Ormat Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Ormat develops, owns and operates geothermal and recovered-energy power plants and sells power-generation equipment; it also provides energy storage, demand-response and energy-management services. Figures below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $199.0 | $184.0 |
| Gross profit / gross margin | $74.2 / 37.3% | $73.4 / 39.9% |
| Operating income / operating margin | $53.7 / 27.0% | $54.6 / 29.7% |
| Net income | $28.1 | $74.3 |
| Net income attributable to Ormat shareholders | $25.9; diluted EPS $0.51 | $69.5; diluted EPS $1.36 |
| Adjusted EBITDA (non-GAAP) | $101.8 | $98.4 |
| Operating cash flow | $77.4 | $19.8 |
| Capital expenditures | $51.3 | $67.0 |
- Revenue rose 8.2%. Electricity revenue increased 7.9% to $142.9 million, Product revenue rose 7.1% to $52.1 million, and Other revenue increased 39.8% to $4.0 million.
- Electricity gross profit improved to $65.4 million from $59.0 million, while Product gross profit declined to $10.0 million from $14.9 million. Higher costs on lower-margin Turkish contracts contributed to weaker Product margins. Other segment operating loss widened to $2.1 million from $1.4 million.
- Net income fell mainly because Q1 2018 included a $44.4 million tax benefit from a valuation-allowance release. Q1 2019 recorded a $14.0 million tax provision versus a $26.9 million benefit a year earlier. Interest expense increased to $21.2 million from $14.3 million.
- Operating cash flow improved substantially, partly reflecting lower tax payments and timing of customer billings and supplier payments. Investing activities used $50.9 million; financing activities used $31.0 million. Cash and restricted cash together were $172.5 million at quarter-end, down $5.0 million during the quarter.
- Cash and cash equivalents were $79.4 million, including $51.2 million held by foreign subsidiaries; restricted cash was $93.1 million. The company reported $159.7 million of unused corporate borrowing capacity.
- Debt included $235.5 million outstanding under bank credit agreements and $443.0 million of listed full-recourse third-party debt. Long-term obligations excluding revolving credit lines totaled $1.253 billion in scheduled future minimum payments. The company reported covenant compliance, equity of $1.463 billion and a net-debt-to-Adjusted-EBITDA ratio of 3.17.
Material changes and developments
- Electricity revenue growth reflected McGinness Hills’ third phase, the acquired U.S. Geothermal business, and Olkaria III expansion. Generation increased 11.0% to 1.69 million MWh. These gains were partly offset by the Puna plant shutdown and maintenance-related outages at other facilities.
- The May 2018 Kilauea eruption damaged Puna facilities and kept the 38 MW plant shut down. Ormat recorded $1.3 million of business-interruption insurance proceeds in Q1 and received a further $4.1 million in April under a new insurer agreement. Insurer discussions continued; the company was assessing damage and potential impairment, and return-to-operation timing was not specified.
- Ormat drew a $41.5 million DEG subordinated loan at a fixed 6.04% to refinance Olkaria III upgrades. It also arranged an additional $50.0 million Migdal loan at a fixed 4.6%, repayable through 2029.
- Ormat signed a 25-year PPA for 16 MW from the planned 30 MW Casa Diablo-IV geothermal project at a fixed $68/MWh, with deliveries expected by the end of 2021. The remaining 14 MW is intended for other offtakers or the spot market.
- The board declared a $0.11-per-share quarterly dividend in May, payable May 28, 2019.
Outlook, risks and contingencies
- Management estimated approximately $200 million of capital expenditures for the remainder of 2019 and approximately $117.7 million of debt repayments, including $60.9 million of revolving lines assumed to be renewed. It expected to fund needs through operating cash flow, available liquidity and future project financing or refinancing. No clear annual revenue or earnings guidance is provided in the filing.
- Planned projects include the 7 MW Tungsten Mountain solar addition, expected online in Q2 2019; Steamboat Hills upgrades, expected online in early 2020; Heber repowering, expected online in early 2021; and Casa Diablo-IV, expected online by the end of 2021. Carson Lake drilling was postponed to the following year.
- Customer and collection exposure is notable: NV Energy subsidiaries, SCPPA and Kenya Power each accounted for significant revenue shares. KPLC and Honduras customer ENNE had overdue balances of $29.4 million and $18.0 million at quarter-end; $20.4 million and $3.0 million, respectively, were paid in April. Ormat recorded no doubtful-account provision. PG&E’s bankruptcy is being monitored; its January invoice was unpaid, while February and March invoices were received.
- Management disclosed an unremediated material weakness in internal control over financial reporting related to income-tax accounting; disclosure controls were judged ineffective at March 31, 2019. Remediation efforts were underway, but completion during 2019 was not assured.
- Risks include Puna damage and potential impairment, geothermal resource and operating risks, project delays, counterparty payment risk, foreign-exchange exposure, financing availability, and ongoing securities and derivative litigation. A Hawaii community action was dismissed after an immaterial settlement; other disclosed litigation remained pending. Management said it intended to defend the claims and did not expect other ordinary-course proceedings to be material in aggregate.
- Approximately 98.3% of Q1 Electricity revenue came from fixed-rate PPAs. Nonetheless, some contracts are exposed to natural-gas or oil prices; international operations also carry currency, political and regulatory risks. The filing states that 97.1% of consolidated long-term debt was fixed-rate.
Most important facts for investors to verify
- Whether Puna insurance recoveries cover the full interruption losses and facility damage, and whether an impairment or prolonged shutdown will result.
- Whether the tax-accounting material weakness is remediated and whether subsequent reporting remains reliable.
- Collection of remaining overdue KPLC and ENNE receivables, and developments affecting PG&E payments.
- Whether Product-segment margins recover after the lower-margin Turkish contracts and whether planned project milestones and capital spending stay on schedule.
- Availability and renewal of bank facilities, refinancing of planned maturities, and continued compliance with debt covenants.
- Progress and potential financial impact of the pending securities, derivative and other litigation; the filing does not provide a clear quantified loss estimate for these matters.