Ormat Technologies, Inc.: Form 10-Q for the period ended Mar 31, 2023

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 attributable to a number of risks and uncertainties, many of which are beyond our control.

These forward-looking statements are made only as of the date hereof, and, except as legally required, we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

A summary of the risks that may cause actual results to differ from our expectations include, but are not limited to the following:

Risks Related to the Company’s Business and Operation

• Our financial performance depends on the successful operation of our geothermal, REG, Solar PV power plants under the Electricity segment as well as, our energy storage facilities, which are subject to various operational risks.
• Our exploration, development, and operation of geothermal energy resources are subject to geological risks and uncertainties, which may result in decreased performance or increased costs for our power plants.
• We may decide not to implement, or may not be successful in implementing, one or more elements of our multi-year strategic plan, and the plan may not achieve its goal of enhancing shareholder value.
• Our investments in battery energy storage system (BESS) technology involves new technologies with relatively limited history with respect to reliability and performance and may not perform as expected. In addition, our investments may be negatively affected by a number of factors, including increases in storage costs, risk of fire and volatility in electricity pricing.
• Concentration of customers, specific projects and regions may expose us to heightened financial exposure.
• Our international operations expose us to risks related to the application of foreign laws and regulations.
• Political, economic and other conditions in the emerging economies where we operate, including Israel, may subject us to greater risk than in the developed U.S. economy.
• Conditions in and around Israel, where the majority of our senior management and our main production and manufacturing facilities are located, may adversely affect our operations and may limit our ability to produce and sell our products or manage our power plants.
• Reduction in our Products backlog may affect our ability to fully utilize our main production and manufacturing facilities.
• Some of our leases will terminate if we do not extract geothermal resources in “commercial quantities” or if we fail to comply with the terms or stipulations of such leases or any of the provisions of the Geothermal Steam Act or if the lessor under any such lease defaults on any debt secured by the relevant property, thus requiring us to enter into new leases or secure rights to alternate geothermal resources, none of which may be available on terms as favorable to us as any such terminated lease, if at all.
• Reduced levels of recovered energy required for the operation of our REG power plants may result in decreased performance of such power plants.
• Our business development activities may not be successful and our projects under construction or facilities undergoing enhancement and repowering may encounter delays.
• Our future growth depends, in part, on the successful enhancement of a number of our existing facilities.
• We rely on power transmission facilities that we do not own or control.
• Our use of joint ventures may limit our flexibility with jointly owned investments.
• Our operations could be adversely impacted by climate change.
• We could be negatively impacted by regulatory and other responses to climate change.
• Geothermal projects that we plan to develop in the future may operate as "merchant" facilities without long-term PPAs and therefore such projects will be exposed to market fluctuations.
• We may not be able to successfully complete acquisitions, and we may not be able to successfully integrate, or realize anticipated synergies from, companies that we have acquired and may acquire in the future.
• We may not be able to successfully conclude transactions and integrate companies, which we acquired and may acquire in the future.
• We encounter intense competition from electric utilities, other power producers, power marketers, developers and third-party investors.
• Changes in costs and technology may significantly impact our business by making our power plants and products less competitive, resulting in our inability to sign new or recontracted PPAs for our Electricity segment and new supply and EPC contracts for our Products segment.
• Our intellectual property rights may not be adequate to protect our business.
• We may experience difficulties implementing and maintaining our new enterprise resource planning system.
• We may experience a cyber-incident, cyber security breach, severe natural event or physical attack on our operational networks and information technology systems.

Risks Related to Governmental Regulations, Laws and Taxation

• Our financial performance could be adversely affected by changes in the legal and regulatory environment affecting our operations.
• Pursuant to the terms of some of our PPAs with investor-owned electric utilities and publicly-owned electric utilities in states that have renewable portfolio standards, the failure to supply the contracted capacity and energy thereunder may result in the imposition of penalties.
• If any of our domestic power plants loses its current Qualifying Facility status under PURPA, or if amendments to PURPA are enacted that substantially reduce the benefits currently afforded to Qualifying Facilities, our domestic operations could be adversely affected.
• We may experience a reduction or elimination of government incentives.
• We are a holding company and our cash depends substantially on the performance of our subsidiaries and the power plants they operate, most of which are subject to restrictions and taxation on dividends and distributions.
• The costs of compliance with federal, state, local and foreign environmental laws and our ability to obtain and maintain environmental permits and governmental approvals required for development, construction and/or operation may result in liabilities, costs and delays in construction (as well as any fines or penalties that may be imposed upon us in the event of any non-compliance or delays with such laws or regulations).
• We could be exposed to significant liability for violations of hazardous substances laws because of the use or presence of such substances at our power plants.
• U.S. federal, state and foreign country income tax reform could adversely affect us.

Risks Related to Economic and Financial Conditions

• We may be unable to obtain the financing we need on favorable terms to pursue our growth strategy and any future financing we receive may be less favorable to us than our current financing arrangements.
• We have incurred substantial indebtedness that may decrease our business flexibility, access to capital, and/or increase our borrowing costs, and we may still incur substantially more debt, which may adversely affect our operations and financial results.
• Our debt obligations may adversely affect our ability to raise additional capital and will be a burden on our future cash resources, particularly if we elect to settle these obligations in cash upon conversion or upon maturity or required repurchase.
• The Capped Call Transactions may affect the value of the Notes and our common stock and we are subject to counterparty risk with respect to the Capped Call Transactions.
• Our foreign power plants and foreign manufacturing operations expose us to risks related to fluctuations in currency rates, which may reduce our profits from such power plants and operations.
• Our power plants have generally been financed through a combination of our corporate funds and limited or non-recourse project finance debt and lease financing. If our project subsidiaries default on their obligations under such limited or non-recourse debt or lease financing, we may be required to make certain payments to the relevant debt holders, and if the collateral supporting such leveraged financing structures is foreclosed upon, we may lose certain of our power plants.
• We may experience fluctuations in the cost of construction, raw materials, commodities and drilling.
• Our commodity derivative activity may limit potential gains, increase potential losses, result in earnings volatility and involve other risks.
• Recent events affecting the financial services industry could have an adverse impact on our business and financial condition.
• We are exposed to swap counterparty credit risk.
• We may not be able to obtain sufficient insurance coverage to cover damages resulting from any damages to our assets and profitability including, but not limited to, natural disasters such as volcanic eruptions, lava flows, wind and earthquakes.

Risks Related to Force Majeure

• The global spread of a public health crisis, including the COVID-19 pandemic may have an adverse impact on our business.
• The existence of a prolonged force majeure event or a forced outage affecting a power plant, or the transmission systems could reduce our net income.
• Threats of terrorism may impact our operations in unpredictable ways and could adversely affect our business, financial condition, future results and cash flow.

