Business context and reporting period
Ormat Technologies, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2016. The company develops, builds, owns and operates geothermal and recovered-energy power plants, and designs and supplies power-generation equipment and related services. It reports Electricity and Product segments.
Financial performance and position
Amounts are in U.S. dollars; financial statement figures are in millions unless noted otherwise.
- Revenue: $151.6 million, up 26.1% from $120.2 million. Electricity revenue increased 19.9% to $107.9 million; Product revenue rose 44.4% to $43.7 million.
- Profit and margins: Gross margin was $63.9 million, or 42.1% of revenue, versus $44.0 million, or 36.6%. Operating income was $50.5 million, up 69.3%, and operating margin was 33.3% versus 24.8%. Net income attributable to Ormat stockholders was $29.3 million versus $10.0 million; diluted EPS was $0.59 versus $0.21. The effective tax rate fell to 23.0% from 33.1%.
- Segment operating income: Electricity generated $34.8 million, versus $24.0 million; Product generated $15.8 million, versus $5.9 million.
- Cash flow: Operating cash flow was $27.0 million versus $83.1 million. Investing used $44.6 million, including $31.0 million of capital expenditures; financing used $19.8 million. Cash and cash equivalents declined $37.4 million to $148.5 million. Restricted cash was $64.1 million.
- Liquidity: Management reported $83.1 million of unused capacity under committed corporate credit lines, with $371.7 million of $454.8 million utilized. Estimated capital needs for the remainder of 2016 were approximately $245 million, plus $51 million of debt repayment; management expected to fund these from available liquidity, operating cash flow and project financing or refinancing.
- Debt: Carrying value of reported borrowings was approximately $899 million, including project-level limited- or non-recourse debt. Approximately 93.4% of consolidated long-term debt was fixed-rate. Ormat reported a net-debt-to-adjusted-EBITDA covenant ratio of 2.47 and stated that it was in compliance with its covenants. Approximately $250 million of senior unsecured bonds mature August 1, 2017.
- Other metrics: Power generation increased 16.4% to 1.40 million MWh. Adjusted EBITDA, a non-GAAP measure, was $80.2 million versus $65.3 million. Dividends paid were $15.5 million ($0.31 per share) during the quarter; a further $0.07-per-share dividend was declared May 4, 2016.
Material changes versus the prior comparable period
- Revenue and operating income grew across both segments, reflecting added generation from McGinness Hills, Don A. Campbell and Olkaria III Plant 4, as well as higher rates under the Heber 1 PPA. Consolidated generation increased 16.4%.
- Gross margin improved as cost of revenue declined to 57.9% of revenue from 63.4%. Management cited improved operating-plant efficiency and lower Product-segment costs, including changes in product mix, manufacturing improvements and lower material and subcontracting costs.
- Operating cash flow declined by $56.1 million, primarily because of working-capital timing: higher receivables and lower billings in excess of costs on uncompleted contracts compared with the prior-year quarter.
- Foreign-currency translation and transaction results shifted to a $2.0 million gain from a $1.4 million loss. Net interest expense fell to $16.0 million from $17.8 million.
- Net income was also affected by a higher income-tax provision ($9.5 million versus $5.5 million) and lower income attributable to sale of tax benefits ($4.4 million versus $5.6 million). The prior-year quarter included $3.4 million of share-exchange transaction costs in general and administrative expense.
Outlook, commentary, risks and unusual items
- Capital and growth plans: Management estimated approximately $245 million in capital expenditures for the remainder of 2016, including $36 million for strategic-plan activities. It is pursuing geographic and customer-base expansion and opportunities in solar and energy storage. The filing does not provide a clear full-year revenue or earnings guidance figure.
- Projects and transactions: Ormat agreed to acquire a gradually increasing interest of up to 85% in Guadeloupe’s Bouillante geothermal plant, with approximately $24 million payable at closing, about $11 million of further investment planned over two years, and up to approximately $17 million contingent on performance and expansion milestones. It also agreed to develop the 10 MW Rabbit Hill energy-storage project, initially holding 85% of the project entity, subject to a possible reduction to 50.1% after specified return achievements. Olkaria III Plant 4 began commercial operation, adding 29 MW; construction began on the 35 MW Platanares project, with commercial operation expected by the end of 2017.
- Sarulla exposure: The 330 MW Indonesian project faced field-development and construction delays, missed milestones and cost overruns from delays and drilling. Lenders requested additional sponsor equity, which the sponsors agreed to provide; financing documents were being revised. Estimated completion cost remained within the approved budget including contingent equity. First-phase operation was expected toward the end of 2016, but timing remains a project risk.
- Market and operating risks: Most Electricity revenue is supported by long-term PPAs, and approximately 89.2% of Electricity revenue came from PPAs with fixed energy rates. Exposure remains to oil and natural-gas prices under certain California and Hawaii contracts, along with geothermal resource and plant-availability risks, construction delays, competition, customer concentration, foreign-country political and currency risks, and changes to renewable-energy incentives and regulation.
- Legal matters: A qui tam case alleging improper grant applications seeks approximately $375 million; the court denied Ormat’s summary-judgment motion in March 2016, and discovery continued. Counties also challenge energy-tax abatements valued at approximately $24.8 million in total, of which only a small portion had been used. Other disclosed matters include environmental and labor disputes. Management said it believed the allegations lacked merit and that the proceedings, individually and collectively, would not be material; outcomes remain uncertain.
- Tax and other items: The company recorded a full valuation allowance against U.S. deferred tax assets. It reported $261 million of federal NOL carryforwards, $191 million of state NOL carryforwards and $70.8 million of PTCs at December 31, 2015. Nevada exploration costs of $0.6 million were written off in the quarter after the company determined they would not support commercial operations. Foreign-currency and commodity derivatives produced gains and losses, including a $3.2 million other-comprehensive-income loss associated with Ormat’s share of Sarulla hedge valuation changes.
Important facts for investors to verify
- Whether operating cash flow recovers as receivables and project billing timing normalize, and how much of the 2016 investment program is funded with new project debt.
- Progress, additional equity requirements and revised milestones for Sarulla, and the timing and cost of the Bouillante and Rabbit Hill commitments.
- The terms and refinancing plan for the approximately $250 million bond maturity in August 2017, plus available corporate credit-line capacity and compliance with debt covenants.
- Developments in the $375 million qui tam case and the challenged tax abatements, including any change to management’s assessment of potential exposure.
- Generation, PPA pricing and customer concentration trends, particularly exposure to oil and natural-gas prices and key utility counterparties.