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Ormat Technologies Inc (ORA 0.93%)
Q2Â 2020 Earnings Call
Aug 5, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the Ormat Technologies Incorporated Second Quarter 2020 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Rob Fink of FNK, Investor Relations. Please go ahead, sir.
Rob Fink -- Investor Relations
Thank you, operator. Hosting the call today are Doron Blachar, Chief Executive Officer; Assi Ginzburg, Chief Financial Officer and Smadar Lavi, Vice President of Corporate Finance and Investor Relations.
Before beginning, we would like to remind you that the information provided during this call, they 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 Reforms 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, please see the Risk Factors section 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's reasons for presenting such information is set forth in the press release that was issued last night, as well as in the slide posted on the company's website. Because these measures are not calculated in the 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'd 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 Doron Blachar. Doron, the call is yours.
Doron Blachar -- Chief Executive Officer
Thank you, Rob and good morning everyone. Thank you for joining us today. I'm excited to speak with you today as the CEO of Ormat, a position I assumed on July 1.
Starting with Slide 5, our second quarter was another solid quarter for Ormat with $23 million net income higher gross margins and $97.9 million second quarter adjusted EBITDA led by improved profitability of our Electricity segment.
I'm extremely proud of how our team is operating through the challenging of COVID-19 environment. While we continue with our efforts to minimize the COVID-19 implications on our business. Our first priority from the beginning of this pandemic was to make sure that all of our employees are safe and they are able to navigate this crisis unharmed.
On the Electricity segment, we were able to successfully complete the enhancement of Steamboat Hills increasing our portfolio by 19 megawatts to 933 megawatts and also made a significant progress to bring Puna back online. Our ability to complete and progress with development of projects derived from our unique capabilities as a vertically integrated company.
The pandemic has delayed the awarding of contract for large project in our product segment. However, our product segment is currently on track to meet its revenue forecast for the full-year 2020. We are continuing our efforts to grow our Electricity segment, as I will elaborate later on the call and not only we are on track to meet our 2022 megawatt growth goals, we're also laying the foundation to enable us to continue our growth path in 2023 and beyond.Now, I will turn the call over to Assi Ginzburg, who joined Ormat in early May as our new Chief Financial Officer for a review of the financial results, before I provide an update on operations. Assi, welcome.
Assi Ginzburg -- Chief Financial Officer
Thank you, Doron. I'm excited to join Ormat. Let me start the review of the results on Slide 7. Total revenues for the second quarter of 2020 were $175 million, down 5%. Our cost of revenue decreased 8% to $110 million in the second quarter of 2020. The net result was a slight increase in gross profit of $0.2 million.
Moving to Slide 8, for more details on Electricity segment. Revenue in our electricity segment were $129 million for the second quarter of 2020 and represented 74% of total revenue, this was slightly down from the $129.1 million or 70% of total revenue in the same period last year. This quarter, our current capex revenue were impacted by curtailment from [Indecipherable] customer, mainly due to COVID-19 reduction in demand. This reduction was offset by improved generation in other power plants that weer upgraded recently.
Cost of revenue this quarter reduced mainly by $1.3 million decrease in lease expenses due to termination of Puna lease transaction and lower O&M expenses in other power plants. The cost of revenue this quarter includes business interruption insurance income of $2.7 million related to Puna, compared to $6.9 million included in the same period last year.
Turning to Slide 9, during the second quarter of 2020, Product segment revenues decreased 16% to $43.7 million or 25% of total revenue.
On slide 10, the Energy Storage and Management Services segment contributed $2.5 million of revenue for the second quarter of 2020, compared to $3 million last year. This decrease was mainly driven by the impact of COVID-19 on the frequency regulation market prices.
Moving to Slide 11, for a discussion of our total gross profit and margin. Second quarter 2020 consolidated gross margin was 37.4%, compared to gross margins of 35.4% for the second quarter of 2019. The increase in gross margin and profit was driven by improved margin of the Electricity segment.
