ORMAT TECHNOLOGIES, INC. annual report, FY2020

Business context and reporting period

Ormat Technologies, Inc. filed this Form 10-K for the fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. Ormat develops, owns and operates geothermal, recovered-energy, solar PV and battery-storage projects, and manufactures related power-generation equipment. Electricity supplied 76.8% of 2020 revenue, Products 21.0% and Energy Storage 2.2%.

At year-end, the company operated 25 geothermal, recovered-energy and solar sites with 932 MW of generating capacity; geothermal represented 94% of capacity. Its electricity portfolio is largely supported by long-term PPAs. The weighted-average remaining PPA term was approximately 16 years at December 31, 2020.

Financial and operating performance

Metric	FY 2020	FY 2019
Revenue	$705.3 million	$746.0 million
Gross profit / margin	$276.3 million / 39.2%	$269.3 million / 36.1%
Operating income / margin	$214.0 million / 30.3%	$193.8 million / 26.0%
Net income	$101.8 million	$93.5 million
Net income attributable to Ormat stockholders	$85.5 million; diluted EPS $1.65	$88.1 million; diluted EPS $1.72
Adjusted EBITDA (non-GAAP)	$420.2 million	$384.3 million
Cash from operating activities	$265.0 million	$236.5 million
Cash used in investing activities	$386.0 million	$254.5 million
Cash and cash equivalents at year-end	$448.3 million	$71.2 million

FY 2020 revenue fell 5.5%. Electricity revenue was nearly flat at $541.4 million; Products revenue declined 22.5% to $148.1 million; and Energy Storage revenue increased 7.6% to $15.8 million. Consolidated generation decreased 3.1% to 6.04 million MWh, while the average realized price increased to $89.60/MWh from $86.60/MWh.

For Q4 2020, revenue was $179.4 million versus $192.4 million in Q4 2019. Operating income was $53.2 million versus $54.5 million; net income attributable to stockholders was $20.7 million versus $12.6 million; and diluted EPS was $0.39 in both periods.

Gross debt was approximately $1.47 billion at December 31, 2020, including limited/non-recourse and full-recourse debt. Approximately 97.2% of consolidated long-term debt was fixed-rate. The company reported $88.5 million of restricted cash and $389.4 million of unused corporate borrowing capacity. Total equity was $1.94 billion; reported leverage under a specified covenant measure—net debt to Adjusted EBITDA—was 2.36, and the company said it was in compliance with its covenants.

Material changes versus the prior comparable period

Lower Products revenue drove the consolidated revenue decline, reflecting projects completed in 2019, COVID-related project delays and weaker customer purchasing commitments. Products gross margin also declined to 22.4% from 23.6%, partly due to higher costs on a New Zealand project.
Electricity gross margin improved to 44.6% from 42.1%, with lower operating costs and a higher average realized price, despite reduced generation. Energy Storage gross profit turned positive at $1.8 million, compared with a $3.2 million loss.
Operating income included $20.7 million of Puna business-interruption insurance income. The company recognized $28.6 million in total business-interruption recoveries, including amounts recorded against related costs; this materially benefited reported results.
Operating cash flow rose to $265.0 million. Investing outflows increased, including $320.7 million of capital expenditures and $43.4 million for the Pomona storage acquisition. Financing inflows included $339.5 million net from an equity offering and new debt issuance; year-end cash rose substantially.
Stockholder-attributable net income decreased despite higher consolidated net income, principally because income attributable to noncontrolling interests increased.

Outlook, commentary, risks and unusual items

Management estimated 2021 capital expenditures of approximately $445 million and long-term debt repayments of $78.6 million. It expected to fund requirements with existing liquidity, operating cash flow and anticipated project financing/refinancing.
Management expected to add 250–270 MW of geothermal and solar PV capacity by the end of 2023. It also cited a roughly 1.2 GW energy-storage development pipeline and expected 200–300 MW of that pipeline could be commissioned by 2023, subject to permitting, interconnection and project economics. These are forward-looking targets, not guarantees.
The company stated that 2021 Products revenue was expected to be significantly lower than 2020, citing the sharp backlog decline: approximately $33.4 million as of February 24, 2021, versus $141.9 million a year earlier. The filing attributes the reduction mainly to COVID-19 effects and deferred customer decisions.
Puna, shut since the 2018 Kilauea eruption, resumed partial operations in November 2020 and was operating at approximately 13 MW in early 2021. Ormat expected gradual recovery toward full capacity by mid-2021, contingent on successful field recovery. It continued to assess potential impairment and was pursuing litigation against insurers disputing portions of its claim; no impairment was recorded at year-end.
COVID-19 had limited 2020 impact on contracted Electricity revenue, but caused construction/permitting delays and affected Products demand and execution. Merchant storage revenues remain exposed to market prices. Other principal risks include geothermal resource decline, outages and natural disasters, customer and geographic concentration, foreign political/currency exposure, changing renewable incentives, financing needs and competition.
Customer concentration is significant: SCPPA represented 20.6% of 2020 revenue, NV Energy 17.5% and Kenya Power and Lighting Company (KPLC) 16.4%. KPLC had $48.9 million overdue at year-end; $16.2 million was paid in January and February 2021. Ormat reported that $2.9 million overdue from Honduras’s ENEE at year-end was collected in January 2021.
Ormat settled Kenyan tax assessments that had proposed approximately $200 million, including interest and penalties. Settlement payments were approximately $29.5 million in 2020, and the company said the settlements concluded open KRA audits and assessments. A separate Israeli tax-audit settlement of $4.3 million was paid in January 2021.
After year-end, severe Texas weather and ERCOT market disruption restricted Rabbit Hill battery charging. Ormat reported losses of up to approximately $11 million on a hedge transaction and said further imbalance-charge losses were possible.
The Sarulla investment experienced lower generation due to well-field issues. Its consortium did not meet a debt-service coverage ratio in October 2020 and was negotiating a lender waiver and remediation plan; Ormat was evaluating the potential accounting implications.

Most important facts an investor should verify

Whether Puna’s resource recovery and generation ramp-up reached management’s stated targets, and whether any insurance dispute or impairment outcome changed.
Whether the Products backlog stabilizes and 2021 Products revenue, contract margins and project cost estimates develop as expected.
Whether KPLC collects and pays overdue balances on schedule, and whether customer concentration or foreign-offtaker credit risk changes.
Progress, costs, financing and commissioning timing for the approximately $445 million 2021 capital plan and the geothermal and storage pipeline.
The final economic impact of the Texas storage hedge loss and any subsequent ERCOT imbalance charges.
Whether Sarulla obtains a lender waiver, executes its remediation plan and restores generation and covenant compliance.
How much reported operating income and cash generation depended on Puna insurance proceeds, tax monetization income and external equity/debt financing.

The independent auditor gave an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective at December 31, 2020. The auditor identified product-revenue percentage-of-completion estimates and deferred-tax-asset realizability as critical audit matters.