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Text: Hosting the call, today are Doron Blachar, Chief Executive Officer; Assi Ginzburg, Chief Financial Officer; Smadar Lavi, Vice President of Corporate Finance and Investor Relations.
Actual 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.
In addition, during the call, the company will present non-GAAP financial measures, such as adjusted EBITDA.
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.
Doron, the call is yours.
During the third quarter, we completed several strategic initiatives that support our long term position, including a sizable geothermal acquisition in Nevada, new resource adequacy contract for our Energy Storage segment, a joint venture for exploration in Indonesia and several new product wins, providing further evidence that the COVID related disruption in our product segment is abating.
This development support our long-term goals and further our efforts to expand our generation capabilities toward our goal to achieve a run rate of $500 million in annual EBITDA toward the end of 2022.
Looking at the third quarter, our results were negatively impacted by operational challenges at three plants.
We are making progress to resolve these challenges and expect them to gradually recover by the first half of 2022.
Even with these challenges and the ongoing slowness in our product segment, we reported continued growth of more than 15.4% in the electricity segment, leading to revenue that was essentially flat year-over-year.
This enabled us to deliver over $100 million in adjusted EBITDA for the quarter.
We continue to view 2021 as a buildup year.
The strategic acquisition of two operating plants and an underutilized transmission line in Nevada is an example of this buildup.
The new long-term resource adequacy agreement with PG&E for our Pomona-2 project is another example as other product segment wins in Nicaragua and Indonesia, which boosted our product segment backlog.
With a portfolio of over 1.1 GW of generation, a rebounding product segment and a growing energy storage offering.
We are well positioned to maintain our industry leadership and deliver consistent profitable growth.
As we look into 2022, we anticipate increased growth as we put the short-term challenges behind us and reap the benefits of the hard work of the last year.
Let me start my review of our financial highlights on slide five.
Total revenues for the third quarter were $158.8 billion, essentially flat year-over-year, reflecting the contribution of the Terra-Gen acquisition, offset by lower year-over-year product sales.
Third quarter 2021 consolidated gross profit was $63.1 million, resulting in a gross margin of 39.8%, up from the gross margin of 34% in the third quarter of 2020.
Gross margin including $15.5 million of BI income compared to $2.6 million in the third quarter last year.
We delivered net income attributed to the companys stockholders of $14.9 million or $0.26 per diluted share in the quarter compared to $15.7 million or $0.31 per share in the same quarter last year, representing a decrease of 5% and 16.1%, respectively, mainly as a result of a lower operating income, driven mainly by a $9 million increase in the G&A expenses.
Adjusted net income attributed to the company stockholder was $17.8 million or $0.32 per diluted share in the quarter compared to $0.31 per share in the same quarter last year.
Net income attributed to the company stockholder was adjusted to exclude the transaction cost of $3.7 million pre-tax and $2.9 million after-tax related to the Terra-Gen Geothermal acquisition.
Our effective tax rate for the third quarter was 9.2%, which is lower than the 38.8% effective tax rate from the third quarter of 2020, mainly due to the movement in the valuation allowances for each quarter.
We still expect the annual effective tax rate to stand approximately between 30% to 34% for the full year 2021.
That assuming no material one-time impact or no impact from changing of lows.
This will result in an overall higher tax rate in the fourth quarter of 2021.
Adjusted EBITDA decreased 5.1% to $101.6 million in the third quarter compared to $107.1 million in the third quarter last year.
Id note that compared to second quarter 2021, adjusted EBITDA increased 20.2%.
The lower year-over-year adjusted EBITDA was due to a combination of approximately $4.6 million, lower business interruption income and approximately $4.7 million of higher G&A costs, mainly related to the special committee legal costs.
I would like to note that we do not expect to incur significant costs on these issues in the remainder of 2021.
Moving to slide six.
Breaking the revenues down, electricity segment revenues increased 15.4% to $142.7 million, supported by contribution from new added capacity to our McGinness Hills Complex, Punas resumed operation and the contribution of the recently acquired plants in Nevada.
This new added generation was partially offset by lower generation in Olkaria and Bouillante power plant due to a lower resource performance that caused a capacity reduction.
And surface leak in one of the broader injection wells, which also reduced generation.
We made progress in resolving these challenges and expect to gradually recover from them by the first half of 2022.
In the product segment, revenue declined 64.5% to $101 billion to $10.5 billion, representing 6.6% of total revenues in the third quarter.
The decline year-over-year is expected to continue throughout 2021 due to the lower backlog at the beginning of the year.
Energy Storage segment revenues remained flat year-over-year at $5.7 million in the third quarter.
This quarter, we had an increase in the revenue from our storage operating facility of 26%.
That was offset by approximately 67% reduction in demand response revenue as we expect to diminish over the next few quarters.
Lets move to slide seven.
Gross margin for the electricity segment for the quarter increased year-over-year to 42.8%.
This was the result of $15.8 million in business interruption insurance, of which $15.5 million was included in the cost of revenues for the electricity segment, partially offset by higher costs related to the repair and the recovery of Olkaria, Brawley and Bouillante power plants.
