Geothermal Tie-up

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Ormat Technologies (ORA:  NYSE) is buying U.S. Geothermal (HTM:  NYSE) for $5.45 per share in cash.   The offer represents a 29% premium to the HTM closing price the day prior to the announcement.  The shares had been in a steady decline over the past several months, hitting a 52-week low of $3.11 earlier in January 2018.  So while the offer price pales in comparison to the U.S. Geothermal’s all-time high stock price of $28.68 way back in October 2007, shareholders may be feeling a warm breeze coming off Ormat’s cash.

Should Ormat shareholders be as thrilled as the company ponies up $110 million in cash to buy U.S. Geothermal?

U.S. Geothermal has three operational geothermal power plants located at Neal Hot Springs in Oregon, San Emidio in Nevada and Raft River in Idaho.  Total power generation is about 45 megawatts.  The company has projects in development that could add another 115 megawatts to power production.  This compares to Ormat’s worldwide operating portfolio of over 700 megawatts.

Folding U.S. Geothermal’s production and development properties into the Ormat portfolio could nudge output by only 6%, but upon completion the development projects would increase Ormat production by 22%.  One of the projects in development by U.S. Geothermal is at The Geysers in California, the largest geothermal property in the world.  It might be of particular interest to Ormat, which has no foothold there.

U.S. Geothermal has been working on a 30 megawatt project at the Geysers.  By the end of September 2017, the company had invested a total of $10.2 million in the project, but expects the entire project to require $148 million.  All permits are in place except for air quality and building permit go-aheads that are expected once the final engineering design is finished.

The targeted commercial operation date is sometime before the end of 2019.  The completion date would be more exciting if there was a power purchase agreement already in place.  Investors are never well served by ‘build it and they will come’ business models.  U.S. Geothermal has targeted power purchases that appear to have an interest in replacing based load from fossil fuel sources.  Perhaps Ormat can accelerate negotiations.

U.S. Geothermal has a tidy balance sheet with $10.5 million in cash in excess of cash security bonds and other restricted cash holdings.  Long-term debt totals $104.3 million, which is backed up by $169.6 million in property, plant and equipment.  The balance sheet is fortified by strong cash flow generation.  In the twelve months ending September 2017, the company converted 32% of revenue to operating cash flow.

Naturally, in the first trading session after the deal was announced, HTM was bid up to Ormat’s offer price.  U.S. Geothermal’s largest shareholder, JCP Investment Management, has reportedly already signaled an intention to vote in favor of the offer.  Shares of Ormat also gapped higher on the news as investors applauded the geothermal tie-up.  The targeted closing sometime before June 2018, seems more likely than not.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.  Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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