Ormat Technologies, Inc. (ORA) Earnings Call Transcript & Summary

Hey, everybody. Welcome to the JPMorgan Energy, Power and Renewables Conference. Thank you very much for joining. My name is Mark Strouse. I cover alternative energy here at JPMorgan. Very happy to have Doron Blachar, incoming CEO of Ormat Technologies joining us today. Doron, thank you very much for participating, and welcome.

Thank you, Mark. Happy to be here.

Great. So I'm just assuming there may be some folks listening that are new to the story. So do you mind just giving kind of a brief overview of what exactly Ormat is all about?

So Ormat is a renewable energy company. We've been operating since 1955, more than 55 years now, focusing on the geothermal energy. We're a vertically integrated company, an international company. So basically, it means that we do the entire process of geothermal energy. We start with the exploration phase, basically finding the resource. Geothermal energy is basically us utilizing the heat from the ground. So we have our geologists, our exploration team which finds resources in specific areas that exists. And once we find the resource, we will do some drilling, like oil and gas, we drill the depth that we drill in between 2,000 feet to 6,000, 7,000 feet deep. We would then utilize the brine or the steam that comes out of the ground. We have engineers that would design based on the parameters of the resource power plant. And utilizing the heat from the resource, we are able to generate electricity. It's 100% green energy. Whatever we use from the ground, the brine that we use, we inject back into the ground. Actually, it's a flow cycle, no emissions. We work 24/7. We are not dependent on wind or solar. All external support, it's a self-working facility. Availability for new power plants are above 95% of the time, can get to 98%, 99% of the time. And that's what we do globally. We have about 1,400 employees. Our main location is in the U.S., where we have about -- more than 600 megawatts that we own and operate. Other areas that we operate in is in Kenya, in Guatemala, in Honduras, in Guadeloupe, which is in the Caribbean, and in Indonesia. All in all, we have more than 900 megawatts that we own and operate. And that's the biggest part of our business, generating electricity. We have 2 additional segments as part of what we do. So since we have the engineers then we know how to design power plants and have the manufacturing facility. We can also sell -- we also sell our products and build power plants to other geothermal developers. We work in other countries, not only the countries that I mentioned before, but we also have quite a lot of customers in Turkey, in New Zealand, in Chile, in China. So we work globally whenever there's a developer that finds a resource and would like to build a geothermal power plant. This is something that we can do and we sell. That's our second segment. And the third part is something that we lately went into, a couple of years ago, in the energy storage market. We acquired a company 2 years ago. It has a software to work, to connect between the batteries and the grid. And today, we own about -- more than 50 megawatts of energy storage facilities where we operate with the grid. And we have additional sites coming online in the next few months and years.

Okay. Great. Can you just talk about the -- what you view is the addressable market for geothermal energy? Perhaps you can talk about the current generating capacity today and what you think the estimated capacity could be.

Yes. So today, basically, there's about 15,000 megawatts of installed capacity for geothermal. Our technology, actually, we supply about 15% -- 17% of that, that is working on our technology. And the potential is around tenfold of that, so about 150,000 megawatts. It is spread in what's called the Ring of Fire. It starts from the West Coast of the U.S., California, Nevada, goes down to Latin America and then circle up to New Zealand, Indonesia, Japan. All of these are areas that have a lot of geothermal. And the largest potential part of the U.S. is in Indonesia, and this is an area that we are targeting and focusing. We have today there about 42 megawatts which is of -- it's our share in a 330-megawatt facility. And last year, we signed a joint venture where we get 49% of a new area that we are doing some exploration there with Medco, one of our partners. And that site has a PPA for 110 megawatts. And we're looking at additional cycle.

Okay. You kind of touched on this earlier, but can you compare and contrast geothermal to other renewable sources of energy, solar, wind, hydro, you name it, in terms of pricing per kilowatt hour capacity factors, project lifetimes, things like that?

