Business context and reporting period
Ormat Technologies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The company develops, owns and operates geothermal and recovered-energy power plants and sells power-generation equipment and related services. Its reporting segments are Electricity and Product. Results are compared with the corresponding 2015 periods.
Financial performance and position
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $159.9 million | $140.5 million | $311.5 million | $260.7 million |
| Gross margin | $65.8 million; 41.2% | $50.8 million; 36.1% | $129.7 million; 41.6% | $94.8 million; 36.4% |
| Operating income | $51.9 million | $38.6 million | $102.4 million | $68.5 million |
| Net income attributable to shareholders | $24.3 million | $14.4 million | $53.6 million | $24.4 million |
| Diluted EPS | $0.49 | $0.28 | $1.07 | $0.49 |
- Revenue mix: Q2 Electricity revenue was $104.0 million and Product revenue was $55.9 million. First-half amounts were $211.9 million and $99.6 million, respectively.
- Cash flow: First-half operating cash flow was $119.6 million, versus $112.7 million in 2015. Investing used $55.3 million and financing used $57.6 million. Capital expenditures were $67.8 million.
- Liquidity: June 30 cash and cash equivalents were $192.6 million, with an additional $38.0 million of restricted cash. Current assets were $380.2 million and current liabilities $193.1 million. Management reported $225.2 million of unused corporate borrowing capacity; $177.3 million of cash was held in foreign jurisdictions.
- Debt and equity: Total current and long-term borrowings were approximately $871 million, including project-level limited- and non-recourse debt. Total liabilities were $1.156 billion and equity $1.117 billion. Approximately 94.4% of consolidated long-term debt was fixed-rate. About $250 million of senior unsecured bonds mature August 1, 2017.
- Non-GAAP measure: Adjusted EBITDA was $81.2 million in Q2 and $161.5 million in the first half, compared with $67.8 million and $133.2 million, respectively, in 2015.
Material changes versus the prior comparable period
- Q2 revenue rose 13.8%; first-half revenue rose 19.5%. First-half electricity generation increased 13.7% to 2.70 million MWh.
- Operating income increased 34.3% in Q2 and 49.5% in the first half. The company attributed improvement primarily to higher revenue and improved Electricity segment cost efficiency, including contributions from new plant capacity.
- First-half Product revenue increased 24.7%, driven partly by the Chile Cerro Pabellon project, which contributed about $36 million of first-half revenue. Reduced revenue from completed Turkish and other projects partly offset the increase.
- Q2 derivative and foreign-currency transaction losses rose to $4.3 million from $0.6 million, including losses on commodity and currency contracts. First-half interest expense declined to $34.4 million from $36.7 million.
- Cash increased by $6.6 million from year-end 2015. First-half dividends paid were $19.0 million, versus $6.8 million in the prior-year period; first-half long-term debt repayments were $31.4 million.
Outlook, commentary, risks and unusual items
- Outlook and investment: No specific full-year revenue or earnings guidance is provided in the supplied filing text. The company estimated approximately $135 million in capital expenditures for the remainder of 2016, including development, maintenance, exploration and strategic-plan investments. It expected to fund requirements with available liquidity, operating cash flow and project financing.
- Projects and strategic developments: The 29 MW Olkaria III Plant 4 in Kenya began commercial operation in early 2016; Veyo was brought online four months ahead of schedule. Construction began on the 35 MW Platanares project, with commercial operation expected by the end of 2017. The company also signed a roughly $36 million New Zealand supply and EPC contract and agreed to develop the 10 MW Rabbit Hill energy-storage project with Alevo.
- Subsequent event: In July 2016, Ormat closed its acquisition of an approximately 60% interest in Guadeloupe’s Bouillante geothermal plant for about $18.6 million. It committed a further $8.4 million over two years and may owe up to $13.4 million subject to performance and expansion thresholds. After enhancements, the plant is expected to generate approximately $22.3 million in annual revenue; this is a stated expectation, not a guarantee.
- Project risk: Sarulla, in which Ormat holds a 12.75% interest, faced field-development delays and drilling-related cost overruns. Lenders requested additional sponsor equity; sponsors agreed. First-phase operations were expected toward year-end 2016. The project had received waivers for missed milestones and was reported in compliance with revised lender milestones at June 30.
- Market and operating risks: Although most electricity revenue came from fixed-rate PPAs, certain California and Hawaii contracts remain exposed to natural-gas or oil prices. Other stated risks include geothermal resource and plant availability, project execution, financing, regulation, foreign-country political conditions, customer concentration and competition.
- Legal and tax matters: A qui tam lawsuit seeks approximately $375 million over alleged grant-related misconduct; the government declined to intervene and the case remained in discovery. A Chilean former representative claimed $4.6 million plus a share of certain future sales. Counties challenged energy-tax abatements valued at approximately $24.8 million in total. The company stated it believes it has defenses and intends to defend these matters. A Kenya tax audit was ongoing.
- Other items: The company wrote off $1.4 million of unsuccessful exploration costs in the first half. It recorded a $2.1 million first-half equity loss from investees, principally Sarulla. The board declared a $0.07-per-share quarterly dividend on August 2, payable August 30, 2016. Management reported disclosure controls were effective and no material second-quarter change in internal controls.
Important facts for investors to verify
- Whether revenue growth, generation gains and segment margins are sustainable, including the timing and margins of Product projects.
- Liquidity availability and restrictions: foreign-held cash, the distinction between total committed borrowing capacity and unused capacity, and the 2017 bond maturity and refinancing plan.
- Sarulla’s drilling progress, additional equity requirements, cost outlook and expected first-phase start date.
- Actual costs, timing and performance of the 2016 capital program and the Bouillante acquisition and expansion.
- Developments and potential financial exposure in the qui tam, Chilean, tax-abatement and other legal or regulatory matters.
- Exposure to customer concentration, commodity prices, foreign exchange, and evolving renewable-energy policies and incentives.