Ormat Technologies, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Ormat develops, owns and operates geothermal, recovered-energy and solar power plants, and sells power-generation equipment and related services. It also provides energy storage and energy-management services. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods. Amounts below are in U.S. dollars unless noted.
Key financial metrics
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Total revenue | $170.5 million, up 2.4% | $553.6 million, up 4.7% |
| Gross profit / margin | $55.5 million / 32.5%; prior year 29.3% | $194.8 million / 35.2%; prior year 34.0% |
| Operating income / margin | $38.7 million / 22.7%; prior year $25.9 million / 15.6% | $139.3 million / 25.2%; prior year $117.1 million / 22.1% |
| Net income | $15.1 million; prior year $10.1 million | $79.4 million; prior year $87.0 million |
| Net income attributable to Ormat stockholders | $15.6 million; diluted EPS $0.30 | $75.5 million; diluted EPS $1.48 |
| Adjusted EBITDA (non-GAAP) | $85.5 million; prior year $75.6 million | $282.1 million; prior year $254.8 million |
| Cash from operations | Not separately stated for the quarter | $201.5 million; prior year $103.2 million |
| Capital expenditures | Not separately stated for the quarter | $190.5 million; prior year $200.7 million |
Revenue mix. Q3 electricity revenue was $124.0 million, up 6.1%; product revenue was $43.0 million, down 11.2%; and other revenue was $3.5 million, up 203.0%. For the nine months, electricity revenue rose 6.6% to $396.0 million, product revenue declined 3.2% to $147.2 million, and other revenue doubled to $10.4 million.
Liquidity and debt. At September 30, cash and cash equivalents were $97.6 million, with an additional $82.4 million of restricted cash. Current assets were $432.3 million and current liabilities $352.7 million. The company reported $154.9 million of unused corporate borrowing capacity. Its debt table showed $763.4 million of limited- or non-recourse debt and $488.6 million of full-recourse debt, including $50.0 million of commercial paper. Ormat reported compliance with debt covenants, a 46.2% equity-to-assets ratio and a net-debt-to-Adjusted-EBITDA ratio of 2.89.
Material changes versus the prior comparable periods
- Higher electricity revenue and gross profit were driven principally by McGinness Hills Phase 3, which began commercial operation in December 2018. Nine-month electricity revenue also benefited from the US Geothermal acquisition and the Olkaria III expansion.
- Product revenue and nine-month product operating income declined. Management cited completed Turkish projects and lower-margin contracts, including two large Turkish contracts.
- Q3 operating income rose 49.5%, supported by stronger electricity margins and lower selling and administrative expenses. The prior-year periods included a $5.0 million Galena 2 PPA termination fee and higher costs related to the 2017 financial-statement restatement and US Geothermal acquisition.
- Nine-month net income fell despite higher operating income, mainly because income-tax expense rose to $20.1 million from $3.3 million and net interest expense increased to $62.8 million from $48.9 million. The 2018 period also included $7.2 million of Puna insurance income in other non-operating income.
- Operating cash flow increased by $98.3 million year over year, principally reflecting changes in supplier payments and withholding-tax payments. Investing cash outflow decreased, partly because 2018 included the $95.1 million US Geothermal acquisition payment.
Outlook, management commentary and risks
- Puna restoration: Following the 2018 Kilauea eruption, Ormat expected refurbishment to be completed by year-end 2019, subject to permits and transmission upgrades expected by the end of Q1 2020. Management targeted a gradual return to full 38 MW operation by the end of Q2 2020. It estimated $30–$50 million of well repair and drilling investment, with some costs expected to be offset by insurance. An impairment assessment remained ongoing.
- Capital spending and projects: Ormat estimated approximately $90 million of capital expenditures for the remainder of 2019, including Puna work. It expected commercial operation at Steamboat Hills in early 2020, Heber repowering in early 2021 and the Casa Diablo IV project by the end of 2021. No consolidated revenue or earnings guidance was provided.
- Tax and controls: The Kenya Revenue Authority issued preliminary findings seeking approximately $77 million, before potential interest and penalties, for tax years 2013–2017. Ormat disputed the findings and recorded no reserve. The company also disclosed that a previously identified material weakness in income-tax controls remained unremediated; management concluded disclosure controls were ineffective as of September 30, 2019.
- Collections and customer concentration: KPLC receivables included $41.1 million overdue, of which $10.8 million was paid in October. Honduras utility ENEE owed $20.1 million overdue, with none paid as of the filing; Ormat expected collection and recorded no doubtful-account provision. Major customers included KPLC, SCPPA and NV Energy subsidiaries. PG&E was in Chapter 11, and Ormat was monitoring receipts.
- Other risks and contingencies: The filing describes litigation relating to prior financial reporting, the US Geothermal acquisition and an insurer dispute over Puna business-interruption coverage. Ormat said it intended to defend itself in the cases. It also cited geothermal resource and operating risks, permitting and construction delays, foreign exchange exposure, and political and market risks in countries including Turkey and Chile.
- Other developments: A private investor acquired an interest in McGinness Hills Phase 3 for an initial approximately $59.3 million, with additional generation-dependent payments expected. Ormat retained operating control and substantially all distributable cash flow, while the investor receives substantially all tax attributes. Ormat also acquired 49% of the Ijen geothermal project in Indonesia and began operating a 7 MW solar expansion at Tungsten Mountain.
Important facts for investors to verify
- Progress, permits, transmission upgrades, well recovery and spending for the Puna restart; potential impairment and remaining insurance recoveries.
- Resolution and potential financial exposure of the $77 million Kenya tax demand, and whether internal-control remediation is completed and tested.
- Collection of overdue KPLC and ENEE receivables and developments affecting PG&E payments.
- Product-segment margins and project mix, particularly the profitability of Turkish contracts and the timing of new project revenue.
- Debt maturities, refinancing needs, interest costs and liquidity available for planned capital spending.
- Potential outcomes of the disclosed litigation and the Sarulla well-field remediation plan.