Ormat Technologies, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2014, compared with the same 2013 periods. Ormat operates geothermal and recovered-energy power plants and sells power and generating equipment through its Electricity and Product segments. Unless noted, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $140.2 | $130.7 | $410.3 | $402.3 |
| Gross profit / margin | $55.5 / 39.6% | $39.8 / 30.4% | $148.9 / 36.3% | $116.9 / 29.1% |
| Operating income / margin | $43.8 / 31.2% | $29.8 / 22.8% | $108.7 / 26.5% | $75.3 / 18.7% |
| Net income attributable to shareholders | $16.5 | $13.0 | $47.2 | $33.1 |
| Diluted EPS | $0.36 | $0.28 | $1.03 | $0.72 |
| Operating cash flow | Not separately shown | Not separately shown | $178.8 | $32.2 |
- For nine months, Electricity revenue increased 18.0% to $289.0 million, while Product revenue fell 22.9% to $121.3 million. Electricity represented 70.4% of revenue, up from 60.9%.
- Q3 revenue rose 7.3%; operating income rose 46.9% and shareholder net income rose 27.5%. Nine-month operating income rose 44.3%; continuing-operations income increased 65.2% to $47.9 million. 2013 nine-month net income included $4.7 million from discontinued operations.
- Management attributed stronger electricity results to new capacity, including Olkaria III Plant 3 and Don A. Campbell, and reported improved segment cost ratios. Product revenue varied with project timing and mix.
- Nine-month operating cash flow increased substantially, helped by collections and working-capital movements, including $21.6 million from lower receivables and $37.4 million from increased billings in excess of costs. Investing cash outflow was $135.4 million, including $122.6 million in capital expenditures; financing cash outflow was $58.2 million.
- Cash and cash equivalents were $42.5 million at September 30, versus $57.4 million at year-end 2013. Restricted cash, cash equivalents and marketable securities were $127.5 million, principally related to VIEs, and are not equivalent to unrestricted corporate cash.
- Debt line items total approximately $1.04 billion, including current and long-term project-level and full-recourse debt. Reported unused corporate borrowing capacity was $229.1 million; committed letters of credit outstanding totaled $362.0 million. Management said it was in compliance with its financial covenants.
- Adjusted EBITDA, a non-GAAP measure, was $69.2 million for Q3 and $199.6 million for nine months, compared with $60.3 million and $175.7 million, respectively.
Material changes, outlook and commentary
- Electricity growth was partly offset by lower Product revenue. Nine-month electricity generation increased, primarily with new plants; the filing gives differing nine-month generation totals in separate sections (3,269,048 MWh and 3,281,785 MWh).
- Reported results included a $7.6 million gain on the Heber Solar project sale, an $8.1 million Wister exploration write-off, and a roughly $1.1 million charge from prepaying the Amatitlan loan. The 2013 comparison included a $9.0 million Mammoth PPA termination fee and $4.7 million of discontinued-operations income.
- Interest expense increased to $65.1 million for nine months from $51.8 million. Foreign-currency losses were $3.6 million versus gains of $3.8 million in 2013; tax-benefit income increased to $18.3 million from $14.3 million.
- The company issued $140 million of secured project debt at a 4.61% coupon to fund McGinness Hills Phase 2 and repaid approximately $30 million of Amatitlan debt. It expects McGinness Hills Phase 2 to begin operating in Q1 2015. The Sarulla project reached financial close and construction began; Ormat has a $254 million equipment supply contract and a 12.75% equity stake.
- No quantified full-year earnings or revenue guidance is provided. Management estimated approximately $55 million of capital expenditures and $31 million of debt repayment for the remainder of 2014, to be funded through available liquidity, operating cash flow and project financing.
- Key risks include geothermal resource and operating performance, project timing and financing, dependence on long-term PPAs and concentrated utility customers, commodity-price exposure on variable-rate PPAs, foreign-currency and political risks, and competition. Puna’s area was affected by volcanic activity and lava flow; the plants and transmission lines were operating normally as of the filing, but future effects were uncertain.
- Two lawsuits remain ongoing: a Clean Air Act and district-rules complaint concerning Mammoth plants, and a former-employee qui tam grant-related complaint. The company disputes the allegations and says it will defend itself; it reports no material accrual for these matters.
- After quarter-end, the board declared a $0.05-per-share dividend. Ormat and parent Ormat Industries were considering a corporate reorganization that could make the parent a wholly owned subsidiary; approval and terms were uncertain. The filing also reported new Menengai project agreements and a $22.3 million Veyo EPC agreement after quarter-end.
Important facts for investors to verify
- Reconcile the inconsistent nine-month power-generation totals in the filing and assess the generation, operating performance and ramp-up of recently commissioned plants.
- Review the composition and quality of operating cash flow, particularly the effects of customer collections and contract billings, and distinguish restricted project cash from corporate liquidity.
- Confirm debt maturities, covenant headroom, project financing conditions and remaining capital needs against the stated 2014 spending and repayment estimates.
- Track Product segment orders, backlog conversion and margins, as revenue is project-timing dependent; assess the Sarulla contract’s execution and Ormat’s minority-investment exposure.
- Monitor Puna volcanic and transmission risks, major customer concentration, variable-PPA commodity exposure, and the status and potential consequences of the pending legal proceedings.
- Determine whether the proposed parent-company reorganization proceeds, on what exchange terms, and with what governance or financial effects.