Ormat Technologies, Inc.

Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines again will be placed on a musical. Thank you for your patience. Good morning and welcome to the Ormet Technologies third quarter 2024 earnings conference call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. If you would like to ask a question, please press star one on your telephone keypad. And if you would like to withdraw that question, again, press star one. Please note that this event is being recorded. I would now like to turn the conference over to Josh Carroll with Alpha IR. Please go ahead.

Thank you, operator. Hosting the call today

are Dharam LaShahr, Chief Executive Officer, Ozzie Ginsburg, Chief Financial Officer, and Smedar Lavi, Vice President of Investor Relations and ESG Planning and Reporting. Before beginning, we'd 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 Security Mitigation 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 risk factors as described in Ormet Technologies' annual report on Form 10K and Quora reports on Form 10Q 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 the management's reason for sending such information as set forth in the press release that was issued last night as well as in the slides posted on the website. Because these measures are not calculated in accordance with GAAP, they should not be considered in isolation from the financial statements prepared in accordance with GAAP. Before I turn the call over to management, I'd like to remind everyone that a slide presentation of a company in this call may be accessed on the company's website at Ormet.com under the presentation link that's found on the Invest Relations tab. With that said, I would now like to turn the call over to Ormet CEO, Dharan Blashar. Dharan?

Thank you, Josh, and good morning, everyone. Thank you for joining us today. During the third quarter, Ormet continued to make significant progress towards achieving its long-term growth targets while also delivering strong financial results. Our financial performance during the quarter was highlighted by a .3% increase in adjusted EBITDA, driven by the strength of our growing operating portfolio, solid operational performance, and increased benefits from PTC generating during the quarter at higher prices. Within our electricity segment, we marked another quarter of consistent EBITDA improvements, which was driven by contributions from our recently acquired Enel assets and the improved operational performance from our PUNA facility, which continues to strengthen. In our energy storage business, we made significant progress in the third quarter as we transitioned to a more stable and consistently profitable portfolio, setting the stage for accelerated growth. This progress is highlighted by the signing of two tolling agreements in Texas, the signing of an RA agreement in California, and our recent announcement that we have achieved commercial operation for our largest storage facility in our operating portfolio, the 80 megawatts, 320 megawatt-hour bottleneck project in California. From a global macro perspective, we continue to experience strong industry tailwinds in our three operating segments, driven by the momentum we see related to the increased demand for renewable energy to support the massive growth of data centers. Our business is very well positioned to continue and capitalize on these trends, which will strengthen our ability to sign additional long-term contracts at elevated prices while continuing to maintain strong product segment backlogs. We expect that these trends should improve our profitability over time and allow us to reach our long-term goals of growing our operating portfolio to approximately 2.1 to 2.3 gigawatts by the end of 2026. Before I transfer the call to Asif, I would like to share with you good news we recently received. In March 2021, we established a special committee of independent directors to investigate, among other things, certain claims made in a report published by a short seller regarding the company compliance with anti-corruption law. We provided information as requested by the Security and Exchange Commission and Department of Justice related to these claims. On October 22, 2024, we were notified by the staff of the SEC that the SEC has concluded its investigation and does not intend to recommend an enforcement action against the company at this time. We are proud of the company's commitment to compliance and the strength of our compliance program, and we are happy to have this behind us so we can devote our full attention to the important work Oma does every day. Now, before I provide further updates on our operations and plans, I will turn the call over to Asif to review the financial results for the quarter. Asif.

