Ormat Technologies, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Ormat develops, manufactures, owns and operates geothermal and recovered-energy power facilities, with Electricity and Product reporting segments. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Revenue | $97.8 million | $82.7 million; up 18.3% |
| Electricity revenue | $78.3 million | $66.1 million; up 18.4% |
| Product revenue | $19.6 million | $16.5 million; up 18.1% |
| Gross margin | $15.0 million; 15.3% of revenue | $15.7 million; 19.0% |
| Operating income | $3.1 million; 3.2% of revenue | $2.2 million; 2.7% |
| Net income (loss) attributable to shareholders | $(9.0) million; $(0.20) per diluted share | $1.8 million; $0.04 per diluted share |
| Operating cash flow | $13.1 million | $48.2 million |
| Investing cash flow | $(107.9) million, including $55.1 million of capital expenditures | $(65.0) million |
| Financing cash flow | $52.7 million | $13.5 million |
At March 31, cash, cash equivalents and marketable securities totaled $64.8 million, down from $82.8 million at year-end; this excludes restricted cash. Total assets were $2.094 billion, total liabilities $1.154 billion, and total equity $940.0 million. Debt listed on the balance sheet, including current maturities, was approximately $825.7 million. The company reported $223.7 million of unused corporate borrowing capacity; total committed lines were $402.5 million, with $178.8 million utilized, including letters of credit.
Changes and drivers
- Revenue growth reflected higher generation: consolidated plants produced 1,048,379 MWh versus 917,882 MWh. Drivers included improved Puna output, North Brawley and recovered-energy generation, and consolidation of Mammoth after Ormat acquired its remaining 50% interest in August 2010. The average portfolio revenue rate increased from $72 to $75 per MWh.
- Gross margin fell despite higher revenue. Electricity cost of revenue rose 20.9%, faster than its revenue growth, with North Brawley operating and maintenance costs of $14.3 million versus $9.5 million and higher Mammoth depreciation. Product cost of revenue rose 35.8%; product gross margin declined to 13.6% from 24.8%, attributed to product mix and contract margins.
- Operating income improved by $0.9 million, principally as operating expenses declined. However, net loss from continuing operations increased to $9.0 million from $2.0 million, primarily reflecting $3.4 million higher net interest expense, a $3.1 million change in income taxes, and $1.0 million higher equity losses of investees.
- Interest expense, net, increased to $13.1 million from $9.7 million, mainly following issuance of senior unsecured bonds. The company issued approximately $107.4 million of additional bonds in February; the bonds mature in 2017 and carry a 7% stated coupon (the additional tranche’s effective rate was 6.75%).
- Operating cash flow declined by $35.2 million, with higher receivables and lower accounts payable/accruals among the drivers. Investing outflows included $29.9 million more restricted cash and $23.0 million of net purchases of marketable securities. Financing inflows included bond proceeds and $24.9 million from sale of OPC Class B units, partly offset by net revolving-credit repayments of about $71.0 million.
Outlook, risks and unusual items
- Management estimated approximately $412 million of capital expenditures for the remainder of 2011 and $46.6 million of debt repayments. It expected to fund requirements through existing liquidity, operating cash flow, prospective bank facilities, project financing or refinancing, and eligible government grants. Management stated it believed these sources would meet anticipated needs; financing availability and cost remain uncertain.
- Projects under construction were estimated to require $711 million through 2013, of which $169 million had been invested by March 31. Management expected $226 million of additional investment in the remainder of 2011 for those projects. Project schedules and financing remain subject to permitting, resource, construction and other conditions.
- Product-segment backlog was approximately $84 million at March 31. Management described product revenue as less predictable than contracted electricity revenue. It also reported a 20-year, 30 MW Dixie Meadows PPA subject to Nevada regulatory approval, an additional 8 MW Puna PPA subject to Hawaii approval, and an amended Kenya PPA covering a planned 36 MW plant expected online in 2013.
- North Brawley’s demonstrated capacity was set at 33 MW on March 31, with an option for another demonstration within a year. Management expected elevated North Brawley operating costs to continue for at least the next few quarters.
- A California PURPA-related global settlement, if it becomes effective, could expose Southern California Edison contracts—27% of Q1 revenue—to short-run avoided-cost pricing beginning in May 2012 or after an amended-pricing period. Ormat planned to amend its contracts but had not selected pricing options; it said the potential revenue impact could not then be reliably estimated.
- Revenue concentration is material: Southern California Edison accounted for 27.0% of revenue, Sierra Pacific and Nevada Power combined 16.2%, and Hawaii Electric Light 10.6%. Most electricity revenue was under long-term contracts with fixed or escalating rates, but Puna pricing varies with avoided costs and electricity revenue is seasonal.
- Other risks include geothermal resource and operating performance, project delays, competition, foreign political and currency exposure, interest-rate exposure, counterparty credit, and changes to renewable-energy incentives. About 24.5% of consolidated long-term debt was floating-rate, with $201.9 million subject to some floating-rate risk.
- Three securities class actions and four derivative actions relate to the company’s prior restatement of exploration and development cost accounting. The court dismissed North Brawley-related allegations in the securities case but allowed restatement-related claims to proceed. The company disputes the claims; it cannot estimate possible loss. It reported no material control changes and concluded disclosure controls were effective.
- Other notable items: the sale of auction-rate securities for $2.822 million was completed in April 2011; a $0.05-per-share dividend was paid in March, and a subsequent $0.04-per-share dividend was declared in May. Q1 2010 results included a $3.8 million after-tax gain on sale of a New Zealand subsidiary, which did not recur.
Important facts for investors to verify
- Whether North Brawley costs and capacity improve as management expects, and whether the additional capacity demonstration changes its economics.
- Progress, permitting, financing and spending against the 2011 capital plan and construction schedules, including the proposed DOE-backed project financing.
- The final status and pricing consequences of the California PURPA settlement and the required approvals for the Puna and Dixie Meadows PPAs.
- Whether operating cash generation, available credit and project financing are sufficient for planned investment and debt service, particularly as $165 million of bank facilities were due to expire in 2011 and extensions were under negotiation.
- Trends in segment margins, receivables and customer concentration, as well as the outcome and potential financial exposure from the pending litigation.