Ormat Technologies, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results; amounts below are in U.S. dollars unless noted. Ormat operates electricity-generating geothermal and recovered-energy plants and sells power-generation equipment and services through its Electricity and Product segments.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $179.4 million | $159.9 million | $369.3 million | $311.5 million |
| Gross profit | $70.5 million | $65.8 million | $144.9 million | $129.7 million |
| Operating income | $53.2 million | $51.9 million | $112.6 million | $102.4 million |
| Net income attributable to Ormat stockholders | $35.0 million | $24.3 million | $70.3 million | $53.6 million |
| Diluted EPS | $0.69 | $0.49 | $1.39 | $1.07 |
| Gross margin | 39.3% | 41.2% | 39.2% | 41.6% |
| Operating margin | 29.6% | 32.5% | 30.5% | 32.9% |
Q2 revenue rose 12.2%; six-month revenue rose 18.6%. Electricity revenue increased 7.5% in Q2 and 7.4% year to date, supported by improved Puna generation and consolidation of Guadeloupe’s Bouillante plant. Product revenue increased 21.0% in Q2 and 42.3% year to date, reflecting new Turkish, New Zealand and China projects. Product cost ratios rose, reducing segment gross margin; consolidated gross margin also declined.
Q2 stockholder earnings benefited from higher operating income, lower interest expense and a year-over-year swing in derivative and foreign-currency results. Six-month net income also benefited from operating growth, lower interest expense and derivative/foreign-currency gains. Q2 operating income included higher G&A, including a $2.1 million stock-compensation charge related to accelerated executive option vesting and $0.9 million of ORIX/M&A costs. Adjusted EBITDA, a non-GAAP measure, was $88.1 million for Q2 and $180.0 million for the six months, versus $81.2 million and $161.5 million, respectively, a year earlier.
Cash flow, debt and liquidity
- Six-month operating cash flow was $114.2 million, compared with $119.6 million in 2016. Investing cash outflow was $194.1 million, versus $55.3 million; financing cash outflow was $31.9 million, versus $57.6 million.
- Cash and cash equivalents fell to $118.4 million at June 30 from $230.2 million at year-end 2016. Major cash uses included $116.0 million of capital expenditures, $35.3 million for Viridity, $27.4 million invested in Sarulla, $33.2 million of long-term debt repayments, $14.6 million paid to noncontrolling interests and $12.4 million of dividends. Restricted cash was an additional $49.5 million.
- Current assets were $387.2 million and current liabilities $214.2 million. Cash plus restricted cash totaled $167.9 million; restricted funds may not be freely available for general corporate purposes.
- Reported debt balances imply approximately $937.6 million of total debt at June 30, including current and long-term borrowings and the $30.0 million revolving-credit balance. Most project debt is limited- or non-recourse. The company reported 94.9% of consolidated long-term debt at fixed rates.
- Management reported $119.8 million of unused corporate borrowing capacity. It also cited $468.0 million of total corporate capacity and $334.8 million utilized; the filing’s figures do not reconcile exactly, so available capacity should be verified. Committed letters of credit outstanding were $303.8 million.
Material developments, outlook and risks
- Long-term power contract: A portfolio PPA with SCPPA covers 150 MW of geothermal capacity, with a 135 MW minimum and 185 MW maximum, at a fixed $75.50/MWh for approximately 26 years through December 2043. Deliveries are expected to start in Q4 2017; the full portfolio is expected online by the end of 2022.
- Expansion and spending: Management estimated approximately $140 million of remaining-2017 capital expenditures, including about $120 million for new projects and enhancements, and forecast $32.8 million of debt repayments for the rest of 2017. It expected to fund needs with cash, operating cash flow and project financing/refinancing. No annual revenue or earnings guidance is provided in the supplied filing text.
- Projects: Sarulla’s first 110 MW phase began commercial operation in March 2017. The second phase was nearing completion, with commercial operation under the PPA expected in Q4 2017; the third phase was under construction. Sarulla had experienced delays, drilling cost overruns and missed financing milestones; waivers had been received or were expected, and lenders could request additional sponsor equity. Platanares and Tungsten Mountain were expected to begin commercial operation before year-end 2017; other expansions were scheduled into 2018.
- Acquisition and strategic expansion: Ormat acquired Viridity in March for $35.3 million, with estimated contingent consideration of $12.8 million tied to milestones. The acquisition expands the company into demand response, energy management and storage. The company also announced that ORIX’s purchase of approximately 22% of Ormat closed July 26, 2017, after quarter-end; related agreements provide ORIX board representation and commercial cooperation rights.
- Tax item: Ormat changed its permanent-reinvestment assertion for some Israeli subsidiary earnings expected to be repatriated to fund U.S. needs. It recorded a $110.5 million deferred tax liability, $53.9 million of estimated Israeli withholding taxes and a $109.6 million deferred tax asset for foreign tax credits; it also released $62.0 million of valuation allowance. The effective tax rate was 14.2% for Q2 and 17.7% for the first half. Realization of tax assets depends on future taxable income and remains subject to estimation.
- Key risks: Exposure includes geothermal resource and operating performance, construction delays and cost overruns, variable-price PPAs linked to oil or natural gas, product-order timing and margins, customer concentration, foreign-exchange and political risks, and competition from other renewable technologies. Most electricity revenue is under long-term PPAs, and 85.7% of first-half Electricity revenue came from fixed-rate PPAs.
- Contingencies: A Chilean former sales representative seeks $4.8 million plus a share of future Chilean product sales; a Hawaii class action alleges damages from a 2014 toxic release, with damages unspecified. The company disputes the claims and says legal proceedings, individually and collectively, are not expected to be material. A Kenya tax audit settlement involved a $2.6 million payment; a waiver request covers approximately $1.2 million of interest, for which a provision was recorded.
Investor verification priorities
- Confirm remaining-2017 capital spending, funding sources and project-financing availability against the reported cash decline and borrowing capacity.
- Track Product segment contract margins and cash conversion, given higher costs as a percentage of Product revenue and the timing-sensitive project business.
- Monitor Sarulla’s commissioning, lender waivers, drilling costs and any additional equity requirements.
- Assess the usability and timing of deferred tax assets and credits, and the cash-tax consequences of repatriating Israeli earnings.
- Verify the status and potential exposure of the Chilean claim and Hawaii class action, and reconcile stated unused credit capacity with total and utilized capacity.
Management stated that disclosure controls were effective as of June 30, 2017 and that no material change in internal control over financial reporting occurred during the quarter.