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Ormat Technologies Inc (NYSE:ORA)
Q3 2019 Earnings Call
Nov 7, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Ormat Technologies Q3 2019 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Rob Fink of FNK IR. Please go ahead.

Rob Fink -- Investor Relations

Thank you operator. Hosting the call today are Isaac Angel Chief Executive Officer; Doron Blachar Chief Financial Officer; and Smadar Lavi Vice President of Corporate Finance and Investor Relations. 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 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 discussion of such risk factors and uncertainties, please see risk factors as described in format technologies annual report on form 10 K and quarterly report on 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 and adjusted net income attributable to the company's stockholders.

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 slide s 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 a slide presentation accompanying this call may be accessed on the company's website at ormat.com under the presentation link that's found on the Investor Relations tab.

With all that said I'd now like to turn the call over to Isaac Angel. Isaac the call is yours.

Isaac Angel -- Chief Executive Officer

Thank you very much Rob. And good morning everyone. Thank you for joining us today. Starting with slide five. Third quarter was another quarter of growth improving profitability. Total revenues increased 2.4% driven by 5% growth in generation and strong growth of 6.1% in our core electricity revenues. The growth helped to offset both of lack of revenues from our full power plant in Hawaii which is preparing to restart operation after the damage from the 2018 eruption of Kilauea volcano as well as be expected quarterly decline in our product segment revenues. These results demonstrate the overall robustness of our electricity segment and the benefits of our diversified portfolio of operations. Our gross margins also expanded on a year over year basis due to the positive impacts of how initiatives improve our level efficiencies and increase the geographic diversification of our product segments into higher margin territory. Raising 2019 and increasing our adjusted our guidance for 2019.

I will turn the call over to the wrong or review financial results before I provide an update on operation. Doron please.

Doron Blachar -- Chief Financial Officer

Thank you Isaac. And good morning everyone. Starting with revenues on slide seven total revenues for the quarter was $170.5 million up 2.4% compared to the same quarter last year. Breaking this down the electricity segment was 6.1% and product segment revenue decreased 11.2%. Moving to slide eight. Revenues in our electricty segments were $124 million for the quarter compared to $116.9 million in the same quarter last year resulting from our expanded operations at McGuinness Hills. Turning to slide nine. Product segment revenues were $43 million down from $48.4 million in the same quarter last year. The decrease in revenue was due to the timing of certain orders which is not unusual in this part of it. On slide 10 other segment contributed $3.5 million of revenues compared to $1.2 million in the same quarter of 2018 as we have started benefiting from revenue of the battery energy storage project which came online during the first quarter of this year. Moving to slide 11 for a discussion of our total gross profit and loss. Third quarter consolidated gross margin was certainly 32.5% compared to 29.3% in the same quarter last year.

On slide 12 gross margin for the electricty segment expanded year-over-year for 35.4%. The improvement was primarily due to increase in gross profit and margin from the commenced operation of McGuinness Hills Phase 3. Gross margin included $4.5 million of additional cost revenues related to pull up in Q3 2019 and $4.6 million in Q3 2018. Excluding the impact of Kilauea gross margin were 38.7% in Q3 of 2019 compared to 35.3% in Q3 of 2018. In the product segment gross margin was 27.8% in the third quarter compared to 26.4% for the third quarter last year. We continue to expect margin to normalize between 22% and 27% for these segments. Other segment reported a negative gross margin as anticipated. Turning to slide 13. Selling and marketing expenses for the third quarter of 2019 was $3.8 million compared to $8.6 million from the same quarter last year. This decrease was primarily due to $5 million elimination fee recorded in the third quarter of 2018 related to our decision to terminate the delay the General and administrative expense for the third quarter of 2019 was $11.9 million compared to $13.6 million for the same quarter last year. This decrease was mainly related to decreasing professional fees. Turning to slide 14. Operating income for the third quarter of 2019 was $38.7 million compared to $25.9 million for the same quarter last year. The increase was primarily attributable to a higher gross margin and lower selling and marketing expenses due to the termination fee that I just mentioned which were partially offset by a decrease in our product segment gross profit as a result motor, On slide 15 you can see the breakdown of operating income by segment.

