impacted by the inflation Reduction Act. We attribute the demonstrated the benefit of our ongoing portfolio expansion strategy.
In our product segment, the step down in revenue compared to the first quarter last year was largely -- which impacted our results in the PJM and Kaiser facility. As we enter the second quarter, we completed construction and started operation of 2 new energy storage facility, the overall positive momentum we saw in Q1 to continue in the rest of 2023 with the IRA providing additional benefits through the tax credits available for geothermal and energy store 2023 and capacity expansion growth for 2025.
As we look to the future, we are confident in the continued demand for renewable energy, and we expect to benefit. I will turn the call over to Assaf review the financial results. Assaf?
Assaf Ginzburg
Thank you, Doron. Let me start my review of our financial highlights on Slide 5. Total revenue -- total gross profit was $76.1 million. This resulted in a gross margin of 41.1%, up from the gross margin of 38.1% or $0.33 per diluted share in the same period last year. The 57.5% increase in net income was mainly the result of a strong increase in operating 14.5% in the first quarter compared to $107.9 million in the first quarter last year.
The increase was largely driven by 17.9% increase in operating income as a result of the new assets added further supported by the impact of the PTC generated in the quarter. Electricity segment revenue increased 4.8% to $170.3 million. This increase was driven by contribution from Ormat portfolio expansion efforts and from the successful repowering of Heber 1 in the hyper complex. These drivers of revenue growth were partially offset by lower energy rates at Puna individual revenue in the first quarter.
The year-over-year decline was mainly due to the timing of revenue recognition compared to the prior year period. However, we were able to start in the first quarter of 2022. This decrease was driven primarily by the reduction in energy rates in the East Coast of the United States, resulting in lower rates at (inaudible). Despite flat segment margin, we believe that the strength of our new contract signed in late 2022 and 2023 so far, will drive highest margin of 13.5% in the first quarter last year. We expect margin improvements as well as we start to operate the new assets and grow versus 2023 was approximately $1.6 billion.
Cash and cash equivalents and restricted cash and cash equivalents as of March the slide breaks down the use of cash for 3 months illustrator of mutability to reinvest in the business, service our debt and return capital to our shareholders in the form of cash equity offering, cash generating by our operation and the strong liquidity profile we maintain.
Our total debt as of March 31, 2023 was approximately 2.1% of the company stand at 4.14%. We think it is important to note, as we prepare to deploy capital to fund our multiyear growth target. Nearly all of our debts continue positioning Ormat compititively in the rising global interest rate environment. In addition, we expect to finance 30% to 50% of our future U.S. CapEx with the support of ITC and PTC under the new IRA, which we expect will enable us to significantly reduce the funds needed to develop storage and geothermal energy.
Moving to Slide 8. In the first quarter of 2023, we have invested nearly $107 million in CapEx to advance our growth. We have $1.1 billion of cash and available lines of credit. Our total expected capital for the last 3 quarters of 2023 includes $494 million of capital expenditure as dated on Slide 29 in the appendix. Of declared, approved and authorized payment of a quarterly dividend of $0.12 per share to all holders of the company's issued and outstanding shares of common stock on May 23, 2023 payable on June 6, 2023. In addition, the company expects to pay quarterly dividends of $0.12 per share in each class.
Turning to Slide 10 for a look at our electricity segment operating portfolio. Generation growth continues to be positively supported by the addition of CD4, Tungsten, Heber 2 with Power and the new solar facilities, including Wister Solar. This was partially offset by lower generation at our oil facilities that are mainly constrained by heat availability from the natural gas pipeline. In addition, since the end of the first quarter, we added 31 megawatts to the electricity segment from the new North Valley, Heber 2 portfolio of 1.1 gigawatts.
Moving to Slide 11. Our Puna geothermal power plant has recently achieved a generating capacity of approximately 28 megawatts range in the fourth quarter of 2022. While prices for electricity generation remained healthy, they were lower than last year's ones. As for the project expansion, we agreed with telco on new terms of the PPAs that are more favorable to Ormat and we are awaiting approval from the Hawaii PLC.
In regard to our Olkaria power plant in Kenya we have made progress in our own 5 megawatts in the fourth quarter of 2022. With respect to Heber 1, the new power plant is near completion and expect to be online by the end of the second quarter is expected to bring the total complex capacity to 89 megawatts and improve its efficiency and profitability.
