Image source: The Motley Fool.
Ormat Technologies Inc (ORA 1.32%)
Q3Â 2020 Earnings Call
Nov 4, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to the Ormat Technologies, Incorporated Q3 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rob Fink of FNK IR. Please go ahead.
Rob Fink -- Managing Partner
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 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, please see the Risk Factors as described in Ormat Technologies' Annual Report on Form 10-K and quarterly reports on Form 10-Q that are filed with the SEC. In addition, during the call, the company will present non-GAAP financial measures such as adjusted EBITDA. Reconciliation 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 on the slides that are posted 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 would 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. Starting with slide 5 and 6, this was another good quarter for Ormat. We continue to navigate successfully the challenges of the COVID pandemic, delivering year-over-year improvements in our profitability and making significant progress in executing our long-term plan to increase our geothermal storage and hybrid solar geothermal capacity. Our third quarter results reflect the strength of our business model and operating execution.
We generated double-digit increases in year-over-year operating income and adjusted EBITDA and made progress with our efforts to grow our Electricity and Storage segments. We delivered strong cash flow from operation this quarter driven by a $20.1 million payment received from ENEE, our customer in Honduras, for prior years' outstanding invoices and improved collection from KPLC, our customer in Kenya. KPLC has made all scheduled payments for the third quarter, and it started reducing overdue amount in October.
Also in Kenya, we favorably resolved the $190 million tax assessment, the most significant assessment of the tax assessments issued by the KRA. We settled this assessment with an expected limited on the fourth quarter P&L. Additionally, the force majeure declared by KPLC in Kenya was removed in early September. We are continuing our efforts to grow our Electricity segment that I will elaborate later on the call. We are also encouraged by our Storage segments result this quarter. The strength of these two segments is helping us to offset the current decline in the Product segment result, which is being impacted with the reduced backlog, lower revenue, lower profitability affected mainly due to COVID-19 effects.
I will turn the call over to Assi Ginzburg for a review of the financial results, before I provide further update on our operations. Assi?
Assi Ginzburg -- Chief Financial Officer
Thank you, Doron. Let me start my review of our financial performance on slide 8. Total revenues for the quarters were $159 million, down 7% and cost of revenue decreased 9% to $105 million. The net result was a decrease in gross profit of 3%. However, gross margin increased from a 32.5% last year to 34% this quarter. Moving to slide 9 for more details in our Electricity segment; revenues for the quarter in our Electricity segment were $124 million, in line with same period last year. This quarter we benefited from increased revenue in Steamboat Hills, Ormesa and Brady, offset by lower revenues in Olkaria as a result of the containment during this period. Cost of revenue this quarter included the business interruption insurance income related to Puna of $2.6 million out of a total of $20.4 million via insurance income received this quarter.
This compared to $1.2 million included last year in gross margin. As a reminder on the GAAP, we allocated profits from the business interruption insurance first to cost of revenue of the Electricity segment. And when that is exhausted, the balance is allocated to insurance income under operating expenses under a separate line item in the P&L. Turning to slide 10. As expected, Product segment revenue are lower in the quarter by $13.4 million compared to last year due to the continued impact of COVID-19 on this segment. On slide 11, the Energy Storage & Management Services segment generated $5.7 million of revenues, an increase of 62.5% over last year. This segment enjoyed from the Pomona addition following its acquisition in July, which contributed $2.4 million to our quarterly revenue.
Moving to slide 12 and 13 for a discussion of our gross profit and margin; the third quarter consolidated gross margin improved by better performance of both the Electricity and Storage segments. Gross margin for the Electricity segment demonstrating our efforts to improved efficiency of our operating assets. In the Product segment, we see declining gross margin mainly due to higher cost of revenue related to the Ngawha project that we are building currently in New Zealand. This project was impacted, among others, by restriction and limitation in the country associated with COVID-19. The higher cost in Ngawha project this quarter also impacted the full-year 2020 gross margin that is expected to be in line with this quarter margin.
Energy Storage & Management Services segment reported a gross margin of 25.6%, a much improved results compared to a negative gross margin in prior quarters. The improvement was driven by addition of Pomona [Indecipherable] carrying $1 million depreciation this quarter delivering strong profit. We expect Pomona annual run rate of depreciation and amortization to be $4.8 million a year. This was the second consecutive quarter where our Energy Storage business contributed positive EBITDA to our consolidated results. Turning to slide 14, SG&A expenses for the third quarter were $18.6 million compared to $15.7 million last year. The increase is mainly driven by increase in sales commission, insurance expense and other professional services.
