Ormat Technologies, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Dollar amounts are in millions unless otherwise noted. The unaudited interim results are not necessarily indicative of full-year results.
Business context
Ormat develops, builds, owns and operates geothermal and recovered-energy power plants and sells related equipment and services. Its two reporting segments are Electricity and Product. Electricity represented 68.1% of Q3 revenue and 60.9% for the first nine months; Product revenue reflects project timing and can vary substantially between periods.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $130.7 | $132.3 | $402.3 | $388.5 |
| Gross margin | $39.8; 30.4% | $30.2; 22.9% | $116.9; 29.1% | $107.1; 27.6% |
| Operating income | $29.8 | $12.1 | $75.3 | $61.0 |
| Income from continuing operations | $13.1 | Loss of $2.2 | $29.0 | $12.5 |
| Net income attributable to Ormat shareholders | $13.0 | Loss of $0.6 | $33.1 | $16.0 |
| Diluted EPS | $0.28 | Loss of $0.01 | $0.72 | $0.35 |
| Operating cash flow | $12.3 | Loss of $9.7 | $32.2 | $62.4 |
Q3 revenue declined 1.2% year over year: Electricity revenue rose 14.7% to $89.0 million, while Product revenue fell 23.6% to $41.8 million, mainly after completion of the Ngatamariki project. For the first nine months, revenue grew 3.6%; generation increased 7.5% to 3.09 million MWh. Nine-month adjusted EBITDA, a non-GAAP measure, was $175.7 million versus $150.5 million.
Q3 operating income improved partly because the prior-year quarter included a $7.3 million impairment charge. Nine-month operating income also benefited from higher segment gross margins and the absence of the prior-year impairment, partly offset by a $9.0 million SCE termination fee recorded in Q1 2013. Q3 net income was also supported by increased income from tax-benefit transactions; interest expense rose to $18.5 million from $15.4 million.
Cash, debt and liquidity
Cash and cash equivalents were $35.4 million at September 30, down from $66.6 million at December 31, 2012. Nine-month investing cash outflow was $128.2 million, including $144.6 million of capital expenditures; financing cash inflow was $64.8 million. Operating cash flow fell year over year, with management citing project billing and collection timing and lower accounts payable.
Reported current and long-term borrowings total approximately $1.08 billion, including $250.7 million of senior unsecured bonds and $123.3 million drawn on revolving credit lines. Total liabilities were $1.43 billion and total equity was $737.0 million. The company reported $145.2 million of unused corporate borrowing capacity under existing lines in its liquidity discussion; it also disclosed $245.1 million of outstanding letters of credit. Management said funding sources were sufficient for anticipated needs. It estimated approximately $59 million of remaining-2013 capital expenditures and $30.9 million of debt repayment.
Ormat stated 84.6% of consolidated long-term debt bore fixed rates; $165.3 million remained subject to some floating-rate risk. The Olkaria III OPIC loan was converted to a fixed average rate of 6.31% in July. The company reported compliance with corporate financial covenants. However, it noted low natural-gas prices could prevent OFC from meeting the 1.25 debt-service coverage ratio required for distributions; its June 2013 actual ratio was 1.25, and management did not expect a debt default.
Material developments, outlook and risks
- Plant 2 at Olkaria III began commercial operation in May, adding 36 MW; the complex was reported to generate 92.4 MW. Plant 3 was expected to enter service in the first half of 2014.
- Management expected Product Segment revenue to remain robust through the end of 2013, supported by orders and backlog. It expected the Don A. Campbell project and Heber solar project to begin commercial operation by year-end, subject to project and interconnection completion.
- Ormat signed a 10-year Heber 1 PPA with SCPPA starting in December 2015, at an expected average price of approximately $85.62/MWh; management estimated 2016 revenue could be over $7 million above 2013 levels. It also signed a 20-year Don A. Campbell PPA at $99/MWh.
- The 330 MW Sarulla project in Indonesia had signed operating and energy sales contracts, but construction depended on financing. Ormat held a 12.75% interest and expected approximately $254 million of equipment-sale revenue over construction; its supply contract was not yet signed at quarter-end. First-phase operations were scheduled for 2016.
- The Momotombo plant was sold in May for approximately $7.8 million, producing a $3.6 million after-tax gain reported in discontinued operations. The ORTP tax-equity transaction generated a $6.1 million net gain for the first nine months, including tax-benefit income and associated financing expense.
- Variable-price PPAs expose revenue to natural-gas prices in California and oil prices in Hawaii. Derivatives were used to limit exposure through 2014, but mark-to-market accounting can add earnings and revenue volatility. Customer concentration is significant: SCE supplied 20.9% of Q3 revenue, while NV Energy subsidiaries and Kenya Power supplied 15.3% and 13.8%, respectively.
- Other risks include geothermal resource and operating performance, construction delays, financing availability, foreign political and currency risks, regulatory changes, competition, and customer counterparty risk. A union petition challenging permits and environmental review for the Mammoth replacement project remained pending; management said it believed the petition lacked merit. A separate CURE petition had been denied, with no appeal filed.
Accounting and controls
The company revised previously issued 2012 and Q1 2013 financial statements for an income-tax valuation-allowance error related to deferred tax effects of a 2012 impairment. It increased the U.S. deferred-tax valuation allowance by $32.7 million at December 31, 2012 and a further $3.1 million at March 31, 2013. Management concluded the prior statements were not materially misstated; the revision affected tax expense, earnings, EPS and balance-sheet lines, but not total cash flows. A full valuation allowance remained against U.S. deferred tax assets at September 30, 2013. Management reported disclosure controls were effective and no material Q3 change in internal controls over financial reporting.
Most important facts for investors to verify
- Cash conversion: why nine-month operating cash flow declined to $32.2 million despite higher net income, and whether project receivables and billing positions normalize.
- Debt and covenant headroom, especially the OFC distribution coverage ratio, revolver availability, and the distinction between unused borrowing capacity and outstanding letters of credit.
- Progress, financing, costs and commissioning dates for Olkaria III Plant 3, Don A. Campbell, Heber Solar, and Sarulla; confirm the Sarulla equipment contract and financing close.
- Effects of variable-price PPAs and derivative mark-to-market changes on future revenue and earnings, including hedge coverage through 2014.
- Tax accounting and realizability of deferred tax assets, including the full U.S. valuation allowance and the consequences of the prior-period revisions.
- Customer concentration and the status or outcome of the Mammoth permitting litigation.