Risks Related to Our Stock

• Future equity issuances, including through our current or any future equity compensation plans, could result in dilution, which could cause the price of our shares of common stock to decline.
• A substantial percentage of our common stock is held by stockholders whose interests may conflict with the interests of our other stockholders.
• The price of our common stock may fluctuate substantially, and your investment may decline in value.
• We may issue additional shares of our common stock in connection with conversions of the Notes, and thereby dilute our existing stockholders and potentially adversely affect the market price of our common stock.
• The fundamental change provisions of the Notes may delay or prevent an otherwise beneficial takeover attempt of us.

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. Other than as required by law, we undertake no obligation to update forward-looking statements even though our situation may change in the future. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

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 quarterly report and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”) and any updates contained herein as well as those set forth in our reports and other filings made with the Securities and Exchange Commission (the “SEC”).

Company Contact and Sources of Information

Our website is www.ormat.com (http://www.ormat.com). Information contained on our website is not part of this quarterly report. Information that we furnish to or file with the U.S. Securities and Exchange Commission (the “SEC”), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to, or exhibits included in, these reports are made available for download, free of charge, through our website as soon as reasonably practicable. Our SEC filings, including exhibits filed therewith, are also available directly on the SEC’s website at www.sec.gov (http://www.sec.gov).

We may use our website as a distribution channel of material company information. Financial and other important information regarding the Company is routinely posted on and accessible through our website at www.ormat.com (http://www.ormat.com). Accordingly, investors should monitor this channel, in addition to following our press releases, SEC filings and public conference calls and webcasts.

General

Overview

We are a leading vertically integrated company that is primarily engaged in the geothermal energy power business. We leverage our core capabilities and global presence to expand our activity in recovered energy generation and into different energy storage services and solar PV (including hybrid geothermal and solar PV as well as Solar plus Energy Storage). Our objective is to become a leading global provider of renewable energy and help to mitigate climate change by providing replacement to carbon-intensive energy sources. We have adopted a strategic plan to focus on several key initiatives to expand our business.

We currently conduct our business activities in three business segments:

• Electricity Segment. In the Electricity segment, we develop, build, own and operate geothermal, solar PV 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. In the three months ended March 31, 2023, we derived 71.9% of our Electricity segment revenues from our operations in the United States and 28.1% from the rest of the world.
• Product Segment. In the Product segment, we design, manufacture and sell equipment for geothermal and recovered energy-based electricity generation and provide services relating to the engineering, procurement and construction of geothermal and recovered energy-based power plants. In the three months ended March 31, 2023, we derived 14.3% of our Product segment revenues from our operations in the United States and 85.7% from the rest of the world.
• Energy Storage Segment. In the Energy Storage segment, we own and operate grid connected In Front of the Meter Battery Energy Storage Systems ("BESS"), which provide capacity, energy and/or ancillary services directly to the electric grid. In the three months ended March 31, 2023, we derived all of our Energy Storage segment revenues from our operations in the United States.

Our current generating portfolio of approximately 1.16 GW includes geothermal power plants in the United States, Kenya, Guatemala, Honduras, Guadeloupe and Indonesia, as well as energy storage facilities, recovered energy generation and Solar PV power plants in the United States.

Recent Developments

The most significant developments in our Company and business since January 1, 2023 are described below.

• In April, 2023, we commenced commercial operation of the North Valley geothermal power plant. The North Valley power plant provides 25 MW of geothermal power to NV Energy under a 25-year agreement to help meet NV Energy’s renewable targets and support increased customer demand for around-the-clock clean energy.
• In April and May we commenced the commercial operation of two energy storage facilities, Howell and Bowling Green. The Howell BESS projects, located in New Jersey, and the Bowling Green BESS project located in Ohio will add 7MW and 12MW of capacity respectively, and will be providing ancillary services to PJM.
• In March 2023, we announced that we closed a public offering of 3,600,000 shares of our common stock at a price of $82.6 per share. In addition, the underwriters' exercised its option to purchase an additional 540,000 shares of common stock at the same price. We intend to use the net proceeds from the offering for general corporate purposes, including working capital and capital expenditures, and for potential acquisitions, including complementary businesses, technologies or assets.
• In January 2023, we, together with PT Medco Power Indonesia (“Medco Power”), signed a Financing Agreement with PT Sarana Multi Infrastruktur (Persero) (“SMI”) for development of the Ijen Geothermal Power Plant. The Ijen power plant will be developed in stages and the first phase of development is expected to generate 34 MW in 2025. MCG, a jointly owned company between Medco Power (51% equity share) and Ormat Technologies (49% equity share), will develop and operate the first geothermal power plant in East Java. The Company also signed a contract as a key contractor on Ormat Energy Converter (“OEC") supply for this project and secured $32.1 million to our backlog.

Trends and Uncertainties

Different trends, factors and uncertainties may impact our operations and financial condition, including many that we do not or cannot foresee. However, we believe that our results of operations and financial condition for the foreseeable future will be primarily affected by the following trends, factors and uncertainties that are, from time to time, also subject to market cycles:

• There has been increased demand for energy generated from geothermal and other renewable resources in the United States as costs for electricity generated from renewable resources have become more competitive. Much of this is attributable to legislative and regulatory requirements and incentives, such as state RPS and federal tax credits such as PTCs or ITCs (which are discussed in more detail in the section entitled “Government Grants and Tax Benefits” below). We believe that future demand for energy generated from geothermal and other renewable resources in the United States will be driven primarily by further commitment to, and implementation of, state RPS and greenhouse gas reduction initiatives.
• The U.S. federal government has taken certain actions which are supportive of the industry for climate solutions. In August 2022, the President of the United States signed into law the IRA of 2022. The IRA includes several tax incentives to promote climate change mitigation and clean energy, electric vehicles, battery and energy storage manufacture or purchase. The U.S. presidential administration has taken immediate steps at the federal level which we believe signify support for climate solutions, including, but not limited to, rejoining the Paris Climate Accords and re-establishing a social price on carbon used in cost/benefit analysis for policy making. We expect this current administration, combined with a closely divided Congress, will usher in additional regulations supportive of the markets in which we invest.
• We expect that a variety of local governmental initiatives will create new opportunities for the development of new projects with the potential to realize higher returns on our equity as well as to 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.
• In the Product segment, we see new opportunities for business in New Zealand, the U.S., Asia Pacific and Central and South America. In addition a new tariff structure was recently introduce in Turkey, which we expect should increase demand for new development. The new tariff includes incentives for local manufacturing and we are currently evaluating the tariff and implication on us. We have experienced increased competition from binary power plant equipment suppliers including the major steam turbine manufacturers. While we believe that we have a distinct competitive advantage based on our technology, accumulated experience and current worldwide share of installed binary generation capacity, an increase in competition may impact our ability to secure new purchase orders from potential customers. The increased competition may also lead to further reductions in the prices that we are able to charge for our binary equipment.
• Russia’s invasion of and military attacks on Ukraine, including indirect impacts as a result of sanctions and economic disruption, has complicated and may continue to further complicate existing supply chain constraints. Supply chain constraints may cause cost increases of raw materials, commodities and equipment that could adversely affect our profit margins.
• In the markets in which we operate, particularly in the U.S, there have been higher rates of inflation over the last year. While our U.S. contracts are not indexed to inflation most of our international-based contracts are indexed to inflation. If inflation continues to increase in our markets, it may increase our expenses such that our profit margins could be adversely impacted. It may also increase the costs of some of our development projects that could negatively impact their competitiveness.
• Interest rate increases for both short-term and long-term debt have increased sharply. Although our outstanding debt mostly bears fixed interest rates, as we refinance it, or borrow additional amounts, we may incur additional interest expense versus expiring loans.