Turning to Slide 12 for an update on our backlog, which stands at 100. In addition, recently a new favourable tariff structure was approved in Turkey, which we anticipate will increase demand for new developments. Moving to Slide 13. The Energy Storage segment was affected by lower rates at PJM and (inaudible). However, we have made progress in this segment by starting at the end of the quarter, the operating of 2 new facilities and nearing completion of 2 more, which will add a combined capacity of 54-megawatt -- 64-megawatt hour. We anticipate that these projects will help to increase the segment's revenue for the year.
Moving to Slide 14 for an overview of the strong tailwinds we expect from regulatory initiatives. On the international side, as I mentioned earlier, the new tariff that was recently introduced in Turkey includes additional incentives that will overall secure development with local manufacturing, a tariff of approximately $118 per megawatt hour. We believe this will reopen the Turkish market for us for new sales opportunities.
In the U.S., we already saw this quarter the positive benefit of the inflation reduction act on our results. geothermal PTC related to Heber georthermal and Wister Solar and PTC sold under the CD4 new tax equity transaction, increased our adjusted EBITDA by $4.8 million this quarter. In addition, the transfer of ITC related to Heber energy storage facility reduced our tax expense and thus increased net income. This positive impact will continue through the year and will increase as we add more new projects.
We expect the total cash benefit related to PTC and ITC benefit of approximately $150 million in 2023. This source of cash will enable us to significantly reduce our capital needs for the year, particularly as we look to continue growing our leading geothermal portfolio. Moving to Slide 16 and 17. Our growth plan for both the electricity and storage segments remained firmly on track despite a minor delay. As we look ahead to 2025, our target of approximately 1.83 gigawatts of added capacity represents an impressive 485% growth at the midpoint compared to the year-end 2022. This will be achieved through the addition of 230 to 250 megawatts of geothermal and solar energy power plants and 412 to 442 megawatts of energy storage capacity.
Slide 18 and 19 display the geothermal and hybrid solar PV projects currently underway. The Dixie Valley and Heber 1 geothermal power plant and (inaudible) solar are expected to be online during the second quarter of 2023. Moving to Slide 20 and 21, which highlights the third layer of our growth plan, the energy storage segment. As presented on Slide 20, and as I mentioned earlier, we commenced the operation of (inaudible) and we are near completion of Upton and Ando.
In addition, we have 2 assets that are planned to be online in the second half of 2023. Our energy storage pipeline is robust, and we have developed a pipeline of more than 3 gigawatts of capacity in our U.S. pipeline mainly in California and Texas. Please turn to Slide 22 for a discussion of our 2023 guidance.
In the first 3 months of 2023, Ormat has delivered meaningful year-over-year growth across our revenues, operating income, adjusted EBITDA and net income. We expect full year revenues to range between $823 million and $858 million, which would represent a 12% to 17% increase year-over-year. Within electricity, revenues are expected to be between $670 million and $685 million, a 7% increase at the midpoint. We also expect product revenue to come between $120 million and $135 million and approximately 79% input. Storage revenue guidance is $33 million to $38 million for the year, which is also a significant increase year-over-year. Adjusted EBITDA for 2023 is expected to be between $480 million and $510 million, which is a double-digit improvement from 2022 throughout the range.
On Slide 24, before I close the call, I want to highlight our continued commitment to environmental, social and governance, ESG initiatives. As part of this commitment, we are working to finalize and publish our 2022 ESG report by the end of August, which will provide a comprehensive overview of our sustainability initiatives, performance and targets. Further supporting our ESG initiatives, we have established a new ESG committee within our Board of Directors, and next week will be our first global ESG week.
I will end our prepared remarks on Slide 26. In summary, we are pleased to report another solid quarter with significant growth despite some short-term delays, our growth plan remains on track, and we are well positioned to capitalize on the strong global demand for renewable energy solutions. As always, we remain dedicated to delivering sustainable, profitable growth for our shareholders, while also making a positive impact on the environment and the communities where we operate. This concludes our prepared remarks. Now I would like to open the call for questions. Operator?
Question and Answer Session
Operator
(Operator Instructions) The first question is from Noah Kaye with Oppenheimer.
Noah Duke Kaye
Maybe we can start with the Heber 1 repowering. Congratulations on getting that done timely. And I think if we went back a year ago and looked at the impact from the fire and look at where you are now, it's impressive what you've been able to do with that complex. Maybe talk through how that process has played out, what you've actually done to be able to affect the repowering.
