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| ORA > SEC Filings for ORA > Form 10-Q on 6-Aug-2012 | All Recent SEC Filings |
6-Aug-2012
Quarterly Report
Cautionary Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this quarterly report that address activities, events or developments that we expect or anticipate will or may occur in the future, including such matters as our projections of annual revenues, expenses and debt service coverage with respect to our debt securities, future capital expenditures, business strategy, competitive strengths, goals, development or operation of generation assets, market and industry developments and the growth of our business and operations, are forward-looking statements. When used in this quarterly report on Form 10-Q, the words "may", "will", "could", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "projects", "potential", or "contemplate" or the negative of these terms or other comparable terminology are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this quarterly report are primarily located in the material set forth under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Risk Factors", and "Notes to Condensed Consolidated Financial Statements", but are found in other locations as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management's current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this quarterly report on Form 10-Q completely and with the understanding that actual future results and developments may be materially different from what we expect due to a number of risks and uncertainties, many of which are beyond our control. Other than as required by law, we will not update forward-looking statements even though our situation may change in the future.
Specific factors that might cause actual results to differ from our expectations include, but are not limited to:
• significant considerations, risks and uncertainties discussed in this quarterly report;
• operating risks, including equipment failures and the amounts and timing of revenues and expenses;
• geothermal resource risk (such as the heat content, useful life and geological formation of the reservoir);
• financial market conditions and the results of financing efforts;
• the impact of fluctuations in oil and natural gas prices on the energy price component under certain of our power purchase agreements (PPAs);
• environmental constraints on operations and environmental liabilities arising out of past or present operations, including the risk that we may not have, and in the future may be unable to procure, any necessary permits or other environmental authorizations;
• construction or other project delays or cancellations;
• political, legal, regulatory, governmental, administrative and economic conditions and developments in the United States and other countries in which we operate;
• the enforceability of the long-term PPAs for our power plants;
• contract counterparty risk;
• weather and other natural phenomena;
• the impact of recent and future federal and state regulatory proceedings and changes, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry and incentives for the production of renewable energy at the federal and state level in the United States and elsewhere, and carbon-related legislation;
• current and future litigation;
• our ability to successfully identify, integrate and complete acquisitions;
• competition from other existing geothermal energy projects and new geothermal energy projects developed in the future, as well as from alternative electricity producing technologies;
• the effect of and changes in economic conditions in the areas in which we operate;
• market or business conditions and fluctuations in demand for energy or capacity in the markets in which we operate;
• the direct or indirect impact on our company's business resulting from the threat or occurrence of terrorist incidents or cyber-attacks or responses to such threatened or actual incidents or attacks, including the effect on the availability of and premiums on insurance;
• the effect of and changes in current and future land use and zoning regulations, residential, commercial and industrial development and urbanization in the areas in which we operate;
• development and construction of the solar photovoltaic (Solar PV) projects may not materialize as planned;
• the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2011 and other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (SEC); and
• other uncertainties which are difficult to predict or beyond our control and the risk that we incorrectly analyze these risks and forces or that the strategies we develop to address them could be unsuccessful.
Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
General
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included elsewhere in this report. See also "Cautionary Note Regarding Forward-Looking Statements" above and Item 1A - "Risk Factors" below for a discussion of important factors that could cause actual results to differ materially from the results described herein or implied by such forward-looking statements.
Overview
We are a leading vertically integrated company engaged primarily in the geothermal and recovered energy power business. We design, develop, build, sell, own and operate clean, environmentally friendly geothermal and recovered energy-based power plants, in most cases using equipment that we design and manufacture.
Our geothermal power plants include both power plants that we have built and power plants that we have acquired, while all of our recovered energy-based plants have been constructed by us. We conduct our business activities in two business segments:
• The Electricity Segment - in this segment, we develop, build, own and operate geothermal and recovered energy-based power plants in the United States and geothermal power plants in other countries around the world, and sell the electricity they generate. We have expanded our activities in the Electricity Segment to include the ownership and operation of power plants that produce electricity generated by Solar PV systems that we do not manufacture; and
Both our Electricity Segment and Product Segment operations are conducted in the United States and throughout the world. Our current generating portfolio includes geothermal power plants in the United States, Guatemala, Kenya, and Nicaragua, as well as recovered energy generation (REG) plants in the United States.
For the six months ended June 30, 2012, our total revenues increased by 29.5% (from $202.4 million to $262.2 million) over the same period last year.
For the six months ended June 30, 2012, total Electricity Segment revenues were $167.3 million, compared to $159.5 million for the six months ended June 30, 2011, an increase of 4.9%, while Product Segment revenues were $94.9 million for the six months ended June 30, 2012, compared to $43.0 million for the six months ended June 30, 2011, an increase of 120.9%.