On Slide 12, the gross margin for the electricity segment expanded year-over-year to 44.1%, compared to 42.8% for the second quarter last year. The increase is mainly due to improved performance of our operating power plant. The Product segment gross margin was 20.6% in the second quarter of 2020 similar to last year. We expect 2020 annual margin in this segment to be in line with this quarter. The Storage segments margin improved, but still reported a negative gross margin as we anticipated. Our recent announcement of closing the Pomona transaction reiterates our commitment to grow and improve the profitability of the segment.
Turning to Slide 13, SG&A expenses for the second quarter of 2020 were $16.2 million, compared to $17.5 million for the second quarter of 2019. The decrease was mostly due to $1.3 million from the sale of concession, business interruption recovery of $0.6 million relating to the Puna power plant and a decrease in professional fees, travel cost, partially offset by higher sales commission.
Turning to Slide 14. Operating income for the second quarter of 2020 was $48.1 billion, compared to $46.9 million for the second quarter of 2019, an increase of 2.5%.
On Slide 15, you can see the breakdown of the operating income by segments. As we continue to grow our stable Electricity segment, we expect it to take a larger portion of our operating income.
Turning to Slide 16, net interest expense for the second quarter of 2020 was $19.8 million, a decrease of $1.7 million. Higher capitalized interest, in addition to lower tax equity-related interest expense was partially offset by interest related to the fact we have choose due to COVID-19 to increase long-term debt level and maintain higher cash levels.
Now turning to Slide 17. Income tax position -- provision for the second quarter of 2020 was $11.8 million or an effective tax rate of 33.3%, compared to income tax benefit of $3.5 million for the second quarter of 2019. Income tax benefit for the second quarter of 2019, included the one-time tax benefit of $13.3 million, which was excluded from our adjusted EPS.
Turning to Slide 18. Net income attributable to the company's shareholders was $23 million or $0.45 per diluted share, compared to $33.9 million or $0.66 per diluted share for the second quarter of 2019. Adjusted net income to the company's shareholders in the second quarter of last year, netting of the one-time tax benefit I mentioned earlier was $20.6 million or $0.40 per diluted share. Reconciliation of adjusted net income and adjusted EPS are provided in the appendix slide.
Turning to Slide 19, adjusted EBITDA was $97.9 million for the second quarter of 2020, up from $94.9 million in the second quarter last year. Reconciliation of the EBITDA and adjusted EBITDA are provided in the appendix slide.
Turning now to Slide 20, cash and restricted cash as of June 30 was $250 million, compared to $153 million as of December 31, 2019. A strong cash flow generation of this slide demonstrates our enhanced ability to reinvest in the business to support our growth. Our long-term and short-term debt as of June 30 was $1.35 billion, net of deferred financing costs. And its payment schedule is presented on the next slide.
The average interest rate on this debt was 5.03%. In order to support Ormat growth plan since March 31, 2020, we have raised on the $400 million of long-term debt, including the recent bond offering of $290 million closed in July 20, debt expected to reduce our overall interest rates. Our net debt as of June 30, 2020 was $1.1 billion.
On August 1, 2020, the company's Board of Directors declared, approved and authorized payment of the quarterly dividend of $0.11 per share pursuant to the Company's dividend policy. The dividend will be paid on September 1, 2020 to shareholders of record as of close business date on August 18, 2020.
That concludes my overview. Now, I will turn the call back to Doron for an operational and business update and closing remarks. Doron?
Doron Blachar -- Chief Executive Officer
Thank you, Assi. Turning to Slide 23 for [Indecipherable] generation. Power generation in our power plants declined by 4.7% to 1.44 million megawatt hours in the second quarter of 2020. This decline is attributable to several factors; including the curtailment of our generation in Olkaria power plant in Kenya and lower generation in our old facility due to lower demand in the natural gas pipeline both mainly due to COVID-19. The impact of the curtailment in Kenya is limited as the Olkaria PPA secured the vast majority of our revenues with fixed capacity payments unrelated to the electricity actually consumed.