Assaf Ginzburg
Thank you for the question. So as a reminder, Heber 2 has started already to operate in Q4 of last year, really throughout December. And Heber 1 is expected any day now to have the COD, it should be during the Q2 before for the end of the quarter. Heber 1 used to be a 40-megawatt power plant and 50% of the power plant was Ormat equipment and 50% was basically Toshiba or Mitsubishi equipment. It was a steam equipment.
During the fire, the steam equipment were all obstinate. And during the last year, we were able to basically reinstall all of the units. We are not going to use even the old units that Ormat used to operate. And then the further the new capacity of Heber between Heber 1 and Heber 2 and the surrounding facilities will be close to 90 mega. And we also expect it to happen in a much better profitability because the cost to operate a brand-new plant is much better than the cost to operate in all the steam plant.
Noah Duke Kaye
Very helpful. I think it opens up a broader question about repowering opportunities across the portfolio. I don't know whether ITC benefits would factor into that decision. But perhaps you can comment to (inaudible) I should say. Perhaps you can comment to the repowering opportunity that you see today, any potential quantification of that would be helpful.
Doron Blachar
It's Doron. So as you said, the Heber facility was repowered. We've done a similar project in our (inaudible) facility... And in our projects like Hyber our facilities. We have smaller ones like Dixxie Valley that you see and in Guatemala. So we do have so-called for power basically taking an old facility that is doing 9, 10 megawatts and will generate over 20 megawatts when it comes online in the middle of next year. And that's the big repower that we have today.
Noah Duke Kaye
Very helpful. And maybe the last one, just on the Puna PPA residing, Nice to hear that, that move forward, you mentioned it's more favorable for the company. Can you just sort of dimension for us in what way is it more favorable? I know that for the PUC there was a desire to kind of get away from linkage to fossil fuel prices. Talk about why this is more favorable for the company.
Doron Blachar
Yes. Actually, Puna is another big repower that we will do basically this one. We have the PPA, we're going to replace the entire facility with a new facility that will come online. Since you're obviously following us over the time, you've seen that we've invested quite a lot of effort and drilling into Puna. And all of these costs are basically embedded into the new and updated PPA. So the PPA is better for us because it takes into account higher costs that we had in order to drill and find resource to support the 46-megawatt facility. And it.
Noah Duke Kaye
Very helpful, (inaudible).
Doron Blachar
And they filed it with the POC, and we hope that Q3 will get -- middle of Q3, we'll get the fuel from the POC in Hawaii and we can move forward with the project.
Operator
The next question is from Justin Clare with Roth MKM.
Justin Lars Clare
First off here, I just wanted to see if you could talk about the visibility you have into growing your geothermal capacity beyond the projects under development that you have already identified in the presentation, when might you be ready to share additional details on projects that you have in the pipeline? And then just wondering at this point in time, beyond the projects identified, are you developing additional projects that will have CODs potentially in 2024? Or are they likely to be 2025 or sometime beyond?
Doron Blachar
So thank you, Justin. We have approximately 40 sites that are listed in our 10-K traditional prospects that we have globally, most of them in the U.S. in Nevada and California. We have started this year a cohort program. We bought this drill in 3 locations. Cohort in Nevada and the plan for the cohort, it's a 7-location cohort plan where we will drill before we start (inaudible) we’ll drill cohort. This will be the next level of development that we will have. But -- and they will come, assuming everything is successful in the 26, 27-time horizon that's in the U.S.
In Indonesia, we are drilling in 2 locations. We just responded to a new tender that was issued by the Indonesian government and utility, the state-owned utility, and we are competing with PERTAMINA and Chevron on this side and we have additional locations that we are in various stages of negotiation as part of the exploration. However, in Indonesia, the process takes a bit longer. So it may be a little later, but there's definitely many potential that we are working today for the next round of development beyond what we have listed on our presentation.
Justin Lars Clare
Okay. Great. Very helpful. And then I was wondering if you could just update us on what you're seeing in terms of the trend in PPA pricing for geothermal assets maybe in the U.S., but then also in other markets, it sounds like the PPA signed for the Puna project was favourable, but maybe you can just comment on what you're seeing more broadly?
Doron Blachar
We see a continuous demand for geothermal projects. I can tell you now to follow up on your previous question, we have been actually been asked already by different utilities and CCAs on signing PPAs towards the end of the 2020s and maybe to the beginning of the 2030s. So we see quite a lot of demand. And when demand is high and the number of projects are not very high prices go up. So we continue to see increased pricing in the U.S. Indonesia, as I said, the other locations that we're operating have set, presidential tariffs that ranges between $95 to $110, $120 per megawatt depends on the location of the site. So these are also good PPA pricing.
