Ormat Technologies, Inc.: Form 10-Q for the period ended Sep 30, 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, including the ongoing war with Hamas, may adversely affect our operations and may limit our ability to produce and sell our products.
• Responses in various countries where we have business operations to Israel’s ongoing war with Hamas or future similar conflicts may adversely affect our operations and may limit our ability to produce and sell our products.
• Reduction in our Products segment 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, into which we entered in connection with the issuance of June 2022 convertible notes, 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.
• 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 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 a 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 September 30, 2023, we derived 69.2% of our Electricity segment revenues from our operations in the United States and 30.8% 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 September 30, 2023, we derived 5.3% of our Product segment revenues from our operations in the United States and 94.7% 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 September 30, 2023, we derived all of our Energy Storage segment revenues from our operations in the United States.

Our current generating portfolio of approximately 1.3 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 October 2023, we entered into a partnership agreement with a private investor, under which the private investor acquired membership interests in the North Valley Geothermal power plant for an initial purchase price of approximately $43.1 million and for which it will pay additional installments that are expected to amount to approximately $6.1 million. The Company will continue to operate and maintain the power plant and will receive substantially all the attributable cash flow generated by the power plant, and the private investor will receive substantially all of the tax attributes of the project.
• In October 2023, we entered into a purchase agreement with Enel Green Power North America (EGPNA), a subsidiary of Enel SpA (ENEL.MI), to acquire a portfolio, which includes two contracted operating geothermal power plants and one triple hybrid geothermal, solar PV (20MW nameplate) and solar thermal power plant with a total aggregate generation of approximately 43 MW, two Solar assets with a total nameplate capacity of 40 MW, and two greenfield development assets, for a total of $271 million(subject to a customary post-closing working capital adjustment to the purchase price, based on the levels of net working capital of the acquired companies). The acquisition is expected to close by the first quarter of 2024, subject to regulatory approvals and customary closing conditions.
• In September 2023, we have signed new contracts with Mercury NZ Limited for the supply and Engineering, Procurement and Construction (EPC) of a new 56 MW (gross) geothermal power plant at Ngatamariki, New Zealand. Under the agreement with Mercury, the project will be an expansion of the existing 96 MW Ngatamariki geothermal power plant currently in operation, which was also built by the Company in 2012. The new power plant will be built on the same platform as the existing power plant and once in operation with the new Ormat Energy Converter (OEC), it will have a total output of over 150 MW (gross).
• In September 2023, we secured a new multi-year contract in partnership with Gotion High-Tech to supply batteries in support of our upcoming Energy Storage projects. Under this supply contract, Gotion will provide us with batteries at a capacity of up to 750MWh, with a variable pricing structure, partly linked to Lithium Carbonate prices. In addition to the signed agreement, we are discussing additional supply contracts and expansions to the existing signed agreement to provide the Company with U.S. domestic manufactured batteries from Gotion’s planned battery plant in Manteno, Illinois, which will allow us to benefit from higher Investment Tax Credits.
• In July 2023, we successfully commenced commercial operations of the Pomona project, a 20MW/40MWh Battery Energy Storage System (BESS) located in California, which provides capacity to Southern California Edison and ancillary services to the California Independent System Operator (CAISO) to support the electric grid in times of scarcity.
• In July 2023, we requested the Bureau of Land Management (BLM) to begin a supplemental National Environmental Policy Act (NEPA) review for the Company’s Dixie Meadows Geothermal Project. The Company has determined that its resources are more efficiently dedicated to Endangered Species Act (ESA) consultation within the context of additional review under NEPA.
• In July 2023, we signed a power purchase agreement with San Diego Community Power (SDCP) for the Arrowleaf Solar and Storage Facility. The Arrowleaf Solar and Storage Facility is located in Imperial County, California, adjacent to the Company’s operational Brawley geothermal facility and within the Imperial Irrigation District service territory. The project’s storage component will provide 35 MW/140 MWh of capacity and the solar component of the project will contribute 42 MW of clean energy to the grid. Under the terms of the 20-year power purchase agreement, the Company will provide SDCP with sustainable electricity generated by the Arrowleaf Solar and Storage Facility at predictable rates for customers.
• In June 2023, we successfully commenced commercial operations for two new battery storage facilities, adding a cumulative capacity of 43MW/43MWh. The projects include the Upton project, a 23MW/23MWh Battery Energy Storage System (BESS) located in Texas, which provides energy and ancillary services to the Electricity Reliability Council of Texas (ERCOT) and support the electric grid in times of scarcity, and the Andover BESS project, a 20MW/20MWh located in New Jersey, which provides ancillary services to PJM
• In June 2023, we signed agreements with Eastland Generation Limited (EGL) to build a 50MW power plant in New Zealand. EGL is a subsidiary of Eastland Group Limited and a regional infrastructure company. Under the terms of the agreement, the Company will design, build, commission and own the power plant. EGL will operate and maintain the power plant under a separate services arrangement. As part of the development agreement with EGL, the Company has granted EGL a contractual option to purchase the power plant at an agreed purchase price, subject to certain conditions.
• In May 2023, we successfully resumed operations at the Heber 1 power plant in California. This achievement comes after the plant temporarily shut down due to a fire incident that occurred in February 2022. The Heber complex, which includes Heber 1 and the repowered Heber 2, is expected to ramp up generation to approximately 87MW by the end of the third quarter 2023.
• In May 2023, we completed a 6MW upgrade to the Dixie Valley power plant in Nevada, which allows the Company to maximize its favorable long-term power purchase agreement. The upgrade involved the replacement of pre-acquisition equipment with the Company’s state-of-the-art energy converters. In addition, we completed the 6 MW Brady solar facility that supply the auxiliary needs of the Brady geothermal power plant and thereby increasing the net geothermal power sold to the grid.
• In April and May of 2023, we commenced the commercial operation of two energy storage facilities, Howell and Bowling Green. The Howell BESS project, 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 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 power purchase agreement to help meet NV Energy’s renewable targets and support increased customer demand for around-the-clock clean energy.
• In March 2023, we announced that we closed a public offering of 3,600,000 shares of our common stock at a price of $82.60 per share. In addition, the underwriters' exercised their option to purchase an additional 540,000 shares of common stock at the same price. We intend to use the $341.7 million 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 the 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 us (49% equity share), will develop and operate the first geothermal power plant in East Java. We also signed a contract as a key contractor for the Ormat Energy Converter (“OEC") supply for this project and secured $32.1 million of 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 trends, factors and uncertainties discussed in our 2022 Annual Report under “Part II - Item 7 – Management Discussion and Analysis of Financial Condition and Results of Operation”, in addition to the information set forth in this quarterly report. These trends, factors and uncertainties are, from time to time, also subject to market cycles.

