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Analyst says Ormat’s good results for 2009 might not be sustainable

In a recent article on Ormat in Israel, “Clal Finance Ltd. analyst Yuval Ben-Zeev predicts that geothermal energy company Ormat Industries Ltd. (TASE: ORMT) US subsidiary Ormat Technologies Inc. (NYSE: ORA) will publish a strong financial report next Wednesday, including record revenue of over $400 million for 2009 as a whole and a net profit of $77 million, a 55% increase in net profit compared with 2008.

However, Ben-Zeev cautions that Ormat Technologies’ results are not sustainable, citing three key factors. The first is that almost all of the increase in revenue was due to the products segment, where he expects $150 million revenue in 2009 from $93 million in 2008. “This revenue is not sustainable, and does not represent future expectations,” he says. He estimates that the products segment’s pretax profit is misleadingly high by about $20 million.

The second factor is that Ormat Technologies bought back some of the rights in a tax partnership, making a one-time capital gain of $14 million in the fourth quarter. Ben-Zeev also points to lagging production at several geothermal plants.

Ormat Technologies’ guidance predicts $406 million revenue in 2009, including $254-258 million revenue from the electricity segment and $150 million revenue from the products segment.

Ben-Zeev says, “We fear that the revenue guidance for 2010 will disappoint investors. We estimate that the company will report $380 million revenue in 2010.”

Ben-Zeev claims that it is not possible to ignore the fact that Ormat Technologies faces ongoing challenges in the electricity segment. He cites the company’s announcements that its North Brawly geothermal plant in California, completed in late 2008, is producing only 17 megawatts, compared with the 50 megawatts planned, and that the company expects to achieve full capacity only toward the end of 2010. This will affect the company’s revenue and cash flow in 2010, not to mention the need for additional, unplanned investment, and delays in obtaining $100 million in US government grants, which will affect the company’s profit.

Ben-Zeev also notes problems at Ormat’s 30-MW Puna geothermal project in Hawaii, where output is below expectations at 17 MW, and delays in the completion of another power plant in the project. He also believes that the 30-MW East Brawly power plant will not be completed on schedule.

In a separate development, Ormat Technologies today announced that it signed a letter of intent with Kenya Power & Lighting Co. Ltd to further expand the company’s Olkaria III geothermal power plant from 48 MW to 100 MW, within the framework of the existing power purchase agreement (PPA).

Ormat Technologies’ share closed at $33.93 on the NYSE yesterday, giving a market cap of $1.54 billion. Ormat Industries’ share rose 1.3% by mid-afternoon on the TASE today to NIS 31.71, giving a market cap of NIS 3.72 billion.”

Source: Globes Online

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