Thank you, Liron. Let me start my review of our financial highlights on slide five. Total revenue for the third quarter was $211.8 million, an increase of .8% on a -over-year basis. Our consolidated top-line expansion was driven by 4.7 growth in our electricity segment, which serves as a testament to the segment's solid and predictable revenue. Oma's third quarter 2024 gross profit was $58.9 million versus $60 million captured in the third quarter of 2023, resulting in a consolidated gross margin of .8% versus .8% last year. Net income attributable to the company's stockholders was $22.1 million or $0.36 per diluted share in the quarter compared to $35.5 million or $0.59 per diluted share in the third quarter of the prior year. The decrease in net income during the quarter was mainly driven by a $9.4 million tax income recorded in the third quarter of 2023, related to changes in Kenya tax laws. Adjusted net income attributable to the company's stockholders was $26.3 million or $0.42 per diluted share compared to $28.2 million or $0.47 per diluted share in the previous year's period. Reconciliation of adjusted net income and EPS are provided in the appendix slide in the back of the presentation. Third quarter adjusted EBITDA was $137.7 million, an increase of .3% compared to the $118.3 million generated in the prior year period. The extremely strong -over-year increase in adjusted EBITDA was driven by contributions from the NL assets we acquired in the first quarter of 2024, the sale of tax benefits from newly built plants and improved operational performance and higher pricing at our Pula Power Plant. In addition, our adjusted EBITDA results during the quarter also benefit from compensation we received from a recently negotiated settlement agreement with a battery supplier. As a result, we will recognize this compensation over 24 months started April 2024, whereby a total of $25 million will be recognized as income. This quarter we recognized $6.25 million related to the period between April and September of 2024. And in the next six quarters, we should recognize approximately $3.1 million each quarter. To clarify, this settlement payment will not have an impact on our storage revenues or margin. They will only be recognized as operating income. Turning to slide six, we break down the revenue performance of the segment level. Electricity segment revenue increased by .7% to $164.6 million. Third quarter revenue growth was driven by contributions from our acquired NL assets and the increase in revenues at our Pula Complex following our successful drilling campaign. The solid revenue growth in the electricity segment was partially offset by the expected weaker performance at Dixie Valley plant, which was weaker compared to the prior period due to an unplanned partial outage that started during the second quarter of the year, which we announced in our second quarter earnings. Doron will provide later an update on Dixie Valley. In the product segment, revenues were still strong, but declined by .2% to $37.4 million versus the same period last year. The current product segment backlog stands at approximately $165 million as of November 5, 2024, similar to the backlog level in the second quarter of this year. As it includes, among other things, a recently signed $24.7 million contract for a geothermal power plant in Portugal, in addition to starting the manufacturing of $6.1 million new rec facilities. Energy storage segment revenues declined .1% to $9.8 million in the third quarter. The decline was mainly driven by lower prices in the air-conditioned market. Third quarter 2023 was positively impacted by spiking prices in the air-conditioned market due to weather events. Moving to slide 7. Gross margin for the electricity segment was .2% in the third quarter, down from .8% from the previous year. The margin comparison was driven primarily by a lower generation at our Dixie Valley facility due to the partial shutdown, which we previously noted during our second quarter earnings call. Breaking down adjusted EBITDA at the segment level on slide 8, the electricity segment generated 82% of our March total consolidated adjusted EBITDA in the third quarter. The product segment contributed 10%, and the energy storage segment accounted for 8% of total adjusted EBITDA. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide in the back of the presentation. Moving to slide 9. In the third quarter, we recorded $19.8 million in income related to tax benefits, compared to $14.9 million last year. This increase is mainly attributable to a transferable PTC related to the Bihuawi power plant, which commenced operation in the second quarter of 2024 and an increase in the value of the PTC. We continue to anticipate that we will receive up to $152 million in cash proceeds related to PTCs and ITCs benefits in 2024. During the third quarter, we sold and collected $14 million of PTCs we generated from Hebrew Complex. And we expect in the fourth quarter to complete the monetization of the bottleneck ITC and complete the tax equity transactions of Hebrew Complex. While this is our base case expectation, we note that it is possible that a Hebrew transaction may be pushed to early 2025. As we have noted previously, this process will effectively lower the capital intensity of our multi-year growth strategy. Looking at slide 10, our net debt as of September 30, 2024, was approximately $2.2 billion, equivalent to 4.1 times net debt to EBITDA. Cash and cash equivalent and restricted cash and cash equivalent as of September 30, 2024, was $176.8 million compared to $287.8 million at the end of 2023. Slide 10 breaks down our use of cash for the nine months, illustrating our master ability to generate cash flows to reinvest in and grow the business while servicing our debt obligations. And also, consistently returning capital to our shareholders. Our total debt as of September 30, 2024, was approximately $2.4 billion net of deferred financing costs. And it's presented on slide 29 in the appendix, which outlined the payment schedule. The average cost of our debt for the company stands at .6.3%. And we reiterate that the majority of our debt liabilities are at fixed interest rate. Moving to slide 11, we have approximately $675 million of total available liquidity. Our expected capital expenditure for the remaining of 2024 is approximately $143 million, as detailed in slide 30 in the appendix. We plan to invest approximately $65 million in the electricity segment for construction, exploration, drilling, and maintenance. We also plan to invest $75 million for the construction of our storage assets during the remainder of 2024. As we continue to progress with executing on our growth plan, we are consistently increasing our cash generation, which, combined with the expected cash from utilizing the tax benefits, will fund our capital. We continue to maintain excellent liquidity and have ample access to additional capital as needed. On November 6, 2024, our Board of Directors declared, approved, and authorized payment of quarterly dividends of $0.12 per share, paid on December 4, 2024, to shareholders on record as of November 20, 2024. That concludes my financial overview. I would like now to turn the call over to Daron to discuss some of our recent developments.

