Ormat buys back share in partnership at 40% discount

Ormat Technologies third quarter financial results, published yesterday, included a 48% increase in net profits, to $23. 4 million, and revenues that were up 20% over the parallel quarter in 2008, to $119.8 million.

Last year Ormat Technologies lost $22.6 million on an investment in bonds backed by auction rate securities from the late Lehman Brothers investment bank.

Now it turns out that the bank's demise also has a positive side. Ormat will record $13 million in pre-tax capital gains following a deal to buy 30% of the rights in Lehman Brothers' partnership with Morgan Stanley investment bank, for $18.5 million.

Ormat Technologies is the operational arm of Ormat Industries, a company traded on the Tel Aviv Stock Exchange. Industries shares rose 4% on the Tel Aviv Stock Exchange yesterday.

The partnership was founded by Ormat Nevada, a subsidiary of Ormat Technologies, jointly with Lehman Brothers and Morgan Stanley, as the owner of Ormat's four geothermal projects in Nevada.

The partnership was supposed to speed up the use of tax benefits, such as accelerated depreciation and tax credits on the production of electricity from a renewable energy source. In June 2007 and April 2008 Ormat Nevada sold the partnership rights to Lehman Brothers and Morgan Stanley for $135 million in cash.

The agreement with the two banks stated that Ormat would transfer the cash flow from the projects and the tax benefits to the banks, until a predetermined yield - apparently 7% per year - was achieved. When that target was reached, Ormat was supposed to receive 95% of the rights to the cash flow and tax benefits, and was to buy the partners' rights to the projects at fair value.

Ormat Technologies is now purchasing the rights to the partnership, and the fair value of the commitment to transfer 30% of the rights to the cash flow from the four projects and their tax benefits is $31.5 million - such that Ormat will be buying the commitment at a 41.3% discount.

But losing business to a former employee

At the same time Ormat Technologies lost some business when Southern California Edison electric company, the Ormat group's biggest customer (22.6% of revenues in 2008), announced it has agreed to buy up to 150 megawatts from a geothermal power plant to be built in Imperial Valley by 2013 by Ram Power. Ram's CEO is Hezi Ram, former director of business development at Ormat Technologies.

A subsidiary of Ram Power and Magma Energy (which is traded on the Toronto stock exchange) last month won an international tender from the Nicaraguan government, for the purchase of two land concessions, each measuring 100 square kilometers, for exploratory drillings in search of geothermal reservoirs. The companies will start drilling in the first quarter of 2010 and will continue for 27 months.

Ram, who had viewed himself as a candidate for CEO of Ormat Technologies, left the company when the Bronicki family decided to give the top post to Yoram Bronicki. Ram founded a geothermal technology company in Reno, Nevada, not far from Ormat Technologies headquarters. Ram Power is currently trading on the Toronto stock exchange at a market cap of $458 million, while Ormat is worth about $1.7 billion.