Ormat to record $230 million write-off on poor performance of California plant

North Brawley geothermal power plant (source: Ormat)

Alexander Richter 24 Oca 2013

Ormat Technologies (NYSE_ORA) reported yesterday that “it will record a non-cash pre-tax charge of up to $230 million during the fourth quarter of 2012 for impairment to the company’s North Brawley power plant located in Imperial County, California.

The North Brawley power plant was placed in service under its power purchase agreement with Southern California Edison (SCE) in 2010. However, the North Brawley geothermal field has been much more difficult to operate than other fields and the power plant has been unable to reach its design capacity of 50 MW. Instead, it has been operating at capacities between 20 MW and 33 MW. This generation level has been achieved following significant additional capital expenditures and higher than anticipated operating costs.

In order to improve the economics of the North Brawley power plant, the company approached SCE to discuss various contractual alternatives to the power purchase agreement and, in early 2012, reached a written understanding to engage in discussions with third parties about purchasing the power at better rates. However, in a letter dated January 14, 2013, SCE informed the company that it is no longer interested in pursuing alternatives to the current power purchase agreement, thus retracting its permission to the company to explore a replacement power purchase agreement with higher electricity prices.

As a result of SCE’s notification and the resulting continuation of the current low price regime under the existing power purchase agreement, coupled with a further understanding of the cost and probability of success of additional well-field work which has been accumulated in the recent months, the company has concluded that it will not be economical to continue to invest the substantial capital required to increase the generating capacity of the North Brawley plant. Accordingly, the company has decided to operate the plant at the current capacity level of approximately 27 MW and refrain from additional capital investment to expand the capacity. The company expects to record a non-cash pre-tax charge for impairment to the North Brawley power plant in the fourth quarter of 2012, which is currently estimated to be in an amount of up to $230 million. The impairment charge will result in a material loss in the fourth quarter and for the full year 2012. The company does not expect that the impairment charge will affect its ability to meet the financial covenants under any of its corporate debt agreements or materially adversely affect its future operational results.

“Although we expect that the substantial reduction in operating expenses through 2012 will result in positive EBITDA for North Brawley going forward, the inability to replace the current power purchase agreement with a new agreement providing higher electricity prices, coupled with this facility’s higher than typical operating expenses drove our impairment decision,” said Ormat CEO Dita Bronicki. “Given these circumstances, additional investment to increase generation is not economically justified. However, we will continue to explore ways to improve North Brawley’s future cash flows to deliver value for shareholders,” added Mrs. Bronicki. “Where applicable, we have implemented operational lessons learned from the North Brawley experience in the development of new projects brought on-line in the last two years, thus improving our ability to develop successful and profitable projects,” concluded Mrs. Bronicki.

Source: Company release PRNewswire via Renewablesbiz