Revenues

For the three months ended March 31, 2023, 92.5% of our Electricity segment revenues were from PPAs with fixed energy rates, which are not affected by fluctuations in energy commodity prices. We have variable price PPAs in California and Hawaii, which provide for payments based on the local utilities’ 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. In Hawaii, the prices paid for electricity pursuant to the 25 MW PPA for the Puna Complex in Hawaii change primarily as a result of variations in the price of oil as well as other commodities. In 2019, we signed a new PPA related to Puna with fixed prices, increased capacity and extended the term until 2052. We are currently negotiating economic amendments to the PPA which are subject to PUC approval.

To comply with obligations under their respective PPAs, certain of our project subsidiaries are structured as special purpose, bankruptcy remote entities and their assets and liabilities are ring-fenced. Such assets are not generally available to pay our debt, other than debt at the respective project subsidiary level. However, these project subsidiaries are allowed to pay dividends and make distributions of cash flows generated by their assets to us, subject in some cases to restrictions in debt instruments, as described below.

Electricity segment revenues are also subject to seasonal variations and are affected by higher-than-average ambient temperatures, as described below under “Seasonality”.

Revenues attributable to our Product segment are based on the sale of equipment, engineering, procurement and construction contracts and the provision of various services to our customers. Product segment revenues vary from period to period because of the timing of our receipt of purchase orders and the progress of our equipment manufacturing and execution of the relevant project.

Revenues attributable to our Energy Storage segment are generated by several grid-connected BESS facilities that we own and operate that sell energy, capacity and/or ancillary services in merchant markets like PJM Interconnect, ISO New England, ERCOT and CAISO. The revenues fluctuate over time since a large portion of such revenues are generated in the merchant markets, where price volatility is inherent.

The following table sets forth a breakdown of our revenues for the periods indicated:

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The following table sets forth the geographic breakdown of the revenues attributable to our Electricity, Product and Energy Storage segments for the periods indicated:

(Dollars in thousands)

In the three months ended March 31, 2023 and 2022, 31% and 33% of our total revenues, respectively, were derived from foreign locations, and our foreign operations had higher gross margins than our U.S. operations in each of those periods. A substantial portion of international revenues came from Kenya and, to a lesser extent, from Honduras, Guadeloupe, Guatemala and other countries. Our operations in Kenya contributed disproportionately to gross profit and net income. The contribution to combined pre-tax income of our domestic and foreign operations within our Electricity segment and Product segment differ in a number of ways.

Electricity Segment. Our Electricity segment domestic revenues were approximately 72% and 71% of our total Electricity segment for the three months ended March 31, 2023 and 2022, respectively. However, domestic operations have higher costs of revenues and expenses than our foreign operations. Our foreign power plants are located in lower-cost regions, like Kenya, Guatemala, Honduras and Guadeloupe, which favorably impact payroll, and maintenance expenses among other items. Our power plants in foreign locations are also newer than most of our domestic power plants and therefore tend to have lower maintenance costs and higher availability factors than our domestic power plants. Consequently, in the three months ended March 31, 2023 and 2022, the international operations of the segment accounted for 40% and 45% of our total gross profits, 54% and 72% of our net income (assuming the majority of corporate operating expenses and financing are recorded under our domestic jurisdiction) and 35% and 38% of our EBITDA, respectively.

Product Segment. Our Product segment foreign revenues were approximately 86% and 96% of our total Product segment revenues for the three months ended March 31, 2023 and 2022, respectively.

Energy Storage Segment. Our Energy Storage segment domestic revenues were 100% of our total Energy storage segment revenues for each of the three months ended March 31, 2023 and 2022.

Seasonality

Electricity generation from some of our geothermal power plants is subject to seasonal variations. In the winter, our power plants produce more energy primarily attributable to the lower ambient temperature, which has a favorable impact on the energy component of our Electricity segment revenues and the prices under many of our contracts are fixed throughout the year with no time-of-use impact. The prices paid for electricity under the PPAs for the Mammoth Complex and the North Brawley power plant in California, the Raft River power plant in Idaho, the Neal Hot Springs power plant in Oregon and Dixie Valley power plant in Nevada are higher in the months of June through September. The higher payments payable under these PPAs in the summer months partially offset the negative impact on our revenues from lower generation in the summer attributable to a higher ambient temperature. As a result, we expect the revenues and gross profit in the winter months to be higher than the revenues and gross profit in the summer months and in general we expect the first and fourth quarters to generate higher revenues than the second and third quarters.

Breakdown of Cost of Revenues

The principal cost of revenues attributable to our three segments are discussed in our 2022 Annual Report under “Part II - Item 7 – Management Discussion and Analysis of Financial Condition and Results of Operation”.

Critical Accounting Estimates and Assumptions

A comprehensive discussion of our critical accounting estimates and assumptions is included in our 2022 Annual Report under “Part II — Item 7 — Management Discussion and Analysis of Financial Condition and Results of Operation.”

New Accounting Pronouncements

See Note 2 to our condensed consolidated financial statements set forth in Item 1 of this quarterly report for information regarding new accounting pronouncements.

Results of Operations

Our historical operating results in U.S. dollars and as a percentage of total revenues are presented below. A comparison of the different years described below may be of limited utility due to (i) our recent construction of power plants or enhancement of power plants; and (ii) fluctuation in revenues related to our Product segment.

(Dollars in thousands, except per share data)

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Comparison of the Three Months Ended March 31, 2023 to the Three Months Ended March 31, 2022

Total Revenues

The table below compares revenues for the three months ended March 31, 2023 to the three months ended March 31, 2022.

(Dollars in millions)

Electricity Segment

Revenues attributable to our Electricity segment for the three months ended March 31, 2023 were $170.3 million, compared to $162.5 million for the three months ended March 31, 2022. This increase was mainly due to: (i) $5.4 million related to the CD4 facility which started commercial operation in July 2022; and (ii) $3.9 million related to Tungsten Mountain 2 which started commercial operations in April 2022, partially offset by the lower revenues at the Puna power plant due to lower electricity prices.

