Business context and reporting period
Ormat Technologies, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company develops, owns and operates geothermal and recovered-energy power plants and manufactures power-generation equipment. Results are reported in Electricity and Product segments. Dollar amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $110.8 | $101.5 | $313.3 | $280.4 |
| Gross margin | $35.8 (32.3%) | $25.2 (24.8%) | $83.9 (26.8%) | $59.5 (21.2%) |
| Operating income | $24.2 | $14.8 | $46.7 | $19.3 |
| Net income attributable to shareholders | $0.9 | $32.5 | $0.02 | $32.9 |
| Diluted EPS | $0.02 | $0.71 | $0.00 | $0.72 |
| Net interest expense | $23.9 | $11.0 | $54.4 | $30.1 |
- Electricity revenue grew 4.1% in Q3 and 12.8% year to date; Product revenue grew 32.6% and 7.8%, respectively. Nine-month generation increased to 2.94 million MWh from 2.74 million MWh.
- Cash provided by operations was $98.5 million for the nine months, versus $79.6 million. Investing used $238.2 million, including $180.8 million of capital expenditures; financing provided $115.9 million. Cash and cash equivalents ended at $59.1 million, down from $82.8 million at year-end 2010. Cash, cash equivalents and marketable securities totaled $80.3 million, excluding restricted balances.
- At September 30, current assets were $248.7 million and current liabilities $187.7 million. Restricted cash, cash equivalents and marketable securities related to variable-interest entities totaled $61.8 million and may not be freely available to the parent.
- Reported debt totaled approximately $904.9 million, including current maturities, versus approximately $789.7 million at December 31, 2010. The company reported $102.3 million of unused capacity under existing committed corporate credit lines; outstanding letters of credit were $97.4 million.
- Adjusted EBITDA, a non-GAAP measure, was $46.7 million for Q3 and $121.6 million for the nine months, versus $78.8 million and $134.9 million, respectively, in 2010.
Material changes versus prior comparable periods
- Operating income and gross margin improved substantially as revenue growth outpaced cost growth. Management cited higher generation and rates, the Mammoth complex consolidation, and lower North Brawley operating costs in Q3; Product margins also improved with sales mix and contract margins.
- Shareholder net income fell sharply despite stronger operating results. 2010 comparisons included a $36.9 million pre-tax gain from acquiring the remaining Mammoth interest; nine-month 2010 results also included a $4.3 million after-tax gain on the sale of GDL.
- Net interest expense increased by $12.9 million in Q3 and $24.3 million year to date. A non-hedge accounting loss on interest-rate locks related to the DOE-backed financing was $11.6 million in Q3 and $16.4 million year to date; additional debt issuance also increased interest expense.
- Q3 electricity generation declined 3% year over year because of major maintenance. North Brawley revenue was lower as the company idled wells it said were negatively affecting margins.
- Year-to-date operating cash flow rose, supported in part by higher customer billings in excess of costs on uncompleted Product contracts. Capital investment remained high, and cash balances declined.
Outlook, management commentary, risks and contingencies
- Management expected Product-segment revenue to rise over the next two years, citing a September 30 backlog of approximately $200 million. It focused on organic development and expansion, while noting project and order timing uncertainty.
- Management estimated approximately $108 million of remaining-2011 capital expenditures, including investment in projects under construction. It estimated about $400 million of remaining investment in listed projects during 2012–2013. It said 2012 capital expenditures would mostly be funded by construction loans.
- Management expected California Global Settlement changes to certain Southern California Edison PPAs to reduce revenue by approximately $9.5 million in 2012 and $6.5 million in 2013; effects beyond 2013 were not estimable. The settlement could expose affected revenues to greater fluctuation as pricing shifts toward avoided-cost formulas.
- After quarter-end, on October 31, 2011, project subsidiaries issued $151.7 million of Series A secured notes, receiving approximately $147.4 million net for construction at McGinness Hills and Tuscarora. The broader DOE-guaranteed financing could total up to $350 million, subject to conditions; the DOE guarantee covers 80% of principal and interest. The company also has an OPIC commitment letter for up to $310 million to refinance and expand Olkaria III, but the filing describes it as a commitment, not completed financing.
- Jersey Valley was operating below design capacity after an injection well was shut down because of interference from an old mining well. The company was drilling additional wells and discussing potential penalties or contract default with NV Energy.
- FERC had directed recovered-energy facilities to refund approximately $1.6 million, but granted rehearing for further consideration. Management said it believed a refund was not probable. Securities class-action and derivative litigation related to a prior financial restatement remained pending; the company could not estimate possible losses and said it would defend the cases.
- Important risks include geothermal resource and construction performance, project delays, counterparty and customer concentration, regulatory and PPA changes, interest-rate and foreign-exchange exposure, and competition. SCE represented 30.5% of nine-month revenue; major customers collectively represented 57% of receivables at quarter-end.
- The company reported that disclosure controls were effective as of September 30, 2011, and that no material change in internal control over financial reporting occurred during the quarter. Management cautioned that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether operating-margin gains persist after maintenance, North Brawley costs, and project ramp-up effects.
- The cash interest burden and debt-service capacity, including the impact of interest-rate-lock losses, floating-rate debt and refinancing needs.
- Availability and timing of construction financing, including conditions and covenants for DOE-backed notes and the status of OPIC financing.
- Actual California PPA amendments and their revenue effects, alongside approval and timing of pending PPAs such as Dixie Meadows and the additional Puna capacity.
- Jersey Valley’s recovery to contracted performance levels and any resulting penalties or guarantee exposure.
- Outcomes of the FERC rehearing and pending litigation, for which the filing provides no clear loss estimate.
- Customer concentration and whether restricted VIE cash can be used to meet corporate liquidity needs.