Ormat Technologies, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Ormat develops, manufactures, owns and operates geothermal and recovered-energy power plants and equipment, with Electricity and Product reporting segments. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $184.6 | $162.9 | $496.1 | $423.6 |
| Gross margin | $74.5; 40.3% | $59.3; 36.4% | $204.2; 41.2% | $154.1; 36.4% |
| Operating income | $48.2; 26.1% | $46.5; 28.5% | $150.7; 30.4% | $115.0; 27.1% |
| Net income attributable to Ormat stockholders | $12.1 | $72.1 | $65.7 | $96.6 |
| Diluted EPS | $0.24 | $1.41 | $1.31 | $1.93 |
- Revenue by segment, nine months: Electricity $321.7 million, up 15.7%; Product $174.4 million, up 19.9%. Electricity generation rose 12.8% to 3.96 million MWh.
- Cash flow, nine months: Operating cash flow was $158.0 million, versus $123.0 million; capital expenditures were $108.0 million. Investing activities used $125.2 million and financing activities used $128.7 million. Cash and cash equivalents declined to $90.1 million from $185.9 million at year-end 2015. Restricted cash was a further $50.5 million, all related to variable-interest entities.
- Liquidity: The company reported $171.1 million of unused corporate borrowing capacity. Management estimated $77.0 million of capital expenditures for the remainder of 2016 and $21.2 million of debt repayments, and said available liquidity, operating cash flow and expected financing would meet anticipated needs.
- Debt: Reported current and long-term debt totaled approximately $818 million. In September, Ormat issued $204 million of unsecured bonds—$67 million at 3.7%, due 2020, and $137 million at 4.45%, due 2022—to prepay approximately $250 million of older 7% bonds due 2017. The refinancing generated about $5 million of prepayment fees; management expected annual interest expense to decline. Approximately 94.4% of consolidated long-term debt was fixed-rate.
- Dividends: $22.5 million was paid during the first nine months. A further $0.07-per-share quarterly dividend was declared in November 2016, payable December 6.
Changes versus the prior comparable period
- Nine-month revenue and operating income increased 17.1% and 31.0%, respectively, reflecting higher generation from recently commissioned plants, improved rates under the Heber 1 PPA, the Guadeloupe acquisition, and increased Product activity.
- Gross margin improved in both segments, supported by higher plant efficiency, lower costs at newer plants, manufacturing improvements and product mix.
- Nine-month net income fell to $70.3 million from $99.2 million. The prior-year period included a $49.4 million Kenyan deferred-tax benefit from releasing a valuation allowance. The 2016 period also included an $11 million former-employee settlement expense, lower income from tax-benefit transactions and bond-repayment costs.
- Q3 net income fell to $14.4 million from $73.7 million, principally because Q3 2015 included the $49.4 million Kenyan tax benefit. Q3 2016 also included the $11 million settlement and approximately $5.6 million of bond-related and other non-operating losses.
- Cash from operations increased, but cash balances declined because of the bond refinancing, capital spending, the Guadeloupe acquisition, debt repayments, distributions to noncontrolling interests and dividends.
Outlook, developments and risks
- Projects and outlook: Management expected the first 110 MW phase of the 330 MW Sarulla project in Indonesia to begin commercial operation in January 2017, following a work stoppage and delay; the second and third phases were expected within 18 months after first-phase operation. The project had drilling delays and cost overruns, remained within its approved budget including contingencies, and sponsors agreed to provide additional equity. Ormat held a 12.75% interest and reported completing its supplier milestones.
- Ormat acquired approximately 60% of Guadeloupe’s Bouillante geothermal plant for about $20.6 million, with a further $8.4 million investment commitment and up to $13.4 million contingent on production and expansion targets. The plant was producing about 13 MW against 14.75 MW design capacity; the company targeted recovery to design capacity by mid-2017 and potential expansion to 45 MW by 2021.
- Management estimated approximately $365 million of capital expenditures for new projects and plant enhancements, of which approximately $138 million had been invested by September 30. Other projects included the 35 MW Platanares project, expected online by end-2017; the 24 MW Tungsten project, also targeted for end-2017; and the 10 MW Rabbit Hill storage project, whose progress depended on battery supply from Alevo.
- Management’s strategy emphasized geographic and customer expansion, operational efficiency, acquisitions, solar and energy storage. No specific consolidated revenue or earnings guidance was provided in the supplied filing text.
- Market and operating risks: Exposure remains to geothermal resource performance, construction delays, plant availability, financing access, foreign political and currency risks, and competition. Most Electricity revenue came from long-term PPAs, but variable-price contracts exposed approximately 90 MW in California to natural-gas prices and 25 MW in Hawaii to oil prices. Customer concentration was significant; Hyundai’s Sarulla project accounted for 14% of nine-month revenue, while KPLC accounted for 16.4% and NV Energy subsidiaries for 18.6%.
- Legal and unusual items: Ormat recorded an $11 million expense for settlement of a former-employee False Claims Act case; the October 25 agreement provided for dismissal without admission of wrongdoing. Other matters included pending Clean Air Act litigation, a Chilean claim seeking $4.6 million plus a sales-based amount, a Hawaii class action related to an alleged 2014 toxic release, and challenges to Nevada tax abatements. The company stated it intended to defend these matters and that other proceedings were not expected to be material. A Hawaii night-drilling case was effectively rendered moot by an October court ruling.
Investor verification priorities
- Confirm the drivers and sustainability of segment growth, margin improvement and increased generation, including the contribution from newly commissioned plants and Product contracts.
- Assess the effect of the $49.4 million prior-year Kenyan tax benefit and 2016 settlement and refinancing costs when comparing earnings periods; review the U.S. deferred-tax valuation allowance and pending Kenyan tax audit.
- Track Sarulla’s first-phase start-up, later-phase schedule, drilling capacity, cost position and sponsor equity commitments.
- Verify the timing, cost and expected output of Guadeloupe, Platanares, Tungsten, Rabbit Hill and other planned construction and enhancement projects.
- Review cash availability and borrowing capacity alongside planned capital spending, debt maturities, covenant headroom and the limits on access to project-level cash.
- Monitor major customer concentration, variable-price PPA exposure, and the status and potential financial impact of pending litigation and tax-abatement appeals.