Excluding the impact of the business interruption in Q3 2021 and Q3 2020, gross profit increased 2.8% compared to the same time last year.
In the product segment, gross margin was 12.8% in the quarter compared to 18.9% in the same quarter last year.
The Energy Storage segment reported gross margin of 12.2% compared to gross margin of 25.6% in the third quarter last year.
The decrease was primarily due to the reduction in demand response and associated profit.
Electricity segment generated 96% of Ormats total adjusted EBITDA in the third quarter.
The product segment generated 2% of the and the Storage segment reported adjusted EBITDA of $2 million, which represents 2% of the total adjusted EBITDA.
Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide.
On slide nine, our net debt as of September 30 was $1.5 billion.
Cash, cash equivalents, marketable security at fair value and restricted cash and cash equivalents as of September 30, 2021, was approximately $402 million compared to $537 million as of December 31, 2020.
Marketable securities were at fair value of $46 million.
slide nine breaks down the use of cash for the nine months and illustrated our ability to reinvest in the business, service debts and return capital to our shareholders, all from cash and cash dividends, all from cash generated by our operations and our strong liquidity profile.
Our total debt as of September 30th was $1.9 billion, net of deferred financing costs, and its payment schedule is presented on slide 32 in the appendix.
The average cost of debt for the company reduced to 4.4% compared to 4.9% last quarter.
During the third quarter, we raised $275 million of new corporate debt to support the Terra-Gen asset acquisition and capex needs.
On November 3, 2021, the Company Board of Directors declared approved and authorized payment of quarterly dividends of $0.12 per share pursuant to the companys dividend policy.
The dividend will be paid on December 3, 2021, to shareholders of record as of close of Business Day on November 17, 2021.
That concludes my financial overview.
Turning to slide 12 for a look at our operating portfolio.
During Q3 of 2021, our power generation in our power plants increased by approximately 13.8% compared to last year.
We benefited from the incremental contribution of the recently expanded McGinness Hills and the generation from Puna that is operating now at a stable level of 26 megawatts.
In addition, we had the contribution of the Dixie Valley and Beowawe plants acquired from Terra-Gen, with a total net annual generating capacity of approximately 67.5 megawatts.
These contributions were partially offset by the lower performance of our Olkaria and Bouillante power plant.
As noted on slide 13, Puna resumed operation in November 2020.
We stabilized Puna generation to approximately 26 megawatts as we continue reservoir study and improvement of existing wells to maximize the long-term performance of the power plant.
We have continued discussions with HELCO and PUC about our new PPA and continue selling electricity under our existing PPA, which is in effect until 2027.
Turning to slide 14.
Let me discuss some of the challenges we experienced this quarter in a few of our property assets, and I will start with a known one in Kenya.
Our revenue in the Olkaria complex was down year-over-year as a result of a reduction in the performance of the resource, which has resulted in an approximate reduction of 25 megawatts.
This reduction in capacity and associated repair costs reduced our quarterly gross margin by approximately $3.6 million compared to last year.
We are taking a few actions to restore the complex generating capacity.
We reduced one of the wells that we plan to connect to the power plant by the end of the quarter.
We are upgrading the equipment that will enable us to generate more capacity, utilizing the same resource.
And we continue with our planned drilling campaign, which includes drilling and redrilling of wells.
We are very optimistic that following these actions, we will see an increase in the production through the first half of 2022.
In the Bouillante power plant in Guadeloupe, we experienced limited injection availability due to scaling that we expect to resolve by cleaning the well.
We finished cleaning the well, and we are waiting to get the permit to restore capacity in the coming days.
In the Brawley complex, we had a leak in one of the injection wells and a pump failure in one of the production wells that caused the reduction of the generating capacity to three megawatts since the second quarter.
We are working to restore production and expect a full recovery by year-end.
The lower performance of the Olkaria, Bouillante and Brawley power plants are reflected in our annual guidance.
We continue to monitor the recommendations of the task force created by the President of Kenya related to the review of all independent power producers PPAs.
Based on a review done by the task force and the report issued by the task force of the President in September 29, Ormats rates in Kenya are significantly lower than many IPPs, as you can see in the chart that shows energy rates of other IPPs compared to Ormats rates.
In the task force report, they indicate that Ken-Gen geothermal average tariff, including steam cost, is $8.05 per kilowatt hour, which is not significantly lower than our rate.
Having said that, we believe that Ormat rate cannot be compared to Canadian tariffs as it is a government-owned company that receives financial benefits, grants and preferred financing terms that we are not qualified for.
We remain committed to providing clean, renewable base load energy to Kenya and continue to work with KPLC for many years to come.
Turning to slide 16.
In July, we closed the accretive acquisition of the Terra-Gen assets.
As a reminder, this acquisition added a total net generating capacity of approximately 67.5 megawatts to our portfolio, along with the greenfield development asset adjacent to Dixie Valley and an underutilized transmission line, capable of handling between 300 to 400 megawatts on a 230 KV electricity connecting Dixie Valley in Nevada to California.
