Good morning, and welcome to the Ormat Technologies second quarter 2022 earnings conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to your host, Sam Cohen with Alpha IR. Please go ahead.
Thank you, operator. Hosting the call today are Doron Blachar, Chief Executive Officer, Azi Ginsburg, Chief Financial Officer, and Smadar Levi, Vice President of Investor Relations and ESG Planning and Reporting. Before beginning, we would like to remind you that 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 of future results or trends. 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. Reconciliations to the most directly comparable GAAP measures, and management's reasons for presenting such information are 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 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 like to now turn the call over to Doron Blachar. Doron, the call is yours.
Thank you, Sam, and good morning, everyone. Thank you for joining us today. In the second quarter, we continued the positive momentum from the beginning of the year, demonstrated by solid growth and advancement against our strategic initiatives and milestones that we laid out in the recent Investor Day. We are encouraged by the robust growth captured in both the company's top line and Adjusted EBITDA, driven by strong performance from our electricity segment and further supported by our growing energy storage segment. This quarter marks significant milestone achievements that validate our strong operational capabilities, our healthy financial position, and the attractiveness of the markets we are operating in.
Since the end of the first quarter, we commenced the commercial operation of 5 projects and added 73 megawatts to our portfolio with the addition of the Tungsten-two and CD4 geothermal power plants, the Wister and Steamboat solar power plants, and the Tierra Buena storage facility. With respect to CD4, we are optimizing the interconnection to allow additional megawatts to be sold through the grid. We are extremely pleased to deliver strong operational execution in the face of supply chain related challenges and labor constraints. We successfully signed two large portfolio PPAs in Nevada and California, and another PPA in Nevada for our North Valley plant, totaling up to 285 megawatts. These long-term PPAs reflect the majority of our new U.S.-based geothermal projects over the next 6 years, as well as most of the Nevada projects renewals.
These contracts, which we signed and renewed at attractive rates, show the growing demand for geothermal in the U.S. market, consistent with our Analyst Day forecast. Finally, our healthy and strong financial position enabled us to raise capital at an attractive coupon rate of 2.5% via the issuance of $431 million of convertible green notes. Proceeds will be partially used to refinance higher cost debt and further enhance our financial flexibility as we look to execute our long-term growth strategy. Now, before I provide further update on our operation and future plans, I will turn the call over to Azi to review the financial results. Assi ?
Thank you, Doron. Let me start my review of our financial highlights on slide 5. Total revenue for the second quarter was $169.1 million, up 15.1% year-over-year, reflecting substantial growth across electricity, product, and energy storage segments. Second quarter 2022 consolidated gross profit was $57.6 million. This resulted in a gross margin of 34.1%, down slightly from a gross margin of 35.4% in the second quarter of 2021, mainly due to lower gross margin within our product segment. Net income attributed to the company stockholders was $11.3 million or $0.20 per diluted share in the quarter. This compared to $13 million or $0.23 per diluted share in the same quarter last year.
On an adjusted basis, net income attributed to the Company stockholder was $12.2 million or $0.22 per diluted share, with net income attributed to the stockholder down 6.7% and diluted EPS down 6.4% versus the same time last year. The decrease in net income and adjusted net income was mainly due to a $2.9 million after-tax loss from a currency-related loss attributed to a stronger U.S. dollar versus Israeli shekel. Excluding these currency-related issues, our EPS would have been $0.27 per share. Adjusted EBITDA of $100.7 million increased 19.1% in the second quarter compared to $84.5 million in the second quarter of last year.
This figure represents a second quarter record for Ormat, and our 12-month trailing adjusted EBITDA is now equal to $426.2 million. The increase was largely driven by strong corporate contribution within our electricity segment and lower G&A costs as a result of reduction in legal expenses. Moving to slide 6. Breaking the revenue down at the segment level, electricity segment revenue increased 12.9% to $151.2 million, supported by contribution from new assets gained through the Terra-Gen acquisition, the expansion of our Tungsten II power plant, and increased operation and higher rates at Puna, which has benefited from elevated oil prices. These contributions to revenue were offset slightly by the impact of the fire in Heber 1 operation and maintenance work at Dixie Valley power plant.
