Ormat Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unless noted otherwise, dollar amounts below are in millions. The company develops, owns and operates geothermal, recovered-energy and solar power plants, and sells power-generation equipment; it also provides energy storage and demand-response services.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $184.1 | $178.3 | $383.1 | $362.3 |
| Gross profit / margin | $65.1 / 35.4% | $57.5 / 32.2% | $139.3 / 36.4% | $130.8 / 36.1% |
| Operating income / margin | $46.9 / 25.5% | $36.6 / 20.5% | $100.6 / 26.3% | $91.2 / 25.2% |
| Net income | $36.2 | $2.7 | $64.3 | $76.9 |
| Net income attributable to Ormat shareholders | $33.9 | $(0.3) | $59.9 | $69.2 |
| Diluted EPS | $0.66 | $(0.01) | $1.17 | $1.36 |
| Adjusted EBITDA (non-GAAP) | $94.9 | $80.8 | $196.6 | $179.2 |
Q2 revenue rose 3.2%, led by electricity revenue growth of 5.6%; product revenue fell 5.3%, while Other grew 145.3% from a small base. First-half revenue increased 5.7%. Electricity benefited from McGinness Hills expansion, the US Geothermal acquisition and the Olkaria III expansion. Product results reflected lower-margin contracts and changing project mix; first-half product cost of revenue rose 17% and product gross margin fell to 19.9% from 31.2%.
Q2 operating income increased 28.0%, mainly on stronger electricity gross profit. Q2 net income also benefited substantially from a $3.5 million income tax benefit versus a $29.1 million provision in the prior-year quarter. First-half operating income rose 10.3%, but net income fell 16.4%, reflecting higher interest expense, higher tax provision and lower other non-operating income. The 2018 comparison included $7.2 million of Puna equipment insurance income in other non-operating income.
Q2 and first-half electricity costs included business-interruption insurance recoveries of $6.9 million and $8.1 million, respectively. These recoveries supported reported margins while Puna remained shut down.
Cash flow, liquidity and debt
- First-half operating cash flow was $156.1 million, versus $67.1 million in 2018. Investing cash use was $114.2 million, including $114.9 million of capital expenditures. Financing used $37.6 million, compared with $188.2 million provided in the prior-year period. Cash and restricted cash together increased $4.1 million to $181.6 million.
- At June 30, cash and cash equivalents were $110.7 million, restricted cash was $71.0 million, and current assets were $412.4 million versus current liabilities of $276.6 million. Management reported $155.9 million of unused corporate borrowing capacity. Of cash and cash equivalents, $97.4 million was held by foreign subsidiaries.
- Balance-sheet debt included $53.1 million of short-term revolving credit lines, current maturities of long-term debt and long-term debt. The filing’s debt schedule lists $780.5 million of outstanding limited/non-recourse debt and $438.3 million of full-recourse debt, excluding revolving credit lines. Most long-term debt was fixed-rate: 95.8%; $51.2 million was floating-rate.
- The company reported compliance with debt covenants, a 46.7% equity-to-assets ratio and a 3.05 net-debt-to-Adjusted-EBITDA ratio. It declared a $0.11-per-share dividend payable August 27, 2019.
Outlook, developments and risks
- Management estimated $186–$206 million of capital expenditures for the remainder of 2019, including $30–$50 million for Puna well repair and drilling. It expected to fund needs with available liquidity, operating cash flow and future project financings/refinancings; management said it believed resources would be adequate. This is a stated expectation, not a quantified earnings or revenue forecast.
- Puna’s 38 MW plant remained offline following the 2018 Kilauea eruption. As of August 2019, refurbishment was expected to finish by year-end, with restart dependent on local permits and utility transmission upgrades in early 2020. Two production wells were found damaged, other wells required cleaning, and the company was still assessing possible asset impairment. Significant resource damage or prolonged outage could materially harm results.
- On July 30, 2019, Kenya’s tax authority issued preliminary findings demanding approximately $77 million, before possible interest and penalties, for 2013–2017 tax years. The company and its advisers said they believed they had strong arguments against the findings; the matter remained preliminary.
- Collections remain a risk: $34.5 million was overdue from Kenya Power at June 30, of which $16.4 million was paid in July and August. Honduras ENEE had $20.1 million overdue, of which $3.1 million was paid in August; the company recorded no doubtful-account provision, citing expected Honduran government support. PG&E was in Chapter 11; it accounted for 1.7% of first-half revenue.
- A material weakness in tax accounting controls remained unremediated, and management concluded disclosure controls were ineffective as of June 30. Remediation steps included added tax personnel, external tax support and enhanced review controls, but management said effectiveness required sustained operation and testing and could not be assured in 2019.
- Other notable items: Ormat began commercial operation of a 7 MW geothermal-solar hybrid expansion at Tungsten Mountain in July; acquired a 49% interest in Indonesia’s Ijen project in July; and issued $50 million of 90-day commercial paper in July at three-month LIBOR plus 0.75%. The filing also describes shareholder and derivative litigation, including securities claims tied to prior financial-statement restatements.
Most important facts for investors to verify
- Progress and timing of Puna repairs, permitting, transmission upgrades, restart, capacity ramp and insurance recoveries; also whether an impairment is recorded.
- Status and potential financial exposure from Kenya’s preliminary $77 million tax demand, plus the company’s tax-control weakness and remediation testing.
- Collection of overdue receivables from Kenya and Honduras and any effects of PG&E’s bankruptcy proceedings.
- Actual returns and margins on product projects, given the sharp decline in product gross margin, and the sustainability of reported electricity margins that included Puna insurance recoveries.
- Execution and funding of the stated capital program, refinancing needs, debt covenant headroom and the consequences of higher interest expense.