Ormat Technologies, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited results; dollar amounts below are in millions unless otherwise noted. Ormat develops, manufactures, owns and operates geothermal and recovered-energy power facilities, and reports Electricity and Product segments.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $104.6 | $96.3 | $202.4 | $178.9 |
| Gross margin | $33.2 (31.7%) | $18.7 (19.4%) | $48.1 (23.8%) | $34.3 (19.2%) |
| Operating income | $19.4 | $2.3 | $22.5 | $4.5 |
| Net income (loss) attributable to shareholders | $8.1 | $(1.4) | $(0.8) | $0.4 |
| EPS, basic and diluted | $0.18 | $(0.03) | $(0.02) | $0.01 |
| Adjusted EBITDA | $47.7 | $24.0 | $74.8 | $56.1 |
Electricity revenue rose 18.0% in Q2 and 18.2% for the half, while Product revenue fell 14.7% and 2.3%, respectively. Six-month generation increased to 2.03 million MWh from 1.80 million MWh. Management attributed Electricity growth to improved output at Puna, North Brawley and recovered-energy facilities, plus consolidation of Mammoth; the Mammoth acquisition closed in August 2010, affecting period comparability. Product results fluctuate with project timing. Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results or operating cash flow.
Cash flow, liquidity and debt
- Six-month operating cash flow was $39.5 million, down from $58.9 million. Investing cash outflow was $135.7 million, including $109.6 million of capital expenditures; financing cash inflow was $57.8 million.
- Cash and cash equivalents were $44.3 million at June 30; marketable securities were $23.1 million, for combined unrestricted cash and securities of approximately $67.4 million. Cash and equivalents declined $38.5 million from year-end 2010.
- Current assets were $215.4 million and current liabilities $145.1 million. Total assets were $2.11 billion and total liabilities $1.16 billion.
- Total reported debt was approximately $838 million, including current maturities, based on balance-sheet carrying values. Senior unsecured bonds totaled approximately $250 million, bear a 7% stated rate and mature in 2017. Management reported 72.7% of consolidated long-term debt at fixed rates and $228.5 million exposed to some floating-rate risk.
- Unused borrowing capacity under committed bank lines was $196 million; $211.5 million of capacity was utilized, including letters of credit. The filing reports covenant compliance and no defaults.
- Six-month interest expense, net, rose to $30.5 million from $19.1 million, including a $4.7 million loss on interest-rate locks. The locks related to a proposed DOE-guaranteed financing and were not accounted for as hedges.
Material changes, outlook and risks
- Q2 operating income improved substantially as revenue increased, costs of revenue declined, and the prior-year period included a $3.1 million exploration write-off. For the six-month period, operating income also benefited from the absence of that write-off.
- Net income for the first half was lower than the prior-year $0.4 million despite stronger operating income, principally because interest expense increased and the 2010 period included a $4.3 million after-tax gain on the sale of GDL.
- Management expected Product revenue to increase over the next two years, citing a $225 million Product backlog at June 30. A customer was expected to pay approximately $8 million after final acceptance testing of an LNG energy-recovery unit; recognition was expected in Q4 2011 or 2012.
- Management estimated $208 million of capital expenditures for the remainder of 2011, including investment in projects under development or construction. It expected funding from available liquidity, operating cash flow, potential financing and grants; it stated these sources were expected to meet requirements. Three Nevada projects had received a conditional DOE commitment that could support a guarantee of up to $350 million, subject to approvals and other conditions.
- Project milestones and approvals remain relevant: the Dixie Meadows PPA required regulatory approval; the Puna 8 MW expansion awaited interconnection and full commercial operation; and the Jersey Valley plant was below design output due to an injection-well issue, with additional drilling and a PPA milestone extension needed.
- California’s PURPA Global Settlement could change pricing for many Southern California Edison PPAs, potentially increasing revenue variability; management could not reliably estimate the impact. Most electricity revenue was under long-term contracts, but some PPAs become exposed to short-run avoided-cost pricing beginning in 2012. Puna rates are also sensitive to oil prices.
- FERC directed certain recovered-energy facilities to refund approximately $1.6 million. Ormat sought rehearing and said a payment was reasonably possible but not probable. Securities class and derivative actions related to a prior accounting restatement remained pending; the company could not estimate possible losses. Management said it was defending the matters and believed ordinary-course proceedings would not materially affect the company.
- Other stated risks include geothermal resource and operating performance, construction delays, customer concentration, foreign-country political and currency risks, competition, and financing availability. Southern California Edison represented 28.3% of first-half revenue. Management reported disclosure controls were effective and no material second-quarter changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the DOE loan guarantee and related project financing are approved, and how the interest-rate-lock loss affects subsequent results.
- Progress and final cost, schedule and output of major projects, particularly Jersey Valley, North Brawley, Olkaria III and the Nevada developments.
- Final regulatory treatment and pricing effects of California’s PURPA settlement, plus the outcome of the FERC refund rehearing.
- Conversion of the $225 million Product backlog into completed work, revenue and cash collections, including acceptance and revenue recognition for the LNG unit.
- Cash generation, remaining 2011 capital requirements, debt maturities and refinancing availability, given lower operating cash flow and significant planned investment.
- Developments in the pending securities and derivative litigation; the filing provides no clear estimate of potential loss.