Business context and reporting period
Ormat Technologies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2010. The company develops, builds, owns and operates geothermal and recovered-energy power plants and manufactures related equipment. Its reporting segments are Electricity and Product. Results are not necessarily indicative of full-year performance.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2009 period.
- Second-quarter revenue: $96.3, down 3.2%. Electricity revenue rose 15.0% to $68.8; Product revenue fell 30.8% to $27.5.
- Six-month revenue: $178.9, down 10.0%. Electricity revenue increased 10.7% to $134.9; Product revenue declined 42.8% to $44.0, primarily due to a lower Product Segment order backlog.
- Gross margin: $18.7 (19.4% of revenue) in Q2, versus $27.5 (27.7%) a year earlier. For the first half, gross margin was $34.3 (19.2%), versus $58.9 (29.6%).
- Operating income: $2.3 in Q2, down from $16.3; $4.5 for the first half, down from $35.0. The Electricity Segment reported operating losses of $5.1 for Q2 and $2.0 for the first half.
- Net result attributable to shareholders: Q2 loss of $1.4, or $0.03 per diluted share, compared with income of $16.1, or $0.35 per share. First-half income was $0.4, or $0.01 per share, versus $30.6, or $0.67 per share. First-half 2010 included a $4.3 after-tax gain on the sale of GDL.
- Cash flow: First-half operating cash flow was $58.9, compared with $55.3 in 2009. Capital expenditures were $139.2; investing cash outflow was $109.0. Financing provided $58.0, including $100.4 of net revolving-credit borrowings. Cash and cash equivalents ended at $54.2, up from $46.3 at year-end 2009.
- Liquidity: Current assets were $189.3 and current liabilities $150.9, for working capital of $38.4 and a current ratio of about 1.25. These figures include $33.2 of current restricted cash and securities related to variable-interest entities (VIEs); this amount is not equivalent to unrestricted cash.
- Debt: Balance-sheet debt totaled approximately $699.8, including current and long-term project debt, senior secured notes and $234.4 drawn on full-recourse revolving credit lines. The company reported $68.7 of unused corporate borrowing capacity under existing committed lines. Debt and cash figures are at June 30 and exclude the subsequent bond issuance.
- Other metric: Adjusted EBITDA, a non-GAAP measure, was $24.0 in Q2 and $56.1 for the first half, down from $39.8 and $77.2, respectively.
Material changes and notable items
- Electricity generation increased to 879,734 MWh in Q2 and 1,797,616 MWh for the first half. North Brawley entered service in January, but operated below half of its 50 MW design capacity; management attributed much of the Electricity Segment cost increase and margin deterioration to the plant’s high operating, maintenance and depreciation costs.
- North Brawley generated $3.5 of Q2 and $6.2 of first-half revenue, while associated costs, including depreciation, were $11.9 and $21.4, respectively. Management expected elevated maintenance costs to continue in coming quarters and electricity cost trends to persist during the remainder of 2010.
- Interest expense, net, rose to $9.4 in Q2 from $4.4 and to $19.1 for the first half from $7.7. Management cited lower capitalization of construction interest, bank borrowings and project financing.
- The company wrote off $3.1 of Gabbs Valley exploration costs after concluding the project would not support commercial operations. It also reported an out-of-period $0.57 million tax adjustment to the GDL sale gain in Q2, described as immaterial to the first-quarter and six-month statements.
- On August 2, 2010, the company acquired the remaining 50% of Mammoth Pacific, LP, becoming its sole owner. The filing gives inconsistent purchase prices: $75.2 in Note 16 and $72.5 in MD&A. Management estimated a possible pre-tax gain of up to approximately $40, subject to valuation.
Outlook, risks and contingencies
- Management expected Product Segment revenue in 2010 to be significantly below 2009 levels, reflecting the reduced order backlog. It expected an income tax benefit in 2010, primarily from production tax credits, while noting the timing and potential sale of an OPC Class B interest create uncertainty.
- Estimated remaining-2010 capital needs were approximately $172.0 for capital expenditures and $27.2 for debt repayment. The company expected to fund these needs with operating cash flow, available credit, project financing, approximately $142.0 of subsequently issued bonds and an anticipated North Brawley government cash grant. Management stated it believed anticipated funding sources would meet requirements.
- On August 3, 2010, the company accepted subscriptions for approximately $142 of senior unsecured bonds bearing 7% interest, due in a bullet payment in 2017. Proceeds were intended for general corporate purposes, potentially including debt repayment and energy-asset investment.
- Construction and development plans include Nevada geothermal projects, Puna enhancements and other projects. Up to $350 of DOE-guaranteed financing for McGinness Hills, Jersey Valley and Tuscarora was being pursued; approval and financing remained conditional, with a process management estimated could take 6–12 months. East Brawley construction was temporarily on hold while North Brawley was stabilized.
- Material risks include dependence on a limited group of utility customers (SCE represented 25.5% of first-half revenue), North Brawley operating performance, geothermal resource and construction risks, financing availability, foreign political and currency risks, and exposure to floating interest rates. Management reported $324.3 of debt subject to some floating-rate risk.
- The company faced securities class actions and derivative lawsuits related to its announced restatement concerning exploration and development cost accounting and allegations regarding North Brawley. Management disputed the claims and intended to defend them. The filing provides no clear estimate of potential loss.
- Failed auctions affected $4.5 par value of auction-rate securities, carried at $3.0; the securities remained illiquid. The company warned further market deterioration could require additional impairment charges.
- The filing states disclosure controls were effective based on management’s evaluation as of March 31, 2010, and reports no material second-quarter change in internal control over financial reporting.
Key facts for investors to verify
- Reconcile the Mammoth acquisition purchase price, reported as $75.2 in the notes and $72.5 in MD&A, and monitor the final purchase accounting and gain.
- Track North Brawley’s ramp-up, generation, maintenance costs and progress toward its 50 MW design capacity.
- Check Product Segment backlog, revenue and margins against management’s expectation of substantially lower 2010 revenue.
- Confirm completion and use of the $142 bond proceeds, the North Brawley cash grant, and financing availability for planned capital spending and debt maturities.
- Monitor litigation developments, the exploration-cost restatement, and any resulting financial or legal exposure.
- Assess customer concentration, floating-rate debt, restricted liquidity and the valuation or impairment risk of illiquid auction-rate securities.