For Heber 1, while revenue going forward for the year will be impacted by the shutdown, we anticipate recovering the majority of the lost income through our business interruption insurance. This quarter, we recorded $3.4 million of BI insurance proceeds related to Heber 1. In Dixie Valley, revenues were negatively impacted by $4 million as a result of a prolonged maintenance work that started at the beginning of April 2022, which Doron will discuss later. In the product segment, revenue increased 40% to $10.4 million and represents now 6.1% of the total consolidated revenue in the second quarter. The revenue increase year-over-year is mainly due to the recognition of higher sales in the current quarter.
Energy storage segment revenue increased 32%—33%, I'm sorry, to $7.5 million when compared to the second quarter of 2021. This meaningful increase is driven primarily by higher rates in our Upton energy storage asset at PJM, which increased our revenues by additional $2.4 million versus the same time last year. Moving to slide 7. The gross margin for the electricity segment for the quarter decreased to 36.8%, declining 60 basis points when compared to the same time last year. In the product segment, gross margin was 0.2% for the quarter compared to 20% in the same quarter last year. Gross margin was impacted by contracts signed in 2021 that had to absorb rapid increase in raw material and maritime transportation costs.
Once these contracts are completed during Q3, we expect to achieve better margins. The energy storage segment reported a gross margin of 25% compared to gross margin of 6% in the second quarter last year. The increase was positively impacted by the significantly higher rates and availability of our PJM storage assets. Looking at slide 8, the electricity segment generated 96% of total adjusted EBITDA in the second quarter. The product segment generated less than 1%, and the energy storage segment reported adjusted EBITDA of $3.5 million, representing almost 4% of total adjusted EBITDA. The reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slides. Moving to slide 9. Our net debt as of June 30, 2022, was approximately $1.7 billion.
In June, we raised convertible bond at a rate of 2.5%, and in connection with the issuance of the convertible bond, we enter into a capped call transaction. The capped call transaction was intended to reduce the dilution to the outstanding shares or, and offset part or all of the cash payments we will be required to make in excess of the principal amount of the converted notes in the event that at the time of the conversion, the share price exceeds the conversion price. To further reduce future dilution, we use part of the proceeds for a buyback of approximately 260,000 shares at a very attractive price. Proceeds were also used to repay the $221.9 million senior unsecured bond Series 3 that carried higher interest rate.
We intend to allocate an amount equivalent to the net proceeds from the offering to finance and/or refinance eligible green projects in accordance with the company's Green Finance Framework. This attractive transaction with our $75 million new bank term loan further enhance our financial strength and flexibility as we look to realize our long-term growth objectives. Cash and cash equivalents and restricted cash and cash equivalents as of June 30, 2022, was approximately $356 million compared to $387 million as of December 31, 2022. The slides break down use of cash for the three months, illustrating our ability to reinvest in the business, service our debts, and return capital to our shareholders in form of cash dividends and also buyback, all from cash generated from our operation and our strong liquidity profile that we keep and maintain.
Our total debt as of June 30, 2022, was approximately $2.1 billion net of deferred financing costs, and its payment schedule is presented on slide 29 in the appendix. The average cost of debt for the company at the end of the quarter was down to 4%. We think it is important to note that as we prepare to deploy capital to fund our multi-year growth plan, nearly all of our debt liabilities are fixed rate in nature, which should help position Ormat competitively in this rising global interest rate environment. Moving to slide 10. In the first half of 2022, we invested nearly $265 million in CapEx to advance our growth. We have $760 million of cash and available lines of credit.
