Ormat Technologies, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016; balance-sheet figures compare March 31, 2017 with December 31, 2016. Ormat operates geothermal and recovered-energy power plants and sells power-generation equipment and services. Its two reporting segments are Electricity and Product. The quarter included Viridity Energy from its March 15 acquisition.
Unless noted otherwise, financial amounts below are in millions of U.S. dollars. The filing cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $189.9 | $151.6 | +25.3% |
| Electricity revenue | $115.8 | $107.9 | +7.3% |
| Product revenue | $74.1 | $43.7 | +69.5% |
| Gross profit / gross margin | $74.4 / 39.2% | $63.9 / 42.1% | Margin down 2.9 percentage points |
| Operating income / operating margin | $59.5 / 31.3% | $50.5 / 33.3% | Income +17.7%; margin down 2.0 points |
| Net income | $39.7 | $30.9 | +28.4% |
| Net income attributable to Ormat stockholders | $35.3 | $29.3 | +20.6% |
| Diluted EPS | $0.70 | $0.59 | +$0.11 |
| Net cash from operating activities | $71.5 | $27.0 | +$44.4 |
| Capital expenditures | $52.9 | $31.0 | +$21.9 |
| Adjusted EBITDA (non-GAAP) | $91.8 | $80.2 | +14.4% |
Product revenue growth reflected new projects in New Zealand, China and Turkey. Product cost of revenue rose faster than sales, and its segment gross margin fell to 33.3% from 45.0%, partly due to Chile project costs, contract mix and differing project margins. Electricity revenue benefited from the Bouillante plant consolidation and improved Puna generation. Power generation increased 2.2% to 1.43 million MWh; Electricity gross margin improved to 43.0% from 41.0%.
Interest expense, net, declined to $14.9 million from $16.0 million, mainly following refinancing of higher-cost bonds in 2016. Income from sale of tax benefits increased to $6.2 million from $4.4 million. Effective tax rate was 20.8%, versus 23.0%.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $174.1 million, down from $230.2 million at year-end; restricted cash was an additional $59.9 million. Cash held by foreign subsidiaries was $158.1 million.
- Current assets were $428.7 million and current liabilities $207.5 million, implying working capital of approximately $221.3 million. This includes restricted cash and should not be read as all immediately available liquidity.
- Total assets were $2.50 billion; total liabilities were $1.30 billion and total equity was $1.20 billion.
- Reported borrowings, including revolving credit and current and long-term debt, were approximately $956 million on a carrying-value basis. This includes project-level limited- and non-recourse debt; project assets and cash flows are often ring-fenced. The filing reports 91.9% of consolidated long-term debt as fixed rate and $79.0 million subject to some interest-rate risk.
- Committed corporate borrowing capacity was $524.8 million, of which $350.6 million was utilized, leaving $132.6 million unused. The company reported compliance with applicable debt covenants at quarter-end.
- Cash fell by $56.1 million. Investing activities used $128.7 million, including $52.9 million of capital expenditures, $35.3 million for Viridity, $25.6 million in increased restricted cash and $14.9 million invested in Sarulla. Financing activities provided $1.2 million, including net $30.0 million of revolving-credit borrowings.
Material developments, outlook and risks
- Viridity acquisition: Completed March 15 for $35.3 million initial consideration. Up to $12.8 million of additional contingent consideration, stated at estimated fair value, depends on performance milestones. The acquisition expands Ormat into demand response, energy management and storage; its brief contribution is included in Q1 results.
- Projects and investment: Sarulla’s first approximately 110 MW phase began commercial operation on March 17. Later phases remain under construction and drilling; the project has experienced delays and drilling cost overruns. Lenders waived missed milestones, and sponsors agreed to provide additional equity. Ormat invested a further $14.9 million in the project during Q1.
- Capital spending: Management described substantial remaining 2017 investment needs and expects to fund them through cash, operating cash flow and project financings/refinancings. The filing gives a detailed estimate of approximately $197 million of capital expenditures for the remainder of 2017, while elsewhere citing approximately $212 million of capital needs for the remainder of 2017, in addition to $52.6 million of debt repayment; the amounts have different descriptions and merit reconciliation. No specific full-year revenue or EPS guidance is provided in the filing text.
- Post-quarter ORIX agreement: Announced May 4, 2017, ORIX agreed to acquire approximately 22% of Ormat through purchases of existing shares at $57 per share, subject to customary conditions and regulatory approvals. The transaction is a secondary share purchase, not a stated capital raise for Ormat, and was expected to close in Q3 2017. Agreements include board representation and commercial cooperation on geothermal projects.
- Tax dispute: Kenya’s tax authority reduced its assessment for 2012–2013 from approximately $16.1 million to $10.0 million, including interest and penalties. Ormat appealed parts of the assessment on April 28, 2017 and recorded a provision based on its estimate of reasonably expected exposure.
- Operating and market risks: Product revenue depends on order timing, manufacturing and project progress. Some PPAs remain exposed to natural-gas or oil prices; 87.4% of Q1 Electricity revenue came from PPAs with fixed energy rates. Other risks include geothermal resource and operating performance, construction delays, customer and country concentration, foreign exchange, financing access, competition, regulation and environmental matters.
- Concentration and contingencies: The four largest named customers represented substantial revenue shares, including NV Energy subsidiaries (18.8%), Kenya Power (14.3%), Southern California Public Power Authority (9.0%) and Hyundai/Sarulla (6.0%) in Q1. A Hawaii class-action claim concerning an alleged toxic release and a Chilean former representative’s $4.6 million claim remained unresolved; management said it intends to defend the matters. A separate California air-quality case was considered effectively closed. The filing states that other proceedings are not expected to be material in aggregate.
- Dividend: Q1 dividend declared was $0.17 per share. On May 8 the board declared a subsequent $0.08 per-share dividend, payable May 31, 2017.
Key investor verification points
- Reconcile the filing’s differing descriptions of remaining 2017 capital expenditure and capital needs, and monitor funding sources and project-financing availability.
- Track Viridity’s integration, contribution to results and contingent consideration milestones.
- Monitor Sarulla’s later-phase drilling, cost overruns, sponsor funding commitments and project milestones.
- Follow the Kenya tax appeal and recorded provision, as well as material updates to the Hawaii and Chile litigation.
- Confirm completion and terms of the ORIX transaction, including governance and commercial-cooperation arrangements.
- Assess the sustainability of operating cash flow and margins, particularly Product segment margins, while accounting for working-capital timing and project-related cash needs.