Thank you, Arthur. Turning to slide 13 for a look at our electricity segment operating portfolio. In the nine months ended September 30, 2024, we generated 5.7 million megawatt hours, a .9% generation growth in our leading electricity segment. The increase was positively impacted by our strategically acquired and L assets and the continued improvement in performance from our PUNA complex. Turning to slide 14 for an update on our operating footprint. As our PUNA complex, we have observed continuous improvement in the reservoir performance, which has increased capacity and, in turn, driven generation growth. We also benefited from higher prices this quarter. At our Olkaria power plant in Kenya, we successfully reached 147 megawatts of capacity following our successful drilling campaign. And while we continue to experience cartelments from our off-taker, this trend was reduced throughout the third quarter. As a result, our revenues from Olkaria increased during the third quarter by approximately .5% versus prior year. As Asi noted earlier, our Dixie Valley facility also experienced lower electricity generation this quarter due to an unplanned outage that occurred during the second quarter of this year. As a result, our revenues and EBITDA were negatively impacted by roughly 4.2 million and 4.1 million dollars during the third quarter respectively. We are currently in the final stages of completing the shutdown of the facility and expect generation to increase moving forward as a result. On a positive note, our NL assets have continued to strengthen our third quarter earnings results with the assets generating revenue and EBITDA of 7.5 million dollars and 4.6 million dollars respectively. We continue to make great progress in enhancing the three acquired geothermal assets, which once complete will translate into expanded returns through improved performance. Finally, our COFOR II facility in Utah was partially released for initial construction. We anticipate that the 25 to 35 megawatt power plant will be completed by the end of 2027, larger and earlier than previously expected compared to our acquisition model. Turning to slide 15, our product segment backlog stands at 165 million dollars, which is similar to the second quarter of 2024. And as you can see on the slide, we added to the backlog total of approximately 33 million dollars of new contracts during the quarter. Moving to slide 16, despite the lower -over-year revenue performance we experienced in our storage segment due to lower, more normalized air code prices, we continue to make great progress in transitioning our storage business into a more predictable portfolio with consistently stronger underlying profitability. This is highlighted by the area agreements we reached with the City of Riverside for our sheer 80 megawatt, 320 megawatt hour facility, as well as our first two tolling agreements in Texas for our Lower Rio and Bexel facilities, each at 60 megawatt, 120 megawatt hour. Additionally, we continue to capture the benefits from some of our facilities that recently came online over the past year quarter, such as our East Flemington facility that became operational earlier this year. Consistent with that theme, I'm also excited to highlight that just a week ago, we announced the commercial operation for 80 megawatts, 320 megawatt hour bottleneck facility, which is our largest energy storage facility and which will generate stable contracted revenues from a 15-year tolling agreement with San Diego Gas and Electron. This is an exciting development format, as we expect that the bottleneck facility will play a key role in improving our energy storage revenue and EBITDA results going forward. Moving to slide 18, we continue to remain on track to have our portfolio capacity target reach between 2.6 gigawatt to 2.8 gigawatt by year end 2028. As a reminder, we currently expect to see an annual capacity growth rate between 15 to 17%, with the majority of that growth focused on the strong US market. The US continues to remain the main focus for our growth efforts, but due to the regulatory support and the increasing demand we are seeing for electricity, which we are well positioned to capture through both our electricity and storage sectors. Turning now to slides 19 and 20, which display our geothermal and hybrid solar PV projects we currently have underway. We continue to remain on track to complete the agent project in Indonesia by the end of 2024. Moving to slides 21 and 22 to discuss our energy storage segment growth. In total, we currently have six different storage projects under development that we expect to achieve COD by the end of 2026, which we believe will add a total of 355 megawatts or 920 megawatt hours to our storage portfolio. As we have previously noted, we are continuing to remain focused on achieving a balanced split in our storage portfolio of contracted revenues and merchant market prices. Please turn to slide 23 for a discussion of our 2024 guidance. In the first nine months of 2024, ORMAT has delivered meaningful -over-year growth across our revenues and adjusted EBITDA. Heading into the close of the year, we are narrowing our revenue guidance. We expect full-year revenues to range between $875 million and $893 million. Electricity segment revenues are expected to be between $710 million and $715 million. Product segment revenues are expected to be between $130 million and $138 million. And storage revenues between $35 million and $14 million. We are increasing our adjusted EBITDA guidance to reflect our strong third quarter results and now expect full-year adjusted EBITDA performance to range between $540 million and $555 million. And finally, we expect annual adjusted EBITDA attributed to the minority interest to be approximately $20 million. I will end our prepared remarks on slide 24. To wrap up, we have continued to successfully execute against our strategic objectives over the past three quarters as evidenced by the increasing size of our open portfolio and our ability to secure new long-term agreements that will drive improved product returns to higher PPA pricing and tolling agreements. Additionally, the monetization of both PTC and IPC benefits and the strong cash flow from our operations are positioning us well to support our future growth and drive improved profitability across the enterprise. This gives us confidence that we are well positioned to achieve our long-term growth targets and deliver meaningful value for our stakeholders through improved financial performance in 2025 and beyond. Now, I would like to open the call for questions. Operator, please.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, again, press star one. And we ask that you limit yourself to one question and one follow-up. Your first question comes from the line of Noah K. with Oppenheimer. Please go ahead.