Our total expected capital for the last two quarters of 2022 includes approximately $254 million of capital expenditures, as detailed on slide 30 in the appendix. Overall, Ormat is very well positioned from a capital resource perspective with excellent liquidity and ample access to additional capital to fund future growth initiatives at attractive rates. On August 3, 2022, our board of directors declared, approved, and authorized the payment of a quarterly dividend of $0.12 per share to all holders of the company issued and outstanding shares of common stock on August 17, 2022, payable on August 31, 2022. That concludes my financial overview. I would like now to turn the call over to Doron to discuss some of the recent developments.
Thank you, Assi . Turning to slide 13 for a look at our operating portfolio. Generation growth was positively supported by the inclusion of Beowawe and the generation of the Dixie Valley Power Plant. This was partially offset by the Heber 1 fire, as we already mentioned, and as you can see on slide 14, this quarter we added 68 MW to the electricity segment portfolio, which will contribute to generation going forward. As noted on slide 15, our Puna Geothermal Power Plant is running and operating at an approximate 25-26 MW level. Currently, PPA prices continue to be positively impacted by the higher global energy prices we experienced in the second quarter, and we expect this dynamic to continue in the third quarter.
Over the long, longer term, our plans in Hawaii are still focused on repowering the power plant, and we are currently amending our agreement with HELCO to enable us to address current market conditions in the new long-term PPA. Turning to slide 16. First, in our Olkaria Power Plant in Kenya, we are on track to begin our drilling campaign during the third quarter, which will enable us to further increase capacity. Second, with respect to Heber 1, we are currently optimizing the contract through repowering work, which is expected to be completed in the second quarter of 2023. Next, while we experienced a shutdown at Dixie Valley due to a generator failure, it has not impacted our full year operations significantly.
The plant was already scheduled for steam turbine maintenance in Q4, but due to the unplanned shutdown, we elected and were able to pull forward the scheduled maintenance and that's the shutdown that was completed earlier in Q2. The Dixie Valley Power Plant returned to service and is performing at a higher capacity than before. Turning to slide 17 for an update on our backlog. We saw a 20% increase compared to last quarter. We were able to sign the contracts totaling approximately $20 million during the quarter, including a sizable contract in the Philippines, as we discussed previously. Moving to slide 18 for an update on the energy storage segment. The energy storage segment delivered another strong quarter, supported by elevating energy prices at PJM market. Next quarter, we expect to start also benefiting from the recent operation of the Tierra Buena facility.
Moving to slide 20 and 21. As we have communicated, 2022 is a significant build-up year comprised mainly of geothermal and hybrid solar PV projects in development. This build-up supports our robust growth plan, which is expected to increase our total electricity portfolio generation to approximately 1.2 GW. In our energy storage portfolio, we plan to enhance our growth and increase our current 88 MW, 196 MWh portfolio by an additional 190-270 MW or 465-605 MWh by year-end 2023. These additions will enable us to reach a total storage portfolio of between 273 and 353 MW, with the assumption that we can overcome any permitting and supply chain challenges.
Slide 22 and 23 display the 6 geothermal and 5 hybrid solar PV projects currently underway following the commercial operation of Tungsten 2, CD4, Wister, and Steamboat Solar, which comprise the majority of our 2023 growth goal. We are on track with North Valley, Tungsten Solar, Brady Solar, and North Valley Solar, all of which we expect to come online during the first quarter of 2023. With respect to our 12-MW Dixie Meadows project, we recently received a positive ruling from the Ninth Circuit. We are also currently working collaboratively with the different agencies and are confident in our ability to work together to identify whether additional mitigation measures are necessary to protect the Dixie Valley toad and have the project move to completion.
While we go through this process, Ormat has decided to temporarily pause construction to allow full focus on these efforts to bring the power plant online and operating. Moving to slide 24 and 25. The second layer of our growth plans comes from the energy storage segment. Slide 24 demonstrates the energy storage facilities that have started construction. Following the recent operation of the 5 MW, 20 MWh Tierra Buena, we continue with the development in this segment and currently have 7 projects under construction with a combined capacity of 184 MW or 444 MWh. As you can see, there are slight delays in commercial operation dates, but we are on track with our 2023 growth targets.