Turning to slide 16. Net interest expense for the third quarter of 2019 of $20.1 million compared to $18.7 million last year. This increase was primarily attributable to an overall increase in our debt portfolio. Turning to slide 17 income tax for the third quarter 2019 was $9.6 million compared to $1.2 million in the third quarter 2018. Our effective tax rate for the third quarter of 2019 was 40.7%. Turning to slide 18 Ormat reported a net income attributable to the company shareholders of the $15.6 million or $0.30 per diluted share compared to $10.6 million or $0.21 per diluted share 42.9% increase. Turning to slide 19 adjusted EBITDA increased 13% to $85.5 million from $75.6 million in Q3 of 2018. Adjusted EBITDA includes the loss of approximately $1.5 billion related to Puna. Reconciliation of EBITDA and adjusted EBITDA are provided in the Appendix slide. Turning to slide 20 cash and cash equivalents and restricted cash and cash equivalents as of September 30 2019 was $180 million compared to $177.5 million as of December 31 2018. The accompanying slide breaks down the use of cash for the nine months. Our long-term and short-term debt as of September 30 2019 was $1.2 billion net of the first 5G plus and statements scheduled is presented on slide 21. The average cost of debt for the company is 4.9%.

Our net debt as of September 30 2019 was $1.1 billion. Turning to slide 22 Briefly, financing activities in the third quarter. Year-to-date we've successfully raised approximately $242 million aggregate including $59.3 million proceeds in the third quarter related to the debt equity partnership of McGuinness Hills 3 and $50 million of commercial paper. Overall a position with ample actions for these actions to fund future additions. On November 6 2019 the company's Board of Directors declared approved and also write payment of a quarterly dividend of $0.11 per share as per the company's dividend policy. The dividend will be paid on December 4 2019 to show the Free Code as of the close of business November 20 2019. That concludes my financial overview.

I would now like to turn the call to Isaac for the operation and business update. Isaac?

Isaac Angel -- Chief Executive Officer

Thank you very much Doran. Starting with slide 24 is an update on operations. Year-over-year we added approximately 4000 megawatt hours and increased our generation by 4.9% to 1.4 million megawatt hours. This increase was due to the addition of McGuinness Hill Phase 3 in the 7 megawatt Southern unit that came online in July of this quarter. The increase from these two was partially offset by planned outages as a preparation of the repowering market Indecipherable. We are still missing the generation of Puna power plant. This is offline since the volcano option in Hawaii in May last year. Turning to slide 25 and 26 let me spend a few moments providing an update on the situation at Puna. The restart and reconstruction efforts of Puna are on schedule and we expect our refurbishment activities will be completed by the end of the year enabling us to deliver energy from the plants on the temporary lines to help to support the power plants. We expect to be able to sell electricity produced at Puna as soon as the relevant permits required from local authorities for the operation of the substation and transmission network pathways being undertaken by our partners in Hawaii. These are expected by the end of Q1 2020.

And we expect to be able to bring the power plant back to operation on to the roster. On the field side we [Technical Issues] the production area and have already one production left available for the operational power plant. In addition we have recovered several injection wells and we continue our recovery, which include rig drilling of existing wells clean outs and drilling of new wells. We expect to gradually increase the power plant generation capacity as we complete well drilling work in the target of a gainful operation by the end of the second quarter of 2020. Let me speak of the insurance situation for a moment on slide 27. We maintained coverage for property and business interruptions in Hawaii provided by a consortium of insurers. All of the insurers have now started paying the costs to rebuild the damaged power plant equipment. However certain insurers rejected our claim for business interruption coverage and we have filed a lawsuit against those insurers. These lawsuits will not impact our plans for restarting the Puna facility. In parallel with our recovery work of Puna we continue the negotiations of HELCO on the PPA that were interrupted by the volcanic eruption in 2018. The PPA as you know expires at the end of 2027.