So basically, geothermal is baseload. None of this -- other alternative for renewal is on baseload. And that's the one and most important uniqueness, we are steady on the system. We don't have any impacts from clouds or lack of wind or the winter. We generate 24/7, we are flexible. We are having capacity factor, as I said, of more than 95% for the new partners. Compare that to solar, that is somewhere between 25%, maybe to 30%. So with geothermal, we actually have it across the year. We actually utilize local resources, so when we go to countries like Honduras or like Indonesia, when we build a partner, we employ local force. All of our facilities are manned by local people. We don't bring people from outside. So we actually support the local communities. Our facilities -- our actually power plants operate more than 30 years with the same equipment. And the resource, the geothermal resource is something that can last for decades. We have power plants opening for 30 and 40 years, and we have just signed new contracts for another 25 years. In Italy, there's a geothermal power plant operating for 100 years. So all in all, this is a long time, a facility operating steadily, not to impact the grid. It's been for a long time. So all of its attributes are well known to everybody. And we do not require any backup because, take an example of a solar field that you will buy or will build. When you build a 100-megawatt solar plant, it operates about 25% of the time. But when it operates, it generates 100 megawatts. So you build a transmission line for 100 megawatts but actually you get only 25 megawatts on average. So there's a lot of waste in other technologies, unlike with geothermal.

Got it. Okay. And I'm sorry, I should have mentioned this in my opening monologue, for members of the audience that have a question, in your digital conference book, there's a little Q button that you can press on it and type it in, and then I will ask your question for you. So Doron, Ormat has -- from what we've seen, you have over 70% market share of the binary geothermal market. What is the competitive advantage? What's the secret sauce? Is it patents? Are you just better at finding the resource? What is that?

On the 70%, it's basically us selling our products to others. And basically, I think that's the DNA of the company. We know how to build power plants, design them specific to the resource. Our budget is fixed. We sign fixed contracts. We meet the budget, we meet the timetable. We are operating in this field for 55 years. So we are very -- so when somebody actually signs a contract with us in order for it to be a delivery on time and on budget. We obviously have patents across different areas of our operation. But I don't think that's the main parameter that distinguish us. We've been here for 55 years and we're operating for 55 years. And I think what customers like to see actually is that we build our power plants with our technology. So they always have the reference of our power plants, power plants as a guide to what they do. So when we try to sell somebody our technology, we can always bring him to see our facilities, how we operate. We can always give advices how to operate, not just to build the power plant but how to operate it going forward. And I think that's what allows us to get to such a high market share.

Got you, okay. Enhanced geothermal systems have been described as a potential growth opportunity for the industry longer term. What are your thoughts regarding EGS and can Ormat potentially benefit?

Look, today, EGS, we say it might be a long-term potential. Today, it's mainly an academic processes done with the DOE and others. I don't think it has any proven yet capabilities of increasing the potential for geothermal. But obviously, as the big player in this market, we put on a very focused eye to see where it will go and to see what is the potential there. And if we see that it actually evolved into a real potential for geothermal, we would obviously join in and take advantage of it. Today, when we look into Ormat, we see that we have a lot of prospects in geothermal in the U.S. and Indonesia and in other places that we don't need the EGS in order to expand and grow. We have enough resources that are not -- do not require this technology which is a much more complicated technology than what we have today in order to support our growth and to see how we get there more.

Right, okay. ORIX has a minority stake in the company. Can you just kind of talk about the benefits of that partnership? And have those benefits met your expectations since the deal was announced a few years ago?

That ORIX benefit, it's probably into 3 potential areas. And I know that, as of now, we haven't seen items actually develop or materialize. We are trying to work with ORIX and try to take advantage of their relationships in Asia Pacific. This is something that it's very hard to pinpoint on anything that materialize from it, but we have been discussing with them using their contacts -- contact. Obviously, their knowledge and expertise as part of our Board is also important. But I cannot, at this time, pinpoint on something that has a direct line from things that we achieved and ORIX has a direct line to it. I think it's a bit more a -- not big but a bit more a -- not a physical -- or something we can distinguish specifically for it.

