Ormat Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial statements are unaudited; amounts below are in U.S. dollars unless stated otherwise.
Business context
Ormat develops, owns and operates geothermal, recovered-energy, solar and energy-storage assets, and sells power-generation equipment and related services. Its reporting segments are Electricity, Product, and Energy Storage and Management Services (ESMS). Electricity accounted for 77.8% of Q3 revenue. Most electricity revenue is supported by long-term power purchase agreements.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $158.9m | $170.5m | $526.0m | $553.6m |
| Gross profit | $54.0m | $55.5m | $201.2m | $194.8m |
| Gross margin | 34.0% | 32.5% | 38.3% | 35.2% |
| Operating income | $51.7m | $38.7m | $160.8m | $139.3m |
| Net income | $23.1m | $15.1m | $78.3m | $79.4m |
| Net income attributable to Ormat stockholders | $15.7m | $15.6m | $64.8m | $75.5m |
| Diluted EPS | $0.31 | $0.30 | $1.26 | $1.48 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $238.9m | $201.5m |
- Revenue mix and trends: Q3 Electricity revenue was $123.7m, nearly flat year over year; Product revenue fell 31.2% to $29.6m; ESMS revenue rose 62.5% to $5.7m. Nine-month revenue declined 5.0%, primarily due to the 18.0% reduction in Product revenue.
- Profitability: Q3 operating income included $17.8m of Puna business-interruption insurance income. Nine-month operating income also included $20.7m of such income. These items helped lift reported operating results. Q3 net income attributable to stockholders was nearly unchanged; nine-month attributable income declined 14.2%.
- Cash flow and investment: Nine-month investing cash outflow was $293.0m, including $231.8m of capital expenditures, $43.3m for the Pomona storage acquisition and $14.8m invested in unconsolidated companies. Financing provided $190.0m; cash and restricted cash increased $136.4m to $289.5m.
- Liquidity: September 30 cash and cash equivalents were $197.3m, with a further $92.2m restricted. The company reported $388.8m of unused corporate borrowing capacity. Current assets were $532.6m and current liabilities $236.3m.
- Debt: The debt schedule lists $690.9m of limited- and non-recourse debt and $783.5m of full-recourse debt outstanding. The company issued about $290m of Series 4 bonds in July, raised additional Series 3 bonds and a $50m loan, and repaid $67m of Series 2 bonds in September. It reported 97.1% of consolidated long-term debt as fixed rate. Net debt/Adjusted EBITDA was 3.0 under the company’s covenant calculation.
- Non-GAAP measure: Adjusted EBITDA was $107.1m for Q3 and $311.0m for the first nine months, versus $85.5m and $282.1m, respectively, in 2019. The company cautions that this measure is not a substitute for GAAP results or operating cash flow.
Material changes, outlook and management commentary
- Management said operations generally continued near capacity with no significant direct operating impact from COVID-19, but cited supply-chain, permitting, customer-payment and market uncertainties. Product backlog was $49.6m as of November 3, 2020, down from $167m as of November 6, 2019. The company expected to recognize more than 80% of backlog by year-end 2020 and expected 2021 Product revenue to be significantly lower than expected 2020 revenue.
- Q3 generation declined 3.5% year over year; nine-month generation declined 0.8%. Management attributed decreases to lower generation at certain facilities and, in Kenya, COVID-related demand and curtailments. KPLC withdrew its force-majeure notice in September; the company said fixed capacity payments limited the financial effect.
- As of November, Puna’s substation and transmission lines were complete and the plant was connected. Ormat expected to resume generation and gradually reach 29 MW by year-end, while noting timing was uncertain. A new Puna PPA, subject to regulatory approval, would extend through 2052; a new 8 MW plant was expected to reach commercial operation in 2022.
- The company acquired the 20 MW/80 MWh Pomona battery facility for $43.3m, expanding its operating storage portfolio to 73 MW/136 MWh. It also completed a 19 MW Steamboat Hills upgrade and reported Rabbit Hill storage operations commenced in Texas.
- Management estimated approximately $127m of capital expenditures for 2020 and $19.8m of debt repayments as remaining-year capital needs. Elsewhere, the filing describes a $466m construction-project budget, $159m invested against that budget as of September 30, and additional project spending. The scope and reconciliation of these figures are not clear from the filing text.
- In October, Ormat settled a Kenyan tax assessment for approximately $28m, paid October 27. The settlement also deferred about $28m of tax benefits to later years; management expected the 2020 financial-statement impact to be immaterial.
- Cash collection remains a consideration: $52.9m was overdue from KPLC at September 30, of which $13.6m was paid in October; $5.8m was overdue from Honduras utility ENEE, of which $2.9m was paid in October. The company reported a $779,000 expected-credit-loss allowance on trade receivables.
- Other risks include Puna’s volcanic-event recovery and insurance coverage, exposure to concentrated utility customers, variable merchant-market revenue in storage, foreign-exchange and swap-counterparty risks, and Sarulla operating and debt-service issues. Sarulla had not met its debt-service coverage ratio in October and was negotiating a waiver and remediation plan.
- Disclosure controls were deemed ineffective at September 30 because a previously identified material weakness in income-tax controls remained unremediated. Management reported remediation work was ongoing but gave no assurance it would be completed during 2020.
Important facts for investors to verify
- How much Q3 and year-to-date operating income and cash generation depend on Puna insurance recoveries, and the timing and economics of Puna’s return to service.
- Whether the Product backlog decline, project delays and expected lower 2021 Product revenue affect future segment margins and cash flow.
- Collection progress on KPLC and ENEE balances, and whether utility-payment or force-majeure issues recur.
- The reconciliation of stated 2020 capital-expenditure estimates and the funding required for committed projects and debt service.
- Progress in remediating the material weakness in tax controls, and any resulting financial-reporting or restatement risk.
- Sarulla’s covenant waiver and remediation outcome, and any effect on Ormat’s investment or earnings.
- Final impact of the Kenyan tax settlement and realization of the deferred tax benefits.