Thanks. I was hoping to start with geothermal development. Maybe you can start by commenting on the results of the BLM land auction. It looks like you won a fair amount there. And it also looks like there's a proposed categorical exclusion to NEPA for geothermal permitting. I think that's something that you highlighted at Investor Day as a potential benefit. So just talk to us a little bit about the implications for development. And at the heart of this is really whether you think you can start to speed up some of the new geothermal projects to help capitalize on this really strong demand for baseload zero emissions power.

Thanks, Noah. Regarding the BLM auction, we actually acquired all the land that we nominated for the auction. Basically, the way it works is that the companies ask the BLM to nominate land and then they are open for auction. So we're able to secure all the land that we nominated as well as additional few sites. So we do have some additional sites, but also sites that we had land position. And after initially reviewed by our exploration, the resource team, we've acquired some additional land to secure the full site to be able to develop a project. And this definitely will come into our growth portfolio. The category that you mentioned is a big step. We've been working on it for quite a while. It will shorten the development exploration phase and it will enable us to expedite our core whole program and allow us to get permitting for the exploration phase faster. So we have done over the last year about seven core whole campaigns in the US. All of them actually were successful and we're moving to the next part of the exploration for drilling full size well next year. And in parallel to that, we're going to do another core whole campaign the entire year for an additional between four to six sites. And the fact that the process has improved and shortened, we believe we'll be able to meet our target definitely and hopefully exceed them.

Very helpful. Maybe you can comment on what you think. I know it's probably early in the process of setting CAPEX budgets for next year, but what does all this mean for how much you might be able to spend in terms of the CAPEX for electricity next year? I would think that you'd be lapping some of the development enhancements that you made progress on this year. So presumably a bit more dry powder to go after kind of core growth.

Oh, yes, definitely. I expect next year CAPEX to be higher than 24 CAPEX. And I think the biggest difference over there will be on the exploration part. Because as I said earlier, we are moving from a core hole program to a full size drilling. So if a core hole will cost, depends how deep you go, you know, between 500,000 maybe to a million, a million and a half, a full size well is in the range of four to six million dollars. And we plan to do a few full size wells next year on the core hole that we've done in 2024 and 2023.

Okay, very good. You know, I'll jump back in queue and ask more questions if we have time. Thank you.

Your next question comes from the line of Justin Clare with Ross Capital. Please go ahead.

This meeting host has enabled Zoom's AI companion technology.

So I wanted to start off here, you know, with the with the new administration in the US, it does look possible that we could get a change in the IRA legislation. So just wondering how you're thinking about mitigating any potential risk of a policy change. Have you looked at, you know, safe harboring geothermal or storage projects to ensure you can qualify for the PTC and ITC? So just wondering, you know, how your position there?

And Justin, so I would say on the geothermal, the PTC part, this is something that has been going on for more than a decade. The law ends and then the question whether or not they will extend it and then they extend it. So the concept of safe harboring on the geothermal part is something that we've been operating all along. And we are getting prepared that if anything will change for the PTC, for geothermal, we will have the safe harboring for all projects that we will develop afterwards. I would say that in the previous Trump administration, they extended the PTC for geothermal. So geothermal, I think, is not in the same category as the other, but still we are definitely looking at safe harbors. And the same, you know, we are going to apply to the energy storage, the project that we are in construction already. We have secured batteries. We need to see how we bring them into the US if anybody will change anything. But there are still a few months until, you know, the change takes place. So we are looking also on safe harboring on the energy storage, but on the geothermal, this is how we've been working for the last, I think, more than a decade. And we do hope that the PTC for geothermal, as it's done in this last administration, they will continue. Okay.