The fourth majeure letter we received from KPLC in April has an immaterial impact on our revenue as agreed by KPLC. On another topic in Kenya, as we reported before, we received from the local Kenya Revenue Authorities, the KRA, three assessments related to tax audits for the year 2015 to 2017. We are in discussions with the KRA on each of these assessments and we're happy to update that the KRA agreed to reduce the third assessment from $17 million to less than $3 million, including fines and benefits. With respect to the other two assessments, the COVID-19 slowed down the discussions. However, we are continuing an open dialog with the KRA and we together with our advisors, still believe that out tax position for the issues raised under these assessments are more likely than not sustainable based on technical merits under the Kenyan tax law.
Another encouraging update we have this time in Honduras, where we had an overdue invoice of $20 million for the period between September 2018 and April 2019. Over the last several weeks, our customer [Indecipherable] had some discussions with several IPPs including us with regard to paying the $20 million over a few installments. Having said that, we're in a unique COVID-19 environment that may impact this process.
Let me now turn to slide 24. As of today, the recommissioning efforts at Puna continue. We completed the construction of the substation and awaiting help to complete its scope of work in the substation. HELCO received the necessary permits from Hawaii [Indecipherable] to build a transmission lines and started constructing the line. We expect this work to be completed by the end of the third quarter.
On the field side, we connected the production well to the department and continue drilling of new wells. We expect initial power generation in the fourth quarter with gradual increase of generation to 29 megawatts by the end of this year.
Turning to Slide 25. We continue with our work to bring online new projects. This quarter, we completed our work at Steamboat Hills increasing the complex capacity by 19 megawatts to 84 megawatts. We continue our work in Heber to increase the capacity of the complex by 11 megawatts, manufacturing and construction of the new equipment is ongoing.
As you can see in the list, successful exploration work enable us to advance the Tungsten 3 project that will add 11 megawatt during 2022. As I mentioned in my opening remarks, we are continuing our efforts to grow our more profitable electricity segment and we are on track with our developments to add 160 megawatts to 180 megawatts by the end of 2022. We allocated manufacturing, exploration and capital resources to continue our growth in 2023 and beyond by enhancing existing operating assets and developing new internal projects in the US and globally that will increase our profitability. As Assi mentioned in his remarks, we raised over $400 million in long-term debt to support these efforts.
Turning to Slide 26, for an update on our backlog. As of August 2020, our product segment backlog was $66 million. We believe that the decline in the backlog resulted in part from the impact of COVID-19 and the current concern of potential customer to enter into large commitments at this time. We anticipate continued weakness in our product backlog as a result, at this stage we expect significant lower revenues from the product segment in 2021. The vertical integration structure of our business model enables us to shift our manufacturing capacity to focus on internal initiatives to support our electricity segment growth. We started to see this shift already in the second quarter, generating approximately $50 million of internal revenues that are eliminated in the consolidation, the highest level of quarterly inter segments revenue in the last five years.
Turning to Slide 27 for an update on our Energy Storage and Management Services. In April this year, we announced that our 10 megawatts Rabbit Hill storage facility in Texas commenced operation, providing ancillary service and energy optimization to the wholesale market managed by ERCOT. We continue our efforts to expand our storage portfolio. In July, we completed our acquisition of the Pomona 20 megawatt battery storage facility for a total net purchase price of $43.9 million.
The Pomona facility has been in commercial operation since the end of 2016 and the 10-year Energy Storage Resource Adequacy Agreement with Southern California Edison company. This facility is our first battery storage assets in operation in California, increasing our existing operating portfolio to 73 megawatt, 136 megawatt hour and added to our battery storage assets in New Jersey, New England and Texas.
As well as Valecito project in California, we are progressing with the small delay in permitting interconnection and EPC work due to the COVID-19 outbreak. We continue to participate in new RFPs to further develop our pipeline projects and aiming a target of 100 megawatts to 150 megawatts to be commissioned by the end of 2022.