The other projects that should help us hit our 2023 growth targets are included in the pipeline with various stages of development. Please turn to slide 26 for a discussion of our 2022 guidance. We expect total revenue to range between $710 million and $735 million, with electricity segment revenues between $630 million and $640 million. We expect product segment revenues between $50 million and $60 million. Guidance for energy storage revenue is expected to be between $30 million to $35 million. We expect Adjusted EBITDA to be between $430 million and $450 million. We expect annual Adjusted EBITDA attributable to minority interest to be approximately $38 million.
As noted in the previous quarter, Adjusted EBITDA guidance for 2022 includes $15 million in business interruption insurance proceeds, of which $5.2 million were already recorded in the six months ended June 30, 2022. I will end our prepared remarks on slide 27. This was a solid quarter demonstrated by continued financial and operating momentum with strong progress against our long-term goals. While the global markets are experiencing challenges related to supply chain disruptions and raw material shortages, including batteries and solar panels, we remain focused on increasing our capacity and delivering meaningful revenue expansion while accelerating our bottom line growth.
This momentum is further supported by the recently proposed Inflation Reduction Act, that, if passed, will enable us to enjoy additional tax benefits in both electricity and storage segments in the U.S., including potential investment tax credits for standalone storage facilities and would increase our ability to realize the value of our production tax credit in a more efficient way. We are encouraged by Ormat's resilience in these trying times, as well as our ability to turn revenue growth into expanded profitability. Our integrated business model provides us with significant differentiation versus many other renewable energy developers.
With a growing pipeline and numerous projects under development, we remain confident in our long-term plans to increase our combined geothermal, energy storage, and solar generating portfolio to approximately 1.5 gigawatt by 2023 and to deliver an annual Adjusted EBITDA of $500 million on a run-rate basis toward the end of 2022. This concludes our prepared remarks. Now I would like to open the call for questions. Operator, please.
Absolutely. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your touch-tone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to generate in queue. The first question comes from the line of Noah Kaye with Oppenheimer. You may proceed.
Yeah, thanks for taking the questions. You know, you discussed this subject at Investor Day, but I wanna build on it here a little bit, and it's really around the return profile at this point for new geothermal projects. You know, we've continued to see inflation in a lot of parts of the cost structure. Can you comment on kind of what you're seeing in terms of inflation trends on average CapEx per megawatt? And then, you know, assuming that there's additional headroom for PPA increases, where you think IRRs are penciling out?
Hi, Noah. Thanks for the question. Look, we see on one hand we see inflation rates going up and that has some impact on our operating expenses although if you look at the profile and the growth margin, obviously EBITDA margin that we have on our electricity segment the impact of inflation on the O&M is not very material. If you look on the capital invested in projects, although inflation is going up, what we've seen in the last few months is a significant reduction in the raw material prices. Actually, over the previous two and a half years, we saw a continuous increase in raw material prices that have started to go down a few months ago.
As we look forward, we see that the new project's CapEx would be similar or maybe even a bit lower than what we've seen in the last couple of years. On top of that, you know, we are a vertically integrated company, so we are continuously improving our project products and continuously seeing alternative ways in order to reduce the cost of developing geothermal projects. This is also something that supports our continued reduction in CapEx costs.
Mm.
In parallel to that, you will do that, you know, in the market, we see PPA pricing increases. The demand for geothermal is significant and growing. The PPA pricing that we have, that we are signing are higher than every one that we sign. Overall, we see a return similar and better for geothermal. With the new Inflation Reduction Act and the extension of the PTC for geothermal, we will see this continuing to support us. At least on the draft, you know, the mechanics of getting these production tax credits is much easier and less costly. No need. Probably no need for tax equity transaction. They can be utilized annually.