Turning to slide 15, operating income for the third quarter increased by 33.5%. In the slide, you can see the breakdown of the operating income by segment. Turning to slide 16, net interest expense for the third quarter of 2020 was $21.8 million compared to $20.1 million in the prior period. Interest expense this quarter was negatively impacted by the interest cost of the $290 million bond, which we borrowed early in Q3 while process were used to pay outstanding debt toward the last part of the quarter including all revolving credit facilities. The issuance of the $290 million bonds and paying down all available lines of credit enable us to be well-prepared to the expected increase in 2021 capex to support our U.S. and Indonesia investments.
Turning to slide 17, provision from income tax for the third quarter was $15.4 million for an effective tax rate of 39% compared to income tax expense of $10 million for the third quarter of 2019. This quarter, we had a $3.7 million non-cash items tax charge related to a recent change in U.S. laws. Turning to slide 18, net income attributable to the company's stockholders was $15.7 million or $0.31 per diluted shares compared to $15.6 million or $0.30 per diluted shares for the third quarter last year. Net income attributable to the company stockholders benefit from $8.1 million related to Ormat's after tax portion of Puna insurance income, partially offset by non-cash charge of $1.4 million related to Sarulla. In addition, a recent change in the tax law in the U.S. resulted in a $3.7 million income tax charge. In aggregate, these factors positively impact our diluted EPS by $0.059 per share.
Turning to slide 19; adjusted EBITDA this quarter was $107.1 million, up from $85.5 million last year. In slide 20, you can see that the electricity contribution to our total EBITDA increased to 92.5%. Please note this adjusted EBITDA included the full impact of the BI insurance received this quarter, while the impact on EPS reduced by associated tax and by a portion related to our partners. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slides. Turning now to slide 21; cash and restricted cash as of September 30, 2020 was approximately $290 million compared to $153 million as of December 31, 2019. This slide breaks down the use of cash for the first nine months and demonstrate our enhanced ability to reinvest in the business to support our growth plans.
Our long-term and short-term debt as of September 30, 2020, was $1.5 million, net of deferred financing costs and its payment schedule is presented on page 22. The average interest rate on our debt is currently 4.9%. Our net debt as of September 30, 2020, was $1.2 billion. Turning to slide 23, that provides an overview of our recent financing activity. These activities in line with our plans to continue and increase our efforts on exploring and developing of new internal projects with a target to increase Electricity and Storage segment in the U.S. and globally in 2023 and beyond. On November 3, 2020, the company's board of directors declared a dividend of $0.11 per share pursuant to the company's dividend policy.
The dividend will be paid on December 2, 2020, to stockholders of record as of the close of business day on November 18, 2020. Before I close the call to Doron, I want to elaborate on some of the favorable developments we had in the international front. In September, we received a $20 million from our customer in Honduras for prior year's outstanding invoices. In addition, we approved collection from KPLC, our customer in Kenya. KPLC has made all scheduled payments for the third quarter and has started reducing overdue amount starting in October.
Finally, subsequent to the end of the third quarter, we concluded an audit by the Kenya Tax Authority also known as the KRA related to a $190 million tax assessment issued by them in December 2019. And we reached a very favorable settlement. The total net estimated impact on Ormat results, which all of it will be recorded in Q4 2020 is approximately $6 million, only $0.12 per diluted share including all associated interests and penalties. The settlement covered the years 2013 through 2019 and included deferral of tax benefits that were previously utilized by Ormat resulting in a payment to the KRA during Q4 of this year of $28.2 million, which the company is expected to recover most of it through lower future tax payments. We still have two unresolved tax assessments at the different stages of negotiation in the total amount of $9 million, including all interest and penalties.
That concludes my overview. Now, I would now like to turn the call over to Doron for the operational and business update. Doron?
Doron Blachar -- Chief Executive Officer
Thank you, Assi. Turning to slide 25 for a look at generation; power generation in our power plants in the quarter declined by 3.5% compared to last year. This decline is mainly due to the lower generation at our OREG facility and some curtailments in the Olkaria power plants. However, revenue remained unchanged because of different energy rates under our portfolio of contracts. As noted on slide 26, our efforts to resume generation at the Puna plant moved forward and the construction of the electrical substation and transmission line is completed and the power plant is currently connected to the transmission lines. On the field site, we connected one new production well to the power plant, and we are in the process of connecting a second production well.
We expect to start generating power in the next few weeks with a gradual increase in generation to 29 megawatts by the end of the year although the exact timing remain uncertain. We plan to further expand generation throughout 2021 as a way to build a new power plant with 46 megawatt. Turning to slide 27, we continue with our work to grow our more profitable electricity segment and we are on track with our development to add 160 megawatts to 180 megawatts in the next two years, and compared to the 24 megawatts we added in the last two years 2019 till 2020. As a result of these expansion efforts, we're expecting our capex in 2021 to be higher than in previous years.