Turning to Slide 28. Our expected capital spend for the rest of the year, include approximately $120 million for capital expenditure, for construction of new projects and enhancement to our existing power plant that management released for construction. In addition we estimate additional $87 million for the exploration and development, that we're not yet released for full construction, maintenance of capital expenditure including our work with the Puna power plant, construction and development of storage projects and enhancement to our production facility is detailed on slide. In the aggregate, we estimate total expenditure for the remainder of 2020 to be approximately $207 million.
Please turn to Slide 29, for a discussion of our 2020 guidance. We are narrowing the upper end of the guidance for the full-year 2020, we expect total revenues between $710 million and $725 million with Electricity segment's revenues between $550 million and $560 million. We continue to expect product segment's revenues between $140 million and $150 million. Revenues for Energy Storage and demand response activities are expected to be between $15 million and $17 million. Adjusted EBITDA is now expected to be between $400 million and $410 million. We expect annual adjusted EBITDA attributable to minority interest to be approximately $27 million.
As a summary, the step we took together with inherent stable and long-term contracted portfolio of our Electricity segment have enabled us to ease the impact of the COVID-19 pandemic at this time. And we are on track with our plan to extend our more profitable Electricity segment, which is taking an interest portion of our revenues and EBITDA.
This concludes our prepared remarks. Now, I would like to open the call for questions. Operator, please.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Noah Kaye with Oppenheimer. Please go ahead.
Noah Kaye -- Oppenheimer -- Analyst
Thanks very much. Good morning, good afternoon. Thanks for taking the questions. If we can just start with the project development. It looks like as we sort of adjust for Steamboat Hills, which has come online in the expansion plans through 2022 are largely unchanged. I'm just wondering, in this environment and certainly with the PTC benefit, where do you see opportunities to accelerate the pace of development. Is it more domestic US focus for international? Just give us some more color on how you see the pace of development?
Doron Blachar -- Chief Executive Officer
Hi, Noah. Well, first, we've added Tungsten 2 to the list as an extension to one of our existing projects, we are working today and advancing exploration. We are working today on several greenfield in the US, we also have some additional enhancement to our power plants that we have today in the US. So the current 2021 and 2022 growth is focused on the US, mainly and as you said, on the PTC eligibility. So we do expect the next projects in the US to be eligible for PTC, when they come online in the next two to four years.
Globally, we are also aiming to interest in Indonesia and Norwegian project that we have invested last year and is doing exploration today. The exploration is moving quite well. We finished drilling one well over there and we're drilling a second well there and we expect if all the exploration [Phonetic] finishes well to be part of the growth beyond 2022.
Noah Kaye -- Oppenheimer -- Analyst
Okay. So, quite a number of activities going on there. Just -- I'm not sure, I quite fully caught it, but the Kenya tax resolution. So this was on the third letter preliminary finding that they reduced it from $17 million down to $3 million, is that correct?
Doron Blachar -- Chief Executive Officer
Yes.
Noah Kaye -- Oppenheimer -- Analyst
Okay. Can you give us an update on the other two letters?
Doron Blachar -- Chief Executive Officer
The other two letter, like in every IRS or KRA audit, you know, there's ongoing discussions -- we, as well as our legal and auditors feel that our position is exactly or technically correct according to the Kenyan tax law. So there's ongoing discussions, the discussions are bit slower, because of COVID. I think now in August, Kenya is opening its borders and maybe we'll be able to expedite the discussions [Indecipherable]
Noah Kaye -- Oppenheimer -- Analyst
Okay, terrific. And then last one from me. We had seen that some of the thermal power producers in Kenya had -- obviously, they've received the force majeure. There's are some discussions with Kenya Power & Light about those contracts? I guess it would be helpful for us and for investors. If you could just give an update on any discussions you are having with the utility, about the contract. It seems like there's an immaterial impact in the short-term from these curtailments. But just wondering, if there's anything you can share with us around some of the long-term contract results.
Doron Blachar -- Chief Executive Officer
So as you said, we have a long-term contract with KPLC, end of last quarter we received the force majeure letter and we analyzed it as immaterial. This quarter, we have discussed with KPLC, and they actually agreed to our position that is totally immaterial and it's already in the numbers. We don't have any discussions with the KPLC on our PPA, on the pricing. There's some other PPAs that are much higher than ours. And the only discussion we had was on the force majeure that was totally immaterial.
