Business context and reporting period
Ormat Technologies, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2020. The company develops and operates geothermal, recovered-energy and solar power plants, and also sells power-generation equipment and provides energy-storage services. Its three reporting segments are Electricity, Product, and Energy Storage and Management Services (ESMS). Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $174.9m | $184.1m | $367.0m | $383.1m |
| Gross profit / margin | $65.4m / 37.4% | $65.1m / 35.4% | $147.2m / 40.1% | $139.3m / 36.4% |
| Operating income / margin | $48.1m / 27.5% | $46.9m / 25.5% | $109.1m / 29.7% | $100.6m / 26.3% |
| Net income attributable to Ormat stockholders | $23.0m | $33.9m | $49.1m | $59.9m |
| Diluted EPS | $0.45 | $0.66 | $0.95 | $1.17 |
| Adjusted EBITDA | $97.9m | $94.9m | $203.9m | $196.6m |
For the six months ended June 30, operating cash flow was $154.4m, capital expenditures were $151.3m, and cash used in investing activities was $159.0m. Financing provided $101.4m; cash and restricted cash increased $96.7m to $249.8m, including $173.7m of unrestricted cash. At June 30, total assets were $3.42bn and equity was $1.56bn. The company reported $285m of unused corporate borrowing capacity under committed lines.
Debt includes $706.9m of limited- or non-recourse debt and $563.9m of full-recourse debt in the company’s debt schedule, plus $100.1m outstanding on short-term revolving credit lines. Commercial paper was $3.8m at quarter-end and was repaid in July. The company reported compliance with its debt covenants.
Material changes versus prior comparable periods
- Q2 revenue decreased 5.0%; first-half revenue decreased 4.2%. Electricity revenue was nearly flat, while Product revenue fell 16.0% in Q2 and 12.5% for the first half. ESMS revenue declined 15.0% and 37.3%, respectively.
- Electricity generation fell 4.7% in Q2 and 3.7% in the first half, partly due to lower output at OREG facilities and Olkaria. Fixed-price and capacity-payment contracts helped keep Electricity revenue broadly stable.
- Operating income increased 2.5% in Q2 and 8.5% for the first half, supported by improved Electricity gross margin and lower general and administrative expenses. Gross margin also improved.
- Net income attributable to stockholders fell 32% in Q2 and 18% for the first half, chiefly reflecting higher income-tax expense. The first-half effective tax rate was 35.5%, versus 14.5% in 2019.
- Adjusted EBITDA increased modestly despite lower revenue. Operating cash flow was slightly lower than in the prior-year half, while capital spending rose from $114.9m to $151.3m.
Outlook, management commentary, risks and unusual items
- COVID-19: Plants and manufacturing and storage facilities operated close to full capacity, with no material direct operational impact reported for the first half. Management nevertheless cited risks to customer demand, collections, supply chains, permitting, project schedules and financing. Lower ancillary-service prices affected ESMS revenue.
- Product outlook: Product backlog was $65.5m as of August 3, 2020, compared with $201m as of August 7, 2019. Management attributed the decline mainly to the pandemic and customer reluctance to commit. It expected to recognize more than 80% of the current backlog by year-end and said 2020 Product revenue would be significantly adversely affected. These are expectations, not guaranteed results.
- Capital spending and projects: Management estimated total 2020 capital expenditures of approximately $207m. Puna recommissioning continued; management expected generation to increase gradually to 29 MW by year-end, subject to successful field recovery and completion of transmission upgrades. The new 8 MW Puna plant was expected to reach commercial operation in 2022. Other project timelines remain subject to construction, permitting and financing risks.
- Financing and transactions: Ormat raised approximately $79.8m through additions to Series 3 bonds and obtained a $50m loan during April and May. In July it issued approximately $290m of Series 4 bonds, converted to U.S. dollars through a cross-currency swap, and acquired the 20 MW/80 MWh Pomona storage facility for $43.9m net. These occurred after quarter-end.
- Puna and insurance: The company received $8.2m of additional Puna-related insurance proceeds during the first half, including business-interruption proceeds; it is litigating with insurers that have not accepted its business-interruption claim. Puna recovery and any resource damage remain material uncertainties.
- Counterparty and credit risk: KPLC accounted for 15.7% of first-half revenue; $54.8m was overdue at June 30, of which $8.8m was collected in July. ENEE had $24.0m overdue, with $0.7m collected in July. The company reported customer concentration among NV Energy, SCPPA and KPLC, and warned that further collection delays are possible.
- Tax contingency: Kenya tax assessments totaled approximately $160m, plus approximately $43m in penalties and interest. Ormat is contesting the assessments, believes its positions are sustainable, and had recorded only an immaterial reserve at June 30.
- Controls and litigation: Management concluded disclosure controls were ineffective because a material weakness in income-tax accounting controls remained unremediated at June 30. Related shareholder and derivative litigation settlements were pending court approval; the filing describes expected company costs as not material in certain cases, while the potential exposure in the Israeli action could not be reasonably estimated.
- Other operational risk: Sarulla reported well-field issues and lower generation; its operator was developing a remediation plan. The company also noted seasonal generation patterns and exposure to foreign exchange, interest rates, merchant storage prices, and natural events.
Important facts for investors to verify
- Whether Product backlog stabilizes and the company achieves its stated expectation to recognize more than 80% of the August backlog by year-end.
- Progress and timing of Puna recommissioning, transmission work, insurance recoveries and the outstanding insurer dispute.
- Collection of overdue KPLC and ENEE receivables, and any effect of force-majeure notices or curtailments on contracted revenues.
- Cash generation relative to the approximately $207m 2020 capital-spending estimate, debt repayments and financing needs.
- Developments in the Kenya tax assessments and pending shareholder, derivative and other litigation.
- Remediation and testing of the material weakness in income-tax controls; management stated it could not assure remediation during 2020.