Ormat Technologies, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2015. Ormat develops, owns and operates geothermal and recovered-energy power plants and sells related equipment and services. Its two segments are Electricity and Product. Unless otherwise stated, amounts are U.S. dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $162.9 million | $140.2 million | $423.6 million | $410.3 million |
| Gross margin | $59.3 million; 36.4% | $55.5 million; 39.6% | $154.1 million; 36.4% | $148.9 million; 36.3% |
| Operating income | $46.5 million | $43.8 million | $115.0 million | $108.7 million |
| Net income attributable to Ormat shareholders | $72.1 million | $16.5 million | $96.6 million | $47.2 million |
| Diluted EPS | $1.41 | $0.36 | $1.93 | $1.03 |
| Operating cash flow | $10.2 million | $75.2 million | $123.0 million | $178.8 million |
- Q3 revenue rose 16.1%, driven by Product revenue growth of 73.9% to $65.6 million; Electricity revenue fell 5.1% to $97.2 million. For the nine months, revenue rose 3.2%: Product increased 19.9% while Electricity declined 3.8%.
- Q3 gross margin contracted as total cost of revenue grew faster than sales. Management cited weaker electricity pricing from lower oil and natural gas prices and reduced derivative gains, as well as less favorable product mix. Nine-month gross margin was broadly stable.
- Power generation increased 10.0% in Q3 and 7.1% year to date, principally due to the second phase of McGinness Hills entering service; Puna and North Brawley generation partially offset the year-to-date increase.
- Reported earnings include a $49.4 million deferred tax benefit from releasing a valuation allowance in Kenya after legislation extended the tax-loss utilization period. Excluding that benefit, the company reported a Q3 tax provision of $11.2 million and a nine-month provision of $22.7 million. The earnings comparison is therefore substantially affected by a nonrecurring tax item.
- Net interest expense declined to $17.7 million in Q3 and $54.4 million year to date, from $22.5 million and $65.1 million, respectively. The nine-month comparison also reflects the prior-year $7.6 million gain on sale of the Heber Solar project and the prior-year $8.1 million exploration write-off, versus $0.4 million in 2015.
Financial position, liquidity and capital
- At September 30, 2015, cash and cash equivalents were $171.5 million, restricted cash was $70.5 million, total assets were $2.286 billion, total liabilities $1.228 billion and total equity $1.058 billion. Cash increased from $40.2 million at December 31, 2014; $148.2 million of cash was held in foreign jurisdictions.
- Operating cash flow for the first nine months fell $55.8 million year over year, to $123.0 million. Capital expenditures were $117.6 million. The cash balance was also supported by $156.8 million of net proceeds from selling a minority interest in ORPD and $42.0 million of Amatitlan project financing.
- Reported debt carrying amounts total approximately $952 million, including current and long-term debt and both recourse and limited/non-recourse borrowings. Project debt is generally secured at subsidiary level; the filing notes that such assets are not generally available to satisfy other company debt. Corporate borrowing capacity under committed lines was $537.5 million, of which $392.6 million was utilized; reported unused capacity was $144.8 million. Letters of credit outstanding totaled $390.3 million.
- Management estimated approximately $18 million of capital expenditures and $31.2 million of debt repayment for the remainder of 2015, to be funded from cash, operations and anticipated project financing/refinancing. It stated that available resources should meet expected needs. No numerical full-year revenue or earnings guidance is provided in the supplied filing text.
- During the nine months, Ormat paid $9.8 million in dividends. The board subsequently declared a $0.06 per-share dividend, payable December 2, 2015.
Material developments, outlook and risks
- Northleaf acquired a 36.75% interest in ORPD for $162.3 million; net proceeds were $156.8 million. Ormat retained control and continues to consolidate ORPD. The February share exchange with former parent Ormat Industries increased shares outstanding and expanded public float; reported shares outstanding were 49.0 million at September 30.
- The Don A. Campbell phase II plant began commercial operation on September 17, with expected average net generation of 19 MW under a 20-year PPA. McGinness Hills phase II began commercial operation in February. A $98.8 million Chilean geothermal EPC contract was signed, scheduled for completion by mid-2017.
- Olkaria III phase four, a planned 24 MW addition, was expected to begin operation in Q1 2016. Sarulla, in which Ormat holds a 12.75% interest and has a supply contract, faced drilling and EPC delays and cost overruns, mainly in phases two and three; consortium members were assessing the budget and financing impact. Ormat said its own supply milestones were achieved and manufacturing was progressing as planned.
- The strategic plan targets geographic expansion, notably Mexico, Chile and Indonesia; broader customer and technology reach; and potential acquisitions. The company described these as plans subject to market conditions, with no assurance they will produce growth. A strategic collaboration with Toshiba was announced after quarter-end.
- About 75% of nine-month Electricity revenue came from PPAs with fixed energy rates. Variable-price contracts remain exposed to oil and natural-gas prices; related derivatives provided partial protection, with a $0.7 million gain in the first nine months. Other material risks include geothermal resource and operating performance, project execution and financing, regulation and permitting, foreign-country political and currency exposure, competition, customer concentration, and weather or natural events. Three major utility customers—NV Energy subsidiaries, Southern California Edison and Kenya Power—each contributed roughly 11%–19% of nine-month revenue.
- Legal matters include environmental claims concerning California plants, a Hawaii night-drilling suit, labor proceedings involving the Puna plant, a qui tam grant-related complaint, and a Chilean sales-representative fee dispute. Management stated that it believes the allegations are without merit or has valid defenses; the California Clean Air Act case proceeded to discovery after a motion to dismiss was denied.
- Management reported effective disclosure controls as of September 30, 2015, and no material third-quarter change in internal control over financial reporting.
Key facts for investors to verify
- How much of the reported earnings increase persists without the $49.4 million Kenya tax benefit, and what assumptions support eventual use of the tax attributes?
- Whether operating cash flow can recover from the year-over-year decline and fund planned capital spending, debt service and dividends without relying on additional financing.
- Progress, cost implications and revised timelines for Sarulla, Olkaria III phase four, and other projects under construction or development.
- Trends in Electricity pricing, generation and margins, and the degree to which oil/gas-linked PPAs and hedges affect results after 2015.
- Debt and liquidity restrictions, including project-level distribution covenants, outstanding letters of credit, foreign-held cash, and the $250 million unsecured bond maturity in 2017.
- Developments and potential financial exposure in the disclosed legal proceedings and the concentration of revenue among major utility customers.