Ormat Technologies, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Financial statements are unaudited. Comparative 2009 results were revised following a change in accounting for certain exploration and development costs.
Business context
Ormat develops, builds, owns and operates geothermal and recovered-energy power plants and manufactures related equipment and provides services. It reports Electricity and Product segments. Electricity generation is generally sold under long-term power purchase agreements (PPAs); Product-segment sales depend more on customer orders and project timing.
Financial performance
| Metric | Q3 2010 | Q3 2009, revised | Nine months 2010 | Nine months 2009, revised |
|---|---|---|---|---|
| Revenue | $101.5m | $119.0m | $280.4m | $317.8m |
| Gross margin | $25.2m (24.8%) | $39.2m (32.9%) | $59.5m (21.2%) | $98.1m (30.9%) |
| Operating income | $14.8m (14.6%) | $23.1m (19.4%) | $19.3m (6.9%) | $58.1m (18.3%) |
| Net income attributable to shareholders | $32.5m | $22.0m | $32.9m | $52.7m |
| Diluted EPS | $0.71 | $0.48 | $0.72 | $1.16 |
- Q3 revenue declined 14.7%; nine-month revenue fell 11.8%. Electricity revenue rose 22.7% in Q3 and 15.0% year to date, while Product revenue fell 64.5% and 51.5%, respectively.
- Higher electricity generation, including Puna’s return after repairs, North Brawley entering service and Mammoth consolidation, lifted electricity revenue. Nine-month generation rose to 2.74 million MWh from 2.45 million MWh.
- Lower Product revenue and elevated North Brawley operating costs pressured gross margin and operating income. North Brawley costs, including depreciation, were $10.1m in Q3 and $31.5m for the first nine months.
- Q3 continuing-operations income included a $36.9m pre-tax, non-cash gain from remeasuring Ormat’s previously held Mammoth interest after buying the remaining 50%. This gain materially boosted reported Q3 earnings; it does not reflect recurring operating performance.
- Nine-month earnings also included a $4.3m after-tax gain on the sale of New Zealand subsidiary GDL. Interest expense rose to $30.1m from $12.1m year over year, partly because less interest was capitalized and new borrowing was issued.
- Adjusted EBITDA, a non-GAAP measure, was $78.8m for Q3 and $134.9m for the nine months, versus $48.0m and $125.1m in the revised 2009 periods.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $79.6m, versus $77.7m. Investing cash outflow was $153.0m, including $194.9m in capital expenditures and a net $64.5m payment for Mammoth, partly offset by the $108.3m U.S. Treasury grant and $19.6m from the GDL sale. Financing cash inflow was $76.3m.
- Cash and cash equivalents were $49.2m at September 30, 2010, versus $46.3m at year-end 2009. An additional $66.1m of current restricted cash and securities was associated with variable-interest entities (VIEs).
- Reported current assets were $218.8m and current liabilities $139.7m. Management reported $222.7m of unused corporate borrowing capacity; $179.8m of committed capacity was utilized, including letters of credit.
- Reported debt balances totaled approximately $720.8m, including current and long-term debt and senior unsecured bonds. The company issued $142.0m of 7% senior unsecured bonds, due in a single payment in August 2017. Total liabilities were $1.03bn.
- Management estimated approximately $132m of capital needs and $24.2m of debt repayments for the remainder of 2010, to be funded through available liquidity, operating cash flow and expected financing. It stated that available sources should meet anticipated requirements.
Outlook, risks and unusual items
- Management expected Product-segment revenue to remain significantly below 2009 levels at least through the remainder of 2010, citing reduced customer orders. It also expected North Brawley operating costs to remain high for the rest of 2010.
- Ormat received a $108.3m Section 1603 Treasury cash grant for North Brawley; the grant reduces the plant’s carrying value and is amortized against depreciation over its estimated useful life. North Brawley was operating at a stable 25 MW, below the 50 MW plant capacity described by management, and SCE extended the firm-operation date to March 31, 2011.
- Growth plans included construction and development projects in Nevada and expansion work at Puna and Mammoth. The company estimated $672m of projects under construction expected to be completed by 2013, with about $222m invested by September 30, 2010. Some project financing and DOE loan-guarantee proposals remained subject to review, approvals and definitive agreements.
- Key risks include geothermal resource and drilling uncertainty, construction delays, customer and counterparty concentration, dependence on renewable-energy incentives and financing availability, foreign political and currency risks, competition, and changes in power prices. Most PPAs had fixed or escalating rates, but Puna’s rate varied with avoided costs; certain PPAs were expected to move to avoided-cost pricing beginning in May 2012.
- Southern California Edison represented 36.9% of Q3 revenue and 29.6% of nine-month revenue. Ormat also disclosed securities class actions and four derivative lawsuits related to its accounting restatement and North Brawley disclosures; motions to dismiss were pending or planned. The company said it believed the claims were without merit and was defending them.
- The company revised 2009 results after concluding its prior exploration-cost accounting was inappropriate in certain respects. It recorded exploration write-offs of $3.1m in the first nine months of 2010, including the Gabbs Valley project.
- After quarter-end, Ormat announced a 50/50 joint development arrangement for a proposed Oregon geothermal plant of up to 30 MW and declared a $0.05-per-share quarterly dividend.
Important facts for investors to verify
- How quickly Product-segment orders and revenue recover, and the margin impact of lower volumes.
- North Brawley’s operating performance, cost trajectory, output and progress toward its firm-operation date.
- Underlying earnings and cash generation excluding Mammoth’s remeasurement gain and the GDL sale gain.
- Capital spending, committed borrowing capacity, refinancing progress and covenant compliance as projects advance.
- Progress on project permits, PPAs, DOE guarantees and other financing, as well as the outcome and potential exposure from the disclosed lawsuits and accounting-related matters.