In the energy price of 25 megawatt and 38 megawatt are linked to be avoided cost of HELCO. Our negotiations with HELCO includes reaching a mutual satisfactory fracking arrangement just to replace the remaining hurdle cost pricing and fixed pricing structure and extended. With the fixed pricing structure and extending history, Moving to slide 28; we recently announced new version of our first-ever geothermal and policy brief project. We added 7 megawatt solar power plant in tax amount in bringing our total generation capacity to 917 megawatts. We remain on track with our near-term growth plans between 120 megawatt and 135 megawatt by the end of 2021. This target is supported by the list of potential projects presented on this slide. In Steamboat Hills which is part of our Steamboat complex we are replacing all of the old power plant equipment with our new advanced technology equipment. This will eventually increase the capacity of the complex by approximately 16 megawatt and reduce maintenance costs. Equipment is being delivered to the site and construction is on work. We expect commercial operation in 2020. In Heber Complex California we are in the process of repowering the Heber 1 and Heber 2 power plants. We are planning to replace steam turbines and other old equipment with our advanced technology equipment with a net capacity of 11 megawatt. Following those enhancements we expect capacity of the complex to reach 92 megawatt. Permitting engineering and procurement are on board. Manufacturing of equipment is planned to commence in the fourth quarter of 2019 with expected commercial operation in early 2021. At North Valley following exploration activity we reduce the expected generation capacity due to the indication of injection imitation. As you can see in the table we plan to expand McGuinness Hills general complex add additional 8 megawatt and plan to duplicate our successful hybrid systems Indecipherable, also to McGuinness complex heading 14 megawatt of solar power plant. Turning to slide 29 for an update on our backlog. As of September 30 2019 our product segment backlog was $167 million.

We continue to see opportunities in Turkey but recent trends of U.S. sanctions and economy and the straining of U.S. Turkey diplomatic relation may impact potential demand and price competitiveness and the result we may see continuation of the slowdown in the Turkish market. We are working on new opportunity in New Zealand Indonesia and the Philippines to diversify and grow out. As we discussed in previous call the New Zealand market remains a stable and attractive market for growth that we are excited to expand our presence in. The Philippines currently have geothermal field supply about 10% of commissions energy with the long-term plan to increase the capacity by 25% by 2040. And Indonesia one of the larger geothermal market in the world there are numerous new opportunities that we're currently evaluating. As our electricity segment continues to grow the impact of the volatility of the product segments and especially margin volatility will have relatively less of an impact on our overall financial results. Turning to slide 30 for an update on our storage activity.

In the storage side of our business we continue to leverage form core capabilities with unique IP network operation center and talented workforce to extend our footprint and build a robust project pipeline. For the third quarter we reported an increase in revenue from the segment because of the commission to project in New Jersey. We are successfully creating diversified storage portfolio in this market serving multiple regions in the U.S. including PJM California ISO and I ISO New England where we recently connected the Hinesberg facility. Our projects that move the application multi region, as well as behind it the combination of contracted revenues and merchant revenues. Our efforts in the battery storage activity are directed both toward greenfield development as well as toward M&A in joint development opportunities. Turning to slide 31 our estimated capital needs for the last quarter of 2019 include approximately $64 million for construction of new projects and enhancement of our existing market. In addition we estimate approximately $17 million of capital expenditures for the maintenance of our operating power plant. For our exploration development activity we plan to invest approximately $5 million in additional $3 million is planned for our storage activity or our production and plan to invest approximately 3 million.

Also in our Puna power plant to resume operations and take the regional megawatt of generation capacity we expect between $30 million to $50 million of which $8 million were invested in the fourth quarter of 2019. We expect control of wells insurance proceeds to recover part of the language. In the aggregate we estimate total capital expenditures would be -- in quarter of 2019 is approximately $90 million. In addition we expect $84.8 million while long-term debt repayment last quarter of 2019 of which $50 million is for repayment of short-term commercial paper we assume will be extended. Please turn to slide 32 for a discussion of our 2019 guidance. We are raising our 2019 revenue guidance for the upper end of the range and increasing adjusted EBITDA guidance. In summary all margin is operating as expected successfully overcoming the continued absence of revenue and EBITDA for Puna. By the end of 2019 we expect to complete our work on the power plant and have it ready for operation in early 2020. We continue to work closely with Telco and operations to expedite their work to enable us resuming the operational course. Before we open the call for questions I wanted to give you an update on the special shareholder -- yesterday mainly to reclassify our call. This initiative and special meeting was put forward based on feedback received directly from stockholders leading into 2019 Annual General Meeting.

