ORMAT TECHNOLOGIES, INC. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; amounts are in U.S. dollars. Ormat develops, owns and operates renewable power plants and sells power-generation equipment and energy-storage services. Its segments are Electricity, Product, and Energy Storage and Management Services (ESMS).
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $192.1 million | $199.0 million | Down 3.5% |
| Gross profit / margin | $81.8 million / 42.6% | $74.2 million / 37.3% | Margin up 5.3 percentage points |
| Operating income / margin | $61.1 million / 31.8% | $53.7 million / 27.0% | Up 13.6% |
| Net income | $29.9 million | $28.1 million | Up 6.3% |
| Net income attributable to Ormat stockholders | $26.0 million; $0.51 diluted EPS | $25.9 million; $0.51 diluted EPS | Nearly flat |
| Operating cash flow | $79.8 million | $77.4 million | Up $2.3 million |
| Capital expenditures | $80.4 million | $51.3 million | Up $29.1 million |
| Adjusted EBITDA | $106.0 million | $101.8 million | Up 4.2% |
Electricity revenue was essentially unchanged at $142.9 million, despite generation declining 2.7% to 1.65 million MWh. Product revenue fell 9.0% to $47.4 million, while ESMS revenue fell 53.9% to $1.8 million. The Product decline reflected completion of projects that contributed revenue in Q1 2019; the ESMS comparison included a one-time EPC project in the prior-year quarter.
Lower cost of revenue—down 11.7%—supported improved gross margin. Operating income also benefited from a higher Electricity gross margin and lower general and administrative expense. Net income attributable to stockholders was nearly flat, as higher operating income and lower interest expense were largely offset by higher tax expense and lower income from sales of tax benefits. Q1 included $4.9 million of Puna insurance recovery recognized in cost of revenue and G&A.
Financial position and liquidity
At March 31, 2020, cash and cash equivalents were $231.1 million, restricted cash was $88.6 million, and total current assets were $584.3 million. Total liabilities were $1.90 billion and equity was $1.53 billion. Reported debt was approximately $1.41 billion, comprising revolving credit lines, commercial paper, and current and long-term borrowings; lease liabilities are additional obligations. Cash and restricted cash together totaled $319.8 million.
Operating cash flow of $79.8 million was slightly below capital expenditures of $80.4 million. Investing activities used $80.8 million. Financing activities provided $168.1 million, principally reflecting $230.0 million of net revolving-credit borrowings, partly offset by debt repayments, commercial-paper repayment and dividends. Management reported $87.0 million of unused corporate borrowing capacity. It estimated 2020 capital expenditures at approximately $242 million and projected $203.4 million of debt repayments for the remainder of the year, including $76.0 million of revolving debt assumed to be renewed.
Ormat reported compliance with its debt covenants: equity was $1.53 billion versus a $600 million minimum, the equity-to-assets ratio was 44.5% versus a 25% minimum, and net debt to Adjusted EBITDA was 3.0 versus a 6.0 maximum. Management said existing liquidity, operating cash flows and expected project financing and refinancing would meet anticipated needs.
Outlook, risks and notable developments
- COVID-19: Plants, manufacturing and storage facilities operated close to full capacity, and the company reported no material direct Q1 operational impact. Management emphasized uncertainty about duration and economic effects. Product backlog was $96.5 million as of May 3, down from $141.9 million on February 25; the filing attributes part of the decline to pandemic-related customer caution. The filing gives differing backlog-revenue recognition horizons: approximately 18 months in MD&A and 24 months in the financial-statement note.
- Customer and collection exposure: Three customers—NV Energy subsidiaries, SCPPA and KPLC—represented 19.2%, 18.7% and 15.4% of Q1 revenue, respectively. KPLC receivables were $38.6 million overdue at quarter-end, of which $8.0 million was paid in April. ENEE in Honduras owed $20.1 million overdue, with none paid as of the filing’s stated period. The company cited government support undertakings but warned of potential collection delays.
- COVID-related notices: KPLC notified Ormat it was invoking force majeure and purporting to reduce Olkaria contracted capacity from 150 MW to 133.9 MW; management expected an immaterial revenue impact. ENEE also declared force majeure; Ormat was still evaluating the potential impact.
- Puna recovery: Reconstruction continued after the 2018 Kilauea eruption. Ormat expected partial generation by early Q4 2020 and a gradual increase to 29 MW by year-end, conditional on permits, transmission upgrades and successful field recovery. A new PPA extends through 2052, with 46 MW contract capacity and an 8 MW plant expected to reach commercial operation in 2022. Ormat noted resource damage or continued shutdown could materially affect results.
- Funding and projects: In April, Ormat raised approximately $64 million through additional Series 3 bonds and borrowed $50 million under an existing lender agreement. It also agreed to acquire a 20 MW California battery facility for $47 million, subject to conditions, with closing expected in Q3 2020. Commercial operation of the 30 MW Casa Diablo-IV geothermal project was expected by the end of 2021.
- Other operating items: Sarulla investee results shifted from $1.0 million of earnings to a $0.7 million loss, attributed to well-field issues and lower generation. The company reported $4.1 million of income from sales of tax benefits, down from $7.8 million a year earlier.
- Tax and legal matters: Kenya tax assessments and preliminary findings totaled approximately $219 million, including penalties and interest. Ormat disputed the assessments and had recorded no related reserve other than an immaterial amount. Several shareholder and derivative cases had proposed settlements pending final documentation and court approval; the company described its expected costs as immaterial.
- Controls: Disclosure controls were not effective at March 31, 2020 because a previously identified material weakness in income-tax accounting controls remained unremediated. Management described remediation steps but gave no assurance that remediation would be completed in 2020.
- Leadership: CEO Isaac Angel was expected to retire July 1, 2020, with President and CFO Doron Blachar appointed as successor. Assaf Ginzburg became CFO effective May 10, 2020.
No specific full-year revenue or earnings guidance is provided in the supplied filing text; the company did provide capital expenditure estimates and project-specific expectations. Other risks include geothermal resource and natural-disaster exposure, project delays, foreign exchange and interest-rate risks, and dependence on major counterparties. The company stated that 95.8% of consolidated long-term debt was fixed-rate.
Important facts for investors to verify
- Progress and results of the Puna well-field recovery, transmission upgrade, permits and expected generation milestones.
- Whether KPLC and ENEE force-majeure notices affect contracted revenue, and whether overdue customer receivables are collected.
- Product backlog conversion and the inconsistent 18-month versus 24-month recognition horizon stated in the filing.
- Outcome and potential cash exposure from Kenya tax proceedings involving approximately $219 million of assessments, despite no material reserve recorded.
- Remediation and independent testing of the income-tax accounting material weakness.
- Ability to refinance or renew revolving borrowings and fund projected capital expenditures and debt repayments.
- Final approval and terms of proposed legal settlements, and closing conditions for the $47 million battery-storage acquisition.