And then I was wondering if you could also comment on, you know, maybe just provide an update on what you're seeing in terms of the trend in PPAs for geothermal projects. You know, are we seeing pricing continuing to trend upward? And then, you know, you do have some capacity that where the PPAs are expiring in 2026, 2027. Any sense for when you might, you know, extend those contracts and how, you know, new PPAs might compare to what you're currently operating under?

Yeah, thanks. So the trend continues and we see pricing today north of 100. We have, we are negotiating with multiple players on contracting new power plants as well as reconstructing the future ones. The PPA for Hebrew that expired in 2026, we have signed a PPA, reconstructing it at similar prices. That's what I said. We are waiting for the offtaker to finish his approval process. And we expect that to happen end of this year, maybe beginning of next year. And we are also in the final negotiations on the extension of the Mamos G2 reconstructing for 27 that I expect will be in similar pricing, as I mentioned before. So we see this interest and demand. And I would say that for almost every project we have, we have a few offtakers that would like to consult it. Okay, I appreciate it. Thank you.

Thank you. Again, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Mark Strauss with JP Morgan. Please go ahead.

Yes, thanks for taking our questions. Is there any color that you can give on the pricing of the new tolling agreements in Texas? Is there any color about kind of the margin accretion relative to 2024 levels as that comes online?

Good morning, Mark. So, you know, we won't give specific numbers, but I will say that the numbers for the two hours batteries in Texas is basically half of the value that we get for today's environment for four hours in California. And California market is around 16 to $17,000 batteries per month. So the numbers in Texas are around half. It's likely shorter. It's a seven year transaction. And when we think from a margin expansion, we do believe that our gross margin over the next few years will go towards around 20 to 30% versus flat in the last few months. So we should expect recovery margin already in 2025 when we expect bottleneck that just came online a few days ago to operate a full year. So that will be the first step. And then we have in the second half of 2025, one of the Texas projects. And then in 2026, we have the next Texas project. So eventually we will get closer to 30%. But, you know, on the way, we're probably going to visit anywhere from 10 to 20.

OK, thanks, Osce. And then kind of relatedly, can you talk about kind of merchant pricing, where your merchant contracts are operating, what you're seeing with pricing there? Is there a reason to be more optimistic kind of on the latest trends compared to what it was earlier this year? Thank you.

I would say that this year, we in general, the US did not have any weather events that impact our profitability. And, you know, as you saw in Q3 last year, it was enough that we had some, I would say, not good weather in Texas with much less assets versus today in Texas with an additional two million dollars in revenue. So I would say that we do expect from time to time those to happen and they can add a few million dollars to our top line. So this is where we are. And then on PGM, I would say in general, throughout the year, we experienced quite good margins. So, you know, we did able to put a gross margin positive this quarter in storage, even though there was no weather event. But I think the key, and you asked that in the first question, everything that is under construction right now, besides the Louisa and Montague, which are not the largest projects that we have, all of them already have PPA. So when you think about trajectory for the next few years, Batteneck is 320 megawatts. It's fully contracted. Lower Riyadh and Burdock, each one is 120 megawatt hours, fully contracted. Montague is in the East Coast and those prices in East Coast have been trending quite favorable somewhere around 25 to 30 dollars per megawatt hour throughout the year. We have air relief coming in the end of 2025 also with a full PPA. So I will say that there is a shift in model, in business model. And as a result, volatility will be much less impactful for us. I do expect, as I said earlier, from time to time to have some weather events that part of the model in Texas. The reason why we're able to secure good contracts there is because some people believe that there will be more volatility. We decided to keep some of the volatility and to reduce some of the exposure to the volatility, but we still like the merchant environment in Texas. But as I said, as a geothermal company, we like to balance between the exposures.

Thank

you. Thank you, Mom.

We have no further questions in our queue at this time. I will now turn the call back over to management for closing remarks.

Hi, so thank you, everyone. I would say that as you've seen, Oman continues to grow and develop its profitable operations in the US and globally. And I would like to highlight one other item that we did talk about in the script. That is the fact that if you remember, the SEC told the company formally that it has decided to close its investigation on Ormat's act with no actions. Following to this letter that we received from the SEC, the board of directors has decided to dismantle a special committee, independent special committee that investigated these issues. So this is a very, very positive act and it demonstrates the company's commitment to comply with all laws wherever we are operating. So thank you, everyone, for your support and looking to see you in the future. Thank you.

That concludes today's conference call. Thank you for your participation and you may now disconnect.