As we discussed last quarter, as part of our preparation for a weak 2021 in the Product segment, we are using our vertical integration capabilities to shift manufacturing capacity to focus more on internal initiative to support our Electricity segment future growth. We're allocating manufacturing, exploration and capital resources to continue our growth in 2023 and beyond. We are increasing our exploration activities domestically and worldwide, enhancing existing operating assets, developing new internal projects in the U.S. and globally that will increase our profitability. We are also actively looking for M&A opportunities in the U.S. and worldwide to expand our portfolio. As you can see in the list, we added a new solar project to our portfolio.
We are duplicating the successful Tungsten hybrid project and adding solar to our existing geothermal power plant to serve geothermal auxiliary needs. Turning to slide 28 for an update on our backlog; our Product segment has been -- the part of our business most impacted by the COVID-19 pandemic with projects around the world being delayed. We believe this is a short-term phenomenon. However, we did sign a $12 million contract and as of November 2020 our Product segment backlog was $50 million. We have a pipeline of additional contracts and we expect to sign one additional agreement by late 2020 or early 2021. However, we currently anticipate continued weakness in the Product segment that will significantly reduce segment revenues in 2021 compared to 2020 guided revenue and as a consequence, will reduce this segment EBITDA.
Partially offsetting the weakness in -- of the Product segment has been a consistent improvement in our Energy Storage business. Energy Storage, discussed in slide 29, continues to evolve, slowly becoming more affordable but quickly becoming more important for a comprehensive renewable energy strategy. The recent blackouts in California only heightened the demand for a strategic energy storage solution. With these tailwinds, we continue to win business in California and elsewhere to expand our presence in this rapidly changing market. We hope to be able to come out with additional updates on the segment developments in future periods. During the third quarter, we signed two Resource Adequacy agreements that expand our Energy Storage footprint in California.
Two community choice aggregator or CCAs each signed an agreement for 2.5 megawatts of Resource Adequacy from our Tierra Buena energy storage project, which is currently under development in Sutter County, Northern California. Under the 10-year agreement, the project is expected to begin commercial operations no later than June 2022 and expect to generate $1.2 million of annual revenues. These are the first energy storage deals for these two CCAs. The two CCAs will start to comply with the multi-year statewide mandate to add 3.3 gigawatts of incremental resource adequacy to the California grid by 2023. California remains the primary growth market for our energy storage. During the third quarter, we also completed the acquisition of the 20-megawatt/80-megawatt hour Pomona energy storage facility in California as we saw its positive contribution to revenues and EBITDA in the third quarter.
The Pomona asset increased our existing operational portfolio to 73 megawatts, which represents 136 megawatt hours. Turning to slide 30, our expected capital expense for the rest of the year includes approximately $52 million for capital expenditure for construction of new projects and enhancements to our existing power plants this management released for construction. In addition, we estimate the additional $53 million for the investments listed in this slide. We estimate total expenditure for the remainder of 2020 to be approximately $127 million. Please turn to slide 31 for a discussion of our 2020 guidance. We are updating our guidance for the full year 2020. We expect total revenues between $707 million and $717 million with Electricity segment's revenue between $550 million and $555 million including approximately $6 million expected revenue related to the Puna power plant assuming its reopening in the fourth quarter.
We expect Product segment's revenue between $142 million and $147 million. Revenues for energy storage and demand response activities is expected to be approximately $15 million. We are increasing our adjusted EBITDA and it is now expected to be between $417 million and $425 million. We expect annual adjusted EBITDA attributable to minority interest to be approximately $34 million. As a summary, I'm very proud with Ormat team with what we have accomplished this quarter. We will continue to remain on track with our plans to expand our more profitable Electricity segment, which is taking an increasing portion of our revenues and dividend.
This concludes our prepared remarks. Now, I would like to open the call for questions. Operator, if you please.
Questions and Answers:
Operator
[Operator Instructions] The first question comes from Noah Kaye with Oppenheimer. Please go ahead.
Noah Kaye -- Oppenheimer & Co. -- Analyst
Thank you. Good morning, everyone. Appreciate you taking the questions. I guess just to start with Kenya, did I hear you correctly that KPLC listed the force majeure in September and does that imply not only in the back of paying regularly but are they buying power at/or comparably near pre-pandemic levels at this point?
