Business context and reporting period
Ormat Technologies, Inc. filed this audited Form 10-K for the fiscal year ended December 31, 2010. The company develops, owns and operates geothermal and recovered-energy power plants and designs, manufactures and sells related equipment and services. Its two reporting segments are Electricity and Product. Results below are for the full year unless otherwise noted; the filing also provides unaudited fourth-quarter information.
At year-end, Ormat reported 553 MW of generating capacity across domestic and foreign plants. Electricity generation was 3.76 million MWh, up 14.1% from 2009. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Financial performance and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Total revenue | $373.2 million | $412.0 million |
| Electricity revenue | $291.8 million | $252.6 million |
| Product revenue | $81.4 million | $159.4 million |
| Gross margin | $77.6 million; 20.8% | $120.5 million; 29.2% |
| Operating income | $23.6 million; 6.3% margin | $66.6 million; 16.2% margin |
| Net income attributable to stockholders | $37.3 million; diluted EPS $0.82 | $68.9 million; diluted EPS $1.51 |
| Net cash from operating activities | $101.4 million | $110.8 million |
| Cash and cash equivalents at year-end | $82.8 million | $46.3 million |
| Working capital at year-end | $66.9 million | $55.7 million |
| Consolidated debt, including current portion | $789.7 million | $624.4 million |
Adjusted EBITDA, a non-GAAP measure defined by the company, was $164.3 million versus $167.0 million. Cash used in investing activities was $203.8 million, including $283.3 million of capital expenditures; financing activities provided $138.9 million. The company received a $108.3 million U.S. Treasury cash grant related to North Brawley. It reported $149.1 million of unused corporate borrowing capacity under existing bank lines at December 31, 2010.
For the fourth quarter of 2010, revenue was $92.8 million and net income attributable to stockholders was $4.5 million, or $0.10 per diluted share, compared with $94.2 million, $16.2 million and $0.36, respectively, in fourth-quarter 2009.
Material changes versus the prior comparable period
- Full-year revenue fell 9.4%: Electricity revenue grew 15.5%, while Product revenue declined 48.9% as customer orders weakened.
- Electricity generation rose 14.1%, supported by North Brawley entering service, improved Puna generation and the August consolidation of Mammoth Pacific after Ormat bought the remaining 50% for $72.5 million.
- Electricity cost of revenue increased 35.3%, including $39.6 million of North Brawley costs, while the plant operated well below its 50 MW design capacity. Electricity-segment gross margin fell to 17.0% from 29.1%.
- Net interest expense increased to $40.5 million from $16.2 million, partly because less interest was capitalized to projects and borrowings increased.
- Operating cash flow decreased by $9.4 million. Cash nevertheless rose, supported by the bond issue, Treasury grant, increased bank-line draws and asset-sale proceeds.
Outlook, risks, contingencies and unusual items
- Management expected Product-segment revenue in 2011 to be at a similar level to 2010. It planned approximately $467 million of 2011 capital expenditures and $49 million of debt repayment, funded by operating cash, available facilities, additional bonds and other anticipated financing sources.
- Management described organic growth through exploration, construction and plant expansions as a priority. It estimated 131–147 MW under construction and expected 212–228 MW of its U.S. geothermal capacity to come online within three years. These targets depend on permits, construction, financing and resource performance.
- North Brawley was producing approximately 30 MW at year-end, with reinjection challenges, high operating costs and potential need for additional injection wells. Management expected costs to remain high into the first half of 2011 and positive EBITDA only toward year-end. The impairment test found estimated undiscounted cash flows exceeded the $245 million carrying value by about $46 million; management warned that capacity below approximately 45 MW or higher costs could require a material impairment.
- Ormat expected exposure to changing California power prices as Southern California Edison contract pricing was due to change after April 2012 under a pending Global Settlement. The company planned to amend its affected PPAs but had not selected pricing options; management could not reliably estimate the revenue impact.
- Funding for up to $350 million of DOE-guaranteed project facilities for three Nevada projects remained subject to review and approval; no guarantee was assured. The Sarulla project in Indonesia also depended on final contract amendments, regulatory approval and financing.
- Key risks include geothermal resource uncertainty and reservoir decline; North Brawley underperformance; construction delays and permitting constraints; dependence on third-party transmission; customer concentration; foreign political, currency and counterparty risks; and interest-rate exposure. Approximately 34.6% of debt was floating-rate, with $272.9 million subject to some floating-rate risk.
- Southern California Edison accounted for 29.1% of 2010 revenue; Sierra Pacific Power and Nevada Power together accounted for 15.0%. Ormat’s electricity business relies substantially on long-term PPAs, but contract pricing and renewal terms remain important risks.
- Unusual items materially affected reported earnings: the $36.9 million pre-tax gain on obtaining control of Mammoth Pacific, a $6.35 million pre-tax gain on the sale of GDL, and $8.7 million of income from tax-benefit arrangements. The filing also describes a prior restatement of certain financial results relating to exploration and development cost accounting and related securities and derivative lawsuits; possible losses could not be estimated.
Important facts for investors to verify
- North Brawley’s sustained output, reinjection requirements, operating costs, commercial status and impairment sensitivity.
- The final SCE PPA pricing amendments and their effect on revenue after April 2012.
- Whether planned 2011 capital spending and debt repayments were funded as expected, including the availability and terms of project financing and DOE support.
- Product-segment order intake and backlog conversion; reported backlog was $51.0 million as of February 15, 2011, down from $90.0 million a year earlier, and included $30 million contingent on letters of credit.
- Debt maturities, floating-rate exposure, covenant compliance and the effect of the 2011 bond issuance on liquidity and leverage.
- Developments in the accounting-restatement-related litigation and any resulting financial exposure.