Noah Kaye -- Oppenheimer -- Analyst
That's extremely helpful. Thanks so much.
Doron Blachar -- Chief Executive Officer
Thank you, Noah.
Operator
Our next question will come from Mark Strouse with JPMorgan. Please go ahead.
Mark Strouse -- JPMorgan -- Analyst
Yes. Thank you very much for taking our questions. Just a kind of a follow-up on Noah's question. Just to be clear, so are you still receiving payments from your counterparties in Kenya and Honduras. And kind of a related question is just looking at the accounts receivable was kind of flattish quarter-over-quarter, but the DSOs keep going up. Just any color on that trend? And what are your expectations going forward?
Doron Blachar -- Chief Executive Officer
We are getting paid in Kenya as well as in Honduras. We have ongoing payments in both countries. KPLC has been slowing its payments for the last, I think, two years, but they keep on paying. In the quarter as well in July, we continue to pay in July the due payments and Honduras are paying regularly. And as I mentioned, we have in Honduras the $20 million debt from the end of '18 beginning of '19. We are in discussions with and actually an as discussion with us as well as other IPPs. And as the Honduran electricity company in order to pay this amount in the coming weeks in a few installments. So, we expect this amount to be paid over time.
Mark Strouse -- JPMorgan -- Analyst
Okay. And then, again, I apologize if I missed this, but just the slightly reduced outlook for the electricity segment revenues. Is that driven primarily by Olkaria or Puna or anything else to call out?
Doron Blachar -- Chief Executive Officer
Yes, it's mainly due to the COVID-19 uncertainty and the curtailment that we had in Kenya, and the low gas in the pipeline in the ore.
Mark Strouse -- JPMorgan -- Analyst
Got it. Okay, thank you very much.
Doron Blachar -- Chief Executive Officer
You are welcome.
Operator
[Operator Instructions] Our next question will come from Jeff Osborne with Cowen and Company. Please go ahead.
Jeff Osborne -- Cowen and Company -- Analyst
Hey, good afternoon guys. Just a couple of questions on my end. Could you touch on the product orders, you referenced COVID, which is understandable for delays. I'm just trying to get a sense of the particular projects that you were bidding that are delayed. Is there financing delays, regulatory delays, we're just not seeing that type of acuteness. For example, in the wind industry, where turbine makers are still signing contracts. I'm just curious why geothermal seems to bit more acutely?
Doron Blachar -- Chief Executive Officer
What we -- Jeff, what we actually see delays in the decision-making process, not in the regulatory environment, at least in New Zealand, where we operate in the Philippines, in Mexico where we have projects. The one country that has regulatory delays is Turkey. Turkey has a feed-in tariff that ends October of this year. And they were supposed to issue some new regulations at the beginning of the year, which -- what we understand due to COVID were delayed. They have a few projects basically ready to be released, if there's going to be some regulations and we hope that the regulations in Turkey will come up, and then there will be some more projects in Turkey. In other places, it's mainly the customer decision to wait to see how COVID-19 is settling.
Jeff Osborne -- Cowen and Company -- Analyst
Got it. That's very helpful. Thank you. Two other quick ones here, on the storage side, where you are talking about adding 100 megawatts to 150 megawatts. Can you just give us a sense of what the pipeline is there, certainly companies like Fluence and NextEra and Tesla have quite a bit of activity going on as well. So A, I'm trying to get a sense of your pipeline and then B, why you folks would win versus others?
Doron Blachar -- Chief Executive Officer
I think in the storage part, we're active in a few of the market in PGM, Texas, California. And as you said, there's quite a lot of activity, quite a lot of RFPs going out and the need for energy storage is very big in California. And we have a few locations that we're working on the interconnections and once we get the interconnections we can bid them into the RFPs and work them and start building them and operating in the market. We've answered those RFPs in Hawaii that we have been shortlisted on some. So, there's quite a lot of activity going on, there is obviously quite a lot of players, but the amount of RFPs and need for energy storage is very big.