Power generation in our power plants increased by 3.4% from 1,820,606 MWh in the three months ended March 31, 2022 to 1,881,942 MWh in the three months ended March 31, 2023.

Product Segment

Revenues attributable to our Product segment for the three months ended March 31, 2023 were $10.0 million, compared to $14.6 million for the three months ended March 31, 2022, which represented a 31.4% decrease. The decrease in our Product segment revenues is primarily related to the progress in our projects and timing of when revenues are recognized during the period. During the three months ended March 31, 2022, Product revenues included projects in Indonesia and Nicaragua compared to other certain projects in New Zealand, Philippines and Japan for which revenues were recognized during the three months ended March 31, 2023.

Energy Storage Segment

Revenues attributable to our Energy Storage segment for the three months ended March 31, 2023 were $4.9 million compared to $6.6 million for the three months ended March 31, 2022. The decrease is mainly due to lower energy rates at PJM Interconnection, LLC (“PJM”) and California Independent System Operator “(CAISO”) facilities in the three months ended March 31, 2023 compared to the same period in the previous year.

Total Cost of Revenues

The table below compares cost of revenues for the three months ended March 31, 2023 to the three months ended March 31, 2022.

(Dollars in millions)

Electricity Segment

Total cost of revenues attributable to our Electricity segment for the three months ended March 31, 2023 was $94.8 million, compared to $94.5 million for the three months ended March 31, 2022. This increase was primarily attributable to: (i) $2.6 million related to the CD4 facility which started commercial operation in July 2022; and (ii) $0.5 million related to Tungsten Mountain 2 which started commercial operations in April 2022. This increase was offset by higher business interruption insurance proceeds of $4.5 million, which were recognized in the first quarter of 2023 compared to the same period in the previous year. Such business interruption insurance proceeds are related to the damage caused to our Puna power plant as a result of the Kilauea volcano eruption in May 2018.

Our total Electricity segment cost of revenues for the three months ended March 31, 2023 was 55.6% of Electricity revenues, compared to 58.2% for the three months ended March 31, 2022, including the impact from business interruption insurance proceeds as described above. The cost of revenues attributable to our international power plants for the three months ended March 31, 2023 was 18.3% of our total Electricity segment cost of revenues for this period compared to 17.9% for the same period in the prior year .

Product Segment

Total cost of revenues attributable to our Product segment for the three months ended March 31, 2023 was $9.4 million, compared to $13.6 million for the three months ended March 31, 2022, which represented a 31.3% decrease. This decrease was primarily attributable to the decrease in Product segment revenues, as discussed above. As a percentage of total Product segment revenues, our total cost of revenues attributable to our Product segment for the three months ended March 31, 2023 and 2022, was 93.1% and 93.1%, respectively.

Energy Storage Segment

Cost of revenues attributable to our Energy Storage segment for the three months ended March 31, 2023 were $5.1 million compared to $5.7 million for the three months ended March 31, 2022. The Energy Storage segment includes cost of revenues related to the delivery of energy storage and energy management services.

Research and Development Expenses, Net

Research and development expenses for the three months ended March 31, 2023 were $1.3 million, compared to $1.1 million for the three months ended March 31, 2022.

Selling and Marketing Expenses

Selling and marketing expenses for the three months ended March 31, 2023 were $3.9 million compared to $4.4 million for the three months ended March 31, 2022. Selling and marketing expenses for the three months ended March 31, 2023 constituted 2.1% of total revenues for such period, compared to 2.4% for the three months ended March 31, 2022.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2023 were $17.7 million compared to $17.6 million for the three months ended March 31, 2022. General and administrative expenses for the three months ended March 31, 2023 constituted 9.5% of total revenues for such period, compared to 9.6% for the three months ended March 31, 2022.

Write-off of Energy Storage Projects and Assets

Write-off of Energy Storage projects and assets for the three months ended March 31, 2022 is related to accumulated costs of energy storage projects that the Company was no longer pursuing as well as specific certain customer related assets. There were no write-offs of Energy Storage projects and assets for the three months ended March 31, 2023.

Interest Income

Interest Income for the three months ended March 31, 2023 was $1.9 million, compared to $0.3 million for the three months ended March 31, 2022. This increase was primarily related to higher cash balances as well as higher interest rates on cash and cash equivalents.

Interest Expense, Net

Interest expense, net for the three months ended March 31, 2023 was $23.6 million, compared to $21.1 million for the three months ended March 31, 2022. This increase of $2.6 million was primarily attributable to: (i) $0.6 million related to the BHI Loan entered into in February 2023; (ii) $0.7 million related to the Bank Mizrahi Loan entered into in April 2022; (iii) $1.0 million of interest expenses related to the CD 4 tax equity transaction entered into in December 2022; and higher interest expenses capitalized in the first quarter of 2022 compared to the same quarter in 2023. This increase was partially offset by lower interest expenses on other long-term loans as a result of regular principal payments.

Derivatives and Foreign Currency Transaction Gains (Losses)

Derivatives and foreign currency transaction gains and losses for the three months ended March 31, 2023 was a loss of $1.9 million, compared to a gain of $0.3 million for the three months ended March 31, 2022. Derivatives and foreign currency transaction gains (losses) for the three months ended March 31, 2023 primarily includes losses from foreign currency forward contracts which were not accounted for as hedge transactions.

Income Attributable to Sale of Tax Benefits

Income attributable to the sale of tax benefits for the three months ended March 31, 2023 was $12.6 million, compared to $7.7 million for the three months ended March 31, 2022. This income primarily represents the value of production tax credits (“PTCs”) and taxable income or loss generated by certain of our power plants allocated to investors under tax equity transactions. This increase of $4.9 million is primarily related to the CD 4 tax equity transaction entered into in December 2022 and income related to the expected sale of transferable production tax credits of $1.8 million, which was recorded in the first quarter of 2023 under the new IRA regulations.

Other Non-Operating Income (Expense), Net

Other non-operating income (expense), net for the three months ended March 31, 2023 was an expense of $0.1 million, compared to an expense of $0.1 million for the three months ended March 31, 2022.

Income Taxes

Income tax provision for the three months ended March 31, 2023 was $8.9 million compared to income tax provision of $10.2 million for the three months ended March 31, 2022. Our effective tax rate for the three months ended March 31, 2023 and 2022, was 21.1% and 31.4%, respectively. The effective rate differs from the federal statutory rate of 21% primarily due to the jurisdictional mix of earnings at differing tax rates and generation of investment tax credits of $1.6 million.

Equity in Earnings (losses) of Investees, Net

Equity in earnings of investees, net for the three months ended March 31, 2023 was $0.3 million, compared to $0.6 million for the three months ended March 31, 2022. Equity in earnings (losses) of investees, net is mainly derived from our 12.75% share in the earnings or losses in the Sarulla Consortium ("Sarulla"). During the second quarter of 2022, Sarulla agreed with its banks on a framework that will enable it to perform remediation work that is aimed to restore the plant’s performance. The recovery plan is ongoing; however, uncertainty remains regarding Sarulla’s ability to meet the plan and we are evaluating the impact of the plan on future performance. As we determined that the current situation and circumstances related to our equity method investment in Sarulla are temporary, no impairment testing was required for the period.

