Ormat Technologies, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance sheet compared with December 31, 2012. Amounts are in U.S. dollars. The interim statements are unaudited, and management cautions that quarterly results are not necessarily indicative of full-year results.
Business context
Ormat develops, owns and operates geothermal and recovered-energy power plants and designs, manufactures and sells power-generation equipment. Its two segments are Electricity and Product. Q1 generation increased 4.2% year over year to 1,083,618 MWh, while lower realized electricity prices weighed on electricity revenue.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Electricity revenue | $71.1 million | $82.2 million |
| Product revenue | $50.6 million | $50.1 million |
| Total revenue | $121.7 million | $132.4 million |
| Gross margin | $27.7 million; 22.8% | $39.8 million; 30.1% |
| Operating income | $8.5 million; 7.0% of revenue | $25.7 million; 19.4% |
| Net income (loss) attributable to shareholders | $(2.0) million; $(0.04) per share | $7.9 million; $0.17 per share |
| Operating cash flow | $18.2 million | $41.9 million |
| Capital expenditures | $49.6 million | $65.4 million |
| Adjusted EBITDA (non-GAAP) | $45.7 million | $51.5 million |
Electricity segment operating loss was $0.5 million versus income of $15.9 million a year earlier; Product segment operating income was $9.0 million versus $9.9 million. Interest expense, net, was $15.9 million, up from $14.9 million. The tax provision was $1.2 million; the reported effective tax rate was 179%, primarily reflecting an $8.6 million increase in the valuation allowance against U.S. deferred tax assets.
Liquidity, debt and balance sheet
- At March 31, cash and cash equivalents were $57.6 million, short-term bank deposits $3.0 million, and restricted cash, cash equivalents and marketable securities $124.9 million. Management reported $60.6 million of cash, cash equivalents and short-term deposits available.
- Current assets were $299.8 million and current liabilities $194.2 million. Total assets were $2.144 billion; total liabilities $1.437 billion; total equity $706.5 million.
- Reported debt carrying amounts total approximately $1.073 billion, including current and long-term project debt, unsecured bonds, other loans and revolving credit lines. This excludes the separate $77.2 million liability associated with sale of tax benefits.
- Unused corporate borrowing capacity was $152.9 million; $225.5 million of letters of credit were outstanding. Management estimated $173.0 million of remaining-2013 capital expenditures and $63.1 million of debt repayments, and believed available funding sources would be sufficient.
- Operating, investing and financing cash flows were $18.2 million, $(98.2) million and $71.0 million, respectively. Investing outflows included $49.6 million of capital expenditures and a $48.4 million increase in restricted cash and related balances. Cash and cash equivalents declined $9.0 million during the quarter.
Material changes and unusual items
- Total revenue declined 8.0%; electricity revenue fell 13.6%, while Product revenue rose 1.0%. Electricity revenue was affected by low natural-gas prices under California variable-rate PPAs, reduced generation and lower rates at certain plants, and a $4.6 million net loss on commodity derivatives. Newer McGinness Hills and Tuscarora operations partially offset the decline.
- Gross margin fell to 22.8% from 30.1%, and operating income decreased by $17.2 million. Selling and marketing expense included a one-time $9.0 million termination fee paid to Southern California Edison to terminate the Mammoth G1 and G3 contracts.
- In connection with the termination, Ormat retained the G2 PPA with SCE and extended it six years to early 2027. G1 and G3 began transitioning to separate long-term PPAs with PG&E, with G1 deliveries expected by year-end 2013.
- The ORTP tax-equity transaction with JPMorgan generated approximately $35.7 million at closing, with further payments tied to production tax credits expected through 2016. The quarter’s reported net impact was $1.1 million, including $2.2 million of tax-benefit income and $1.1 million of financing expense.
- Ormat received the remaining $45.0 million draw under Tranche II of the OPIC loan. It also repurchased OFC secured notes with $12.8 million principal for $11.9 million cash and recorded a $0.8 million gain.
Outlook, risks and contingencies
- Management expected Product segment revenue to remain robust through year-end 2013, citing new orders and increased backlog. No consolidated revenue or earnings guidance was provided in the filing text.
- Planned project spending includes $124.0 million for identified projects and approximately $49.0 million for other 2013 capital needs. The filing describes development of Olkaria III, Wild Rose, Heber Solar PV, Mammoth repowering and other projects. After quarter-end, Olkaria III Plant 2 reached commercial operation on May 3, increasing worldwide capacity by 36 MW to 611 MW.
- After quarter-end, Ormat signed a 20-year Wild Rose power purchase agreement at $99/MWh without annual escalation, and the Sarulla consortium signed project contracts. Sarulla construction depends on financing; the first phase was scheduled to begin operation in 2016.
- Exposure includes variable power prices tied to natural-gas and oil prices, commodity and foreign-exchange derivatives, floating-rate debt, customer concentration, geothermal resource and operating risks, permitting and construction delays, and reliance on long-term PPAs and government incentives. Derivatives reduced some commodity exposure through December 31, 2013 but increased reported earnings and revenue volatility.
- Management stated that the company was in compliance with its debt covenants. It cautioned that low gas prices could prevent OFC from meeting the 1.25 debt-service coverage ratio required for distributions; the latest reported actual ratio, at December 31, 2012, was 1.28. This was a distribution restriction risk, not a reported default.
- A union petition challenges permits and environmental review for the Mammoth replacement project; Ormat said it believes the petition is without merit and reported no immediate adverse effect. A separate CURE petition concerning Brawley projects was denied, with no appeal filed by the deadline. Management said other proceedings were not expected to be material.
- Disclosure controls were assessed as effective as of March 31, 2013; no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether electricity revenue and segment margins recover, particularly as variable-rate PPAs respond to natural-gas and oil prices and as derivative impacts change.
- Whether planned project spending, financing and commissioning proceed as scheduled, including Wild Rose, Mammoth enhancements and the remaining Olkaria III expansion.
- Cash availability and restrictions: distinguish unrestricted cash from the $124.9 million of restricted balances, and monitor operating cash flow against capital needs and debt maturities.
- Debt covenant headroom, floating-rate exposure and the effect of lower power prices on project-level distribution tests.
- Realizability of U.S. deferred tax assets and the valuation allowance, as well as the company’s future elections and obligations under applicable tax-benefit programs.
- Progress and economic terms of the ORTP/JPM transaction, including tax-credit payments and the timing of the contractual flip.
- Outcome and potential project effects of the Mammoth permitting litigation and other material legal or regulatory developments.