Ormat Technologies, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. Financial statements are unaudited. Ormat develops, owns and operates geothermal and recovered-energy power plants and sells generation equipment and related services through its Electricity and Product segments.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Electricity revenue | $90.0 million | $94.8 million |
| Product revenue | $30.3 million | $47.6 million |
| Total revenue | $120.2 million | $142.4 million |
| Gross margin | $44.0 million; 36.6% | $53.5 million; 37.5% |
| Operating income | $29.9 million; 24.8% of revenue | $42.6 million; 29.9% |
| Net income attributable to Ormat stockholders | $10.0 million | $21.6 million |
| Diluted EPS | $0.21 | $0.47 |
| Adjusted EBITDA | $65.3 million | $70.6 million |
Electricity segment operating income was $24.0 million, down from $30.9 million; Product segment operating income was $5.9 million, down from $11.7 million. Gross margin percentage declined as total cost of revenue increased to 63.4% of sales from 62.5%. The dividend declared for Q1 was $0.08 per share, versus $0.06 a year earlier.
Cash flow, liquidity and debt
- Operating cash flow was $83.1 million, compared with $68.1 million. Investing activities used $47.3 million, including $42.4 million of capital expenditures; financing activities used $5.4 million. Cash and cash equivalents rose to $70.7 million from $40.2 million. The balance sheet also reports $115.5 million of restricted cash, generally associated with variable-interest entities.
- At March 31, current assets were $307.1 million and current liabilities $244.9 million. Reported current assets include restricted cash and contract assets. Management reported $162.8 million of unused corporate borrowing capacity under existing credit lines.
- Reported current and long-term debt totals approximately $1.00 billion, including limited/non-recourse project debt and full-recourse debt. Long-term debt is primarily fixed-rate; the filing says 94.9% of consolidated long-term debt was fixed-rate and $50.8 million remained exposed to some floating-rate risk.
- Management estimated $151.0 million of capital expenditures and $61.0 million of debt repayments for the remainder of 2015. It expected to fund requirements from operating cash flow, credit facilities, project financing and the subsequent ORPD transaction proceeds.
Material changes and notable items
- Total revenue fell 15.6% year over year. Electricity revenue declined 5.1%, which management attributed mainly to lower Puna generation following hurricane conditions, lower energy rates associated with lower oil and natural gas prices, partly offset by McGinness Hills Phase 2 beginning commercial operation. Product revenue fell 36.4%, primarily due to project timing and reallocating manufacturing resources to Don A. Campbell Phase 2.
- Power plants generated 1.2 million MWh in both periods. Operating income declined 29.9%; net income attributable to stockholders fell to $10.0 million from $21.6 million.
- Q1 general and administrative expense included $3.4 million of share-exchange costs. Ormat also recorded a $2.5 million reimbursement following a successful appeal of Nevada mining taxes, and a $0.2 million write-off of unsuccessful exploration activities.
- On February 12, Ormat completed its share exchange with former parent Ormat Industries. Public float increased from approximately 40% to 76%; the transaction added approximately 3.0 million net shares and brought $15.4 million cash and other assets to the company.
- After quarter-end, Ormat sold Northleaf a 36.75% interest in ORPD for $162.3 million. The portfolio includes Puna, Don A. Campbell and three recovered-energy assets. The transaction is expected to produce an estimated $104 million U.S. taxable gain; proceeds were not Q1 cash.
Outlook, management commentary and risks
- No specific full-year revenue or earnings guidance is provided. Management’s strategic plan targets expansion into high-temperature geothermal, solar, hybrid renewable energy and storage, additional markets and customers, and potential acquisitions; management cautions that execution and growth are not assured.
- Projects under development include Don A. Campbell Phase 2, expected online toward the end of 2015; Olkaria III Plant Four, expected in the second half of 2016; and the Sarulla project, whose first phase is expected to begin operations in 2016. A $98.8 million Chilean EPC contract and the Northleaf transaction were announced after quarter-end.
- Key operating and market risks include geothermal resource and construction risks, changing commodity-linked PPA rates, customer concentration, competition, foreign-country political and currency exposure, permitting and environmental requirements, and weather or natural events. The Puna plant was not directly affected by the Kilauea lava flow, and transmission lines were operating at regular capacity at filing time, but future effects remain uncertain.
- Major customers account for substantial revenue: NV Energy subsidiaries 24.0%, Kenya Power 17.8%, Southern California Edison 8.8%, and HELCO 6.1% in Q1 2015. The filing also identifies customer concentration in receivables.
- Contingencies include lawsuits concerning Puna night drilling, alleged Clean Air Act violations at Mammoth, union representation at Puna, and a qui tam action alleging improper grant applications. Ormat disputes the allegations; management says proceedings are not expected to be material, but the filing provides no quantified potential loss.
- Management reported disclosure controls were effective and no material Q1 change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the filing’s different statements of the share of Electricity revenue from fixed-price PPAs: approximately 81.4% in one section and 78.9% in another.
- Reconcile the stated Q1 effective tax rates: 33.1% in the financial-statement note versus 34.4% in MD&A.
- Assess the sustainability of operating cash flow, including the large contribution from increased customer billings ahead of costs, and distinguish unrestricted cash from restricted cash and overseas cash.
- Track execution, remaining costs and timing for the 2015–2016 projects, the $151.0 million remainder-of-2015 capital plan, and the expected Northleaf proceeds and tax consequences.
- Review project-debt distribution tests, refinancing and credit-line maturities, customer concentration, and the status and potential exposure of the disclosed legal matters.