Justin Lars Clare
Got it. Okay. And then maybe just one more for me. Shifting to the product segment, revenues declined a bit quarter-over-quarter. I was just wondering if you could share why the revenues declined in that segment? Was this just happened to be the timing for project deliveries? Or did you see any issue in supply chain or logistics? And then also on the margin profile, you indicated that margins in that segment are expected to increase through the rest of the year here. I was wondering where could we see gross margins for the Project segment in, say, Q2, Q3 or Q4 moving through the year here.
Assaf Ginzburg
So as we mentioned in our brief remarks, we expect the full year revenue to be on the high end of the revenue. And basically, we were able to have a sufficient backlog to almost guarantee almost the revenue for the year. And the reason why we were behind this quarter was just the way we decided to allocate work between internal work, building projects for Ormat and working for third party.
With respect to margin, I think that on an annual basis Ormat in this environment should be somewhere in 15% to 20% of gross margin. These are the types of margins that we should have based on the combination of the -- some of the contracts that have lower margins that are coming from 2022 and the one that are tracking with higher margin that was signed in early 2023. So when you combine between them and also some of our fixed costs, we should come somewhere between 15% to 20% margin, maybe on the higher end towards the end of the year.
Operator
(Operator Instructions) The next question is from Julien Dumoulin-Smith with Bank of America.
Julien Patrick Dumoulin-Smith
Appreciate it. Look, I wanted to talk about California first and foremost. Obviously, California capacity prices are up very meaningfully in the last few months here and obviously, year-over-year in a big way. I know that you principally operated a contracted portfolio, but I just wanted to get a sense as to how that might impact even modest amounts of exposure in the next few years as you might see some step up from that as well as does that actually change your development focus to fixate on California and the opportunity there, just given how much more robust the IRRs are conceivably between, first, the higher capacity and secondly, IRA, if you will.
Doron Blachar
Julien, thank you. So we see the demand very strongly in California, as you said, but we've also seen a very strong demand in Nevada that is coming from the basic requirement to go to renewables. As preparation for this growth that we've started to see a couple of years ago with the resolution of the CPUC, we have more than doubled our exploration efforts. In the past, we've been drilling in 2 to 3 locations at the maximum. Today, we're drilling at 5 locations in parallel and targeting to go up to 7 locations. We see the benefits that we get in the higher PPA pricing and the IRA as you mentioned. We are working the geothermal at PTC up until the end of '24. And we hope they will be extended. But regardless, we are operating in the context of getting to start of construction according to the IRS requirements by the end of the year. So most of our projects coming online in the following 4 years will enjoy the IRA PTCs even if they will not be expanded for geothermal.
So we've put a lot of efforts into the U.S., mainly in the resource and exploration phase. And as I said before, we are drilling build already 3 new locations in Nevada boreholes, planning to drill another 4 this year and the beginning of next year. And this will be the base for the next wave of projects if the exploration will be successful will be part of our growth henceforward.
Julien Patrick Dumoulin-Smith
Excellent. And if you can elaborate briefly, if you don't mind, a key question is around the ITCs and PTCs recognized through the forecast rate. I think you guys had $150 million in the current year here. What is -- how does that flow through over the next few years? Just what does that amount to per year if you can try to give some sense of visibility. And I know these things are moving around a little bit.
Assaf Ginzburg
Julien, this is Assaf. Thank you for the question. So first, the ITC is an outcome of the amount of CapEx and the timing of the COD of the storage assets. This year, the amount of assets that we are bringing online, we expect somewhere around $15 million to $18 million of ITC benefit. All of it should flow through the reduction in income tax and reduce the tax rate for the company, similar to what we saw this quarter.
When we look to next year, we have 2 large projects. The larger of one, of course, is bottleneck, which cost us around $105 million, $110 million. It looks like based on preliminary analysis that bottleneck will be entitled to 40% ITC, which means in this scenario, only bottleneck next year should give us compared to the $15 million and $18 million this year, $40 million. So next year, ITC benefit will be more than doubled in this year because in addition to bottleneck, we also have, as you can see on the list, Montague, which also we expect to get around $6 million of ITC. So on ITC and net income next year, we see a boost, and we see roughly $45 million of ITC proceeds.