Net Income Attributable to the Company’s Stockholders

Net income attributable to the Company’s stockholders for the three months ended March 31, 2023 was $29.0 million, compared to net income attributable to the Company’s stockholders of $18.4 million for the three months ended March 31, 2022, which represents an increase of $10.6 million. This increase was attributable to an increase of $10.7 million in net income which was affected by the explanations described above, and an increase of $0.1 million in net income attributable to noncontrolling interest in the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

Liquidity and Capital Resources

Our principal sources of liquidity have been derived from cash flows from operations, proceeds from third party debt such as borrowings under our credit facilities, private or public offerings and issuances of debt or equity securities, project financing and tax monetization transactions, short term borrowing under our lines of credit, and proceeds from the sale of equity interests in one or more of our projects. We have utilized this cash to develop and construct power plants, fund our acquisitions, pay down existing outstanding indebtedness, and meet our other cash and liquidity needs.

As of March 31, 2023, we had access to (i) $414.9 million in cash and cash equivalents, of which $100.3 million is held by our foreign subsidiaries; and (ii) $391.0 million of unused corporate borrowing capacity under existing committed lines of credit with different commercial banks.

Our estimated capital needs for the remainder of 2023 include $494.0 million for capital expenditures on new projects under development or construction including energy storage projects, exploration activity and maintenance capital expenditures for our existing projects. In addition, $143.1 million will be needed for long-term debt repayment.

We expect to finance these requirements with: (i) the sources of liquidity described above; (ii) positive cash flows from our operations; and (iii) future project financings and re-financings (including construction loans and tax equity). Management believes that, based on the current stage of implementation of our strategic plan, the sources of liquidity and capital resources described above will address our anticipated liquidity, capital expenditures, and other investment requirements.

As of March 31, 2023, we continue to maintain our assertion to no longer indefinitely reinvest foreign funds held by our foreign subsidiaries, with the exception of a certain balance held in Israel, and have accrued the incremental foreign withholding taxes. Accordingly, during the three months ended March 31, 2023, we included a foreign income tax expense of $0.4 million related to foreign withholding taxes on accumulated earnings of all of our foreign subsidiaries.

As described under Note 1 to the condensed consolidated financial statements, on February 27, 2023, the Company entered into a definitive loan agreement with Hapoalim Bank under which it provided for a loan in an aggregate principal amount of $100 million.

Letters of Credits Under Credit Agreements

Some of our customers require our project subsidiaries to post letters of credit in order to guarantee their respective performance under relevant contracts. We are also required to post letters of credit to secure our obligations under various leases and licenses and may, from time to time, decide to post letters of credit in lieu of cash deposits in reserve accounts under certain financing arrangements. In addition, our subsidiary, Ormat Systems, is required from time to time to post performance letters of credit in favor of our customers with respect to orders of products.

(Dollars in millions)

Restrictive Covenants

Our obligations under the credit agreements, the loan agreements, and the trust instrument governing the bonds described above, are unsecured, but we are subject to a negative pledge in favor of the banks and the other lenders and certain other restrictive covenants. These include, among other things, restraints on: (i) creating any floating charge or any permanent pledge, charge or lien over our assets without obtaining the prior written approval of the lender; (ii) guaranteeing the liabilities of any third party without obtaining the prior written approval of the lender; and (iii) selling, assigning, transferring, conveying or disposing of all or substantially all of our assets, or a change of control in our ownership structure. Some of the credit agreements, the term loan agreements, and the trust instrument contain cross-default provisions with respect to other material indebtedness owed by us to any third party. In some cases, we have agreed to maintain certain financial ratios, which are measured quarterly, such as: (i) equity of at least $750 million and in no event less than 25% of total assets; and (ii) 12-month debt, net of cash, cash equivalents, and short-term bank deposits to Adjusted EBITDA ratio not to exceed 6.0. As of March 31, 2023: (i) total equity was $2,337.0 million and the actual equity to total assets ratio was 46.6% and (ii) the 12-month debt, net of cash, cash equivalents, to Adjusted EBITDA ratio was 3.45. During the three months ended March 31, 2023, we distributed interim dividends in an aggregate amount of $6.7 million. The failure to perform or observe any of the covenants set forth in such agreements, subject to various cure periods, would result in the occurrence of an event of default and would enable the lenders to accelerate all amounts due under each such agreement.

As described above, we are currently in compliance with our covenants with respect to the credit agreements, the loan agreements and the trust instrument, (except as described below), and believe that the restrictive covenants, financial ratios and other terms of any of our full-recourse bank credit agreements will not materially impact our business plan or operations.

As of March 31, 2023, we did not meet the dividend distribution criteria related to the DAC 1 Senior Secured Notes and USG Prudential - NV, which resulted in certain equity distribution restrictions from these related subsidiaries.

Future minimum payments

Future minimum cash payments under long-term obligations (including long-term debt, lease obligations and financing liability), as of March 31, 2023, are as follows:

(Dollars in thousands)

39

Third-Party Debt

Our third-party debt consists of (i) non-recourse and limited-recourse project finance debt or acquisition financing debt that we or our subsidiaries have obtained for the purpose of developing and constructing, refinancing or acquiring our various projects; (ii) full-recourse debt incurred by us or our subsidiaries for general corporate purposes; (iii) financing liability related to the business combination purchase transaction of the Terra-Gen geothermal assets and (iv) convertible senior notes issued in the second quarter of 2022.

Non-Recourse and Limited-Recourse Third-Party Debt

(Dollars in millions)

1. LIBOR cannot be lower than 1.25%. Margin of 4.35% as long as the Company’s guaranty of the loan is outstanding (current situation) or 4.75% otherwise.

2. Secured by equity interest.

3. Secured by the assets.

4. Loan issued in total aggregate amount of EUR 8.0 million.

Full-Recourse Third-Party Debt

(Dollars in millions)

(1 ) Bonds issued in total aggregate principal amount of NIS 1.0 billion.

Financing Liability - Dixie Valley

The financing liability is related to the business combination purchase transaction of the Terra-Gen geothermal assets. The financing liability amount outstanding as of March 31, 2023 is $236.1 million, it bears a fixed interest rate of 2.5% per annum, principal and interest are payable semi-annually, and matures in March 2033.

Convertible Senior Notes

The convertible senior notes ("Notes") were issued in June 2022. The Notes bear annual interest of 2.5%, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2023. The Notes mature on July 15, 2027, unless earlier converted, redeemed or repurchased and the outstanding aggregate amount of the Notes as of March 31, 2023 is $431.3 million.

