ORMAT TECHNOLOGIES, INC. annual report, FY2012

ORMAT TECHNOLOGIES, INC. — FY 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are identified where reported. Ormat develops, owns and operates geothermal and recovered-energy power plants and sells generation equipment and related services. Its portfolio had 575 MW of operating capacity as of February 15, 2013.

Financial performance and liquidity

Metric	FY 2012	FY 2011
Total revenue	$514.4 million	$437.0 million
Electricity revenue	$327.5 million	$323.8 million
Product revenue	$186.9 million	$113.2 million
Gross profit / margin	$134.4 million / 26.1%	$116.9 million / 26.8%
Operating income (loss)	$(155.1) million	$64.0 million
Net income (loss)	$(206.0) million	$(42.7) million
Diluted EPS	$(4.54)	$(0.95)
Operating cash flow	$89.5 million	$132.7 million
Adjusted EBITDA*	$185.7 million	$166.7 million

Amounts are in U.S. dollars. Adjusted EBITDA is a non-GAAP measure and adds back the 2012 impairment charge; it should not be read as GAAP operating performance.

Revenue increased 17.7%, led by Product Segment growth of 65.1%, substantially reflecting execution of a $130 million Ngatamariki geothermal equipment order. Electricity revenue rose 1.1%.
Electricity gross margin was 25.3%, up from 24.6%; Product gross margin was 27.6%, down from 32.8%. Overall gross margin declined to 26.1% from 26.8%.
Fourth-quarter revenue was $116.1 million; the quarter recorded an operating loss of $221.0 million, net loss attributable to shareholders of $222.4 million, and EPS of $(4.89). The quarter included a $229.1 million North Brawley impairment.
At year-end, cash and cash equivalents were $66.6 million, with a $3.0 million short-term deposit; working capital was $64.7 million. Total assets were $2.094 billion and equity was $702.2 million.
Total debt, including current maturities, was $1.031 billion: $595.4 million was limited- or non-recourse project debt and the remainder full-recourse debt. Cash, cash equivalents, marketable securities and short-term deposit totaled $69.6 million. Unused corporate borrowing capacity was $184.9 million; some facilities support letters of credit.
Investing cash outflow was $100.8 million, including $233.0 million of capital expenditures, partly offset by $119.2 million in U.S. Treasury grants. Financing cash outflow was $21.9 million. Long-term debt principal due in 2013 was $68.3 million.

Material changes versus the prior year

The $236.4 million total impairment charge drove the swing from 2011 operating income to an operating loss. It comprised $229.1 million for North Brawley and $7.3 million for OREG 4; the latter was recorded in the third quarter.
North Brawley did not achieve its 50 MW design capacity and had operated at 20–33 MW. After the offtaker declined to pursue alternative pricing, Ormat decided to operate at approximately 27 MW and stop further capacity-expansion investment. The plant was written down to $32.0 million.
California SO#4 energy rates became variable with natural-gas-linked avoided costs in May 2012. Low gas prices reduced revenue by $25.2 million; new Tuscarora and McGinness Hills generation and other items partly offset the impact. Total generation rose 7.3% to 4.13 million MWh.
Product revenue growth was accompanied by higher segment costs and lower reported product margin, reflecting contract mix and margins. Operating income for the Product Segment increased to $30.3 million from $18.9 million; the Electricity Segment recorded an operating loss of $185.4 million.
Operating cash flow declined $43.3 million to $89.5 million. Cash and cash equivalents fell $33.3 million to $66.6 million, while debt increased modestly to $1.031 billion from $1.025 billion.

Outlook, commentary and risks

Management expected Product Segment revenue to remain robust through the end of 2013, supported by backlog of approximately $262.2 million as of February 15, 2013. The filing does not provide a clear numerical consolidated revenue or earnings forecast.
Management estimated 2013 capital expenditures of approximately $237 million and debt repayment of $68.3 million. It cited operating cash flow, available credit, project financing, cash grants where eligible, and the January 2013 ORTP transaction as funding sources.
At the filing date, 78 MW of projects were fully released for construction, with 62 MW expected to be completed by the end of 2013 and the balance in 2014. Olkaria III expansion and the Heber solar project were among the planned additions; project timing and completion remain subject to construction, permits, interconnection, financing and resource performance.
In January 2013, JPM paid approximately $35.7 million for an interest in ORTP and was expected to make additional tax-credit-related payments of approximately $8.7 million through 2016. Ormat retained operating control and initially received the portfolio’s distributable cash flow.
Commodity exposure remained relevant: variable California PPAs were tied mainly to natural gas prices and the Puna PPA partly to oil prices. Derivative transactions were intended to reduce exposure through 2013, but were generally not hedge-accounted and could increase reported earnings and revenue volatility.
Major risks include geothermal resource decline or underperformance, plant outages and maintenance, construction and permitting delays, transmission constraints, counterparty concentration, foreign political and currency risks, environmental obligations, changing renewable-energy incentives, and PPA or regulatory changes. Southern California Edison, NV Energy subsidiaries, HELCO and KPLC together represented a significant share of revenue.
OFC’s historical debt-service coverage ratio was 1.28 at year-end against a 1.25 threshold for distributions; management warned low gas-linked revenues could restrict distributions, though it did not expect a debt default. The filing states the company was in compliance with its corporate-level covenants.
Prior securities class actions and derivative suits were settled, with payments and legal fees funded by insurers; the derivative settlement also required governance measures for at least five years. A union petition challenged the Mammoth enhancement approvals. A separate challenge concerning North and East Brawley was denied by the court in November 2012, subject to the possibility of appeal.
The independent auditor issued an unqualified opinion and reported effective internal control over financial reporting as of December 31, 2012. Management also concluded disclosure controls were effective.

Important facts for investors to verify

North Brawley’s sustainable output, operating costs, impairment assumptions and prospects under its existing PPA; the valuation used estimated output of 224,836 MWh and an 8% discount rate.
Whether lower natural-gas or oil prices continue to pressure variable PPA revenue after the disclosed 2013 derivatives expire, and the effect of new Mammoth PPAs.
Liquidity available for the stated 2013 capital program after distinguishing unrestricted cash from restricted project reserves, letters of credit and committed but undrawn facilities.
Debt maturities, interest-rate exposure, project-level coverage ratios and any resulting limits on subsidiary distributions or parent-company liquidity.
Construction, resource and interconnection milestones for Olkaria III, Wild Rose and Heber Solar, and whether the expected capacity and completion dates are achieved.
Product backlog conversion, particularly the large Ngatamariki contract, including timing, project margins, customer financing and revenue-recognition estimates.
Customer concentration and the credit, renewal and regulatory status of major offtakers and long-term PPAs.