ORMAT TECHNOLOGIES, INC. quarterly report, Q3 FY2023

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Ormat Technologies, Inc. — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results are compared with the corresponding 2022 periods. Ormat develops, owns and operates geothermal, recovered-energy, solar and energy-storage assets, and sells geothermal and recovered-energy equipment and EPC services. Its portfolio was approximately 1.3 GW; its reporting segments are Electricity, Product and Energy Storage.

Financial performance

  • Q3 revenue: $208.1 million, up 18.3% year over year. Electricity revenue was $157.2 million (+2.9%), Product $39.8 million (+180.2%) and Energy Storage $11.0 million (+24.5%). Product growth primarily reflected project progress and the timing of revenue recognition.
  • Q3 earnings: Gross profit was $60.0 million versus $61.1 million; gross margin was 28.8% versus 34.7%. Operating income was $37.6 million versus $38.9 million. Net income attributable to Ormat stockholders was $35.5 million versus $18.1 million; diluted EPS was $0.59 versus $0.32.
  • Nine-month revenue: $588.1 million, up 11.2%. Electricity revenue was $482.8 million (+3.5%), Product $83.3 million (+112.4%) and Energy Storage $21.9 million (-4.3%).
  • Nine-month earnings: Gross profit was $185.6 million versus $188.6 million; gross margin was 31.6% versus 35.7%. Operating income was $115.0 million versus $122.6 million. Net income attributable to stockholders was $88.7 million versus $47.8 million; diluted EPS was $1.49 versus $0.85.
  • Cash flow, nine months: Operating cash flow was $170.3 million, down from $206.2 million. Capital expenditures were $448.8 million; investing cash outflow was $458.2 million. Financing provided $247.6 million, including $341.7 million net equity proceeds and $99.9 million of Hapoalim loan proceeds, partly offset by debt repayments, dividends and payments to noncontrolling interests. Cash and restricted cash combined declined $40.4 million to $186.3 million.
  • Liquidity and debt: September 30 cash and cash equivalents were $78.1 million, with $108.2 million of restricted cash. The company reported $390.5 million of unused corporate borrowing capacity. Balance-sheet debt included $1.71 billion of current and long-term debt, including convertible notes, plus $35.0 million of short-term revolving borrowings; financing liabilities were separately reported at $225.8 million. Management reported a net-debt-to-adjusted-EBITDA ratio of 3.82 and compliance with applicable covenants, except for a distribution restriction at the DAC 1 subsidiary.
  • Margins and adjusted results: Adjusted EBITDA, a non-GAAP measure, was $118.3 million in Q3 versus $102.2 million and $342.7 million for nine months versus $310.8 million. It should not be treated as a GAAP cash-flow or earnings measure.

Material changes and key drivers

  • Q3 electricity generation increased 7.6% to 1.65 million MWh; nine-month generation increased 6.3% to 5.26 million MWh. New or returning generation included North Valley and Heber 1, while lower Puna prices and generation partly offset growth.
  • Higher electricity costs and the absence of some prior-year Heber 1 business-interruption insurance proceeds contributed to lower electricity gross margin. Overall cost of revenue rose faster than revenue in both comparison periods.
  • Product revenue rose sharply, but project timing and mix affect results. Product gross margin was 18.7% in Q3 versus 18.0%; for nine months it was 13.9% versus 9.2%.
  • Energy Storage nine-month revenue declined amid lower PJM and CAISO energy rates, partly offset by new facilities. Its nine-month gross margin fell to 11.2% from 24.3%.
  • Q3 net income benefited from a $9.4 million Kenyan branch tax-rate-change benefit and tax credits. Nine-month effective tax rate was 2.4%, versus 28.5% in 2022. Income attributable to sale of tax benefits was $42.5 million for nine months versus $26.3 million.
  • Interest expense, net rose to $73.1 million for nine months from $63.9 million, reflecting new and existing borrowings and lower interest capitalization. The company completed a public offering of 4.14 million shares in 2023, generating $341.7 million net proceeds and increasing shares outstanding.

Outlook, developments and risks

  • Management estimated approximately $110 million of capital expenditures for the final quarter of 2023, including project construction, exploration, storage and maintenance. It budgeted $537 million for specified new-project construction and enhancements, of which $265 million had been invested by September 30. Management said existing liquidity, operating cash flow and anticipated project financing/refinancing were expected to meet requirements. No full-year revenue or earnings guidance is stated in the provided filing text.
  • Growth projects include geothermal, solar and storage construction and development. Ormat signed a contract for a 56 MW gross geothermal plant in New Zealand and a battery supply agreement for capacity up to 750 MWh. Several construction projects have estimated commercial-operation dates extending from late 2023 through 2025; schedules remain subject to execution and permitting.
  • After quarter-end, Ormat agreed to acquire a portfolio of geothermal, hybrid and solar assets for $271 million, with closing expected by Q1 2024 subject to approvals and other conditions. It also completed a North Valley tax-equity transaction with approximately $43.1 million initial proceeds and issued $73.5 million of 90-day commercial paper. A new $50 million, 7.15% fixed-rate loan was agreed November 1.
  • Israel conflict: Approximately 10% of the Israeli workforce (about 4% globally), mostly in Product, had been called to military service. Management said facilities and infrastructure had not been damaged and supply chains had not been significantly affected as of the filing’s approval date, but prolonged conflict could disrupt production, shipping, contracts and growth plans. The company had issued precautionary force-majeure notices to several customers.
  • Dixie Meadows: Litigation and regulatory review concerning the Dixie Valley toad and project approvals remain unresolved. Construction is paused while supplemental environmental review and endangered-species consultation proceed. The project carried approximately $84.9 million of construction-in-process; the company could not estimate a possible loss or outcome, and delays or mitigation could increase costs or affect project economics.
  • Receivables and concentration: Three major utilities represented substantial revenue, including SCPPA (18.7% of Q3 revenue), NV Energy entities (14.0%) and Kenya Power (13.1%). Overdue amounts were $50.6 million from Kenya Power and $10.0 million from Honduras’s ENEE at quarter-end; partial payments followed in October. Management expected collection, but Honduras could experience further delays.
  • Other risks include possible renegotiation pressure on Kenyan power-purchase agreements, an ongoing SEC/DOJ information request related to historical anti-corruption allegations under review by a board special committee, foreign-exchange exposure, inflation and supply-chain costs, customer concentration, project execution and permitting, and merchant-market price volatility in Energy Storage. Management identified increased competition in Product equipment markets.

Investor verification priorities

  1. Track Product segment backlog, project execution, revenue timing and margins; assess how much of the sharp growth is repeatable.
  2. Monitor cash conversion, receivables and collections from Kenya Power and ENEE, alongside the high customer concentration.
  3. Reconcile capital-spending plans and project financing needs with operating cash flow, available borrowing capacity, debt maturities and the reported leverage covenant ratio.
  4. Follow the Israel conflict’s effects on staffing, manufacturing, shipping, customer contracts and insurance costs.
  5. Review Dixie Meadows permitting, consultation and litigation developments, potential project delays and the carrying value at risk.
  6. Assess the contribution of tax credits, tax-benefit monetization and the Kenyan tax-rate change to reported earnings, and distinguish these items from recurring operating performance.
  7. Verify closing, approvals, financing and integration assumptions for the announced $271 million asset acquisition, and the terms and cash-flow allocation of the North Valley tax-equity transaction.