Right, okay. Kind of switching to the near term. Can you talk about the impact from COVID-19 on your existing portfolio projects as well as new projects that might be in the earlier stages of development?

Yes. So COVID actually had different impacts on the different segments that we have. On the electricity segment, COVID had some impact from growth in Kenya. In other places, it didn't have almost any impact. All of our power plants are take or pay in the U.S. So whatever we generate, we are getting paid. The fact there's been some reduction in the demand for electricity, it doesn't impact us directly. Probably impacts our customers but doesn't impact us directly. In Honduras, it's a take-or-pay or the big issue, they send us a letter of force majeure. They didn't quantify or tie to any specific item, but they see in Latin America a big reduction in the demand. And so this is something that we are following on. And in Kenya, we also got a force majeure letter requesting us to reduce capacity, actual capacity. So the letter had a -- not a material impact on us, the specific letter. But we do see curtailments today, it had some impact. But overall, the electricity segment, combined it with wind farm. The product segment is a bit more challenging. I think that whoever follows Ormat and sees the backlog, so the backlog went down, it was $96 million at beginning of May when we last discussed it. We do see some holdback of companies before making any large investment decisions, something that you can expect. So this is something that have some impact on us.

Okay. And you mentioned the force majeure in Kenya. The reason that, that's immaterial is because it's impacting the electricity payments and not the capacity payments. Is that the right way to think about that?

It's immaterial because they've exercised some plant in the agreement. Perhaps we have some specific calculation on issues like that, but that's a small number. It doesn't impact the capacity payment as you've said. It has some impact on the energy payment. So it's not a material amount.

All right. Can you give an update on operations at Puna? What's the latest expectation for when that can come back online?

Yes, so on Puna actually, no new news is good news. So basically, what we've discussed in May is what we -- what we've done in May, it's still ongoing. And we are drilling now another well. We have one well that we drilled and we are connecting it now to the facility. And we still expect in Q3, towards the end of Q3, [ Norske Skog ] coming online and gradually going up, getting to about 29 megawatts towards the end of the year. HELCO is doing their part on the substation, still waiting for the PUC to approve building the transmission line. But we see the small transmission line, I think it's 1 or 2 miles. So in short, a few -- a couple of weeks to build it. And so, so far, we don't have any updates on the timing that we've discussed. So I expect towards the end of Q3 and then going up to the 29 towards the end of the year.

Okay, okay. So you touched on backlog, the product backlog a bit. Bigger picture, though, product backlog has declined over the past couple of years. You've had a very big project in Sarulla. As you delivered on that, that's kind of been the reason that the backlog has come down. But on the last couple of calls, you have mentioned a new contract that you said can "replenish your backlog." I'm sure it's early and it's probably sensitive as far as what you can say. But just any color that you can provide regarding the magnitude of that project.

As I said -- what we've said in our call is that we're expecting significant contract during 2020. We have -- we're working on and you can expect several projects of potential. However, within the product segment and the waiting to make decisions, we see it coming a bit slower. And we don't -- cannot comment on any specific contract. Like you've said, obviously, this is commercial issues. But we do see the backlog declining as we said so, so it's one segment that has its challenges now with the COVID. And hopefully, when they do find some cure or some vaccine to it, then life will become normal again. But we'll have to see now where it goes.

Yes, okay. So for several quarters now, you've had an initiative to diversify backlog. Why do you feel the need to do that? And how are you driving that? Are customers coming to you or are you actively out there and in new customers and new territories diversifying?

I think it's a combination. In 2017, '18 and '19, we had quite a lot of projects in Turkey. They had a nice feed-in tariff over there, and we -- from the market as we are trying to diversify. And we did. We have a big market in Chile. We had some products in New Zealand, Taiwan and China. The reason for now diversifying is mainly not being dependent on a specific market that can go up or down or have some specific problems. So diversifying is something that we try to do all the time. I think today, we are working -- I don't think there should not be any geothermal project globally that we should not be aware of or not work on it and try to win it. And that's something that we try to do.

Got it. Okay. Can you talk about your initiatives within battery storage? When do you think that can become a more material part of your business?

