Ormat Technologies, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited; amounts below are in millions of dollars except per-share data.
Business context
Ormat develops, builds, owns and operates geothermal and recovered-energy power plants, and manufactures and sells power-generation equipment. Its two reporting segments are Electricity and Product. In 2017 it entered energy storage and demand response through its Viridity acquisition.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $157.2 | $184.6 | $526.4 | $496.1 |
| Gross profit / margin | $59.2 / 37.7% | $74.5 / 40.3% | $204.1 / 38.8% | $204.2 / 41.2% |
| Operating income / margin | $44.0 / 28.0% | $48.2 / 26.1% | $156.6 / 29.8% | $150.7 / 30.4% |
| Net income attributable to Ormat shareholders | $19.2 | $12.1 | $89.5 | $65.7 |
| Diluted EPS | $0.38 | $0.24 | $1.77 | $1.31 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $166.5 | $158.0 |
Q3 Electricity revenue rose 2.3% to $112.3 million, while Product revenue fell 40.0% to $44.9 million. Product operating income declined to $7.8 million from $24.3 million; Electricity operating income increased to $36.2 million from $23.9 million. For the nine months, Electricity revenue increased 5.6% and Product revenue 7.0%; segment operating income was $113.2 million for Electricity and $43.4 million for Product.
Q3 operating income declined 8.8%, but shareholder net income increased, principally reflecting lower interest and other non-operating expense. Nine-month net income growth also benefited from lower interest expense and improved derivative results. Adjusted EBITDA, a non-GAAP measure, was $76.4 million for Q3 (versus $85.4 million) and $256.4 million for nine months (versus $246.9 million).
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $77.2 million, down from $230.2 million at December 31, 2016; restricted cash was a further $42.6 million. Current assets were $332.2 million and current liabilities $193.5 million.
- Nine-month cash flow: operating activities provided $166.5 million; investing used $261.6 million, including $177.4 million of capital expenditures, $37.9 million invested in unconsolidated companies and $35.3 million for Viridity; financing used $58.0 million. Cash declined by $153.0 million.
- Reported debt categories imply approximately $906 million of debt, including $33.9 million drawn on revolving credit lines. Debt includes full-recourse corporate obligations and substantial limited- or non-recourse project debt. The company reported $122.5 million of unused corporate borrowing capacity and stated that it was in compliance with its financial covenants.
- Ormat prepaid $14.3 million of OFC senior secured notes and an $11.8 million DEG loan in September, recognizing related prepayment costs. Nine-month debt repayments totaled $55.2 million. Fixed-rate debt represented 95.4% of consolidated long-term debt; $41.3 million remained subject to some interest-rate risk.
Material changes, outlook and risks
- Projects and contracts: The 35 MW Platanares project in Honduras began commercial operation in September; management estimated average annual revenue of about $33 million. The municipal land lease still requires Honduran congressional approval, which could be delayed. Sarulla’s second unit began commercial operation October 2, after quarter-end; phase three was progressing, but gathering-piping delays and drilling cost overruns could affect the project and may prompt requests for additional sponsor equity.
- Growth and investment: The company announced a 26-year SCPPA portfolio PPA for 150 MW at a fixed $75.50/MWh, with deliveries expected to begin in Q4 2017 and the full portfolio expected online by 2022. It acquired Viridity for $35.3 million, with contingent consideration estimated at $12.8 million. Its capital-spending discussion estimates $459 million for projects and plant enhancements, with $275 million invested by September 30. The filing gives differing estimates for remaining 2017 spending: approximately $82 million in the project-capex discussion versus approximately $106 million in the liquidity discussion.
- Ownership and strategy: ORIX completed its purchase of an approximately 22% stake and obtained board-designation rights under a governance agreement. A commercial cooperation agreement gives Ormat specified rights to develop, operate and supply equipment for ORIX geothermal projects outside Japan, but the filing cautions that opportunities may not materialize.
- Tax and unusual items: Ormat changed its permanent-reinvestment assertion for some Israeli subsidiary earnings intended to fund U.S. investment. It recorded a $111.0 million deferred tax liability, a $111.1 million foreign-tax-credit asset and estimated Israeli withholding taxes; it also released $61.5 million of U.S. valuation allowance. The nine-month effective tax rate fell to 21.6% from 28.1%. Q3 2016 included an $11.0 million qui tam settlement expense, contributing to lower year-over-year G&A in 2017. No unsuccessful exploration write-offs were recorded in 2017.
- Key risks: Product revenue and margins fluctuate with project timing and mix; Q3 Product gross margin fell to 28.3% from 41.7%. Other exposures include geothermal resource and operating performance, construction delays and cost overruns, commodity-linked PPAs, foreign exchange and political conditions, tax-law changes, concentrated utility customers, and competition from other renewable technologies. A Hawaii class-action claim concerning an alleged toxic release remained in discovery; management said it intended to defend the company. Management considered the legal proceedings not material overall.
- No specific full-year revenue or earnings guidance is stated in the provided filing text. Management said available liquidity, operating cash flow and potential project financing were expected to address anticipated requirements. Disclosure controls were deemed effective, with no material Q3 change in internal controls reported.
Important facts for investors to verify
- Reconcile the filing’s different estimates of remaining 2017 capital expenditures ($82 million versus $106 million) and assess project funding needs.
- Track Product-segment backlog, project completion timing and margins, given the sharp Q3 revenue and margin declines.
- Monitor cash levels, use of revolving facilities, debt maturities and project-finance covenant headroom.
- Confirm congressional approval of the Platanares land lease and progress, cost and financing at Sarulla phase three.
- Assess realization of deferred tax assets and foreign tax credits, and the cash-tax impact of planned repatriations.
- Review customer concentration, variable-price PPA exposure, litigation developments and the execution of the SCPPA and ORIX arrangements.