Ormat Technologies, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three months ended March 31, 2014, compared with Q1 2013 (revised). Ormat develops, owns and operates geothermal and recovered-energy power plants and sells equipment and related services through its Electricity and Product segments.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $142.4 million | $118.9 million |
| Gross margin | $53.5 million; 37.5% | $26.8 million; 22.5% |
| Operating income | $42.6 million; 29.9% of revenue | $7.7 million; 6.5% |
| Net income (loss) attributable to Ormat shareholders | $21.6 million; $0.47 per diluted share | $(5.0) million; $(0.11) per share |
| Operating cash flow | $68.1 million | $18.2 million |
| Capital expenditures | $48.3 million | $49.6 million |
| Cash and cash equivalents at quarter-end | $47.9 million | $57.4 million at Dec. 31, 2013 |
- Electricity revenue grew 38.8% to $94.8 million, primarily from Olkaria III Plants 2 and 3 and the Don A. Campbell plant entering service, higher California contract rates, and lower derivative losses. Generation increased 15.5% to approximately 1.20 million MWh.
- Product revenue fell 5.9% to $47.6 million, reflecting fewer new orders and timing of project revenue recognition.
- Interest expense, net, rose to $20.5 million from $15.9 million, principally due to additional OPIC borrowing, fixed-rate conversion and lower capitalized interest. The effective tax rate was 22.3%; the filing attributes the difference from the statutory rate partly to unbenefited losses and foreign tax effects.
- Adjusted EBITDA, a non-GAAP measure, was $70.6 million versus $45.7 million. The company cautions that this measure is not a substitute for GAAP results or operating cash flow.
Balance sheet, debt and liquidity
- At March 31, total assets were $2.13 billion, total liabilities $1.37 billion, and total equity $765.7 million. Interest-bearing debt was approximately $1.04 billion, based on reported current and long-term debt balances.
- Restricted cash was $74.4 million, all related to variable-interest entities, and should not be treated as unrestricted corporate cash. Management reported $208.1 million of unused corporate borrowing capacity; committed credit facilities totaled $522.6 million, of which $314.5 million was utilized, including letters of credit.
- Management estimated remaining-2014 capital needs of approximately $190 million and debt repayments of $68.1 million. It expected to fund requirements from cash, operations, project financing or refinancing, and available grants, and stated that it believed these sources were sufficient.
- Operating cash flow benefited from a $43.1 million decrease in receivables, partly reflecting collection timing. Investing cash flow was $(35.3) million and financing cash flow was $(42.2) million; cash declined $9.4 million during the quarter.
Material changes and unusual items
- Operating income improved substantially versus Q1 2013, when results included a $9.0 million one-time fee to terminate two Mammoth PPAs. New generating capacity and stronger Electricity segment margins also contributed. Lower Product revenue partly offset these gains.
- Q1 2013 comparative financial statements were revised for an income-tax valuation-allowance error: the revision increased the quarter’s tax provision by $3.1 million and revised shareholder loss per share to $(0.11). The company said the previously issued statements were not materially misstated; the revision did not change total cash flows.
- The company signed an agreement to sell the Heber Solar project for $35.25 million, received $15.0 million, and deferred an approximately $7.5 million pretax gain pending resolution of contingencies, expected in Q2 2014.
- The Sarulla consortium signed $1.17 billion of project-financing agreements for a 330-MW geothermal project. Ormat owns a 12.75% consortium interest and expects to supply a $254 million equipment contract once financing closes and notice to proceed is issued. Management expected first-phase operations in 2016 and anticipated recognizing project revenue over three to four years beginning in Q3 2014; these expectations are conditional.
Outlook, commentary and risks
- The filing provides no formal consolidated revenue or earnings guidance. Management estimated approximately $190 million of capital expenditures for the remainder of 2014 and described organic development, plant enhancements and operating efficiency as priorities.
- Management reported that Olkaria III reached 110 MW after Plant 3 entered commercial operation, and that Don A. Campbell was operating at its 16-MW capacity. Heber 1 enhancement work was expected to require an outage through May 15, 2014; McGinness Hills Phase 2 was targeted for operation in the first half of 2015.
- Commodity exposure remains for certain California natural-gas-linked PPAs and a 25-MW Puna oil-linked PPA. Derivatives reduce, but do not eliminate, exposure; Q1 derivative transactions produced a reported $2.4 million net loss. The company also identifies geothermal-resource, operating, construction, financing, regulatory, political, foreign-currency and customer-counterparty risks.
- Major customers represented meaningful revenue shares: NV Energy subsidiaries 15.3%, Kenya Power 14.3%, Southern California Edison 12.1% and HELCO 9.1% in Q1 2014. Primary customers together accounted for 68.3% of receivables at quarter-end.
- Two former employees’ qui tam complaint alleges fraudulent grant applications and certifications. The Department of Justice declined to intervene, but the former employees may proceed; Ormat said it would defend the matter. A separate union challenge concerns approvals for the Mammoth enhancement. Management stated it did not expect ordinary-course legal matters to be material.
- Management reported effective disclosure controls as of March 31, 2014 and no material Q1 change in internal control over financial reporting.
Important facts for investors to verify
- Whether Sarulla financing closes, notice to proceed is issued, and the expected equipment contract and revenue schedule are realized.
- Progress and final proceeds from the Heber Solar sale, including whether the deferred gain is recognized after contingencies are resolved.
- Cash availability and funding for the stated 2014 capital expenditures and debt repayments, taking account of restricted cash, facility utilization and project-level debt limitations.
- Whether receivable collections and operating cash generation are sustainable, given customer concentration and the working-capital contribution to Q1 cash flow.
- Developments in the grant-related lawsuit, the Mammoth permitting challenge, the U.S. deferred-tax-asset valuation allowance and commodity-derivative exposures.