PUERTO DE SANTA MARIA, Spain (ResourceInvestor.com) -- Business prospects and operating conditions continue to improve at Nevada’s Ormat Technologies [NYSE:ORA], a leading developer of geothermal and recovered energy technology and resources. Management reported $10.1 million in net income for Q1 2008 as it continues to pursue a goal of adding 100 megawatts (MW) a year of power generation capacity to its project portfolio.
The company’s improving performance and business prospects are attracting greater attention from Wall Street and institutional investors. Word spread round Net investor boards in late May that Google co-founder Sergei Brin had met with Ormat’s management and that its philanthropic arm was considering taking a stake in the company as Google.org looks to diversify its efforts to develop clean, renewable energy sources that are cheaper than coal.
Morgan Stanley and Lehman Bros. already have stakes in Ormat’s success. Lehman Bros. in early May negotiated the purchase of 3.1 million Ormat shares through a block trade negotiated with management as part of a shelf registration filed back in 2006.
Less than a month earlier, Ormat Nevada, Inc. reported that Lehman and Morgan Stanley had purchased part-ownership interests in its Galena 3 geothermal power plant for $64 million, the second time the investment banks’ private investment arms have taken stakes in Ormat projects. Title to Galena 3 was transferred to a private partnership, OPC LLC, as a result.
A Strong Q1
Ormat’s year-over-year first quarter revenues grew 12.4%, to $69.4 million this year. Revenue from its main business line, geothermal power resource development and electricity generation, grew more than 36%, to $59.5 million, year-to-year and 7.2% on a quarterly basis. While revenues rose, their costs fell 16% year-to-year.
The $10.1 million in net income - $0.24 per common share - is a substantial year-to-year improvement. Ormat reported a net loss of $5.8 million ($0.15 per common share) for Q1 2007.
Increased power production and rates were the main factors underlying the recent performance improvements. Ormat’s generating capacity in the U.S. rose to 572,488 MWh from Q1 as compared to 437,126 MWh in Q1 2007.
Ormat began receiving revenues from the Amatitlan project in Guatemala during Q1, which added to the revenue gain, as did higher rates from its Puna project in Hawaii and per a power purchase agreement with Southern California Edison, which were due to higher oil prices, management reported. The Amatitlan geothermal plant came on-line in March 2007.
The company’s operations produced positive Q1 cash flow - earnings adjusted for interest, taxes, depreciation and amortization - of $27.5 million as compared to $13.4 million in the year-ago quarter.
As a result, and following through on Ormat’s dividend policy - which aims for an annual dividend payout ratio of at least 20% - the company’s board approved a quarterly dividend 5 cents per share.
Operating and Development Portfolios
Ormat has four geothermal power plants up and running in Nevada, three in California and one in Hawaii. Internationally, it is operating two plants in Guatemala, another in Nicaragua and one in Kenya.
Looking ahead, Ormat is developing three geothermal projects in California’s Imperial Valley, two more in Nevada, another in Hawaii (the Puna project), as well as one in Indonesia, one in New Zealand and a second in Kenya.
"Since the beginning of the first quarter, we declared commercial operation for the Galena 3 and Heber South projects and continued to make progress on our exploration work to secure geothermal resources for 2010 and beyond,” CEO Dita Bronicki told analysts during Ormat’s Q1 earnings conference call.
“Also during the quarter, we strengthened our products backlog signing three EPC (engineering, procurement and construction) agreements for a total amount of over $100 million, consisting of one geothermal and two recovered energy generation power plants, out of which approximately $50 million are still subject to a Notice to Proceed. We expect to add an additional 174 MW by the end of 2009 from projects that are currently under construction, including Olkaria and Brawley."
Designing and building recovered energy systems for industry and government is Ormat’s second line of business.
Management on May 1 announced that Ormat had signed an EPC agreement with Montana-Dakota Utilities Co. to build a 5.3 MWh recovered energy generation facility that, pending regulatory approval, will be located on the Northern Border Pipeline Company’s compressor station in Morton County, North Dakota.
Expected to be completed in Q4 2009, the facility will increase energy conversion efficiencies by approximately 25% and produce enough renewable electrical power to supply some 5,000 homes in the service territory without burning any additional fuel.
Investor Prospects
Based on Ormat’s Q1 performance “we maintain our guidance for 2008 and expect our 2008 Electricity Segment revenues to be approximately $245 million,” Bronicki told analysts.
“We also expect an additional approximately $9 million of revenues from our share of electricity revenues generated by Mammoth that is accounted for under the equity method. With regard to our Products Segment, we maintain our guidance for 2008 revenues and expect them to be between $70 million and $80 million."
Initiating coverage of Ormat on May 30, Janco Partners’ analyst Vijay K. Singh rated the company’s shares “accumulate” and set a target price of $57.
The analyst in a research note reportedly cited increasing interest and rapid growth in renewable power and geothermal resulting from rising fossil fuel prices and intensified efforts to reduce greenhouse gas emissions, along with Ormat’s vertically integrated operations, successful track record and expansions - and the interest it has attracted from major investment banks and investors - as the main reasons for investing in Ormat’s shares.