Jeff Osborne -- Cowen and Company -- Analyst
Got it. And then the last one, can you just remind us how we should think about Puna with the 29 megawatts for 2021. So obviously, very little revenue this year. But can you just remind us when it was operational. What the revenue and EBITDA profile was? And then given the reconstruction and the new cost points. I wasn't sure if you know what happened in the past as comparable to what we should anticipate for 2021 and beyond?
Doron Blachar -- Chief Executive Officer
In the past, we had 38 megawatts, revenue was around $38 million to $40 million and EBITDA was about $20 million. So obviously, if we go to 29 megawatt, compared to the 38 megawatt, it will be a bit lower. And the pricing in Puna, the first 25 megawatt are avoided costs. So, these are relates to the avoided cost, it help of mainly oil and diesel pricing, so this changes over time. Since we look into more details, but I think today's avoided cost are quite similar to the beginning of 2018.
Jeff Osborne -- Cowen and Company -- Analyst
Got it. Thank you. That's all I had.
Doron Blachar -- Chief Executive Officer
Thank you.
Operator
[Operator Instructions] And our next question will come from Gerry Sweeney with ROTH Capital. Please go ahead.
Gerry Sweeney -- ROTH Capital -- Analyst
Good afternoon. Hi, Doron. Thanks for taking my call. Couple of quick follow-up questions, just on the electricity in terms of take-or-pay. I know the US is take-or-pay especially with Puna agreement, you've talked about Olkaria to Kenya. Your 90% i s-- I guess, levered to capacity, 10% production. What about other facilities on a global basis, they take-or-pay as well or is there -- are there any others that have some variability in their PPAs?
Doron Blachar -- Chief Executive Officer
All the others in Honduras, Guatemala and Guadeloupe, all of them are take-or-pay. So...
Gerry Sweeney -- ROTH Capital -- Analyst
Okay and then just speaking on Honduras. I know in the last call, I'm not sure if I missed it anywhere. But they did send a force majeure letter with very little details on any linkage to anything or revenue or any specific revenue numbers. Has anything come about from that letter or is that move to the background?
Doron Blachar -- Chief Executive Officer
No, we didn't have any -- they didn't have any follow-up discussions with us or anything they keep on taking the electricity and paying the bill. So there's is nothing to follow-up.
Gerry Sweeney -- ROTH Capital -- Analyst
Yes, that's fine. And then just one more on the Kenya tax issue. I know, I guess the three assessments; one assessment on $17 million to $3 million. Reading the Q, I think, there was a couple of different numbers over time. But what is the outstanding principal and penalties on the other two assessments? I believe all three were $219 million in the last Q, but could you just update us as to whether -- I didn't see the Q [Technical Issues]?
Doron Blachar -- Chief Executive Officer
In the outstanding, [Technical Issues] is $157 million, so if you add the [Technical Issues] that's the principle. And then there's also penalties and interest, but that's obviously subject to -- for the discussion.
Gerry Sweeney -- ROTH Capital -- Analyst
Yes, yes.So got it, one [Technical Issues]
Doron Blachar -- Chief Executive Officer
The first two are about $157 million, it has penalties and interest of about $40-something million. And the third one, as we said was $17 million went down to $3 million.
Gerry Sweeney -- ROTH Capital -- Analyst
Got it. Perfect. Appreciate it. Thanks for taking my questions.
Doron Blachar -- Chief Executive Officer
Thank you.
Operator
[Operator Instructions] [Operator Closing Remarks]
Duration: 36 minutes
Call participants:
Rob Fink -- Investor Relations
Doron Blachar -- Chief Executive Officer
Assi Ginzburg -- Chief Financial Officer
Noah Kaye -- Oppenheimer -- Analyst
Mark Strouse -- JPMorgan -- Analyst
Jeff Osborne -- Cowen and Company -- Analyst
Gerry Sweeney -- ROTH Capital -- Analyst
