Ormat Technologies, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unless noted otherwise, financial amounts below are in millions of dollars. Ormat develops, manufactures, owns and operates geothermal and recovered-energy power projects, reporting Electricity and Product segments.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $129.8 | $104.6 | $262.2 | $202.4 |
| Gross profit / margin | $40.1 / 30.9% | $33.2 / 31.7% | $79.9 / 30.5% | $48.1 / 23.8% |
| Operating income / margin | $26.0 / 20.0% | $19.4 / 18.5% | $51.7 / 19.7% | $22.5 / 11.1% |
| Net income attributable to shareholders | $8.6 | $8.1 | $16.5 | $(0.8) |
| EPS, basic and diluted | $0.19 | $0.18 | $0.36 | $(0.02) |
| Operating cash flow | $30.2 | $26.4 | $72.1 | $39.5 |
- Six-month revenue rose 29.5%. Electricity revenue increased 4.9% to $167.3 million; Product revenue more than doubled, rising 120.9% to $94.9 million and representing 36.2% of total revenue.
- Six-month electricity generation increased 2.5% to 2.03 million MWh; the average portfolio revenue rate rose to $82/MWh from $80/MWh.
- Electricity operating results benefited from lower maintenance costs, including at North Brawley, new Tuscarora revenue, and a reported $3.8 million net gain on commodity swaps and a natural-gas option. Product operating income increased to $17.7 million for the half, though Product gross margin declined to 30.0% from 39.2%.
- Interest expense, net, was $29.1 million for the half, down from $30.5 million. The six-month tax provision was $9.8 million; the effective tax rate was 36.4%. The U.S. deferred-tax valuation allowance increased from $61.5 million at year-end 2011 to $85.1 million at June 30, 2012.
Financial position, liquidity and debt
- At June 30, cash and cash equivalents were $66.7 million, marketable securities $5.2 million, and restricted cash and securities $97.8 million. Unrestricted cash, cash equivalents and marketable securities totaled $71.9 million, down from $118.4 million at year-end 2011.
- Six-month investing cash outflow was $67.0 million, including $129.9 million in capital expenditures, partly offset by a $72.3 million U.S. Treasury cash grant. Financing cash outflow was $38.3 million; cash declined $33.2 million during the period.
- Reported interest-bearing debt components totaled approximately $997.2 million, including $203.4 million drawn on revolving credit lines. The company reported $64.8 million of unused capacity under committed corporate credit lines; $247.2 million of letters of credit were outstanding.
- Management reported compliance with debt covenants. Certain project-finance covenants restrict distributions: OFC’s historical 12-month debt-service coverage ratio was 1.66 versus a 1.25 minimum, and OrCal’s was 2.04 versus the same minimum.
Changes, outlook and material risks
- Revenue growth was driven mainly by Product orders, including work on the $130 million Ngatamariki project in New Zealand. Management expects the Product backlog to support segment revenue over the next couple of years.
- California SO#4 PPAs for Ormesa, Mammoth and Heber shifted from fixed to natural-gas-linked variable energy rates in May 2012. Management cited lower gas prices as reducing revenue under those contracts. Commodity transactions were used to hedge selected natural-gas and oil exposures; they are not designated for hedge accounting and mark-to-market changes affect electricity revenue.
- Management estimated approximately $140 million of capital expenditures for the remainder of 2012, including about $90 million for projects under construction. It estimated $597 million of total construction spending for projects expected to be completed by 2013, with approximately $159 million invested by June 30. Management expects to fund requirements through liquidity, operating cash flow, project financing/refinancing and eligible grants; these are expectations, not guaranteed funding.
- Near-term project milestones include the 36 MW Olkaria III expansion, expected online in mid-2013; the 16 MW Wild Rose project, also expected online in 2013 subject to resource results; and the 10 MW Heber Solar PV project, targeted for 2013 subject to interconnection. Mammoth repowering was delayed pending permits.
- Unusual items included a $1.9 million six-month write-off of Nevada exploration costs for projects judged not commercially viable. The $72.3 million Treasury grant materially supported investing cash flows.
- The securities class-action settlement provided for a $3.1 million payment funded by insurers and had preliminary court approval, but still required final approval. Related derivative lawsuits were stayed; the company said it could not estimate reasonably possible losses. A California Unions for Reliable Energy petition concerning North and East Brawley licensing was pending; management said it had no immediate adverse project implications.
- Key risks include variable energy prices and commodity exposure, reliance on major utility customers, project construction and permitting delays, geothermal resource uncertainty, financing availability and interest-rate exposure, foreign-country political and currency risks, and competition. Southern California Edison, NV Energy subsidiaries and HELCO were individually significant customers.
Investor facts to verify
- Whether Product-segment backlog converts to revenue and margin as expected, particularly the Ngatamariki project.
- Actual project spending, completion dates, permits and financing for Olkaria III, Wild Rose, Heber Solar PV and other projects.
- Cash generation after capital spending and the availability of grants, project financing and unused credit capacity.
- Revenue and covenant effects of California’s variable-rate PPAs, commodity hedges and their mark-to-market accounting.
- Final court approval and insurance coverage for the securities settlement, and developments in derivative and Brawley licensing proceedings.
- Management reported disclosure controls were effective and no material second-quarter change in internal control over financial reporting.