When we look at tax equity transaction, we do have the Huawei next year. It won't be as big as what we saw this year. It will be equal to somewhere around North Valley, and it should add around $30 million, $35 million of prostite. So between the 2 next year, we expect around $75 million of ITC and PTC proceeds. In addition to some other PTCs that we'll generate during the year from some of the solar projects. So it's probably going to be around $80 million, but the P&L impact in 2024 will be much higher. The cash impact will be lower, but the P&L impact will be much higher. So we expect a very good net income next year.
Julien Patrick Dumoulin-Smith
Right. And that's because you slow the ITCs pretty much instantaneously, right? When we're talking these numbers, that's not necessarily delayed or staggered over some period of time, right? Just to confirm with you, right? The numbers that you quoted are flowing through the P&L?
Assaf Ginzburg
The ITC proceeds recorded flying to the P&L, you are correct. The PTC are flying to the cash flow and then amortized over usually 9 to 10 years through the tax equity line item. And you can see that this quarter, there was $4.8 million more than the same period last year. It's because we are producing more PTCs. We expect to sell them either through tax equity transactions or through, I would say, a PTC transfer transaction.
We are seeing the market moving to a higher level and values on PTCs. It started with $0.80 to $0.85. Now we are getting quotes up to $0.92 on the dollar for PTCs. And hopefully, Bank of America will be buying from us more PTCs in the future.
Operator
The next question is from Jeff Osborne with TD Cowen.
Jeffrey David Osborne
Just a couple of questions on my side. I think obviously, you've given some hints or bread crumbs over the past 2 earnings calls about some of the leverage in the model and new projects that are flowing through '24. In response to Julien's question, you talked a lot about the tax side. But I was wondering if you could talk specifically on EBITDA as you get a full year of Puna break back some of the other projects or bottleneck. Is there a way of quantifying what sort of incremental EBITDA you have in '24, either through the rebuild of the 2 facilities or some of the new projects?
Assaf Ginzburg
So first, already last quarter, we mentioned that the assets that will be built in 2023 and will be operated in 2023, will add roughly $30 million, 3-0 of adjusted EBITDA to 2024. Puna will only be upgraded in 2025. In addition to that, there are new assets that will be operated in 2024 partly, which are bottleneck, Montague on the storage side combined probably over $15 million of EBITDA. And then we also have the upgrade of (inaudible) that's our largest project in 2024, which will add a few more million dollars of EBITDA.
So the assets that will be COD, hopefully, as early as we can this year should add to the following year, around $30 million of EBITDA, which means if in 2023, our guidance are for $480 million to $5 million, $10 million of EBITDA. The year after, we should benefit by additional $30 million from the assets that were already paid by the company. And then we'll start adding the new asset for 2024.
Jeffrey David Osborne
Got it. That's helpful. And then maybe just one follow-up. I think it was on Justin's question about the product gross margins. I think you mentioned the Turkish support has come back. I think they have an election this weekend, if I'm not mistaken, but I'm just curious, any 2-part question, how political that process was if the outcome of the election changes? Is there any risk to that program? And then b, I think historically, your Turkish margins in particular were pretty depressed relative to other countries. So I'm just curious, as Turkey starts resuming orders, if there's any risk to the 15% to 20% number that you talked about?
Doron Blachar
So the elections in Turkey is on May 14, the new tariff was signed last week. We cannot predict who's going to win the election and obviously, what the winner will do following the election. But what -- but this feeding target was due for a long period of time. So the market did stop. I think the government in Turkey saw that the market stopped because of the feed-in tariff that was initiated a few years ago and the discussion on improving the feeding tally was a very long discussion. So we hope that it will not be changed or reduced.
I can tell you that unlike previous years, the requirement is for -- a lot of production in Turkey. And as you know, we have a facility in Turkey, and we know subcontractors that can deliver the required goods in Turkey. So we are very encouraged at the feeding tariffs that came in. We're waiting for the election. We hope that after the election, the economy interms regardless of who wins will be more stable and stronger that will allow the local developers to these projects. We've already been approached by a multiple of them, but similar to what you ask, everybody is waiting for the election on May 14.
Margins in Turkey in the past had ups and down. There are a few projects with very nice margins, other with lower margin. We do expect significant competition on the supply in Turkey. But if it's going to be a big market, I'm sure we'll be able to take a large portion of it with good margins.
Operator
We have no further questions at this time. I'll turn it over to the presenters for any closing comments.
Doron Blachar
Okay. Thank you, Operator. Thank you all for joining us and your continued support. We look forward to continue and deliver to all our shareholders, all our stakeholders at profitable growth. Thank you all.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