Doron Blachar -- Chief Executive Officer
Yes. They lifted the force majeure at the end of September and they are buying more than what they've bought in Q3, still a bit less than last year. But what we've seen in Kenya is that regardless of COVID, the country is returning roughly to normal business so we hope that the cost elements, which are lower than Q2, will continue to decline.
Noah Kaye -- Oppenheimer & Co. -- Analyst
Yeah, Okay. That's helpful. Thanks. And then on the business interruption, can you just -- I mean, so we can kind of back this out for next year, can you just remind us like year-to-date what the insurance proceeds have been and how much is sort of outstanding in terms of your claims as you start to get and put it back on line here in 4Q?
Assi Ginzburg -- Chief Financial Officer
Hey, Noah. This is Assi. If you're looking between gross margin and the separate line out of insurance income, it's roughly $30 million year-to-date.
Noah Kaye -- Oppenheimer & Co. -- Analyst
Okay. And I'm sorry if I didn't catch it, but did you expect to recover any more in 4Q and how much is outstanding?
Assi Ginzburg -- Chief Financial Officer
Out of the $100 million policy, we have collected roughly 60% of the policy and we're still negotiating with the insurance company, including with one of them we're actually in the legal event right now and therefore we cannot provide at this point guidance for Q4. I will say it's less likely that we will have something in Q4.
Noah Kaye -- Oppenheimer & Co. -- Analyst
Okay. So, that may still be to come in 2021. And just on products and obviously we've watched the declining backlog here. I think -- at this point already you're indicating, it sounds like, some good prospects for the near- to medium-term. Just for everybody's modeling benefit, I mean, should we really be thinking about this $50 million or so as a reasonable revenue indicator for 2021? How likely is it that you can book enough and then turn that around into revenues over the course of next year to do significantly better than sort of this $50 million level?
Assi Ginzburg -- Chief Financial Officer
So, we're not giving any -- at this state of things, we're not giving guidance for next year but obviously there is a time. Since we are recognizing revenue percentage of completion, there is a time delay between the time we signed a contract and until we can actually start to recognize revenue from it. And so, obviously, 2021 as we said is going to be lower than 2020. And contract that we signed today can come into effect toward Q3 and onwards if we sign them today.
Noah Kaye -- Oppenheimer & Co. -- Analyst
Right. Right, that's helpful. And final last one, again, understanding it's too early to give formal guidance right now for next year. But you did mention that capex is going to be higher next year, which I think is really indicative of your putting foot on the gas here with the development. Order of magnitude, are we looking at somewhere along the lines of 10% to 20% increase or could it even be even greater than that?
Assi Ginzburg -- Chief Financial Officer
I think, if you look in the -- we said that we had 24 megawatts in the last two years and we plan around 160 megawatts to 180 megawatts. So, the interest in 2021 and 2022 is going to be higher than 10% or 20%.
Noah Kaye -- Oppenheimer & Co. -- Analyst
Yeah. All right. That's helpful. I'll jump back. Thank you.
Assi Ginzburg -- Chief Financial Officer
Thank you Noah.
Operator
[Operator Instructions] The next question comes from Mark Strouse of J.P. Morgan. Please go ahead.
Mark Strouse -- J.P. Morgan Securities LLC -- Analyst
Yeah. Thanks very much for taking our questions. Most of them have actually been answered. But if you could just, kind of, break down the revenue guidance, narrowing it toward the lower-end of the range for this year. Can you just, kind of, quantify the different buckets that drove that? Was there any, kind of, changes and expectations for Puna timing or pullbacks on the Kenya production? Anything like that, that you could provide more color, that'd be great. Thank you.
Doron Blachar -- Chief Executive Officer
Yeah. So, thank you Mark. On the Electricity side, the main parameters is as you said Puna. We are hoping it will start earlier. Unfortunately, it is taking a bit longer to work on the field. So, that is the main driver that pushes it to the low-end. The Product segment, we shorten the guidance, which is in the middle, so there's no major change over there. And in the storage front, I think it's roughly where we said it would be.
Mark Strouse -- J.P. Morgan Securities LLC -- Analyst
Right. Okay. That's very helpful. That's it for us. Thank you very much.
Doron Blachar -- Chief Executive Officer
Thank you.
Operator
[Operator Instructions] The next question is from Jeff Osborne with Cowen and Co. Please go ahead.
Jeff Osborne -- Cowen & Company -- Analyst
Hey. Good afternoon, guys. A couple of questions on my end. On the -- congratulations on resolving the Kenya thing. That certainly has been an overhang for investors for quite some time, so great to see. How do we think about where the $6 million should be modeled for next quarter? Is that in other expense or is that a cost of goods item?