We successfully reached required call to support our proposal to the classified on-board structure and have our directors to be reelected every year. On that Board of Management Board and the management team are committed to transparency and the highest level of corporate governance. We believe that transitioning to a declassified Board is in line with the best corporate governance practices and better serve the interest of all our stakeholders. And this concludes our prepared remarks.

Now let's open the call for questions. Operator please?

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Noah Kaye of Oppenheimer. Please go ahead.

Noah Duke Kaye -- Oppenheimer & Co. Inc. Research Division -- Analyst

Good morning good afternoon. Thanks for taking the questions. I appreciate the update on Puna and I understand you may not want to get too much into specifics of ongoing PPA negotiations but the regulatory filings seem to imply the PUC would like you and the utility to file an amended PTA application before they approved the transmission upgrade. Also again just from the filing it seems to us like an amended PPA could actually allow you to increase total capacity and potentially plant revenue. Can you confirm that's your understanding of the regulators intent? Two how likely is it in your view that these developments will allow you to potentially increase total product revenues and profits over time from Puna?

Isaac Angel -- Chief Executive Officer

Noah as we mentioned before it's a bit delicate to talk about this issue. We are in midst of the negotiation as I just explained during the call I am very optimistic that this negotiation will end positively very soon. And I'm not aware of the fact that the PPA negotiations and HELCO to start the transmission line connected. I like to believe that it's not the case. But if we disregard that we will -- as I said before I'm positive given also the fact that a wide moment under present, 00% RPS this PPA will be signed soon. We should also increase time frame with another 25 years from 2027 and obviously we'll illuminate the price differences connected to that and increase the capacity of the power plant as suggested before. I hope this answers your question?

Noah Duke Kaye -- Oppenheimer & Co. Inc. Research Division -- Analyst

Yes thank you for that. You mentioned a number of geographies for growth opportunity in products. In addition to the ones you mentioned I'd like to ask for Kenya KenGen just published in our queue for an EPC contract for 140-megawatt project at Olkaria with a 20-year PPA with KPLC. I would assume it could be a significant EPC opportunity for your products pipeline can you comment on this development in your appetite to do EPC work in Kenya?

Isaac Angel -- Chief Executive Officer

Noah alas we know each other for long time you know that it is the doublet for us which means that in one hand we are increasing the electricity revenue and then profitability not at the same rate we are improving our product revenue and profit. But fortunately on upwards let me there review the opportunity that you mentioned in Kenya New Zealand Philippines and also in other countries. So I'm expecting that the product revenues in the upcoming year will be at least at the rate that they were before. And as you mentioned the opportunities are numerous and we shouldn't also forget the Turkish market which is beyond that 1 gigawatt and their expectation is to increase. If we double it the problem over there are I like to believe only temporary and eventually also the open economy will somehow rewind. So and the financial capabilities of the local invested will be in place.

Noah Duke Kaye -- Oppenheimer & Co. Inc. Research Division -- Analyst

Okay that's helpful. I guess as a follow-up you mentioned there was a curtailment at Olkaria. Can just explain what drove that? And then I get as a related in the past quarters you've disclosed receivables outstanding from some customers and international customers so the receivables balance went up again sequentially. Can you just give us some color on was that a continued headwind this quarter can you help us make sense of this trend?

Isaac Angel -- Chief Executive Officer

Okay. First we had a 150-megawatt facility operating in Kenya which was gradually built in the last 10 years. The PPA calls for asset -- the energy; there is a trend in the last few months that we are beginning to tell on the energy part especially as night. We understand that this is due to the fact that they are still missing transmission lines and which would be being built and when it gets to be operational we expect that this curtailment will be finished. In any case as I mentioned before as the PPAs both for capacity and energy with the larger part being capacity at the end of the day it is a more let's say problem with the revenues. But it's not something severe and I believe it's only temporary. On the second part of your question we mentioned that there are -- I don't recall that we talked about the payment issues.

