Business context and reporting period
Ormat Technologies, Inc. designs, builds, owns and operates geothermal and recovered-energy power plants, and sells related equipment and services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Dollar amounts below are in millions unless stated otherwise.
The business has Electricity and Product segments. Electricity generated 69.4% of first-half revenue; Product generated 30.6%. In February, the company completed its share exchange with former parent Ormat Industries, increasing public float from about 40% to about 76%. In April, it sold Northleaf a 36.75% interest in a subsidiary holding selected power assets, while retaining control.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $140.5 | $127.6 | $260.7 | $270.0 |
| Gross margin | $50.8; 36.1% | $40.0; 31.3% | $94.8; 36.4% | $93.4; 34.6% |
| Operating income | $38.6 | $22.3 | $68.5 | $64.9 |
| Net income attributable to Ormat stockholders | $14.4 | $9.1 | $24.4 | $30.7 |
| Diluted EPS | $0.28 | $0.20 | $0.49 | $0.67 |
| Operating cash flow | Not stated separately | Not stated separately | $112.7 | $103.6 |
- Revenue mix: Q2 Electricity revenue was $90.9, down 0.8%; Product revenue was $49.6, up 38.0%. First-half Electricity revenue fell 3.0% to $180.9, and Product revenue fell 4.4% to $79.8.
- Margins and costs: Q2 operating margin was 27.5%, versus 17.5% a year earlier. First-half operating margin was 26.3%, versus 24.0%. Lower electricity costs and stronger Product revenue/margins supported improvement; 2014 included an $8.1 exploration write-off.
- Cash flow and investment: First-half capital expenditures were $86.1; operating cash flow less capital expenditures was approximately $26.6. Investing cash outflow was $79.4. Cash and cash equivalents rose to $137.7 from $40.2 at year-end; this excludes $104.9 of restricted cash.
- Debt and liquidity: Balance-sheet current and long-term debt totaled approximately $920.9, including project and corporate debt; the filing distinguishes limited/non-recourse debt from full-recourse obligations. Cash and cash equivalents were $137.7. Management reported $160.5 of unused corporate borrowing capacity; committed corporate facilities totaled $538.9, of which $378.4 was utilized, largely through letters of credit.
- Other metrics: Power generation increased 12.4% in Q2 and 5.7% in the first half. Adjusted EBITDA was $67.8 for Q2 versus $61.8, and $133.2 for the first half versus $135.3. Quarterly dividend declared was $0.06 per share; a further $0.06 dividend was declared in August.
Material changes versus prior comparable periods
- Q2 revenue rose 10.1%, mainly from Product segment timing and new contracts; first-half revenue declined 3.5% in both segments.
- Q2 attributable net income improved, while first-half attributable net income fell 20.3%. The first-half comparison was affected by the $7.6 gain on the 2014 Heber Solar sale, which did not recur.
- First-half interest expense declined to $36.7 from $42.6, partly due to debt repayments. The June repurchase of $30.6 principal of OFC secured notes reduced future interest expense by an estimated $2.5 but generated a $1.7 loss.
- Northleaf contributed $156.8 net proceeds and created a substantial noncontrolling interest; the transaction generated an approximately $102.1 U.S. taxable gain, which the company expects to offset with NOLs and tax credits.
- Share exchange-related costs contributed to higher first-half general and administrative expense. First-half cash flow benefited from timing of customer billings, while receivables increased.
Outlook, commentary and risks
- No full-year revenue or earnings guidance is provided. Management estimated approximately $79.0 of capital expenditures and $36.5 of debt repayments for the remainder of 2015, and expects to use available liquidity, operating cash flow and project financing/refinancing.
- Projects under development include Don A. Campbell Phase 2, expected to start commercial operation toward year-end 2015; Olkaria III Plant Four, expected in the second half of 2016; and Sarulla, whose first phase is expected in 2016, although the filing warns of possible schedule delay. A $98.8 Chile EPC contract was announced; completion is scheduled by mid-2017.
- Management’s multi-year strategy targets geographic and customer-base expansion and diversification into higher-temperature geothermal, solar, hybrid renewable energy and storage. Management cautions that timing and results are uncertain.
- Key exposures include geothermal resource and operating performance, project delays, competition, changing oil and gas prices under variable-rate PPAs, foreign exchange, political and regulatory conditions, environmental requirements, and customer concentration. About 77.7% of first-half Electricity revenue came from fixed-energy-rate PPAs. Four utilities accounted for significant revenue, including NV Energy subsidiaries and Kenya Power.
- As of June 30, the company reported compliance with stated debt covenants. The OFC secured-note debt-service coverage ratio was close to its 1.25 distribution threshold: actual 1.26 and pro forma 1.29. Other disclosed covenant ratios were above their stated minimums or below their maximums.
- Legal matters include a Hawaii night-drilling suit, an appeal concerning union recognition at Puna, and a qui tam case alleging improper grant applications; the company disputes the allegations. A Clean Air Act case was dismissed in June. Management says other proceedings are not expected to be material.
- Subsequent events: a $42.0, 12-year limited-recourse Amatitlan refinancing closed July 31; the board declared a $0.06-per-share dividend on August 3. The interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether first-half revenue weakness in both segments persists, and how Product backlog, order timing and margins develop.
- Project schedules, capital requirements and returns for Don A. Campbell Phase 2, Olkaria III Plant Four and Sarulla, including Sarulla’s stated delay risk.
- Available unrestricted liquidity versus restricted/project-level cash, committed facilities and planned 2015 capital spending and debt repayments.
- Debt covenant headroom, particularly the OFC distribution coverage ratio, and the distinction between project-level non-recourse debt and corporate recourse obligations.
- Northleaf transaction economics, ongoing control and distributions, and the use and realizability of tax attributes against the taxable gain.
- Effects of oil and natural-gas prices, customer concentration, resource performance, and the disclosed litigation and regulatory risks.