Business context and reporting period
Ormat Technologies, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018 (filed March 1, 2019). The company develops, owns and operates geothermal and recovered-energy power plants; manufactures generation equipment and provides EPC services; and is expanding into energy storage, demand response and energy management. It reports Electricity, Product and Other segments. This is an annual filing; the fourth-quarter figures below are the filing’s unaudited quarterly data.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $719.3 million | $692.8 million |
| Gross profit / margin | $270.4 million / 37.6% | $268.5 million / 38.7% |
| Operating income / margin | $185.1 million / 25.7% | $205.0 million / 29.6% |
| Net income attributable to Ormat stockholders | $98.0 million; diluted EPS $1.92 | $132.4 million; diluted EPS $2.61 |
| Adjusted EBITDA (non-GAAP) | $368.0 million | $343.8 million |
| Cash from operating activities | $145.8 million | $245.6 million |
| Capital expenditures | $258.5 million | $259.2 million |
| Cash and restricted cash | $177.5 million | $96.6 million |
| Working capital | $111.1 million | $38.3 million |
| Reported long-term debt, including current portion | $1,108.9 million | $862.1 million |
Fourth-quarter 2018 revenue was $190.5 million, operating income $68.0 million, net income attributable to stockholders $18.2 million and diluted EPS $0.36.
At year-end, the company also had $159.0 million drawn on short-term revolving credit lines and $78.8 million of unused corporate borrowing capacity. Management reported compliance with debt covenants; the debt-to-Adjusted-EBITDA measure specified in certain covenants was 3.21. Approximately 96.8% of consolidated long-term debt was fixed-rate. Management estimated 2019 capital needs of approximately $250 million and debt repayments of $68.2 million.
Material changes versus the prior comparable period
- Revenue rose 3.8%, as Electricity revenue increased 9.5% to $509.9 million, while Product revenue declined 10.1% to $201.7 million. Other revenue rose to $7.6 million from $2.7 million.
- Electricity growth reflected new or expanded generation, the April 2018 US Geothermal acquisition, and higher rates under the Ormesa PPA. Total generation increased 6.7% to 5.86 million MWh.
- Product revenue fell partly because major New Zealand and China projects were largely completed; new Turkish projects partly offset the decline. Product gross margin contracted to 30.3% from 32.2%.
- Operating income declined 9.7% and stockholder-attributable net income declined 26.0%. Higher interest expense, a $13.5 million Viridity goodwill impairment, a $5.0 million Galena 2 PPA termination fee and higher G&A contributed to the decline.
- Operating cash flow fell by $99.8 million, primarily reflecting working-capital timing, including lower accounts payable and accrued expenses. Investing outflows remained substantial at $342.4 million, including capital spending and the USG acquisition.
Outlook, risks and unusual items
- Growth and investment: Management expects to invest approximately $250 million in 2019 in construction, enhancements, maintenance, exploration and storage. Approximately 37 MW of U.S. geothermal and solar capacity was fully released for construction; additional projects were at earlier construction or development stages. These are plans, not assured outcomes.
- Puna volcano disruption: The 38 MW Puna plant has been shut down since the May 2018 Kilauea eruption. Lava covered three wellheads, monitoring wells and the substation. At year-end, Ormat had received $3.3 million for substation rebuilding and recorded $12.1 million of business-interruption proceeds, while insurer coverage timing remained disputed. Management was assessing damage and whether an impairment was required.
- Control weakness and restatement: The auditor concluded that the 2018 financial statements were fairly presented, but that internal control over financial reporting was ineffective at December 31, 2018 because of an unremediated material weakness in income-tax risk assessment and controls. The weakness had led to restatements and revisions of prior-period tax reporting. Management had undertaken remediation, but had not yet established that controls operated effectively for a sufficient period.
- Customers and collections: KPLC represented 16.6% of 2018 revenue and SCPPA 15.2%. The filing reports late payments from KPLC and Honduras utility ENEE, with no doubtful-account provision recorded. PG&E, representing approximately 1.9% of revenue, filed for Chapter 11 in January 2019; January payments were received, but the future effect was unclear.
- Debt, liquidity and financing: Debt increased following new borrowing and the USG acquisition. Project debt may restrict distributions to the parent, and revolving facilities were scheduled to mature during 2019. The company depends on continued access to financing to support planned investment.
- Other risks and contingencies: Risks include geothermal resource decline, operating or construction delays, weather and seismic events, commodity-linked PPA pricing, foreign political and currency exposure, regulatory and incentive changes, and merchant-market volatility for storage projects. The filing also describes securities class actions and derivative litigation relating to prior financial reporting, plus other legal matters; management stated it intended to defend the claims.
- Other unusual items: A $13.5 million impairment eliminated the goodwill assigned to Viridity’s storage and energy-management reporting unit. The company completed its accounting for the Tax Act during 2018 and reported a 25.3% effective tax rate, versus 12.7% in 2017.
Important facts for investors to verify
- Progress restoring Puna, final repair and resource assessments, any impairment, and resolution of disputed business-interruption insurance coverage.
- Remediation and independent testing of the income-tax control weakness, and the implications of the prior-period restatements.
- Collection timing from KPLC and ENEE and any payment or recovery effects arising from PG&E’s Chapter 11 proceedings.
- 2019 project spending, debt maturities and refinancing capacity, covenant headroom, and the assumptions supporting management’s liquidity assessment.
- Execution and economics of planned projects, including merchant storage revenue, and the impact of Turkish market conditions and equipment-price competition on Product margins.