Ormat Technologies, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Unaudited results are not necessarily indicative of full-year performance. Ormat develops, builds, owns and operates geothermal and recovered-energy power plants, sells power-generation equipment and provides energy storage and demand-response services.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $184.0 million | $189.9 million | Down 3.1% |
| Gross profit / margin | $73.4 million / 39.9% | $74.4 million / 39.2% | Profit down $1.0 million |
| Operating income / margin | $54.6 million / 29.7% | $59.5 million / 31.3% | Down 8.2% |
| Net income | $74.3 million | $39.6 million | Up $34.7 million |
| Net income attributable to Ormat shareholders | $69.5 million; diluted EPS $1.36 | $35.2 million; diluted EPS $0.70 | More than doubled |
| Operating cash flow | $19.8 million | $71.5 million | Down $51.7 million |
| Capital expenditures | $67.0 million | $52.9 million | Up $14.1 million |
- Revenue mix shifted: Electricity revenue rose 14.4% to $132.5 million; Product revenue fell 34.3% to $48.7 million; Other segment revenue was $2.9 million. Electricity generation increased 6.7% to 1.52 million MWh.
- Electricity segment operating income increased to $46.4 million from $40.9 million. Product segment operating income declined to $9.6 million from $18.6 million; Other segment recorded a $1.4 million operating loss.
- Reported net income benefited substantially from a $26.9 million income tax benefit, including a $44.4 million valuation-allowance release recorded in Q1. The filing says the company expected to reverse that $44.4 million benefit in Q2 following new information about proposed GILTI regulations. Net income therefore is not a straightforward indicator of recurring earnings.
- Adjusted EBITDA, a non-GAAP measure, was $98.4 million versus $91.8 million. The filing cautions it should not be considered a substitute for GAAP results or operating cash flow.
- Cash and cash equivalents were $54.7 million; restricted cash was $50.3 million. Total current assets were $322.1 million and current liabilities $205.2 million. Management reported $148.3 million of unused corporate borrowing capacity.
- Cash from operations fell primarily because accounts payable and accrued expenses declined $49.0 million, including payment timing and tax-related items. Cash used in investing was $68.0 million; financing provided $56.7 million, including $100 million proceeds from a new loan.
- Reported borrowings, including current and long-term debt and revolving credit, totaled approximately $984 million at March 31, 2018, compared with approximately $915 million at year-end. These totals are calculated from balance-sheet debt line items; project debt is largely limited- or non-recourse. The filing states 95.9% of consolidated long-term debt was fixed-rate.
Material changes, outlook and risks
- Tax accounting and controls: Ormat revised Q1 2017 comparative financial statements for immaterial tax errors and had previously restated other 2017 financial statements. A material weakness in income-tax controls remained at March 31, 2018; management concluded disclosure controls were ineffective. Remediation efforts included additional tax and accounting staff, outside advisers and strengthened review procedures, but the weakness was not yet remediated.
- Filing and covenant waivers: The 10-Q was filed after its required deadline. Lenders granted filing extensions and cross-default waivers; after filing, the company said it believed it and its subsidiaries were compliant with reporting and other debt covenants. The delay also temporarily restricted access to short-form registration statements.
- Tax uncertainty: The company was still evaluating the Tax Cuts and Jobs Act and GILTI rules. It anticipated recording a reversal of the Q1 $44.4 million tax benefit in Q2, with the final adjustment dependent on subsequent activity and guidance.
- Puna volcano event, after quarter-end: The May 3 Kilauea eruption forced the 38 MW Puna plant offline. Lava covered three wellheads and the complex substation, and burned an adjacent warehouse. The company expected insurance coverage but could not estimate the full damage or restart timing; the plant’s property and equipment had a net book value of about $109 million. A material impairment had not been determined.
- Growth and investment: Management estimated approximately $231 million of capital expenditures for the remainder of 2018, including new projects, maintenance, exploration and storage. It expected to fund these needs from liquidity, operating cash flow and project financings. McGinness Hills 3 was expected to enter commercial operation by year-end 2018; Olkaria III repowering was expected in Q2.
- Subsequent transactions: Ormat completed its approximately $110 million U.S. Geothermal acquisition on April 24, adding about 38 MW of operating capacity and development assets. A May partnership transaction for Tungsten Mountain was expected to provide an initial $33.4 million and about $13 million in later installments. Sarulla’s third unit began commercial operation in May, bringing the project to 330 MW. A financing agreement for up to $124.7 million for Platanares was signed after quarter-end, subject to funding conditions.
- Market and operating risks: Risks include geothermal resource and plant availability, earthquakes and volcanic activity, project delays, competition and power-price exposure under variable-rate PPAs. About 89.9% of Q1 Electricity revenue came from PPAs with fixed energy rates. Three customers—NV Energy subsidiaries, SCPPA and Kenya Power—accounted for 17.4%, 16.3% and 15.1% of revenue, respectively.
- Legal matters: Pending proceedings included claims relating to the U.S. Geothermal acquisition, a Hawaii alleged toxic-release matter and a Chilean sales-representative claim seeking $4.8 million plus future sales-based amounts. Investor class-action matters were filed in Israel and the U.S. after quarter-end, alleging misleading statements concerning tax provisions and internal controls; the company said it intended to defend them.
Most important facts for investors to verify
- Whether and how much of the $44.4 million Q1 tax benefit was reversed in Q2, and the resulting effect on full-year tax expense and earnings.
- Progress and independent evidence of remediation of the material weakness in tax controls, and whether any further restatements or filing delays occurred.
- The duration, repair costs, insurance recovery and operating impact of the Puna shutdown, including any impairment or lost PPA revenue.
- Execution and funding of the stated 2018 capital program, new project financing and integration of U.S. Geothermal.
- Debt levels, covenant headroom, available borrowing capacity and the effect of dividend restrictions under the Migdal loan and other facilities.