Ormat Technologies, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results; comparisons are with the corresponding 2020 periods. Ormat operates Electricity, Product, and Energy Storage businesses.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $158.8m | $158.9m | $472.1m | $526.0m |
| Gross profit (margin) | $63.1m (39.8%) | $54.0m (34.0%) | $188.8m (40.0%) | $201.2m (38.3%) |
| Operating income | $36.0m | $51.7m | $114.5m | $160.8m |
| Net income attributable to Ormat shareholders | $14.9m | $15.7m | $43.2m | $64.8m |
| Diluted EPS | $0.26 | $0.31 | $0.77 | $1.26 |
| Adjusted EBITDA | $101.6m | $107.1m | $285.4m | $311.0m |
Q3 revenue was essentially flat: Electricity revenue rose 15.4% to $142.7m, offset by a 64.5% fall in Product revenue to $10.5m; Energy Storage revenue was $5.7m. For the first nine months, revenue declined 10.2%, principally because Product revenue fell 78.0% to $26.6m. Electricity revenue increased 6.7% to $421.5m and Energy Storage revenue rose 139.6% to $24.0m.
Q3 gross margin improved, but operating income declined as general and administrative expense increased and business-interruption insurance income was much lower than in the prior-year quarter. Nine-month shareholder net income fell 33.3% year over year. The effective tax rate was 9.2% for Q3 and 15.2% for the nine-month period, versus 38.8% and 36.6%, respectively, in 2020.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $144.8m, down from $238.9m. Capital expenditures were $288.4m; cash paid for the TG Geothermal acquisition was $171.0m. Investing cash outflow totaled $509.9m.
- Financing activities provided $185.0m, including $275.0m of new bank loans. Cash, cash equivalents and restricted cash decreased $180.5m during the period to $356.3m. At quarter end, unrestricted cash was $267.8m, marketable securities were $45.5m, and unused committed corporate borrowing capacity was $385.9m.
- Current assets were $635.4m and current liabilities $534.3m. Restricted cash was $88.5m and is not equivalent to unrestricted liquidity.
- Debt schedules report $630.6m of non-recourse or limited-recourse debt and $1,068.3m of full-recourse debt, plus a $252.9m finance liability assumed with the Nevada acquisition. The company reported a net debt-to-adjusted-EBITDA ratio of 4.0 and equity-to-assets of 45.2%; it stated that it was in compliance with financial covenants.
- New full-recourse loans totaled $275m: Hapoalim $125m and HSBC $50m, each at 3.45%, and Discount Bank $100m at 2.90%. Loan agreements include leverage and minimum-equity covenants.
Material changes and business developments
- In July, Ormat acquired two Nevada geothermal plants with 67.5 MW net capacity, development land and transmission assets. Consideration included $171m cash and an assumed finance liability valued at approximately $258m at acquisition. The plants contributed $14.4m of electricity revenue and $4.3m of earnings after specified tax and financing costs from acquisition through September 30.
- Electricity generation increased 13.8% in Q3 and 5.6% for the nine-month period. The filing attributes higher electricity revenue partly to the acquisition, the McGinness Hills expansion and Puna’s return to service.
- Product revenue and margins were pressured by project timing, pandemic-related sales weakness, and delays and cost increases on a project. Product backlog was $66.9m as of November 3, 2021, compared with $49.6m a year earlier; the company expected to recognize approximately all of $66.6m in remaining performance obligations over the next 24 months.
- Energy Storage’s nine-month revenue benefited from the Rabbit Hill facility during the Texas power crisis and the acquired Pomona asset. However, the Texas event also generated approximately $9.1m of net hedge losses and a $3.0m provision for potentially uncollectible demand-response receivables.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management estimated approximately $177m of fourth-quarter 2021 capital expenditures and $29.4m of debt repayments; it expected to use available liquidity, operating cash flow and future project financing. The filing also describes project schedules, with timing subject to permits, construction and other conditions.
- COVID-19 uncertainty, supply-chain and shipping constraints, higher raw-material costs, and permitting delays may affect costs, margins, project schedules and product sales. Management reported easing restrictions in some locations but ongoing uncertainty.
- Electricity revenue is largely supported by long-term contracts, but customer and geographic concentration remains significant. Three customers—NV Energy, SCPPA and KPLC—represented 53.2% of Q3 revenue. KPLC had $33.8m overdue at quarter end ($14.2m received in October); Honduras utility ENEE had $13.8m overdue ($2.7m received in October). KPLC curtailments and a Kenyan task-force recommendation to renegotiate producer tariffs add uncertainty.
- Puna operated at a stable 26 MW in Q3. Insurers have disputed aspects of the Puna claim; Ormat recognized approximately $15.8m of business-interruption income in Q3 2021, compared with $20.4m in Q3 2020, and continued discussions about additional payments. Approval of a proposed Puna PPA extension and repowering remains unresolved pending environmental review and rate renegotiation.
- Ormat disclosed a Special Committee investigation into short-seller allegations concerning anti-corruption compliance and stated it was providing information requested by the SEC and DOJ. A separate Israeli shareholder claim seeks approximately $100m; the company considers the likelihood of an award low, but says potential exposure cannot be reasonably estimated. A Chilean subcontractor arbitration seeks approximately $5.1m. Prior shareholder and derivative cases were settled for immaterial company payments.
- Other execution and operating risks include reduced geothermal resource performance and KPLC curtailments at Olkaria, a Brawley injection-well leak, Sarulla performance and debt-service covenant issues, merchant-market price exposure for storage assets, foreign exchange and interest-rate risk, and natural-disaster and cyber risks.
- Management reported effective disclosure controls as of September 30, 2021 and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether the sharp Product revenue decline reverses as backlog converts, and whether project delays and cost inflation continue to pressure segment margins.
- Collection timing for overdue KPLC and ENEE receivables, the outcome of Kenya’s PPA review, and the extent of continued Olkaria curtailments.
- Progress on Puna’s insurance recovery, environmental review and proposed PPA terms; and repair progress at Brawley.
- Actual spending, financing and completion timing for the development and storage project pipeline, compared with management’s capital-expenditure estimates.
- Developments in the SEC/DOJ information requests, the Special Committee review, and the pending legal claims and arbitration.
- Debt service, covenant headroom and liquidity after acquisition financing and planned capital investment; distinguish unrestricted cash from restricted cash and project-level financing.