Ormat Technologies, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Ormat develops, owns and operates geothermal and recovered-energy power plants and manufactures related equipment. Financial amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions.
Financial results and key metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $136.1 | $110.8 | $398.3 | $313.3 |
| Gross margin | $32.5; 23.9% | $35.8; 32.3% | $112.4; 28.2% | $83.9; 26.8% |
| Operating income | $14.2 | $24.2 | $65.9 | $46.7 |
| Net income (loss) attributable to shareholders | $(0.6) | $0.9 | $16.0 | $0.02 |
| Diluted earnings (loss) per share | $(0.01) | $0.02 | $0.35 | $0.00 |
| Net cash from operating activities | Not reported separately | Not reported separately | $62.4 | $98.5 |
| Capital expenditures | Not reported separately | Not reported separately | $186.3 | $180.8 |
| Adjusted EBITDA | $48.2 | $46.7 | $150.5 | $121.6 |
- Revenue mix: Q3 electricity revenue fell 6.2% to $81.5, while product revenue rose 127.6% to $54.7. For the nine months, electricity revenue increased 1.0% to $248.7 and product revenue increased 123.3% to $149.6.
- Cash and liquidity: Cash, cash equivalents and short-term bank deposits totaled approximately $40.5 at September 30, 2012, down from $99.9 in cash and cash equivalents at year-end 2011; there were no marketable securities on the September balance sheet. Restricted cash and related assets were $76.3. The company reported $85.4 of unused corporate borrowing capacity under committed lines.
- Debt: Balance-sheet debt totaled approximately $970.4, including current maturities, secured project debt, unsecured bonds and revolving credit borrowings. The company also had a $56.5 liability associated with sale of tax benefits. Management reported compliance with debt covenants.
- Balance sheet: Total assets were $2,258.4 and total equity was $923.2 at September 30, 2012. Current assets of $266.5 exceeded current liabilities of $189.2.
Changes versus the comparable periods
- Q3 revenue growth reflected increased equipment and project-contract activity, led by the Ngatamariki project for Mighty River Power and the Cove Fort contract for Enel. Electricity revenue declined as California natural-gas-linked rates weakened; new Tuscarora and McGinness Hills generation partly offset the decline.
- Q3 gross margin and operating income declined despite higher revenue. The product segment’s lower contract mix margins and the $7.3 OREG 4 impairment were significant factors. Electricity operating income fell to $6.8 from $21.1, while product operating income increased to $7.4 from $3.1.
- Nine-month operating income rose 41% to $65.9 and net income attributable to shareholders increased to $16.0 from near break-even, helped by higher product sales, improved electricity-segment costs and lower net interest expense. The $7.3 impairment and $1.9 unsuccessful-exploration write-off partly offset gains.
- Nine-month operating cash flow fell $36.1 to $62.4, primarily because of higher receivables and less favorable timing of customer billings. Investing cash outflow was lower than in 2011, partly because of $119.2 in Treasury cash grants. Financing cash flow was a $71.1 outflow, including net revolving-credit repayments, debt repayments, payments to noncontrolling interest and dividends.
Outlook, management commentary, risks and unusual items
- Management expected Product Segment revenue to remain robust through the end of 2013, reflecting the order backlog, including Ngatamariki, expected to complete in 2013. No specific consolidated revenue or earnings forecast was provided.
- Management estimated approximately $70.0 of capital expenditures for the remainder of 2012 and $26.6 of debt repayment. It expected to meet these needs through available liquidity, operating cash flow and project financing/refinancing. Approximately $319.0 of construction expenditures related to projects expected to complete by 2013; $149.0 had been invested by September 30.
- OrPower 4 signed an OPIC financing agreement for up to $310.0 to refinance and fund expansion of the Olkaria III complex in Kenya. Funding remained subject to conditions precedent. The financing includes up to $265.0 for initial tranches and a $45.0 standby tranche for a potential further expansion.
- Variable-price PPAs expose the company to natural gas and oil prices. Derivatives were used to reduce exposure through 2013, but were not designated for hedge accounting and can add volatility to reported electricity revenue. Q3 included a $3.8 net loss on commodity swaps and put transactions.
- OREG 4 was written down from a $10.9 carrying value to $3.6 due to continued low output, producing a $7.3 impairment. The company also wrote off $1.9 in unsuccessful Nevada exploration costs during the nine-month period.
- The valuation allowance against U.S. deferred tax assets increased to $97.3 at September 30, 2012. The company cited uncertainty about realizing net operating loss carryforwards and tax credits.
- Key risks include customer concentration, commodity-price movements, geothermal resource and operating performance, project delays and financing availability, foreign-country political and currency risks, competition, and potential reduction or expiration of renewable-energy incentives. Southern California Edison contributed 18.8% of nine-month revenue; NV Energy subsidiaries contributed 13.8%.
- The securities class-action settlement received final court approval in October 2012; the $3.1 payment was to be funded by insurers. A derivative-case settlement, including governance measures and insurer-funded attorneys’ fees, had preliminary approval but remained subject to final approval. A California Unions for Reliable Energy petition concerning North and East Brawley permitting was pending; the company said it did not immediately affect operations or development.
- Management reported effective disclosure controls as of September 30, 2012 and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether OPIC financing conditions were satisfied and proceeds were disbursed, and how the Olkaria III expansion and refinancing affect leverage and debt service.
- Product backlog conversion, contract margins and completion timing, particularly for Ngatamariki and Cove Fort, and whether product revenue remains strong through 2013.
- Collections and working-capital trends after the $29.7 increase in receivables and the decline in nine-month operating cash flow.
- Electricity pricing and generation trends under California and Puna variable-rate PPAs, including the financial effect of commodity derivatives and new replacement PPAs.
- Operating performance and impairment risk at OREG 4 and North Brawley, and progress on exploration and projects under construction.
- Availability of unused credit capacity, covenant headroom, upcoming credit-line maturities and the company’s ability to fund planned capital spending and debt payments.