Assi Ginzburg -- Chief Financial Officer
Good morning. I suggested that we will put it in the tax line item. It will include $3 million of roughly of interest and penalties and right now, we're planning to book everything in the tax line item. So it will not impact EBITDA, it will only impact the tax rate. But the good news is as you know, Q4 is usually our best quarter and then that's why that impact shouldn't be as significant.
Jeff Osborne -- Cowen & Company -- Analyst
Got it. And then on the storage side, you alluded to the blackouts. Was there any abnormal pricing that you saw in the third quarter that maybe the current run rate isn't repeatable? I know you gave guidance for the year but how do we think about what you saw in the third quarter in associated profitability just given the overall pricing environment for adequacy resources such as batteries?
Doron Blachar -- Chief Executive Officer
Yeah. There were quite -- the blackouts did push pricing to be out of the ordinary in California. Pricing rose to $1,000 and $2,000 per megawatt hour during the blackout. But on the contrary in Texas, that actually has in Q3 extreme pricing. In 2019, they actually had even an hour with $9,000 per megawatt hour. They had a mild summer, so actually that didn't happen. So, we do see some abnormalities in Q3 in California. So, Q3 -- we expect Q3 to be a bit better than other quarters in the Energy Storage. But still since it's not that material to Ormat, it is something that we'll need to follow and we'll obviously give you additional guidance as we grow this business.
Jeff Osborne -- Cowen & Company -- Analyst
Got it. And, Doron, you've had M&A as a target for years. And other than U.S. geothermal, you haven't been that active. How would you reflect on the past several years of M&A as a strategy for Ormat and then relative to future M&A? You've obviously done things in storage, but I think in the past you've alluded to geothermal tuck-in acquisitions as well. Can you just touch on what the pipeline looks like now relative to the two different technologies that you're focused on?
Doron Blachar -- Chief Executive Officer
Yeah. So, on geothermal, there's an active pipeline today of a potential acquisition. On the geothermal front, we are trying to make acquisitions that are synergetic to us and that they are accretive to Ormat. And knowing the industry and knowing the risks with the resources, sometimes we have a better understanding of the risks and the focus. And by that, we sometime maybe underprice compared to other potential acquisition that we've seen happen. But we are looking at a few projects today that are in the market. And on the storage, we did some acquisitions. We are discussing additional acquisition. These are usually smaller acquisitions like Pomona and others. So, I do expect to see some more acquisition in the near term.
Jeff Osborne -- Cowen & Company -- Analyst
Got it. It's certainly going to be a challenging 2021 then for potential capital allocation, I guess if you've got an elevated capex here and then also M&A. So, how do you plan on paying for any M&A assuming it's sizable in the geothermal side or are these pretty small?
Doron Blachar -- Chief Executive Officer
They might be sizable within our capital ability, capacity. So, we did raise the bond, a $300 million bond earlier in the quarter. We do have significant approaches by different financial institutions to do -- to give us money -- to lend us money. Capital is available. If we have the right target with the right price, we can finance it, we will.
Jeff Osborne -- Cowen & Company -- Analyst
Makes sense. And my last question was just on the $20.1 million from Honduras. Was that in the guidance as it relates to adjusted EBITDA last quarter? I'm just trying to get a sense of the moving pieces with the EBITDA guidance change this quarter. How much of that was the Honduras event versus just sort of operational assets and sort of flow through?
Doron Blachar -- Chief Executive Officer
The Honduras event was a cash flow event. It didn't go -- it didn't flow through the P&L. So, that was pure cash flow and you can see it. The one thing that did go through the P&L is the business interruption that increased the EBITDA and following that the guidance. And you can see that we have a specific line item in the -- after the G&A of business interruption income of $17.7 million that is there.
Jeff Osborne -- Cowen & Company -- Analyst
Got it. Okay. That's all I had. Thank you.
Doron Blachar -- Chief Executive Officer
Thank you.
Operator
[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Doron Blachar for any closing remarks.
Doron Blachar -- Chief Executive Officer
Thank you. So, thank you, everybody, for joining us, you know, on this special day in the U.S. Still unknown results, but hopefully, it will be the right one, whoever the right one you want it to be. And want to thank you for the continued support. And talk to you soon. Thank you.
Operator
[Operator Closing Remarks]
Duration: 37 minutes
Call participants:
Rob Fink -- Managing Partner
Doron Blachar -- Chief Executive Officer
Assi Ginzburg -- Chief Financial Officer
Noah Kaye -- Oppenheimer & Co. -- Analyst
Mark Strouse -- J.P. Morgan Securities LLC -- Analyst
Jeff Osborne -- Cowen & Company -- Analyst