For the six months ended June 30, 2012, our Electricity Segment revenues represented approximately 63.8% of our total revenues, while our Product Segment revenues represented approximately 36.2% of our total revenues. For the six months ended June 30, 2011, our Electricity Segment revenues represented approximately 78.8% of our total revenues, while our Product Segment revenues represented approximately 21.2% of our total revenues.
Revenues from our Electricity Segment are derived from sales of electricity generated by our power plants pursuant to long-term PPAs. We have variable price PPAs in California, Hawaii and Guatemala:
• The energy rate under the PPAs in California for the Ormesa complex, the Mammoth complex, and the Heber 1 and Heber 2 power plants (the California SO#4 PPAs), changed in the beginning of May 2012, from a fixed to a variable rate that is subject to the impact of fluctuations in natural gas prices.
• The prices paid for the electricity pursuant to the 25 MW PPA for the Puna complex in Hawaii are variable and based on the local utility's avoided cost, which is the incremental cost that the power purchaser avoids by not having to generate such electrical energy itself or purchase it from others. The prices, which are calculated on a monthly basis, are mainly impacted by the price of oil.
• The energy price under the Amatitlan PPA in Guatemala is fixed, but we have the option to sell the power with advance notice to the spot market.
We have hedged our exposure to fluctuations in the price of natural gas and oil until December 31, 2012 and March 31, 2013, respectively, as described below under the heading "Recent Developments".
In the six months ended June 30, 2012, approximately 76.2% of our Electricity Segment revenues were derived from contracts with fixed energy rates, which are not affected by the fluctuations in energy commodity prices. Electricity Segment revenues are also subject to seasonal variations and can be affected by higher-than average ambient temperatures, as described below under the heading "Seasonality".
Revenues attributable to our Product Segment are based on the sale of equipment and the provision of various services to our customers. These revenues may vary from period to period because of the timing of our receipt of purchase orders and the progress of our execution of each project.
Our management assesses the performance of our two segments of operation differently. In the case of our Electricity Segment, when making decisions about potential acquisitions or the development of new projects, we typically focus on the internal rate of return of the relevant investment, relevant technical and geological matters
and other relevant business considerations. We evaluate our operating power plants based on revenues and expenses, and our projects that are under development based on costs attributable to each such project. We evaluate the performance of our Product Segment based on the timely delivery of our products, performance quality of our products, and costs actually incurred to complete customer orders compared to the costs originally budgeted for such orders.
Recent Developments
The most significant recent developments in our company and business are described below.
• On July 23, 2012, we entered into a European put transaction with a bank for settlement effective from August 1, 2012 until December 31, 2012, pursuant to which we purchased a natural gas put option for 0.7 million MMbtus that settles against Natural Gas - California SoCal - NGI (NGI). We entered into this transaction in order to economically hedge our exposure to NGI below $3.19 per MMbtu under our California SO#4 PPAs with Southern California Edison Company (Southern California Edison). We paid an up-front premium of approximately $0.2 million that will be recorded as a current asset and will be marked to market on each balance sheet date. Under this transaction we will receive from the bank on each settlement date the difference between the strike price of $3.19 per MMbtu and the market price on the first commodity business day on which the relevant commodity reference price is published in the relevant calculation period (July 1, 2012 to December 1, 2012). If the strike price is lower than the market price, no payment will be made. This transaction will not be designated as a hedge transaction and will be marked to market with the corresponding gains or losses recognized within electricity revenues.
• In July 2012, our wholly owned subsidiary, Ormat Nevada Inc. (Ormat Nevada), entered into a $61.4 million engineering, procurement and construction (EPC) contract with Enel Green Power North America (Enel). Under the terms of the EPC contract, we will provide two air-cooled Ormat Energy Converters at Enel's Cove Fort geothermal power plant project in southern Utah. Previously, on April 25, 2012, we entered into an interim agreement in the amount of $9.1 million to ensure timely completion of the project.
• In July 2012, our 30 MW McGinness Hills geothermal power plant in Nevada is in full operation under the OFC 2 Senior Secured Notes requirements. We expect that the full energy price under the PPA will be paid retroactive from July 1, 2012 once we receive the off-taker's commercial operation date approval.
• In the second quarter of 2012, we received approximately $72.3 million in
cash grants from the U.S. Department of the Treasury (U.S. Treasury) under
Section 1603 of the American Recovery and Reinvestment Act of 2009 (ARRA)
for specified energy property in lieu of tax credits relating to the
enhancement of our Puna geothermal complex, and to our Jersey Valley and
Tuscarora geothermal power plants.
• On May 25, 2012, NV Energy, Inc. (NV Energy) approved the commercial operation date of our 18 MW Tuscarora power plant in Nevada and the full energy price under the PPA will be paid retroactive to January 1, 2012.
