Ormat Technologies, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Comparisons are primarily with FY2018. The filing was signed March 2, 2020. This is an annual report, not a standalone fourth-quarter filing.
Business context and reporting period
Ormat is a vertically integrated geothermal and recovered-energy company that develops, manufactures equipment for, owns and operates power plants. It is also expanding into solar PV, battery storage and energy management. FY2019 revenue came from Electricity (72.4%), Product (25.6%) and Energy Storage and Management Services (2.0%).
The company operated 25 geothermal, recovered-energy and solar sites with 914 MW of stated generating capacity; geothermal and recovered-energy plants reported capacity factors of 87% and 74%, respectively. Most electricity sales are under long-term PPAs; the weighted-average remaining PPA term was approximately 17 years at year-end.
Key financial results and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Total revenue | $746.0 million | $719.3 million | +3.7% |
| Gross profit / margin | $269.3 million / 36.1% | $270.4 million / 37.6% | Profit down $1.1 million |
| Operating income / margin | $193.8 million / 26.0% | $185.1 million / 25.7% | +4.7% |
| Net income | $93.5 million | $110.1 million | −15.0% |
| Net income attributable to shareholders | $88.1 million | $98.0 million | −10.1% |
| Diluted EPS | $1.72 | $1.92 | −10.4% |
| Operating cash flow | $236.5 million | $145.8 million | +$90.7 million |
| Capital expenditures | $280.0 million | $258.5 million | +$21.5 million |
| Adjusted EBITDA | $384.3 million | $368.0 million | +4.4% |
FY2019 revenue by segment: Electricity $540.3 million (+6.0%); Product $191.0 million (−5.3%); Storage and Management Services $14.7 million (+92%). Electricity gross margin was 42.1% versus 41.5%; Product gross margin declined to 23.6% from 30.3%. Storage remained loss-making at the gross-profit level, with a $3.2 million loss.
Generation increased 6.5% to 6.24 million MWh. Electricity revenue benefited from McGinness Hills Phase 3, the Olkaria III expansion and the USG acquisition, partly offset by the Puna shutdown and lower generation at some plants. Product revenue declined as prior Turkish projects concluded; increased competition and two lower-margin Turkish contracts pressured Product profitability.
For Q4 2019, revenue was $192.4 million versus $190.5 million in Q4 2018. Net income attributable to shareholders was $12.6 million versus $18.2 million; diluted EPS was $0.24 versus $0.36.
At December 31, 2019, cash and equivalents were $71.2 million, restricted cash was $81.9 million, and working capital was $39.2 million. Total assets were $3.25 billion and equity was $1.52 billion. Reported long-term debt, including current portion, was $1.147 billion. The company also had $50.0 million of commercial paper and $40.6 million drawn on short-term revolving bank lines; it reported $213.9 million of unused corporate borrowing capacity. Cash held by foreign subsidiaries was $59.2 million.
FY2019 investing cash outflow was $254.5 million and financing cash outflow was $5.8 million. The filing estimates $332 million of 2020 capital needs and $135.5 million of long-term debt principal repayments; it assumes renewal of $50 million of commercial paper and approximately $40.6 million of revolver borrowings. Cash dividends declared were $0.44 per share for FY2019, totaling $22.4 million.
Material changes versus the prior comparable period
- Revenue rose, chiefly from electricity generation growth and storage projects coming online, while Product revenue and margins weakened.
- Operating income improved despite slightly lower gross profit; higher general and administrative expense and interest costs weighed on results.
- Interest expense, net rose to $80.4 million from $70.9 million, principally reflecting additional borrowing and acquired debt. The income tax provision increased to $45.6 million from $34.7 million; the effective tax rate rose to 33.2% from 25.3%.
- Operating cash flow improved materially, partly due to working-capital timing, including supplier payments, collections and withholding-tax payments. Investing outflow was lower than in 2018, which included the USG acquisition.
- The company recorded no goodwill impairment in 2019; 2018 included a $13.5 million impairment related to Viridity. FY2019 also included $9.3 million of additional Puna business-interruption insurance proceeds recorded in cost of revenues.
- Product backlog was $141.9 million as of February 25, 2020, down from $216.8 million a year earlier. The filing says the 2020 backlog includes revenue for January 1 through February 25.
Outlook, management commentary, risks and contingencies
- Projects and outlook: Management estimated $332 million of 2020 capital expenditures. Projects under construction included approximately 70–75 MW of geothermal capacity and a 20 MW solar project; the company also described a broader 90–95 MW U.S. geothermal and solar construction plan. It expected to commission 150–200 MW of storage projects during 2020–2022. These are plans, not guaranteed outcomes. The filing does not provide a clear quantified earnings or revenue guidance range.
- Puna: The 38 MW plant remained shut after the May 2018 Kilauea eruption. Management expected restoration of full generating capacity in Q3 2020, conditional on permits, transmission upgrades and successful field recovery. A separate amended PPA, filed for regulatory approval, would extend the contract to 2052 and increase contracted capacity to 46 MW; the planned replacement plant’s COD was expected in the first half of 2022.
- Kenyan tax dispute: KRA assessments and preliminary findings sought approximately $228 million, including interest and penalties. Ormat disputed the claims, considered its tax positions sustainable and had recorded no material reserve for the demands at year-end. The exposure is significant relative to annual earnings.
- Internal controls: Management and the independent auditor concluded that internal control over financial reporting was ineffective at December 31, 2019 because of an unremediated material weakness in income-tax accounting risk assessment. Disclosure controls were also deemed ineffective. The financial-statement audit opinion was unqualified. Management reported remediation steps but said the weakness would not be remediated until controls operated effectively for a sufficient period and were tested.
- Customer and operating risks: Three customers—SCPPA, NV Energy subsidiaries and Kenya’s KPLC—each represented approximately 16%–18% of FY2019 revenue. KPLC had $40.7 million overdue at year-end, of which $24.2 million was collected in January and February 2020. Honduras utility ENEE had $20.1 million overdue, unpaid at year-end. The company cited geothermal resource decline, extreme temperatures, maintenance, volcanic/seismic events, transmission constraints and counterparty payment delays as risks.
- Other material exposures: The filing identifies competition-driven Product price and margin pressure, foreign-country and currency risks, financing and refinancing needs, regulatory and incentive changes, environmental obligations, project delays, and merchant-market exposure for some storage or future generation projects. Puna insurance coverage remains disputed in litigation. Securities class-action litigation related to prior financial reporting was ongoing; the U.S. court denied a motion to dismiss in December 2019.
- Near-term developments: The filing disclosed a February 2020 agreement to acquire California storage assets for up to approximately $65 million, including $51 million expected at closing, subject to conditions. The CEO transition was planned for July 2020. The company also cited the emerging coronavirus outbreak as a potential supply, travel and construction risk.
Most important facts for investors to verify
- Progress and final cost of Puna restoration, permit and transmission milestones, insurance recoveries and the status of the amended PPA’s regulatory approval.
- Developments in the $228 million Kenyan tax dispute, including whether assessments are revised, appealed or settled and whether a reserve becomes necessary.
- Remediation and independent testing of the income-tax internal-control material weakness, including any impact on future reporting.
- Collections from KPLC and ENEE, and the effect of customer concentration on cash flow and project distributions.
- Product backlog conversion, Turkish-market demand and margins, and whether storage projects reach operation on schedule and improve segment economics.
- 2020 funding and refinancing execution against planned capital spending and debt maturities, while maintaining covenant compliance and liquidity.