ORMAT TECHNOLOGIES, INC. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited quarterly results, including fourth-quarter 2013. Unless otherwise noted, amounts are U.S. dollars.
Business context
Ormat is a vertically integrated geothermal and recovered-energy company, with two segments: Electricity, which owns and operates power plants, and Product, which designs and sells generation equipment and provides engineering, procurement and construction services. At year-end, the portfolio had 626 MW of stated generating capacity, including 473 MW in the U.S. and 153 MW abroad. Most electricity sales were under long-term power purchase agreements (PPAs).
Financial performance and liquidity
| Metric | FY 2013 | FY 2012, revised |
|---|---|---|
| Total revenue | $533.2 million | $501.8 million |
| Electricity revenue | $329.7 million | $314.9 million |
| Product revenue | $203.5 million | $186.9 million |
| Gross profit / gross margin | $159.8 million / 30.0% | $129.0 million / 25.7% |
| Operating income (loss) | $97.0 million | $(159.9) million |
| Net income (loss) | $42.0 million | $(212.6) million |
| Net income (loss) attributable to Ormat stockholders | $41.2 million; diluted EPS $0.91 | $(213.0) million; diluted EPS $(4.69) |
| Net cash from operating activities | $86.8 million | $89.5 million |
| Capital expenditures | $204.6 million | $233.0 million |
- Revenue rose 6.3%; electricity generation increased 7.9% to 4.25 million MWh. Operating margin was 18.2% and net margin was 7.9%.
- Operating cash flow less capital expenditures was approximately negative $117.9 million. Investing activities used $157.2 million; financing activities provided $61.1 million.
- Year-end cash and cash equivalents were $57.4 million, down from $66.6 million; restricted cash was $51.1 million. Working capital was $103.0 million.
- Consolidated debt, including current maturities, was $1.078 billion, versus $1.031 billion in 2012. Of reported year-end debt, $632.9 million was limited- or non-recourse project debt. The company reported $485.1 million of committed corporate credit capacity, of which $325.2 million was utilized, including letters of credit.
- Net interest expense increased to $73.8 million from $64.1 million. Adjusted EBITDA, a non-GAAP measure, was $227.1 million, compared with $185.7 million.
- Fourth-quarter 2013 revenue was $130.9 million, operating income $21.6 million, net income $8.4 million and diluted EPS $0.18.
Material changes versus the prior period
- FY 2013 returned to operating and net profitability, following the 2012 loss. The comparison is substantially affected by $236.4 million of impairment charges in 2012, principally a $229.1 million North Brawley write-down; there were no impairment charges in 2013.
- Revenue growth reflected new and fuller-year generation, including Olkaria III Plant 2, McGinness Hills and Tuscarora, as well as higher Product Segment sales. The company reported a $5.0 million net loss on oil and natural-gas derivatives in 2013, versus a $2.3 million gain in 2012.
- Electricity gross margin improved to 29.4% from 24.6%; Product gross margin improved to 30.9% from 27.6%. Selling and marketing expense rose 56.6%, principally because of $11.6 million in one-time PPA termination fees.
- The 2012 comparative statements were revised for a deferred-tax valuation-allowance error: the revision increased the 2012 net loss by $6.6 million to $212.6 million. The company said it did not materially misstate the previously issued statements; operating income and cash flows were not changed.
Outlook, commentary and notable items
- Management estimated 2014 capital expenditures of approximately $229 million and debt repayments of $78.6 million. It expected to fund requirements through existing liquidity, operating cash flow, project financing or refinancing, and eligible cash grants; these are expectations, not a guarantee of funding.
- Near-term construction and expansion priorities included the McGinness Hills Phase 2 project, expected to enter operation in mid-2015, and the Heber 1 upgrade, which requires a planned outage in the first half of 2014. The Heber Solar PV project was largely complete but awaiting grid interconnection; Ormat was considering selling it before completion.
- Olkaria III Plant 3 entered commercial operation in January 2014, bringing the complex to 110 MW. The Honduras Platanares project was acquired in late 2013, with initial development planned and first-phase operation anticipated in late 2016 or early 2017. Sarulla in Indonesia remained dependent on financing, with construction expected to begin in the first half of 2014.
- Ormat highlighted exposure to geothermal resource uncertainty, plant outages and maintenance, construction and permitting delays, transmission constraints, counterparty and international political risks, and changes in renewable-energy incentives. Electricity prices under some PPAs vary with natural-gas or oil prices; derivatives were used to reduce exposure through 2014. About 68.5% of 2013 Electricity Segment revenue was from PPAs with fixed energy rates.
- Operational concerns include North Brawley, which was being operated at about 27 MW rather than its 50 MW design capacity after the 2012 impairment, and declining resource temperatures at the Brady and Steamboat complexes. The company also reported lower run time at the heat source serving OREG 4.
- Unusual matters include the 2013 sale of the Momotombo operation for $7.8 million, generating an after-tax gain of approximately $3.6 million, and a $9.0 million payment to terminate Mammoth G1 and G3 PPAs. Two former employees alleged in a qui tam complaint that grant applications and certifications were fraudulent; the Department of Justice declined to intervene, and Ormat said it was investigating and disputed the allegations. A separate labor-union challenge to Mammoth project approvals remained pending.
- Management announced a leadership transition: Isaac Angel was appointed CEO effective July 1, 2014, succeeding Yehudit Bronicki. The filing stated management and the auditor considered financial-reporting controls effective; PwC issued an unqualified opinion on the financial statements and internal control.
Important facts for investors to verify
- Whether 2014 capital spending, financing availability and debt service can be met without materially weakening liquidity; review covenant and distribution restrictions.
- Whether North Brawley can sustain its current output and whether resource trends at Brady, Steamboat and other fields affect generation, costs or PPA obligations.
- Progress and economics of the Heber upgrade, McGinness Hills Phase 2, Solar PV interconnection, Platanares and Sarulla, including permits, financing and commercial-operation milestones.
- Revenue sensitivity to avoided-cost PPAs, oil and natural-gas prices, derivative settlements, and renewal or replacement of expiring PPAs.
- Resolution and potential financial exposure from the grant-related qui tam allegations and the Mammoth permitting litigation, along with the effect of the 2012 tax-statement revision and substantial U.S. deferred-tax valuation allowance.