ORMAT TECHNOLOGIES, INC. quarterly report, Q1 FY2012

Ormat Technologies, Inc. — Q1 2012 Form 10-Q

Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. Financial statements are unaudited. Ormat operates electricity-generating geothermal and recovered-energy plants and manufactures equipment and provides related project services.

Financial results

Metric	Q1 2012	Q1 2011
Electricity revenue	$82.2 million	$78.3 million
Product revenue	$50.1 million	$19.6 million
Total revenue	$132.4 million	$97.8 million
Gross profit / margin	$39.8 million / 30.1%	$15.0 million / 15.3%
Operating income / margin	$25.7 million / 19.4%	$3.1 million / 3.2%
Net income attributable to stockholders	$7.9 million	Net loss of $9.0 million
Diluted earnings (loss) per share	$0.17	$(0.20)
Net cash from operating activities	$41.9 million	$13.1 million
Capital expenditures	$65.4 million	$55.1 million

• Revenue rose 35.3%; Product revenue increased 156.3%, reflecting orders secured in 2011 and $3.0 million in final revenue from a completed Spain LNG energy-recovery unit. Electricity revenue increased 5.1%.
• Electricity generation increased 1.2% to 1.04 million MWh, while the average portfolio revenue rate rose to $79/MWh from $76/MWh.
• Gross margin improved as revenue grew and electricity operating costs declined. North Brawley operating and maintenance costs fell to $7.2 million from $14.3 million. Product margin also improved, attributed to higher revenue, sales mix and contract-specific margins.
• Interest expense, net, increased to $14.9 million from $13.1 million. Income tax expense increased to $5.5 million from $0.6 million; the effective tax rate was 40.1%, versus 7.4%, primarily reflecting an increase in the U.S. deferred-tax valuation allowance.

Liquidity, debt and balance sheet

• At March 31, cash and cash equivalents were $84.6 million and marketable securities were $15.7 million. Restricted cash, cash equivalents and securities, primarily related to variable-interest entities, totaled $75.1 million. Cash and marketable securities decreased from $118.4 million at year-end.
• Current assets were $275.5 million and current liabilities $187.7 million, implying working capital of approximately $87.8 million.
• Reported debt, including current maturities and revolving credit borrowings, was approximately $1.035 billion. The company classified 71.3% of long-term debt as fixed-rate and 28.7% as floating-rate; $296.5 million remained subject to some floating-rate risk. Revolving borrowings totaled $227.6 million at a weighted-average rate of 3.0%.
• Corporate committed credit lines totaled $420.0 million; the filing reports $52.6 million of unused capacity. Outstanding letters of credit were $225.1 million, including $149.7 million under committed facilities.
• Total equity was $916.0 million. Management reported compliance with debt covenants. Several project financings restrict distributions if specified debt-service coverage ratios are not met; management expected the Ormat Funding Corp. facilities could fall below distribution requirements as California power prices transition to variable rates, but did not expect a default.
• Operating cash flow improved year over year, in part from higher earnings and favorable receivables and payables timing. Investing activities used $62.3 million; financing activities provided $5.2 million. Cash declined $15.3 million during the quarter.

Material changes, outlook and risks

• Management estimated approximately $270 million of capital expenditures for the remainder of 2012 and $51.7 million of debt repayments. It expected to fund these needs with cash, operating cash flow, project financing or refinancing, and available government grants, and believed sources would be sufficient.
• Projects under construction expected to be completed by 2013 were estimated to require $680 million in total capital expenditures; approximately $255 million had been invested by March 31. Management expected $146 million of additional spending on these projects in the remainder of 2012 and $279 million in 2013.
• Management expected increased Product Segment backlog to support higher segment revenue over the next two years. It did not provide a specific consolidated revenue or earnings forecast; it cautioned that first-quarter results are not necessarily indicative of full-year results.
• California PPAs for Ormesa, Mammoth and Heber 1 and 2 shifted from fixed to natural-gas-linked variable energy rates beginning in May 2012, increasing exposure to lower natural-gas prices. Puna’s 25 MW PPA is linked to oil-sensitive avoided costs. April oil-price swaps covering May 2012 through March 2013 were intended to reduce Puna exposure; they are not hedge-accounted and fair-value changes will affect electricity revenue.
• Development risks include geothermal resource uncertainty, permitting and construction delays, financing availability, project economics, and competition from other renewable technologies. Management noted that obtaining new PPAs had become more difficult and that natural-gas prices affect certain contract rates.
• In April, Ormat received a $13.8 million Treasury cash grant for the Puna complex; it also reported a $61.2 million prospective EPC award under negotiation, with a $9.0 million interim services agreement. These are subsequent-period developments, not Q1 revenue or cash receipts except as specifically noted.
• A securities class-action settlement for $3.1 million, to be funded by insurers, received preliminary court approval and remained subject to final approval. The company continued to deny wrongdoing. Related derivative lawsuits were stayed, with possible loss not estimable. A California Unions for Reliable Energy petition challenged licensing jurisdiction for North and East Brawley; Ormat considered it without merit and reported no immediate project impact.
• The company wrote off $0.8 million of unsuccessful Leach Hot Springs exploration costs. It increased its U.S. deferred-tax valuation allowance by $6.4 million, to $67.9 million at quarter-end, citing uncertainty over realization of deferred tax assets.

Key facts for investors to verify

• Whether product backlog converts to revenue and cash on schedule, and whether reported margin gains persist as project mix changes.
• Exposure to natural-gas and oil-linked PPA rates, the results of the Puna swaps, and the effect of California rate changes on project cash flows and debt-service coverage.
• Funding and execution of the estimated 2012 capital program, including project financing, grant availability, and the reported remaining credit capacity and letters of credit.
• Progress, permitting, cost and commissioning timelines for major projects, particularly McGinness Hills, Olkaria III expansion, Mammoth and other developments.
• Final court approval and insurance funding of the securities settlement, plus developments in derivative litigation and the CURE petition.
• Whether taxable income supports use of U.S. tax-loss carryforwards and credits, given the $67.9 million valuation allowance.