With this acquisition, we now own 10 operating plants in Nevada, generating a total of 443 megawatts, which is roughly equivalent to approximately 7% of Nevadas overall generated energy.
We are currently working to increase the capacity of the acquired Dixie Valley in 2022 by adding Ormats acquisition.
Turning to slide 17 for an update on our backlog.
Our results for the product segment continued to be impacted by the lower backlog at the beginning of the year, we continue to see encouraging signs of recovery.
We have seen clear signs of improvement in this business, including an expansion of our backlog, reinforcing our confidence that this is a short term phenomenon.
We signed a few new contracts during the quarter, including a new contract with Salak energy geothermal to supply products to a new 14 megawatt Salak geothermal power plant in Indonesia.
And another contract to supply equipment to a project in Nicaragua.
As of November 3, 2021, our product segment backlog increased for the third quarter in a row to approximately $67 million compared to $56 million in early August this year, giving us a good start for this segment in 2022.
Moving to slide 18.
The Energy Storage segment continues to become a more important part of our consolidated results.
This quarter, we see an increase in our storage facilities contribution.
And as Assi, indicated, they were up 26%.
The increase was offset by diminished contribution of the demand response activity inherited from the Viridity acquisition.
Moving to slide 19 for an update on legislation.
The global support for renewable energy by government continues as can be seen in the Glasgow Climate Change conference.
In the U.S., the negotiations between the White House and Congress have made substantial progress over the past weeks.
Last Thursday, the House released a draft bill that will serve as the basis for the final negotiation.
Although not final, the new bill suggests extending the PTC and ITC until the end of 2026 for geothermal, and it includes storage to be eligible for ITC.
The bill draft also allows taxpayers to elect the option to receive the tax credits in cash.
The commitment of the government to renewable energy is also reflected in the inclusion of credit plans beyond 2026.
We believe that assuming the bill will pass, this enhanced flexibility and long-term clarity will encourage and accelerate the use of renewable energy, and we expect to be in the forefront of this growth in geothermal and in the energy storage as well as in energy storage and solar.
Moving to slide 21 and 22.
As we have communicated, 2021 will be a significant buildup year, comprised mainly of geothermal project.
The buildup supports our robust growth plan, which is expected to increase our total portfolio by almost 50% by the end of 2023.
One of the main challenges in our efforts to achieve our gross growth is obtaining permits on the time frame, we were used to before COVID.
The delays we experienced in obtaining the permits results in delays in the commissioning of our future projects.
Although we have delays within 2021 to 2023, we are still aiming to add an additional 240 to 260 megawatts by year-end 2023, in addition to the 83 megawatts we added since the beginning of 2021.
In our rapidly energy storage portfolio, we plan to enhance our growth and to increase our portfolio by 200 megawatts to 300 megawatts by year-end 2022.
Achieving this growth target is expected to help us reach an annual run rate of more than $500 million in adjusted EBITDA toward the end of 2022, that we expect to continue to grow as we move forward with our plans in 2023 and beyond.
slide 23 displays 14 projects underway that comprise the majority of our 2023 growth goals.
While we are experiencing significant delays in the permitting process, we still expect to be on track to meet our growth targets for the end of 2023.
Moving to slide 24 and 25.
The second layer of our growth plan comes from the Energy Storage segment.
slide 24 demonstrates the energy storage facilities that have started construction.
The other projects included in our growth plans are in different stages of development, and their release will require site control and execution of an interconnection agreement, obviously, all subject to economic justification.
The storage facilities listed in this slide are expected to generate in todays pricing, approximately $15 million annually, with EBITDA margins of 50% to 60% approximately.
Since the majority of the revenues are merchant based, we may see volatility in revenues once they will be in operations.
As you can see on slide 25, our energy storage pipeline stands at 2.1 gigawatt and currently include 30 named potential projects, mainly in California, Texas and New Jersey.
Moving to slide 26.
The significant growth in both our electricity and storage segments will require robust capital investment over the next couple of years.
To fund this growth, we have over $780 million of cash and available lines of credit.
Our total expected capital for the remainder of 2021 includes approximately $177 million for capital expenditures, as detailed in slide 33 in the appendixes.
Overall, Ormat is well positioned with excellent liquidity and ample access to additional capital to fund future initiatives.
Before I move to the guidance, I would like to update you on some ESG initiatives.
We are moving to strengthen our ESG commitment.
We build our approach and policy on four significant valuable issues as water management, taxation, suppliers and procurement policies and political communication.
The purpose of the move was to reflect in the most up-to-date and accurate way, our approach envision and courses of action on these issues.
Im also happy to update that we are planning to publish our corporate sustainability report in the next few weeks.
We expect total revenues between 652 and $675 million, with electricity segment revenues between 585 and $595 million.
We expect product segment revenues between 40 and $50 million.
Guidance for energy storage revenues are expected to be between 27 and $30 million.
We expect adjusted EBITDA to be between 400 and $410 million.
We expect annual adjusted EBITDA attributable to minority interest to be approximately $31 million.
Adjusted EBITDA guidance for 2021 includes the $15.8 million insurance proceeds received in the third quarter.

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q3 earnings per share $0.26.

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