Ormat Technologies, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited consolidated results, compared with the corresponding 2013 periods. Ormat operates geothermal and recovered-energy power plants and sells power, equipment, and related services through its Electricity and Product segments.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $127.6 million | $152.7 million | $270.0 million | $271.6 million |
| Gross margin | $40.0 million; 31.3% | $50.4 million; 33.0% | $93.4 million; 34.6% | $77.2 million; 28.4% |
| Operating income | $22.3 million | $37.9 million | $64.9 million | $45.5 million |
| Net income attributable to Ormat shareholders | $9.1 million | $25.2 million | $30.7 million | $20.1 million |
| Diluted EPS | $0.20 | $0.55 | $0.67 | $0.44 |
| Net cash from operating activities | — | — | $103.6 million | $20.0 million |
- Segment mix: Six-month Electricity revenue rose 19.5% to $186.5 million, while Product revenue fell 27.7% to $83.5 million. Electricity generation increased 6.5% to 2.245 million MWh for the half year.
- Cash, liquidity and investment: Cash and cash equivalents were $80.1 million at June 30, versus $57.4 million at December 31, 2013. First-half capital expenditures were $89.1 million. The company reported $168.4 million of unused corporate borrowing capacity and estimated $111.0 million of capital expenditures and $41.7 million of debt repayments for the rest of 2014. Current assets were $306.8 million and current liabilities $226.0 million.
- Debt and interest: Balance-sheet debt included $250.4 million of senior unsecured bonds, $124.6 million of revolving borrowings and significant project-level secured loans. Net interest expense was $22.1 million in Q2 and $42.6 million for the half year, up from $17.5 million and $33.4 million, respectively. Ormat said 85.3% of consolidated long-term debt was fixed-rate.
Material changes and unusual items
- Q2 revenue declined 16.4%, principally because Product revenue dropped 44.7%, reflecting project timing, fewer projects, lower consideration, and product mix. Electricity revenue increased 4.5%, but segment costs rose, including costs from the Heber enhancement shutdown and an uncontrolled well flow at North Brawley.
- Q2 operating income fell to $22.3 million from $37.9 million. Results included an $8.1 million write-off of Wister exploration costs after the site was judged unable to support commercial operations. The quarter also included a $7.6 million gain on the Heber Solar project sale.
- For the first half, operating income increased despite nearly flat total revenue, helped by higher Electricity gross margin and the absence of the $9.0 million Mammoth PPA termination fee recorded in 2013. First-half net income also benefited from the Heber Solar gain and increased income associated with tax-benefit monetization. Interest expense increased $9.2 million year over year.
- Operating cash flow rose substantially, but reflected working-capital movements, including customer collections and higher billings in excess of costs on uncompleted contracts. Investing cash flow included $89.1 million of capital expenditures, a $27.4 million U.S. Treasury grant, and $35.3 million from the Heber Solar sale.
Outlook, commentary and risks
- Management forecast approximately $111.0 million of capital expenditures for the second half of 2014 and expects to fund requirements through existing liquidity, operating cash flow, and project financing or refinancing. No clear full-year revenue or earnings guidance is provided in the filing.
- The Sarulla project reached financial close on $1.17 billion of consortium financing in May 2014. Ormat holds a 12.75% interest and has a $254.0 million equipment supply contract; it expects related revenue recognition to begin in Q3 2014 and continue over three to four years. First-phase operations are expected in 2016, with the other phases scheduled thereafter.
- New and expanded generation included Olkaria III Plant 3, which brought the complex to 110 MW, and the 16 MW Don A. Campbell plant. McGinness Hills Phase 2 (30 MW) was expected online in the first half of 2015; Mammoth G3 refurbishment was expected to finish in 2015.
- Key exposures include geothermal resource and operating performance, construction and permitting delays, financing availability, changing renewable-energy policies, foreign political and currency risks, and competition. Certain PPAs are exposed to natural-gas or oil prices; the company uses derivatives to reduce, but not eliminate, this exposure. Four utility customers accounted for substantial shares of revenue, including Kenya Power and Lighting Co. at 15.6% of first-half revenue.
- Legal matters include a July 2014 Clean Air Act complaint concerning Mammoth-area plants and a former-employee qui tam suit alleging grant-related fraud. The company disputes the allegations and intends to defend itself; the filing does not provide a clear estimate of potential losses. Management said other proceedings were not expected to be material.
- Management reported disclosure controls were effective as of June 30, 2014, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether Product-segment orders and project timing recover, and whether the Sarulla contract converts to revenue on the stated schedule.
- Operating and maintenance developments at North Brawley, Heber, and other plants, and whether generation and segment margins normalize.
- Funding and execution of the stated second-half capital program and debt repayments, including availability of project financing and remaining credit capacity.
- Debt-service covenant headroom, refinancing needs, and the effect of higher interest costs; the filing reports compliance with covenants at the stated measurement dates.
- Any developments in the Mammoth air-pollution and grant-related litigation, and any resulting financial or operating impact.
- Dividend: the board declared a subsequent quarterly dividend of $0.04 per share, payable August 28, 2014 to holders of record August 19.