Business context and reporting period
Ormat Technologies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The company develops, owns and operates geothermal and recovered-energy power plants and manufactures and sells power-generation equipment. Its reporting segments are Electricity and Product. Dollar figures below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $152.7 | $126.7 | $271.6 | $256.2 |
| Gross margin | $50.4; 33.0% | $38.3; 30.2% | $77.2; 28.4% | $76.9; 30.0% |
| Operating income | $37.9; 24.8% | $24.4; 19.2% | $45.5; 16.8% | $49.0; 19.1% |
| Income from continuing operations | $21.4 | $7.5 | $15.8 | $14.8 |
| Net income attributable to Ormat stockholders | $25.2 | $8.6 | $20.1 | $16.5 |
| Basic and diluted EPS | $0.55 | $0.19 | $0.44 | $0.36 |
| Net cash from operating activities | Not stated for quarter | Not stated for quarter | $20.0 | $72.1 |
- Revenue mix: Q2 Electricity revenue was $87.7 million, up 7.1%; Product revenue was $65.0 million, up 44.9%. For the first half, Electricity revenue fell 3.2% to $156.0 million, while Product revenue rose 21.7% to $115.6 million.
- Cash and liquidity: Cash, cash equivalents and short-term deposit totaled $31.9 million at June 30, down from $69.6 million at year-end 2012. The company reported $180.7 million of unused corporate borrowing capacity. Restricted cash and securities related to VIEs were $85.5 million and are not equivalent to unrestricted cash.
- Debt and equity: Balance-sheet debt line items total approximately $1.05 billion, including current maturities and revolving lines. Total liabilities were $1.414 billion and total equity $723.7 million. About 62.5% of consolidated long-term debt carried fixed rates at quarter-end; $402.1 million remained subject to some floating-rate risk.
- Capital spending: First-half capital expenditures were $102.0 million. Management estimated approximately $106.0 million of capital expenditures and $49.5 million of debt repayments for the remainder of 2013.
Material changes versus prior comparable periods
- Q2 revenue increased 20.5%, and operating income rose to $37.9 million, driven by stronger Product results and additional electricity generation from Olkaria III Plant 2 and McGinness Hills. Power generation increased 13.0% year over year in Q2.
- First-half operating income declined 7.1%, primarily due to weaker Electricity segment performance and a $9.0 million one-time fee to terminate the Mammoth G1 and G3 PPAs with Southern California Edison. Product operating income improved to $24.2 million from $17.7 million, while Electricity operating income fell to $21.3 million from $31.4 million.
- First-half operating cash flow fell by $52.1 million year over year, reflecting working-capital timing, including higher receivables and lower payables. Investing cash use rose to $103.2 million from $67.0 million; the 2012 period included a $72.3 million government cash grant.
- Q2 net income included $4.1 million after tax from discontinued operations, including a $3.6 million gain on the May sale of the Momotombo operation. First-half net income also benefited from that sale.
- Management reported first-half Adjusted EBITDA of $115.5 million versus $102.3 million in 2012. This is a non-GAAP measure and should not be treated as a substitute for operating cash flow or GAAP earnings.
Outlook, commentary, risks and unusual items
- Management expected Product segment revenue to remain robust through year-end 2013 due to orders and backlog. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Management expected available liquidity, operating cash flow, project financing/refinancing and potential grants to fund projected needs; it believed those sources would be sufficient. Planned projects included Wild Rose and Heber Solar PV, both targeted for year-end 2013 operation, and Olkaria III Plant 3, targeted for 2014. Completion dates and project economics remain subject to execution and permitting risks.
- On July 15, 2013, the company converted $263.0 million of OPIC financing for Olkaria III from floating to a 6.31% average fixed rate, reducing rate exposure on those tranches.
- Variable-price PPAs expose some electricity revenue to natural-gas and oil prices. Derivative contracts were intended to mitigate this exposure through December 31, 2013, but can increase reported earnings and revenue volatility. Product revenue also varies with project timing and customer financing.
- The company revised prior-period financial statements for an income-tax valuation-allowance error: the U.S. deferred-tax valuation allowance had been understated by $32.7 million at December 31, 2012 and by an additional $3.1 million at March 31, 2013. The filing says the previously issued statements were not materially misstated and that the revisions did not affect revenue, operating income or net cash flows, but did affect prior-period tax expense, net income, EPS and balance-sheet items. A full valuation allowance remained against U.S. deferred tax assets.
- Legal matter: a union petition challenges permits and environmental review for the Mammoth replacement project; Ormat considers it without merit and says the filing itself had no immediate adverse project effect. A separate CURE petition concerning Brawley licensing was denied, and no appeal was filed. Management does not expect other proceedings, individually or collectively, to be material.
- Disclosure controls were assessed as effective at June 30, 2013; no material second-quarter change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the sharp decline in first-half operating cash flow reflects temporary working-capital timing or persists, and how much unrestricted liquidity is available after project and financing restrictions.
- Product-segment backlog, project execution and customer financing, particularly the expected Sarulla equipment revenue and construction timetable.
- Progress and costs for 2013 projects, capital spending and debt repayments, and the availability and timing of financing or government grants.
- Exposure to variable natural-gas/oil-linked PPAs after the current derivative protections expire, including the effects on margins and cash generation.
- Effects of the tax-accounting revisions, the full U.S. deferred-tax valuation allowance, and any decision on the Israeli retained-earnings tax election due by November 11, 2013.
- Compliance with debt covenants and project-level debt-service coverage requirements, including the disclosed 1.25 historical DSCR for OFC at June 30, 2013.