Business context and reporting period
Ormat Technologies, Inc. is a geothermal and recovered-energy power developer, owner and operator, with equipment, engineering and energy-storage businesses. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; comparisons are with 2017. The company acquired U.S. Geothermal in April 2018 and reports Electricity, Product and Other segments.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data, percentages and generation.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $166.5 | $157.2 | $528.8 | $526.4 |
| Gross profit (margin) | $48.8 (29.3%) | $59.2 (37.7%) | $179.6 (34.0%) | $204.1 (38.8%) |
| Operating income (margin) | $25.9 (15.6%) | $44.0 (28.0%) | $117.1 (22.1%) | $156.6 (29.8%) |
| Net income attributable to Ormat stockholders | $10.6 | $24.0 | $79.7 | $67.8 |
| Diluted earnings per share | $0.21 | $0.47 | $1.56 | $1.34 |
| Adjusted EBITDA (non-GAAP) | $75.6 | $76.4 | $254.8 | $256.4 |
Q3 revenue rose 5.9%; nine-month revenue was nearly flat, up 0.4%. Nine-month Electricity revenue increased 10.1% to $371.6 million, while Product revenue declined 18.5% to $152.0 million; Other revenue rose to $5.2 million from $2.3 million. Generation for the first nine months increased 7.2% to 4.28 million MWh.
For the nine months, operating cash flow was $103.2 million, down from $166.5 million. Investing cash outflow was $291.6 million, including $200.7 million of capital expenditures and $95.1 million net cash paid for the USG acquisition. Financing cash inflow was $219.8 million. Cash and cash equivalents were $72.0 million at September 30; restricted cash was another $83.1 million. The company reported $112.3 million of unused corporate borrowing capacity and $209.5 million outstanding under bank revolving credit agreements.
Total debt was approximately $1.23 billion, calculated from reported current and long-term debt balances, including revolving credit lines. Debt includes both recourse corporate borrowings and limited- or non-recourse project financing. Management reported compliance with applicable debt covenants. Current assets were $421.8 million and current liabilities $396.4 million.
Material changes versus the prior comparable period
- Q3 operating income fell 41.1% and stockholder-attributable net income fell to $10.6 million from $24.0 million. Higher electricity operating costs, the Puna outage, the $5.0 million Galena 2 PPA termination fee, higher G&A and higher interest expense contributed.
- Nine-month operating income declined 25.2%, despite slightly higher revenue. Electricity and Product gross profit decreased; reported cost of revenues rose to 66.0% of revenue from 61.2%.
- Nine-month stockholder-attributable net income increased to $79.7 million, despite lower operating income, chiefly because the income tax provision fell to $3.3 million from $50.0 million and other non-operating income increased. The reported effective tax rate was 3.8%, including a valuation-allowance release; management estimated an annual effective tax rate of approximately 44% excluding that release.
- Interest expense, net rose to $48.9 million for nine months from $41.2 million, reflecting new borrowing, USG debt, increased revolving borrowings and lower capitalized interest.
Outlook, commentary, risks and unusual items
- No consolidated full-year revenue or earnings guidance is stated in the supplied filing text. Management expected approximately $49.3 million of capital expenditures in the remainder of 2018 and said available liquidity, operating cash flow and anticipated project financing/refinancing were expected to meet planned needs.
- Management expected Galena 2 to begin selling under the SCPPA portfolio PPA in March 2019 at $75.50/MWh, more than 50% above the terminated PPA rate. The 48 MW McGinness Hills 3 project was nearing completion, with commercial operation expected in Q4 2018. Two New Jersey 20 MW/20 MWh battery projects were under construction; management projected average 2019 revenues of $7–8 million, primarily from merchant-market ancillary services.
- The Puna 38 MW plant was shut down after the May 2018 Kilauea eruption. Lava covered wellheads, monitoring wells, the substation and a warehouse; restoration work and insurance discussions continued, and impairment remained under assessment. The company disclosed that it had no Hawaii property-damage or business-interruption coverage from August 28, 2018 while seeking replacement coverage.
- The company identified a material weakness in income-tax controls that remained unremediated at September 30, 2018. Disclosure controls and procedures were therefore deemed ineffective. Prior-period financial statements had been restated or revised for tax-related errors, and related shareholder and derivative litigation was pending. Management described remediation efforts but gave no assurance they would be completed during 2018.
- Other notable items include the $110 million USG acquisition; the Tungsten Mountain partnership, which generated approximately $33.4 million initially with about $13 million in further installments expected; and an October 2018 $124.7 million Platanares project-finance agreement, of which $114.7 million was disbursed after quarter-end. The company declared a $0.10-per-share quarterly dividend in November.
- Risks include geothermal-resource and operating performance, natural disasters, concentrated utility customers, foreign political and collection exposures, variable-price PPAs, competition and project execution. Three customers accounted for significant revenue shares in the quarter: Kenya Power 18.6%, SCPPA 13.7%, and NV Energy subsidiaries 13.6%.
Important facts for investors to verify
- Progress restoring Puna, the timing and extent of insurance recovery, replacement insurance coverage and any impairment assessment.
- Whether the income-tax control material weakness is remediated, and the status and potential exposure of the restatement-related securities and derivative litigation.
- Debt maturities, covenant headroom, revolver availability and the funding plan for remaining capital expenditures and debt repayments.
- Execution and economics of the announced generation and storage projects, including Galena 2’s transition to the SCPPA PPA and merchant-market revenue assumptions for New Jersey batteries.
- How much of reported earnings reflects recurring operations versus tax valuation-allowance adjustments, insurance proceeds and other unusual items; also review the company’s non-GAAP Adjusted EBITDA reconciliation.