• On May 24, 2012, we entered into a European put transaction with a bank for settlement effective from July 1, 2012 until December 31, 2012, pursuant to which we purchased a natural gas put option for 4.4 million MMbtus that settles against NGI. We entered into this transaction in order to economically hedge our exposure to NGI below $3.08 per MMbtu under our California SO#4 PPAs with Southern California Edison. We paid an up-front premium of approximately $1.6 million that was recorded as a current asset and is marked to market on each balance sheet date. Under this transaction we will receive from the bank on each settlement date the difference between the strike price of $3.08 per MMbtu and the market price on the first commodity business day on which the relevant commodity reference price is published in the relevant calculation period (July 1, 2012 to December 1, 2012). If the strike price is
• On May 22, 2012, Bronicki Investments Ltd. (Bronicki Investments), the controlling shareholder of our parent company, Ormat Industries Ltd. (Ormat Industries), completed the sale of part of its interest in Ormat Industries to FIMI ENRG Limited Partnership, a newly formed Israeli partnership and FIMI ENRG, a newly formed Delaware partnership, both controlled by FIMI Opportunity IV (collectively, FIMI), whereby Bronicki Investments sold to FIMI approximately 11.7% of the issued and outstanding shares of Ormat Industries. Following consummation of the transaction, each of Bronicki Investments and FIMI now holds 22.499% of the issued and outstanding shares of Ormat Industries and the parties collectively own 44.999% of the issued and outstanding shares of Ormat Industries. In addition, effective May 22, 2012, Gillon Beck, a senior partner in FIMI, was appointed as the chairman of our Board of Directors; Ami Boehm, David Granot and Robert E. Joyal were appointed to our Board; and Lucien Y. Bronicki (our former Chairman), Roger W. Gale and David Wagener (former members of our Board) resigned from their respective positions on our Board of Directors.
• On April 18, 2012, we entered into a NYMEX Heating Oil swap contract (85%) and an ICE Brent swap contract (15%) with a bank, each of which is effective from May 1, 2012 until March 31, 2013, to reduce our exposure to fluctuations in the energy rate under our 25 MW PPA for the Puna complex as a result of fluctuations in oil prices. We entered into these contracts because both swaps had a high correlation with the avoided costs (which are the incremental costs that the power purchaser avoids by not having to generate such electrical energy itself or purchase it from others) that Hawaii Electric Light Company (HELCO) uses to calculate the energy rate. Fuel prices in April 2012 were at historically high levels and we wanted to protect ourselves from a decrease in prices over the next twelve months. The contracts did not have up-front costs. Under the terms of these contracts, we will make floating rate payments to the bank and receive fixed rate payments from the bank on each settlement date. The swap contracts have monthly settlements whereby the difference between the fixed price and the monthly average price will be settled on a cash basis. These contracts have not been designated as hedge transactions and are marked to market with the corresponding gains or losses recognized within electricity revenues.
• On February 16, 2012, Geothermal Development Company (GDC), a company owned by the Government of Kenya, awarded our subsidiary the first well head power plant project in the Menengai geothermal field in Kenya on a Build-Own-Transfer basis. The award was the result of an international tender for the design, manufacturing, procurement, construction and commissioning of a 6 megawatts (MW) geothermal well head power plant. GDC will supply the steam for conversion to electricity by our power plant. The Menengai geothermal field is located on the outskirts of the town of Nakuru, about 110 miles west of Nairobi.
• On January 30, 2012, the Public Utilities Commission of Nevada (PUCN) approved the 20-year PPA that we signed in February 2011 with NV Energy to sell 30 MW from the Dixie Meadows geothermal project that we are developing in Churchill County, Nevada.
Trends and Uncertainties
The geothermal industry in the United States has historically experienced significant growth followed by a consolidation of owners and operators of geothermal power plants. During the 1990s, growth and development in the geothermal industry occurred primarily in foreign markets and only minimal growth and development occurred in the United States. Since 2001, there has been increased demand for energy generated from geothermal resources in the United States as costs for electricity generated from geothermal resources have become more competitive relative to fossil fuel generation. This has been partly due to increasing natural gas and oil prices during much of this period and, equally important, to newly enacted legislative and regulatory
requirements and incentives, such as state renewable portfolio standards and federal tax credits. The ARRA further encourages the use of geothermal energy through production tax credits (PTCs) or investment tax credits (ITCs) as well as cash grants (which are discussed in more detail in the section entitled "Government Grants and Tax Benefits" below). In response, the geothermal industry in the United States has seen a wave of new entrants and, over the last several years, consolidation involving smaller developers. We see the increasing demand for energy generated from geothermal and other renewable resources in the United States and the further introduction of renewable portfolio standards as significant trends affecting our industry today and in the immediate future. Our operations and the trends that from time to time impact our operations are subject to market cycles.
