Ormat Technologies, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Amounts are U.S. dollars unless stated otherwise. This is an annual filing; selected fourth-quarter figures are unaudited.
Business context
Ormat designs, builds, owns and operates geothermal and recovered-energy power plants and manufactures related equipment and provides engineering, procurement and construction services. Its two segments are Electricity and Product. In March 2017, Ormat acquired Viridity, entering energy storage, demand response and energy management services. At year-end, electricity generation remained the larger and more recurring business, while Product revenues depended more on contract timing and project mix.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $692.8 million | $662.6 million |
| Electricity revenue | $468.3 million | $436.3 million |
| Product revenue | $224.5 million | $226.3 million |
| Gross profit / margin | $268.5 million / 38.7% | $270.8 million / 40.9% |
| Operating income / margin | $205.0 million / 29.6% | $201.9 million / 30.5% |
| Net income attributable to Ormat shareholders | $155.5 million; diluted EPS $3.06 | $93.9 million; diluted EPS $1.87 |
| Operating cash flow | $245.6 million | $159.3 million |
| Adjusted EBITDA (non-GAAP) | $343.8 million | $323.8 million |
Revenue increased 4.6%; electricity revenue rose 7.3%, while Product revenue fell 0.8%. Generation increased 1.7% to 5.49 million MWh. Electricity gross margin improved to 41.9% from 40.0%, but Product gross margin declined to 32.2% from 42.5%, reflecting higher project costs and a different contract mix. Consolidated gross profit fell despite revenue growth.
Annual net income included a $1.4 million income tax benefit, versus a $31.8 million tax provision in 2016. Management attributed the change primarily to U.S. tax reform and valuation-allowance changes; the 2017 effective tax rate was negative 0.8%. The filing reports consolidated net income of $170.2 million, of which $14.7 million was attributable to noncontrolling interests.
In Q4 2017, revenue was $166.4 million versus $166.5 million a year earlier; operating income was $48.4 million versus $51.2 million. Net income attributable to Ormat shareholders was $66.0 million versus $28.2 million, including a $29.7 million quarterly income tax benefit. The Q4 earnings increase therefore was not matched by operating-income growth.
Cash and cash equivalents fell to $47.8 million from $230.2 million; restricted cash was $48.8 million. Working capital was $38.3 million. The company used $368.1 million in investing activities, including $259.2 million of capital expenditures, a $46.3 million investment in an unconsolidated company and $35.3 million for Viridity. Reported long-term debt, including its current portion, was $862.1 million; the balance sheet also lists $51.5 million of revolving credit borrowings. Management reported $107.9 million of unused corporate borrowing capacity at year-end. Debt covenants restrict distributions, including a 35% of net income limit under certain financing arrangements.
Material changes and developments
- New or expanded operations contributed to electricity growth: Platanares in Honduras and Tungsten Mountain in Nevada began commercial operation in 2017; Ormat also consolidated Bouillante in Guadeloupe for a full year.
- Viridity contributed $2.7 million of 2017 revenue after its acquisition. Ormat also acquired full economic and voting interests in tax-equity partnerships OPC and ORTP during 2017.
- ORIX acquired approximately 22% of Ormat’s shares and obtained board designation rights; a commercial cooperation agreement gives Ormat specified rights to develop and supply ORIX geothermal projects outside Japan.
- The 150 MW SCPPA portfolio PPA provides for a fixed price of $75.50/MWh, a 26-year term and deliveries expected to continue ramping through 2022.
Outlook, risks and unusual items
Management estimated approximately $300 million of 2018 capital expenditures and $109 million of debt repayment, to be funded through operating cash flow, available liquidity and project financing or refinancing. Projects included McGinness Hills Phase 3, an Olkaria III expansion, Sarulla’s third phase, and energy-storage systems. These plans and projected timing are forward-looking and subject to project execution, permitting, financing and resource conditions. The company gave no clear consolidated revenue or earnings guidance in the provided filing text.
In January 2018, Ormat agreed to acquire U.S. Geothermal for approximately $109.9 million in cash; closing was expected in Q2 2018, subject to approvals. The filing also describes the Tax Act’s 21% corporate rate and other provisions whose effects remained under review. Management expected the lower rate to affect tax-equity financing and after-tax returns, while some provisions could increase tax or borrowing costs.
- Control weakness: Management and the auditor concluded internal control over financial reporting was ineffective at December 31, 2017 because of a material weakness in income-tax risk assessment and controls. Management was implementing remediation and expected to address it during 2018; no restatement was required.
- Operating and market exposure: Geothermal resource decline, equipment outages, water shortages, natural hazards and transmission constraints can affect output. Some California and Hawaii PPAs have energy prices linked to avoided costs and fuel prices; most electricity revenue was from fixed-rate PPA components.
- Concentration and collection: NV Energy subsidiaries, KPLC and SCPPA were significant customers. Ormat reported late payments from KPLC and Honduras utility ENEE but recorded no doubtful-account provision, believing amounts would be collected.
- Project, regulatory and legal matters: Platanares land-lease approval in Honduras remained outstanding. A claim by former Chilean sales representative Aquavant sought $4.8 million plus future sales-based amounts; Puna residents’ toxic-release litigation remained in discovery; and an appeal challenged approval of McGinness Hills Phase 3. Management said proceedings, individually and collectively, were not expected to be material, but outcomes remain uncertain.
- Other contingencies: A Kenyan tax audit settlement included $2.6 million paid and a provision for potential interest waiver exposure. The filing also identifies possible tax-law, political, currency, customer-credit and energy-storage merchant-market risks.
Most important facts for investors to verify
- Whether the tax-control remediation was completed and tested effectively, and whether subsequent filings identify further tax adjustments.
- Whether 2018 capital spending, financing, debt repayment and project commissioning progressed as planned.
- Product-segment margins and backlog conversion, particularly given lower 2017 Product gross margin and reliance on international projects.
- Collection of overdue KPLC and ENEE receivables and continued performance and credit quality of major PPA counterparties.
- Resolution of the Aquavant claim, Puna litigation, McGinness Hills appeal and Platanares lease approval; assess any subsequent developments and recorded reserves.
- Final terms and completion of the U.S. Geothermal acquisition, and the realized contribution and economics of Viridity and storage projects.