At the end of the day we are operating in the country but not in us and we are -- even if we are not exactly due on all payments we don't have a payment issue over there so far. And now I'd like to add as you continue to the big part of the PPA capacity focus of The best obviously only the energy part and not the capacity -- Okay that's very helpful. Maybe I should turn it over and follow-up with the rest of line. But I appreciate that.

Operator

[Operator Instructions] The next question comes from Jeff Osborne of Cowen and Company. Please go ahead.

Jeffrey David Osborne -- Cowen & Company -- Analyst

Yes good afternoon. Maybe just following up on Noah's question. I think it was the 10-Q that actually flagged that there were some late payments from Kenya and Honduras. Can you just talk about those? I believe the outstanding balance was given for both those countries as of August when it was last published. I'm just asking are things getting better or worse in those two countries?

Isaac Angel -- Chief Executive Officer

Let me relate first again on Kenya. I don't recall the exact due today but in Kenya we are being paid even if it's late it's OK. And they are covered as Doron in telling me now and on Honduras we had a serious issue until 2019 because I don't know if you know that there is a very large in Honduras that they are putting together today not only to us but to others. But since April we are being paid current and we expect all the payment that is I don't know if we have the number on the 10-Q but it's a significant number that we're expecting to be based through financing Indecipherable,

Doron Blachar -- Chief Financial Officer

Got it. That's helpful. I appreciate that. Two other quick ones on my end. Can you just talk about what the drivers were on the upward revision of guidance to the higher end of the prior range? What were the -- was there -- McGuinness Hills 3 for example or tungsten do those come online faster than you originally planned? I'm just trying to understand what the moving pieces were.

Isaac Angel -- Chief Executive Officer

Jeff all of the above which means that at the end -- you probably noticed that our gross margin segment is growing faster than we expected. Due to timing issue we are building much faster than before. Due to the fact that the efficiencies of the power plants are growing we developed during the last year a much more efficient turbines and solutions which are increasing the biggest piece of the power plant by 6 megawatt and decreasing the O&M expenses in those power plants. Altogether we feel confident to increase the guidance on the EBITDA as I said before which are coming mainly from the electricity.

Jeffrey David Osborne -- Cowen & Company -- Analyst

Got it. That's good to hear. And the last question I had is can you just touch on the M&A environment? I think you've been highlighting M&A as a strategy for the past two years other than US Geothermal. There hasn't been much coming across the finish line. I didn't know would you say that the activity there is higher than it was six months or nine months ago or about the same? I'm just trying to get a sense of your appetite for that.

Isaac Angel -- Chief Executive Officer

Jeff as we speak we are negotiating with more than one party to stop M&A. Let's say these higher even but unfortunately nothing has been concluded. As we said before meaning management we are not going to perform M&A for the sake of doing M&A it should be a credit to Ormat. And you probably know that there are few opportunities which are publicly released in the market. Unfortunately these one of them stalled because of the fire then the PG&E issues in California. I think overall I don't have any let's say news I won't say even good or bad at this stage but we are working ,

Jeffrey David Osborne -- Cowen & Company -- Analyst

I appreciate it. Thank you. That's all I had.

Operator

[Operator Instructions] Okay this concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Isaac Angel for any closing remarks.

Isaac Angel -- Chief Executive Officer

Thank you operator. Thank you everybody for joining us this morning or evening in other countries. And as usual I'm remaining very optimistic that we are on the right path to take the company for the next step and I thank you all for your ongoing support. Thank you very much.

Operator

[Operator Closing Remarks].

Duration: 37 minutes

Call participants:

Rob Fink -- Investor Relations

Isaac Angel -- Chief Executive Officer

Doron Blachar -- Chief Financial Officer

Noah Duke Kaye -- Oppenheimer & Co. Inc. Research Division -- Analyst

Jeffrey David Osborne -- Cowen & Company -- Analyst

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