Yep.
We see a very strong momentum.
Yep. Very helpful there. Wanted to ask about that Dixie Valley shutdown, and I guess just generally around operations. Can you give us a little bit of a indication of what caused the pull forward of the maintenance and the shutdown? I guess the broader question is, you know, we continue to see some pretty extreme weather events, certainly in a lot of the areas where your operations are. You know, are you just generally at this point planning for increased OpEx costs related to, you know, basically climate resiliency?
Look, on Dixie Valley, this is as you know, a project that we acquired last year from Terra-Gen. The issue that we had, there was a failed generator. We were planning to do the maintenance for these generators in Q4 of this year. Unfortunately, you know, the failure happened just before we did the overall maintenance. What we're able to do is actually to move backwards to the same period of time while fixing the generator to do the entire maintenance and shutdown of the plant that was due in Q4. Actually it's an old generator, I think a 30-year-old generator that we knew needed maintenance, but unfortunately the failure happened just before we did the maintenance.
Okay.
I said on O&M costs, these are things that we see some impact mainly on the labor market and labor costs. On other parts, this is part of the ongoing business to manage these expenses.
Yep. Maybe just sneak one more in. You know, you highlighted the IRA. It looks like there's some incrementally positive policy support coming out of the Western Governors' Association or that may be in development. Can you just comment on what that might look like and you know, how you're engaged there?
The policy support that we got both in California and in Nevada, you know, pushed many utilities, NCCA, to look for a geothermal project. I think we are probably maybe the only or the most bigger developer of new geothermal because the support is for new geothermal projects, not recontracting existing one. We see a lot of support. I can tell you also that we've seen in California from the governor pushing permitting processes to expedite the project. We do hope that the last few decisions that he'll make will allow us to have permitting faster than what we had in the past. I think these extreme weather, you know, conditions highlight the fact that you need to have more renewable energy.
I can say now personally also that managing a company that is actually part of the solution for the climate crisis is a very nice place to be in.
Great. Thank you for the call, Doron.
Thank you.
Thank you, Mr. Kaye . The next question comes from the line of Mark Strouse with J.P. Morgan. You may proceed.
Yeah. Thank you very much for taking our questions. Just had a few follow-ups on the Inflation Reduction Act. When you're talking about the PTC becoming kind of more efficient and kind of the maybe not needing tax equity partnerships, should we think about that as kind of on a go-forward basis for new contracts that are being signed, or is there potential to apply that to your existing portfolio as well?
Mark, good morning. This is Assi. We are looking to see the final bill in order to assess the options to start enjoying, you know, almost a cash PTC versus a tax equity transaction. Of course, at Ormat we still need to sell those PTCs, but they can be sold to, according to the new ruling, to a new company that actually makes money in the U.S., and there's plenty of those. The bottom line is we will try and see if we can apply and enjoy also for the project under construction, the new PTC laws.
Okay. Thanks, Assi. Then just one follow-up. When I'm looking at the geothermal pipeline and the storage pipeline and thinking about the IRA, is there potential that some of the longer-dated opportunities that you're talking about kind of in maybe in 2024 and beyond, you could potentially pull those forward into 2023 maybe, or should we think about this as just kind of as far as the ITC goes, benefiting more of the longer-term visibility?
It's very hard to pull projects earlier because the main constraints that we have on the projects are not related directly to Ormat. It's the permitting process and the interconnection process that you're probably familiar that takes time. We are ready to do them whenever we can, but we are usually waiting for permitting and for interconnection. We will not be able to push forward projects unless something changes the regulatory environment, the local regulatory environment in the permitting and interconnection power.
