Ormat Technologies, Inc. — Q2 2018 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2018, compared with the same 2017 periods. Ormat develops, owns and operates geothermal and recovered-energy power plants, sells power-generation equipment and provides energy storage and demand-response services. Its reportable segments are Electricity, Product and Other.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and where noted.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $178.3 | $179.4 | $362.3 | $369.3 |
| Gross profit / margin | $57.5 / 32.2% | $70.5 / 39.3% | $130.8 / 36.1% | $144.9 / 39.2% |
| Operating income / margin | $36.6 / 20.5% | $53.2 / 29.6% | $91.2 / 25.2% | $112.6 / 30.5% |
| Net income attributable to Ormat shareholders | $(0.3) | $8.6 | $69.2 | $43.8 |
| Diluted EPS | $(0.01) | $0.17 | $1.36 | $0.87 |
| Cash from operating activities | Not separately stated | Not separately stated | $67.1 | $114.2 |
- Revenue mix: Q2 Electricity revenue increased 10.2% to $122.2 million, while Product revenue fell 18.7% to $54.9 million. For the first half, Electricity revenue rose 12.4% to $254.7 million and Product revenue fell 26.9% to $103.6 million. Other revenue was $4.1 million for the first half.
- Cash and liquidity: At June 30, cash and cash equivalents were $66.7 million and restricted cash was $76.0 million. Current assets were $395.6 million versus current liabilities of $341.0 million. Management cited $112.3 million of unused corporate borrowing capacity; elsewhere the filing reports $468.0 million of committed capacity and $333.7 million utilized.
- Debt: Reported revolving bank borrowings were $158.6 million. Carrying amounts of current and long-term debt, including revolving borrowings, totaled approximately $1.19 billion. The company added a $100 million senior unsecured loan at 4.8% and assumed USG debt in its acquisition. Management reported compliance with debt covenants at quarter-end.
- Cash uses and funding: First-half investing cash outflow was $236.2 million, including $139.1 million of capital expenditures and $95.1 million net cash paid for the USG acquisition. Financing provided $188.2 million, including the new loan, net revolving-credit proceeds and Tungsten Mountain partnership proceeds. Cash and restricted cash increased by $19.1 million, excluding the effect of restricted cash acquired.
- Dividends: Dividends declared were $0.33 per share in the first half. A further $0.10 per share dividend was declared August 7, payable August 29, 2018.
Material changes versus the prior comparable periods
- Q2 revenue was down 0.6% and first-half revenue down 1.9%, primarily reflecting weaker Product-segment revenue as earlier projects were completed or moved through different revenue-recognition stages.
- Despite higher Electricity revenue and generation, operating income declined 31.1% in Q2 and 19.0% for the first half. The filing cites lower segment gross margins, higher general and administrative expense, longer-than-expected USG outages and costs at Puna while its plant was shut down.
- First-half operating cash flow decreased by $47.1 million, mainly due to a larger decline in accounts payable and accrued expenses.
- First-half attributable net income increased despite lower operating income, primarily because the income-tax provision fell to $2.2 million from $43.8 million. The Q2 tax provision was $29.1 million, producing a 92.8% effective tax rate; the first-half effective rate was 2.8%.
- The company acquired U.S. Geothermal (USG) on April 24 for approximately $110 million cash consideration. USG added three operating plants with approximately 38 MW of capacity and development assets. USG’s three plants contributed about $3.4 million of revenue and $4.2 million of operating losses in the six-month results.
- Ormat adopted ASC 606 using the modified retrospective method. It recorded a $24.0 million opening retained-earnings adjustment related to its Sarulla investment; the standard increased reported equity-method earnings by $2.9 million for the first half, including $3.6 million in Q2.
Outlook, risks, contingencies and unusual items
- Puna volcanic event: The May 3 Kilauea eruption led to shutdown of the 38 MW Puna plant. Lava covered three wellheads and the substation; a warehouse and drilling rig were destroyed. The company wrote off approximately $4.9 million of assets and recorded about $7.2 million of insurance recovery in excess of the rig’s carrying value. Puna’s net book value was approximately $102.2 million. The timing of safe restart, full damage assessment, insurance recovery for lost profits and any impairment remained uncertain.
- Capital plans: Management estimated approximately $98 million of capital expenditures for the remainder of 2018 and $103.8 million of debt repayment needs. It expected to fund requirements through available liquidity, operating cash flows and future project financing/refinancing. No consolidated revenue or earnings guidance is provided in the filing.
- Projects and growth: The 11 MW Olkaria III expansion began commercial operation in June, bringing the complex to 150 MW; Sarulla’s third unit began commercial operation in May, completing its 330 MW capacity. Two planned 20 MW/20 MWh New Jersey battery projects were expected to be operational in Q4 2018; management estimated average 2019 revenue of $7–8 million, subject to merchant-market volatility. Management expected approximately $98 million in remaining-2018 capital spending.
- Internal controls and reporting: A previously identified material weakness in income-tax controls remained unresolved at June 30. Management concluded disclosure controls were not effective. The weakness had resulted in restatements of 2017 quarterly and annual financial statements; remediation was ongoing, with no assurance it would be completed during 2018.
- Legal and tax matters: Putative shareholder class actions relating to the USG acquisition and alleged securities-reporting misstatements were pending. A separate Israeli shareholder action was stayed pending the U.S. case. The company also disclosed a Kenyan tax assessment of approximately $16.1 million, including interest and penalties; it disputes the assessment and has recorded a provision based on its estimate of exposure. Management stated that ordinary-course proceedings were not expected to be material in aggregate.
- Other sensitivities: Risks include geothermal resource and operating performance, natural disasters, PPA counterparties and customer concentration, merchant storage-market revenue, foreign currency and interest rates, competition, foreign political conditions, tax-law changes and the ability to obtain financing. Three customers each represented a material share of revenue; the filing identifies significant reliance on NV Energy subsidiaries, SCPPA and Kenya Power.
Important facts for investors to verify
- Progress on Puna’s safe restart, the condition and recoverability of its assets, insurance settlements and any impairment charge.
- Remediation of the tax-related material weakness, the reliability of subsequent reporting and the outcome of shareholder litigation.
- Actual available liquidity and borrowing capacity, near-term debt maturities, covenant headroom and the planned $103.8 million debt repayment.
- Whether USG outages and integration costs improve, and whether Product-segment orders and margins recover as projects are completed.
- Realization of the New Jersey battery projects’ expected 2019 revenue and exposure to volatile merchant-market pricing.
- Changes in the Kenyan tax dispute and other tax estimates, including the effects of GILTI and remaining Tax Act accounting adjustments.