Liquidity Impact of Uncertain Tax Positions

The Company has a liability associated with unrecognized tax benefits and related interest and penalties in the amount of approximately $6.6 million as of March 31, 2023. This liability is included in long-term liabilities in our condensed consolidated balance sheet because we generally do not anticipate that settlement of the liability will require payment of cash within the next twelve months. We are not able to reasonably estimate when we will make any cash payments required to settle this liability.

Dividends

The following are the dividends declared by us since March 31, 2021:

Historical Cash Flows

The following table sets forth the components of our cash flows for the periods indicated:

(Dollars in thousands)

For the Three Months Ended March 31, 2023

Net cash provided by operating activities for the three months ended March 31, 2023 was $56.5 million, compared to $81.8 million for the three months ended March 31, 2022. The net decrease of $25.3 million was primarily due to an increase in our operational results, period over period, as explained above, offset by: (i) net increase in change to inventories of $18.2 million related to timing of allocating costs to projects under construction; (ii) an increase in prepaid expenses and other of $8.7 million primarily related to prepayment made to suppliers; and (iii) a net increase in the change in receivables of $31.8 million, as a result of the timing of collection from our customers. This increase was partially offset primarily by a net increase of $15.2 million in costs and estimated earnings in excess of billings on uncompleted contracts, period over period, as a result of timing of billing to our customers and increase in the change in accounts payable and accrued expenses of $9.1 million, mainly due to timing of payments to our supplier and construction of power plants.

Net cash used in investing activities for the three months ended March 31, 2023 was $111.2 million, compared to $139.3 million for the three months ended March 31, 2022. The principal factors that affected our net cash used in investing activities during the three months ended March 31, 2023 and 2022 were: capital expenditures of $106.9 million, and $137.2 million, respectively, primarily for our facilities under construction that support our growth plan.

Net cash provided by financing activities for the three months ended March 31, 2023 was $350.4 million, compared to net cash used in financing activities of $44.7 million for the three months ended March 31, 2022. The principal factors that affected the net cash provided by financing activities during the three months ended March 31, 2023 were: (i) net proceeds of $297.1 million and $99.9 million from issuance of common stock and the Hapoalim Loan 2023, respectively, primarily offset by: (i) repayment of long-term debt in the amount of $42.8 million; (ii) cash dividend payment of $6.7 million, and (iii) $3.0 million cash paid to noncontrolling interest. The principal factors that affected our net cash used in financing activities during the three months ended March 31, 2022 were: (i) repayments of long-term debt in the amount of $39.1 million; (ii) cash paid to noncontrolling interest of $3.4 million, and (iii) cash dividend payment of $6.7 million.

Non-GAAP Measures: EBITDA and Adjusted EBITDA

We calculate EBITDA as net income before interest, taxes, depreciation, amortization and accretion. We calculate Adjusted EBITDA as net income before interest, taxes, depreciation, amortization and accretion, adjusted for (i) mark-to-market gains or losses from accounting for derivatives, (ii) stock-based compensation, (iii) merger and acquisition transaction costs, (iv) gain or loss from extinguishment of liabilities, (v) cost related to a settlement agreement, (vi) non-cash impairment charges; (vii) write-off of unsuccessful exploration activities; and (viii) other unusual or non-recurring items. We adjust for these factors as they may be non-cash, unusual in nature and/or are not factors used by management for evaluating operating performance. We believe that presentation of these measures will enhance an investor’s ability to evaluate our financial and operating performance. EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under accounting principles generally accepted in the United States, or U.S. GAAP, and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to net earnings as indicators of our operating performance or any other measures of performance derived in accordance with U.S. GAAP. Our Board of Directors and senior management use EBITDA and Adjusted EBITDA to evaluate our financial performance. However, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do.

Starting in the fourth quarter of 2022, we include accretion expenses related to asset retirement obligation in the adjustments to net income when calculating EBITDA and adjusted EBITDA. The presentation of EBITDA and adjusted EBITDA includes accretion expenses for the three months ended March 31, 2023, however, the prior year has not been recast to include accretion expenses as the amounts were immaterial.

Net income for the three months ended March 31, 2023 was $33.5 million, compared to $22.8 million for the three months ended March 31, 2022 respectively.

Adjusted EBITDA for the three months ended March 31, 2023 was $123.5 million, compared to $107.9 million for the three months ended March 31, 2022, respectively.

The following table reconciles net income to EBITDA and Adjusted EBITDA for the three months ended March 31, 2023 and 2022:

(Dollars in thousands)

In May 2014, the Sarulla consortium ("SOL") closed $1,170 million in financing through SOL. As of March 31, 2023, the SOL credit facility had an outstanding balance of $836.6 million. Our proportionate share in the SOL credit facility is $106.7 million. During the second quarter of 2022, Sarulla agreed with its banks on a framework that will enable it to perform remediation work that is aimed to restore the plant’s performance. The recovery plan is ongoing; however, uncertainty remains regarding Sarulla’s ability to meet the plan and we are evaluating the impact of the plan on future performance. As we determined that the current situation and circumstances related to our equity method investment in Sarulla are temporary, no impairment testing was required for the period.

Capital Expenditures

Our capital expenditures primarily relate to: (i) the development and construction of new power plants, (ii) the enhancement of our existing power plants; and (iii) investment in activities under our strategic plan.

The following is an overview of projects that are fully released for construction.

Heber Complex (California). We are currently in the process of repowering the Heber 1 power plant. We are planning to replace the steam turbine and old OEC units with new advanced technology equipment that will add a net capacity of 8 MW. Following these enhancements, we expect the capacity of the complex to reach 89 MW. Pre-Commissioning activities at Heber 1 are ongoing. We expect commercial operation of Heber 1 repowering in the second quarter of 2023.

Steamboat Solar (Nevada). We are currently developing a Solar PV power plant adjacent to our Steamboat 2/3 geothermal power plant at the Steamboat complex in Nevada. The project is expected to generate approximately 7 MW that will be used for the ancillary needs of the geothermal power plant and will free a similar amount of MW to be sold from the geothermal resource to SCPPA under the SCPPA portfolio PPA. Construction of the Steamboat 2/3 Solar PV is delayed due to weather conditions and commercial operation is expected in the second half of 2023.

Zunil Upgrade (Guatemala). We are expanding the Zunil geothermal power plant in Guatemala to add 5 MW of additional capacity. We are planning to sell the electricity generated under the existing PPA with the local utility, Instituto Nacional de Electrification or “INDE”. Construction has been completed and drilling is still ongoing. Commercial operation is expected in the first half of 2023.

North Valley Solar (Nevada). We are currently developing a Solar PV power plant adjacent to our North Valley geothermal power plant in Nevada. The project is expected to generate approximately 6 MW that will be used for the ancillary needs of the geothermal power plant and will free a similar amount to be sold from the geothermal resource to SCPPA under the SCPPA portfolio PPA. Permitting is ongoing. Permits are expected any day. Commercial operation is expected in the third half of 2023.