Yes. So battery storage is -- it's an interesting area. We see -- it's a market that is built based on the solar and wind markets. So more solar and more wind coming online, the more -- the higher the need for energy storage. So we have gone into this market a couple of years ago, today 53 megawatts. We are building a facility in California, Vallecito, that should come online towards the end or beginning of next year, end of this year, beginning of next year. And we're finishing an acquisition of Pomona. Hopefully, the closing will happen in the next few weeks. So we are looking quite focused on this segment in the COVID impact period as well. And obviously, the reduction in demand obviously impacts energy storage. But it still has the -- following the solar and wind. So we see some slowing in this market, some of our pricing. But we expect that to pick up, since come back to the new normal with COVID. And in the next few years, we see it as an important segment for us. It's going to be a different segment than what we are familiar with, with PPA because this is a merchant -- many merchant. And we'll see how this market will evolve. So we are looking today at numerous projects, numerous M&A acquisition like Pomona and like others that we will try to do. And we expect that in a few years it will become an important and significant segment.

Okay. Can you just remind everybody what you've said your long-term targets are for megawatt growth, revenue growth? And then your margins have been improving as the mix has shifted towards the electricity business. I mean how should we think about margins long term?

So in the long term, we have a target in 2022 of between 180 to 200 new megawatts on the electricity front. It's on the presentation, the list of the projects that we've already announced, which should be between 180 to 200 megawatts that we plan to add. On the energy storage, we think between 100 to 115 megawatts. But this is obviously something that we see growth time. So this is still the long-term growth that we have on the electricity and storage. Regarding margins, I would say 2 things. One, it's important to look at the gross margins on a rolling 12 months. We see a big difference between Q1 and Q4. And compared to Q2 and Q3, geothermal is impacted by ambient temperature, so we do work 24/7. However, when the summer comes, we generate less electricity. So margins go down. So when you look on a quarterly basis, there is some shift in the margins. The best way to look at it is on a trailing 12 months. We have done quite a lot of initiatives over the last few years to improve margins. We still are. The enhancement in Steamboat that is coming online, the enhancement in Heber that is coming online next year, the change that we plan to do in Puna once we rebuild the power plant. So all of these improvements come with very high margins because obviously you don't need to redrill or build a substation or transmission line, you just improve the operations. And this is something that we keep on doing. I think we did enjoy quite a lot of the upgrades that we could have done in the last few years. And now we're seeing the list, a few more that can be done or we'll be doing there. I think one other item is to take into account and that's the benefit of Ormat as a vertical company is that we continue to invest in R&D, and we continue to look at ways how to improve our operations. So today, our new power plants are unmanned at night. We are working to make them unmanned also during the day. That obviously reduces the O&M. We have larger turbines today. If in the past, our turbines would be 4, 5, 6, maybe 8 megawatts, today we'll have 24 and 30 megawatts turbine. So in places that in the past we need to put 4, 5 turbines, today, we put only 1. Obviously, the CapEx goes down, the O&M goes down and the bottom is much more efficient. That's the benefit of us actually working from A to Z on geothermal power plants.

All right. Okay. I think lastly for me, what should investors view the change in management? Or should we expect a change in strategy going forward?

I would say not to think that might be a bit contradicting, but that's life. So over the last 7 years, I worked in Ormat as the CFO. The last 6 years I worked hand-in-hand with Isaac, the CEO. Obviously, I was part of the strategy that we've built and operated over these years. So on one hand, I'm part of the existing strategy. On the other hand, whenever there's a new CEO coming into town, he relooks at things, tries to see how it can do better and how he can grow the company more and more profitable. And this is something that I will do with the management that we have and the team. We have Assaf, the new CFO that joined us and others. So on one hand, I'm part of what is working now, and it's working good. But I will obviously be looking at expanding, focusing on profitability and growth.

Well, we look forward to watching, so good luck with that. Doron Blachar, thank you very much for participating. And to those that are listening in, thank you all for joining. Have a great day. Thank you very much.

Thank you very much.