I think Mark is really worth mentioning that on the storage side, the ITC on storage is something quite unique that we haven't seen, but we anticipated it, and that should provide more boost to our business. As you know, some of our revenues are related to natural gas, so they should not be lower as a result of the ITCs. In addition to that, we have RAs signed on all of our California assets that are operating. Even we will see a lower CapEx, you know, for future developments, we should enjoy the ITC and the higher IRR. We do think that the IRA is something very supportive to Ormat and to the whole industry.
Okay, that makes sense. Very helpful. Thank you.
Thank you, Mr. Strouse. The next question is from the line of Julien Dumoulin-Smith at Bank of America. Please go ahead.
Hi, guys. It's Anya stepping in for Julien here. My first question is I was wondering if you have an update on the supply chain issue, the supply chain situation across geothermal, solar, and storage. It just seems like there were maybe delays here and there across the portfolio of growth projects. Battery storage CODs seem for the most part generally unchanged last quarter. Yeah, just wondering if you could provide any details on levels of procurement across types. For example, how much is already versus what needs to be shipped, and then, any other color you could provide on what you mitigate those risks or shift your supply chain would be helpful also.
Okay, thank you. I will start, you know, the supply chain issues, you know, is something that has been discussed for the last couple of years. I think that when you look at Ormat and the fact that in this quarter alone we've added 73 MW of new operating power plants, demonstrates, you know, in reality how we deal with supply chain issues. If I need to maybe drill down into the three segments that you related to on the geothermal and storage and solar power. I would say that on the geothermal part, we are the leading geothermal company. We're vertically integrated. We have experience and knowledge with multiple suppliers globally.
If we do get into some kind of supply chain issue with one, we move to the other, and we're able to manage them. The geothermal project, as you can see, comes generally on time as we expect them to come. On the batteries and solar, this is a more challenging supply chain market. We are seeing small delays of a few months. However, for the projects that we've already announced, we have already ordered all the relevant materials or the relevant batteries. We are working with our suppliers in case there are issues. The way basically that we are mitigating it, you know, is that we have strategic stock that we buy.
We maintain a level that can support our growth needs, in the near and medium term. By that, we are able to meet most of our timetables, both on the geothermal and on the battery storage and solar projects.
Oh, thank you. As just a follow-up, I was hoping to maybe if you can color geothermal growth opportunity, specifically, at your Analyst Day, you mentioned Indonesia and prospects as particularly strong. Maybe provide an update there. Then secondly, is additional upside that you could see for any targets at this point? Anything you're hearing on that front.
Your line is not very good, so I'll try to answer at least the part that I heard and as you said, and as we said on the Investor Day, Indonesia is a very important growing market for us. We have on top of Sarulla and the region that we are in developing already with Medco, our partners. We have two additional projects, Tokati Dong and Wapsolit, where we own 100% of the project. We expect to start drilling in Tokati Dong this quarter and in Wapsolit to start drilling end of the year, beginning of next year.
These are all the projects that are in development, and they are not in our near term, but in the midterm growth plan that we have. On top of that, we have multiple discussions with local developers and with PLN, the Indonesian utility, on doing projects, some of them on standalone, where we own 100% and other with joint venture. The way PLN operates is through joint venture, and that's required by the Indonesian law since it's a state-owned entity. We are working very close with them. We have a dedicated resource and a dedicated business development and sales team in Indonesia. We see Indonesia in the midterm to become an important part of our growth plans.
Okay, great. Thank you. Back to you.
Thank you.
Thank you, Anya. Again, to ask a question, please press star one. There are no additional questions left at this time. I will pass it back to the management team for closing remarks.
Okay. Thank you, everyone. As you've seen, this has been another very strong quarter for Ormat, both on top line and on our Adjusted EBITDA numbers. On the CapEx, we've invested more than $250 million in the first half, and we plan to do the same. This demonstrates our confidence in the geothermal and energy storage segment going forward. This is a build-up year, and we expect to enjoy the fruits from this project that we are investing today in the near and midterm time. Thank you all for your support, and have a good day.
That concludes today's conference call. Thank you. You may now disconnect your line.