Beowawe Upgrade (Nevada). We are currently in the process of upgrading the Beowawe project that we recently acquired. We are planning to replace the old equipment with new advanced technology equipment that will add a net capacity of 9 MW. Construction commenced and we expect commercial operation in the second quarter of 2024.

Steamboat Hills Solar (Nevada). We are currently developing a Solar PV power plant adjacent to our geothermal Steamboat complex in Nevada. The project is expected to generate approximately 3.5 MW that will be used for the ancillary needs of the geothermal power plant and will free a similar amount of MW to be sold from the geothermal resource to SCPPA under the SCPPA portfolio PPA. Engineering and procurement are ongoing and we expect commercial operation in the second half of 2023.

Beowawe Solar (Nevada). We are currently developing a Solar PV power plant adjacent to our geothermal Beowawe power plant in Nevada. The project is expected to generate approximately 6 MW that will be used for the ancillary needs of the geothermal power plant and will free a similar amount of MW to be sold from the geothermal resource under its PPA. Engineering and procurement are ongoing and we expect commercial operation in the first half of 2024.

In addition, we are in the process of repowering Ormesa, Neal Hot Springs, Steamboat 2/3 and Mammoth. In the Energy Storage segment, we commenced operation of two assets since the

beginning

of the year and we are in the process of constructing several facilities as detailed below:

The following is an overview of projects that are in initial stages of construction:

Carson Lake Project. We plan to develop between 10 MW to 15 MW at the Carson Lake project on BLM leases located in Churchill County, Nevada. We signed a Small Generator Interconnection Agreement with NV Energy in December 2017. As of March 31, 2023, we are planning to begin the drilling activity next year.

We have budgeted approximately $570.0 million in capital expenditures for construction of new projects and enhancements to our existing power plants, of which we had invested $317.0 million as of March 31, 2023. We expect to invest approximately $164.0 million in the rest of 2023 and the remaining approximately $89.0 million thereafter.

In addition, we estimate approximately $330.0 million in additional capital expenditures in 2023 to be allocated as follows: (i) approximately $89.0 million for the exploration, drilling and development of new projects and enhancements of existing power plants that are not yet released for full construction; (ii) approximately $49.0 million for maintenance capital expenditures for our operating power plants; (iii) approximately $175.0 million for the construction and development of energy storage projects; and (iv) approximately $17.0 million for enhancements to our production facilities.

In the aggregate, we estimate our total capital expenditures for the last three quarters of 2023 to be approximately $494.0 million.

Exposure to Market Risks

Based on current conditions, we believe that we have sufficient financial resources to fund our activities and execute our business plans. However, the cost of obtaining financing for our project needs may increase significantly or such financing may be difficult to obtain.

We, like other power plant operators, are exposed to electricity price volatility risk. Our exposure to such market risk is currently limited because the majority of our long-term PPAs have fixed or escalating rate provisions that limit our exposure to changes in electricity prices. Our energy storage projects sell primarily on a "merchant" basis and are exposed to changes in the electricity market prices.

The energy payments under the PPAs of the Heber 2 power plant in the Heber Complex until the end of 2022, are determined by reference to the relevant power purchaser’s short run avoided cost. A decline in the price of natural gas will result in a decrease in the incremental cost that the power purchaser avoids by not generating its electrical energy needs from natural gas, or by reducing the price of purchasing its electrical energy needs from natural gas power plants, which in turn will reduce the energy payments that we may charge under the relevant PPA for these power plants. The Puna Complex is currently benefiting from energy prices which are higher than the floor under the 25 MW PPA for the Puna Complex. For Heber 2 power plant we signed a new PPA and for Puna we are currently negotiating a new PPA, for a fixed energy rate, as discussed above.

As of March 31, 2023, 98.8% of our consolidated long-term debt was fixed rate debt and therefore was not subject to interest rate volatility risk and 1.2% of our long-term debt was floating rate debt, exposing us to interest rate risk in connection therewith. As of March 31, 2023, $26.0 million of our long-term debt remained subject to interest rate risk.

Our cash equivalents are subject to interest rate risk. We currently maintain our surplus cash in short-term, interest-bearing bank deposits, money market funds, corporate bonds and debt securities available for sale (with a minimum investment grade rating of A+ by Standard & Poor’s Ratings Services).

We are also exposed to foreign currency exchange risk, in particular the fluctuation of the U.S. dollar versus the New Israeli Shekels ("NIS") in Israel and the Euro. Risks attributable to fluctuations in currency exchange rates can arise when we or any of our foreign subsidiaries borrow funds or incur operating or other expenses in one type of currency but receive revenues in another. In such cases, an adverse change in exchange rates can reduce such subsidiary’s ability to meet its debt service obligations, reduce the amount of cash and income we receive from such foreign subsidiary, or increase such subsidiary’s overall expenses. In Kenya, the tax asset is recorded in Kenyan Shillings ("KES") similar to the tax liability, however any change in the exchange rate in the KES versus the U.S. dollar has an impact on our financial results. Risks attributable to fluctuations in foreign currency exchange rates can also arise when the currency denomination of a particular contract is not the U.S. dollar. Substantially all of our PPAs in the international markets are either U.S. dollar-denominated or linked to the U.S. dollar except for our operations on Guadeloupe, where we own and operate the Boulliante power plant which sells its power under a Euro-denominated PPA with Électricité de France S.A. Our construction contracts from time to time contemplate costs which are incurred in local currencies. The way we often mitigate such risk is to receive part of the proceeds from the contract in the currency in which the expenses are incurred. Currently, we have forward and cross-currency swap contracts in place to reduce our NIS/U.S. dollar currency exposure and expect to continue to use currency exchange and other derivative instruments to the extent we deem such instruments to be the appropriate tool for managing such exposure.

On July 1, 2020, we concluded an auction tender and accepted subscriptions for senior unsecured bonds comprised of NIS 1.0 billion aggregate principal amount (the “Senior Unsecured Bonds - Series 4”). The Senior Unsecured Bonds - Series 4 were issued in New Israeli Shekels and converted to approximately $290 million using a cross-currency swap transaction shortly after the completion of such issuance.

In June 2022, we issued $431.3 million aggregate principal amount of our 2.5% convertible senior notes due in 2027. The Notes bear annual interest of 2.5%, payable semiannually in arrears, and mature on July 15, 2027, unless earlier converted, redeemed or repurchased.

We performed a sensitivity analysis on the fair values of our long-term debt obligations, and foreign currency exchange forward contracts. The foreign currency exchange forward contracts listed below principally relate to trading activities. The sensitivity analysis involved increasing and decreasing forward rates at March 31, 2023 and December 31, 2022 by a hypothetical 10% and calculating the resulting change in the fair values.

