Ormat Industries (TASE: ORMT) has been in the news a lot recently, and not for anything positive. A series of events, that started with a technical fault at one of the company's power plants, continued with 2010 guidance that disappointed investors, deep cuts by analysts in their target prices for the stock, and restated financials that have now led to investors organizing to bring a class action against the company all this has led to a 33% drop in Ormat's share price in the past few months.
Last week, Ormat released its results for 2009, and after several years in which revenue grew, the company estimates that it will fall about 13% in 2010 to around $360 million. Dita Bronicki, CEO of Ormat and its controlling shareholder, explains in an interview with "Globes" why investors should not be perturbed at the expected fall in revenue. As for the other problems that have arisen recently, she says, "You have to analyze each of the incidents or breakdowns to realize that it's not all that exceptional or unusual."
Last month, Ormat reported that the power plant at Puna in Hawaii was generating only 17 megawatts out of a capacity of 30 megawatts, after a drop in the supply of steam to the plant. "There's a plant that is supposed to generate 30 megawatts, and when you hear that it is only generating 17 megawatt, it sounds untoward, but you have to look at this in a broader perspective," Bronicki explains.
"Ormat supplies over megawatts, and 2.5% of this is down while problems in the geothermal field are dealt with. In geothermal energy, the average activity rate is 92%, and we are within that average."
At the end of 2008, Ormat was due to start operating the power plant at North Brawley in the US, at 50 megawatts output. In fact, the plant began commercial operation only at the beginning of 2010, and that at partial output of 20 megawatts.
"There are phenomena in the geothermal field in the area that we have not met with at any other plant. This is a very serious technological challenge, and it took us a long time to find solutions to the problem, which we are now implementing.
"These are some of the geothermal risks that have to be taken into account," Bronicki says. "This is high-risk technology in comparison with other technologies, but it works 24 hours a day, and not just when the sun shines or the wind blows."
Ormat operates in geothermal energy in two ways. The first is products, in which it sets up power plants for customers, receives payment, and exits the deal. The second is power, in which it is also the owner of the power plant, and enjoys the stream of revenue from power production over the years.
In products, the company had record revenue of $160 million last year, but it estimates only half this for 2010.
Why is there such high volatility in this sector?
"The nature of the products sector is that it is project-based, which the reason that Ormat switched 15 years ago from a company dealing in products to a company that owns power plants. In 2009, there were two large projects that we built for other companies in Nevada in the US, and in New Zealand, worth $70 million and $60 million respectively, so that most of the annual turnover derived from these projects.
"Projects of that size are not expected in 2010. Instead, there will be smaller, $20 million projects, and we built our guidance on that basis. It could be that there will be a big project that will come along in the second half of the year, but the income from it will be recognized only in 2011. Over the long term, the products sector represents 25% of revenue, and in 2009 there was a jump that has to be neutralized."
Has the economic crisis affected the flow of project orders?
"Execution of projects in the products sector is not connected to the economic situation. The support that exists today in the US for alternative energy projects represents potential for orders in the products sector, and we expect that that will happen. However, it's important to remember that just as it takes us time to obtain licenses and make progress with development, our colleagues too have difficulties, and we are talking about activity that takes a long time, so it's hard to estimate when orders will come in."
While visibility is short in the products sector, in power, Bronicki says, Ormat can see twenty years ahead, and not just in talk. "The average life of our power contracts is 17-18 years, and we know how much revenue we will have even if we don't grow." The power plants Ormat owns have overall output of 520 megawatts, and the company forecasts a 50% rise in installed output by the end of 2013.
Should investors regard you as a growth company or a value company?
"We're a mixture of the two. We have a stable element that generates value, and that is our existing portfolio of power plants with long-term contracts and assured prices. In addition, we will increase the size of our installed output by 50% by the end of 2013, and we have a pool of over 20 more possible projects at initial stages of development, so that we are a combination of the two."
Published by Globes [online], Israel business news - www.globes-online.com - on March 3, 2010
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