Although other trends, factors and uncertainties may impact our operations and financial condition, including many that we do not or cannot foresee, we believe that our results of operations and financial condition for the foreseeable future will be affected by the following trends, factors and uncertainties:
• We expect to continue to generate the majority of our revenues from our Electricity Segment through the sale of electricity from our power plants. Substantially all of our current revenues from the sale of electricity are derived from payments under long-term PPAs related to fully-contracted power plants. We also intend to continue to pursue opportunities, as they arise, in our recovered energy business and in the Solar PV sector.
• In our Product Segment, we expect our increased backlog to have a positive impact on our revenues in that segment over the next couple of years.
• Our primary focus continues to be our organic growth through exploration, development, and construction of new projects and enhancements of existing power plants. We expect that this investment in organic growth will increase our total generating capacity, consolidated revenues and operating income attributable to our Electricity Segment from year to year. In addition, we routinely look at acquisition opportunities.
• The continued awareness of climate change may result in significant changes in the business and regulatory environments, which may create business opportunities for us. In 2011, the first phase of the U.S. Environmental Protection Agency's (EPA) "Tailoring Rule" took effect. The Tailoring Rule sets thresholds addressing the applicability of the permitting requirements under the Clean Air Act's Prevention of Significant Deterioration and Title V programs to certain major sources of greenhouse gas (GHG) emissions. Federal legislation or additional federal regulations addressing climate change are possible. Several states and regions are already addressing climate change. For example, California's state climate change law, AB 32, which was signed into law in September 2006, regulates most sources of GHG emissions and aims to reduce GHG emissions to 1990 levels by 2020. On October 20, 2011 the California Air Resources Board (CARB) adopted cap-and-trade regulations to reduce California's greenhouse gas emissions under AB 32. In addition to California, twenty-two other states have set GHG emissions targets or goals. Regional initiatives, such as the Western Climate Initiative (which includes California and four Canadian provinces) and the Midwest GHG Reduction Accord (which includes six U.S. states and one Canadian province), are also being developed to reduce GHG emissions and develop trading systems for renewable energy credits. In addition, twenty-nine U.S. states and the District of Columbia have adopted Renewable Portfolio Standards (RPS) and eight other states have adopted renewable portfolio goals. On April 12, 2011, Governor Jerry Brown signed California Senate Bill X1-2 (SBX1-2) which increased California's RPS to 33% by December 31, 2020 and instituted a tradable Renewable Energy Credit (REC) program. SBX1-2 is expected to foster a liquid tradable REC market and lead to more creative off-take arrangements. Although we cannot predict at this time whether the tradable REC program under SBX1-2 and its implementing regulations will have a significant impact on our operations or revenue, it may facilitate additional options when negotiating PPAs and selling electricity from our projects. The California Public Utilities Commission (CPUC) recently authorized the utilities to procure 1,299 MW through a Renewable Auction Mechanism (RAM), a procurement mechanism for renewable distributed generation projects greater
• Outside of the United States, we expect that a variety of government initiatives will create new opportunities for the development of new projects, as well as create additional markets for our products. These initiatives include the award of long-term contracts to independent power generators, the creation of competitive wholesale markets for selling and trading energy, capacity and related energy products, and the adoption of programs designed to encourage "clean" renewable and sustainable energy sources.
• We expect competition from the wind and solar power generation industry to continue. While the expected demand for renewable energy is large enough to accommodate increased competition, the increase in competition and the amount of renewable energy under contract may contribute to a reduction in electricity prices. Despite increased competition from the wind and solar power generation industry, we believe that baseload electricity, such as geothermal-based energy, will continue to be a leading source of renewable energy in areas with commercially viable geothermal resources.
• The business environment for obtaining new PPAs in California has become more difficult. Currently, the three investor-owned utilities in California appear to have sufficient renewable energy under contract to satisfy their RPS goals over the next few years. However, we believe that this is a temporary market condition and remain confident in our ability to secure new long-term PPAs.
• In the Product Segment, we expect increased competition from binary power plant equipment suppliers. While we believe that we have a distinct competitive advantage based on our accumulated experience and current worldwide share of installed binary generation capacity, which is in excess of 90%, an increase in competition may impact our ability to secure new purchase orders from potential customers. The increased competition may also lead to a reduction in the prices that we are able to charge for our binary equipment, which in turn may impact our profitability.
• North America is the largest and most developed natural gas market in the world. As recently as five years ago, the region was considered to be short on supply, with an expected need to import significant volumes of liquefied natural gas (LNG) from the international gas market to balance . . .
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