Ormat Technologies, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 1, 2017. This is an annual filing, not a standalone fourth-quarter report. Ormat is a vertically integrated geothermal and recovered-energy company with Electricity and Product segments.
Key financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $662.6 million | $594.6 million |
| Electricity revenue | $436.3 million | $375.9 million |
| Product revenue | $226.3 million | $218.7 million |
| Gross profit / gross margin | $270.8 million / 40.9% | $218.3 million / 36.7% |
| Operating income / margin | $201.9 million / 30.5% | $164.1 million / 27.6% |
| Net income | $101.5 million | $123.3 million |
| Net income attributable to Ormat stockholders | $93.9 million; diluted EPS $1.87 | $119.6 million; diluted EPS $2.43 |
| Cash provided by operating activities | $159.3 million | $190.0 million |
| Cash and cash equivalents at year-end | $230.2 million | $185.9 million |
| Working capital at year-end | $283.6 million | $186.6 million |
| Long-term debt, including current portion | $938.8 million | $901.4 million |
FY2016 generation was 5.40 million MWh, up 11.6%. Adjusted EBITDA, a non-GAAP measure, was $323.8 million versus $291.3 million. The filing reports FY2016 Electricity and Product segment operating income of $126.8 million and $75.1 million, respectively; segment gross margins were 40.0% and 42.5%.
Material changes versus FY2015
- Revenue rose 11.4%; Electricity revenue increased 16.1%, primarily from new capacity at McGinness Hills, Don A. Campbell and Olkaria III, plus the July 2016 consolidation of Bouillante. Product revenue increased 3.5%, with project timing and mix affecting results.
- Operating income rose 23.1% as gross profit improved in both segments and cost of revenue declined as a share of revenue.
- Net income fell $21.8 million despite higher operating income. Drivers included a $47.1 million increase in income tax provision, lower income from tax-benefit sales, higher non-operating losses and an $11.0 million settlement expense. FY2015 included a $49.4 million Kenyan deferred-tax benefit, making the comparison less representative of underlying operating growth.
- Operating cash flow declined $30.7 million, principally due to higher receivables and changes in product-contract billing. Investing cash use increased to $158.5 million, including $151.9 million of capital expenditures and $20.1 million net cash paid for Bouillante.
Liquidity, debt and capital allocation
- Year-end cash was $230.2 million, including $215.9 million held by foreign subsidiaries; restricted cash was an additional $34.3 million. Management said foreign cash is expected to remain invested abroad.
- Reported unused borrowing capacity under existing bank lines was $139.8 million. The filing also describes $524.8 million of aggregate committed facilities and $341.6 million of outstanding letters of credit; availability figures should be reconciled against facility terms.
- Debt includes project-level limited- and non-recourse borrowings as well as full-recourse obligations. The company refinanced approximately $250 million of 7% bonds with $204 million of new bonds: $67 million at 3.7% due 2020 and $137 million at 4.45% due 2022. It also issued $92.5 million of 4.03% secured notes due 2033 for Don A. Campbell Phase 1 and drew a $50 million, 6.28% DEG loan for Olkaria III Plant 4.
- Scheduled principal on long-term obligations was $66.0 million for 2017; total scheduled principal was $956.5 million, with $593.2 million due thereafter. Estimated FY2017 capital expenditures were $255 million, including construction, maintenance and exploration.
- The company paid $25.7 million in dividends during 2016 and declared a further $0.17 per share dividend in February 2017. Debt terms limit annual dividends to 35% of net income, notwithstanding the stated policy to target at least 20% of profits available for distribution.
Outlook, risks and unusual items
- No consolidated revenue or earnings guidance is provided. Management expects to continue expanding its geothermal footprint and entering demand-response, energy-management and storage markets. The filing estimates $255 million of 2017 capital expenditures.
- At year-end, 110 MW of geothermal capacity was fully released for construction across the U.S., Honduras, Kenya and Indonesia. Projects at earlier construction or development stages were described as totaling a further 135–140 MW. Timing and completion remain subject to permits, financing, resource performance, construction and transmission availability.
- The planned Viridity acquisition, announced under a definitive agreement in December 2016, was expected to close in early 2017 for $35 million initially, plus contingent milestone payments. Viridity had contracts covering more than 850 MW across 3,000 sites; Ormat still required regulatory and RTO approvals for aspects of the business.
- Ormat signed a 25-year Ormesa PPA beginning November 30, 2017 at $77.25/MWh without annual escalation, replacing a gas-linked contract. About 86% of 2016 Electricity revenue came from PPAs with fixed energy rates, but certain California and Hawaii contracts remain exposed to natural-gas or oil prices.
- Important operating risks include geothermal resource cooling or pressure decline, equipment outages, drought-related cooling-water constraints, transmission dependence and project delays. The filing reports Ormesa capacity was reduced due to resource performance; North Brawley was generating about 10 MW against 18 MW capacity, with a recovery plan; and Tuscarora faced summer generation curtailment from declining cooling-water supply.
- Unusual items included the $11 million settlement of a False Claims Act qui tam case, without admission of wrongdoing, and $5.5 million of derivative and foreign-currency losses. The Kenya Revenue Authority issued a non-final $16.1 million tax demand in January 2017; Ormat objected and recorded a provision based on its estimate of reasonably expected exposure. If the tax authority prevails, the $49.4 million Kenyan deferred-tax asset recognized in 2015 may be affected.
- Other disclosed contingencies include a Chilean former-sales-representative claim seeking $4.6 million plus future product-sales royalties, and a Hawaii class action alleging harm from a 2014 toxic release; management says it intends to defend the claims. The filing states that other proceedings are not expected to be material in aggregate. Nevada tax-abatement appeals were resolved in Ormat’s favor.
- PwC gave an unqualified audit opinion and concluded internal control over financial reporting was effective as of December 31, 2016.
Most important facts for investors to verify
- Reconcile reported unused credit capacity with the $524.8 million facility total and $341.6 million of outstanding letters of credit; assess restrictions on cash held overseas and at project subsidiaries.
- Track the Kenya tax objection, potential effect on the $49.4 million deferred-tax asset and any changes to the recorded provision.
- Test the construction schedule, spending and expected commissioning of the 110 MW released-for-construction pipeline and other projects, particularly Sarulla and Platanares.
- Monitor geothermal resource performance, water availability and PPA exposure at North Brawley, Tuscarora, Ormesa and other affected plants.
- Assess Viridity’s closing, required FERC/RTO approvals, integration costs and ability to convert its contracted load portfolio into recurring earnings.
- Separate recurring earnings and cash generation from tax benefits, tax-equity monetization, the 2015 Kenyan tax benefit and one-time settlement or refinancing costs.