At this time, the development of our strategic plan has not exposed us to any additional market risk. However, as the implementation of the plan progresses, we may be exposed to additional or different market risks.

The results of the sensitivity analysis calculations as of March 31, 2023 and December 31, 2022 are presented below:

(Dollars in thousands)

In July 2019, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR (London Interbank Offered Rate), announced that it intends to phase out LIBOR. LIBOR is still in use and being published until its phaseout in June 2023 in order to allow a transition period mainly for contracts that already exist using LIBOR. We have evaluated the impact of the transition from LIBOR, and currently believe that the transition will not have a material impact on our consolidated financial statements.

Effect of Inflation

We are seeing an increase in overall operating and other costs as the result of higher inflation rates, in particular in the United States. In addition, we are experiencing increases in raw material cost and supply chain delays, which may put pressure on our operating margins in the Product segment and increase our cost to build our own power plants and energy storage assets. To address the possibility of rising inflation, some of our contracts include certain provisions that mitigate inflation risk.

In connection with the Electricity segment, none of our U.S. PPAs, including the SCPPA Portfolio PPA, are directly linked to the Consumer Price Index ("CPI"). Inflation may directly impact an expense we incur for the operation of our projects, thereby increasing our overall operating costs and reducing our profit and gross margin. The negative impact of inflation would be partially offset by price adjustments built into some of our PPAs that could be triggered upon such occurrences. In addition to the Heber 2 and part of the Puna rates that are impacted by higher commodity prices, the energy payments pursuant to our PPAs for some of our power plants such as the Brady power plant, the Steamboat 2 and 3 power plants and the McGinness Complex increase every year through the end of the relevant terms of such agreements, although such increases are not directly linked to the CPI or any other inflationary index. Lease payments are generally fixed, while royalty payments are generally calculated as a percentage of revenues and therefore are not significantly impacted by inflation. In our Product segment, inflation may directly impact fixed and variable costs incurred in the construction of third party power plants, thereby lowering our profit margins at the Product segment. We are more likely to be able to offset long term, all or part of this inflationary impact through our project pricing. With respect to power plants that we build for our own electricity production, inflationary pricing may impact our operating costs which may be partially offset in the pricing of the new long-term PPAs that we negotiate.

Interest rate increases for both short-term and long-term debt have increased sharply. Although our outstanding debt mostly bears fixed interest rates, as we refinance it, or borrow additional amounts, we may incur additional interest expense versus expiring loans.

Contractual Obligations and Commercial Commitments

We have various contractual obligations, which are recorded as liabilities in our consolidated condensed financial statements. Other items are not recognized as liabilities in our consolidated condensed financial statements but are required to be disclosed. There have been no material changes, outside of the ordinary course of business, to our contractual obligations as previously disclosed in our 2022 Annual Report.

Concentration of Credit Risk

Our credit risk is currently concentrated with the following major customers: Sierra Pacific Power Company and Nevada Power Company (subsidiaries of NV Energy), SCPPA and KPLC. If any of these electric utilities fail to make payments under its PPAs with us, such failure would have a material adverse impact on our financial condition. Also, as we implement our multi-year strategic plan we may be exposed, by expanding our customer base, to different credit profile customers than our current customers.

The Company's revenues from its primary customers as a percentage of total revenues are as follows:

We have historically been able to collect on substantially all of our receivable balances. As of March 31, 2023, the amount overdue from KPLC in Kenya was $36.9 million of which $9.8 million was paid in April 2023. In Honduras, as of March 31, 2023, the total amount overdue from Empresa Nacional de Energía Eléctrica ("ENEE") was $16.6 million of which $5.9 million was paid in April 2023 In addition, due to the financial situation in Honduras, the Company may experience further delays in collection. The Company believes it will be able to collect all past due amounts in Honduras.

Government Grants and Tax Benefits

A comprehensive discussion on government grants and tax benefits is included in our 2022 Annual Report. There has been some change to the comprehensive discussion as noted below.

On August 16, 2022, the President of the United States signed into law the Inflation Reduction Act of 2022, which is effective for taxable years beginning after December 31, 2022. Additional information in respect of the Inflation Reduction Act is detailed under Note 1 and 10 to the condensed consolidated financial statements.

Ormat Systems received “Benefited Enterprise” status under Israel’s Law for Encouragement of Capital Investments, 1959 (the Investment Law), with respect to two of its investment programs through 2011. In January 2011, new legislation amending the Investment Law was enacted. Under the new legislation, a uniform rate of corporate tax will apply to all qualified income of certain industrial companies, as opposed to the previous law’s incentives that are limited to income from a “Benefited Enterprise” during their benefits period. As a result, we now pay a uniform corporate tax rate of 16% with respect to that qualified income. In March 2023, Ormat Systems received an approval from the Israeli Innovation Authority that it owns an "Innovation Promoting Enterprise" and therefore is eligible for a reduced corporate tax rate of 12% on its "Preferred Technological Income" for the tax years 2021 through 2023 (effective tax rate of approximately 13% for 2021 through 2023). The tax benefit of lower effective tax rate is reflected in the 2023 net income.

The information appearing under the headings “Exposure to Market Risks” and “Concentration of Credit Risk” in Part I, Item 2 of this quarterly report on Form 10-Q is incorporated by reference herein.

a. Evaluation of disclosure controls and procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO (principal executive officer) and CFO (principal financial officer), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(e) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of our disclosure controls and procedures as of March 31, 2023. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2023 to provide the reasonable assurance described above.

b. Changes in internal control over financial reporting

There were no changes in our internal controls over financial reporting in the first quarter of 2023 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

A comprehensive discussion of our other risk factors is included in the “Risk Factors” section of our annual report on Form 10-K for the year ended December 31, 2022 which was filed with the SEC on February 24, 2023. The risks described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. During the period covered by this quarterly report on Form 10-Q, there have been no material changes in our risk factors as previously disclosed except the following:

Recent events affecting the financial services industry could have an adverse impact on our business and financial condition.

The recent closures of Silicon Valley Bank, Signature Bank and Silvergate Capital Corporation, as well as acquisitions of Credit Suisse and First Republic Bank at regulators’ behest, have created bank-specific and broader financial institution liquidity risks and concerns. While we did not have any material deposits at any of these institutions, uncertainty remains over liquidity concerns in the financial services industry and potential impacts on the broader global economy, and our business, our customers and suppliers, and/or industry as a whole may be adversely impacted in ways that we cannot predict at this time.

If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash and cash equivalents may be threatened. In addition, if any of our customers, suppliers or other parties with whom we conduct business are unable to access funds, such parties’ ability to pay or perform their obligations to us or to enter into new commercial arrangements requiring additional payments to us or additional funding could be adversely affected. Moreover, sufficient external financing may not be available to us on a timely basis, on commercially reasonable terms to us, or at all. Any of these events could adversely affect our business and financial condition.