• In the Product segment, we see new opportunities for business in the U.S., Asia Pacific and Central and South America. In addition, a new tariff structure was recently introduced 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.

Revenues

For the nine months ended September 30, 2023, 94.7% of our Electricity segment revenues were from PPAs with fixed energy rates, which are not affected by fluctuations in energy commodity prices. We have a variable price PPA in Hawaii, which provides 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 negotiating economic amendments including minimum capacity payments for commercial operations to the PPA and it is currently 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)

(Dollars in thousands)

In the nine months ended September 30, 2023 and 2022, 38% and 33% of our total revenues, respectively, were derived from foreign locations. Our foreign operations had higher Electricity gross margins than our U.S. operations in each of those periods. A substantial portion of Electricity international revenues came from Kenya and to a lesser extent, from Honduras, Guadeloupe and Guatemala. 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 70% and 70% of our total Electricity segment for the nine months ended September 30, 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 nine months ended September 30, 2023 and 2022, the international operations of the segment accounted for 49% and 46% of our total gross profits, 76% and 74% of our net income (assuming the majority of corporate operating expenses and financing are recorded under our domestic jurisdiction) and 39% and 39% of our EBITDA, respectively.

Product Segment. Our Product segment foreign revenues were approximately 93% and 93% of our total Product segment revenues for the nine months ended September 30, 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 and nine months ended September 30, 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 as 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 the 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)

(Dollars in thousands, except per share data)

36

37

Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022

Total Revenues

The table below compares revenues for the three months ended September 30, 2023 to the three months ended September 30, 2022.

(Dollars in millions)

Electricity Segment

Revenues attributable to our Electricity segment for the three months ended September 30, 2023 were $157.2 million, compared to $152.8 million for the three months ended September 30, 2022. This increase of $4.4 million was mainly due to: (i) $2.4 million related to the Heber 1 power plant which resumed operations in May 2023 after a temporary shutdown due to a fire incident that occurred in February 2022; (ii) $2.7 million related to the North Valley power plant which started commercial operations in April 2023; and (iii) $2.4 million related to the higher generation at the Guadeloupe power plant. This increase was partially offset by $5.6 million of lower revenues at the Puna power plant due to lower electricity prices and generation.

Power generation in our power plants increased by 7.6% from 1,535,051 MWh in the three months ended September 30, 2022 to 1,651,880 MWh in the three months ended September 30, 2023.

Product Segment

Revenues attributable to our Product segment for the three months ended September 30, 2023 were $39.8 million, compared to $14.2 million for the three months ended September 30, 2022. This increase of $25.6 million, or 180.2%, is primarily related to the progress in our projects and timing of when revenues are recognized during the period. During the three months ended September 30, 2023, Product revenues included projects primarily in New Zealand and Indonesia, compared to projects in New Zealand, Nicaragua and Indonesia for which revenues were recognized during the three months ended September 30, 2022.

Energy Storage Segment

Revenues attributable to our Energy Storage segment for the three months ended September 30, 2023 were $11.0 million compared to $8.8 million for the three months ended September 30, 2022. This increase is related to the new energy storage facilities which commenced commercial operation during 2023 and higher prices in Texas due to the warm weather conditions, partially offset by lower energy rates at PJM Interconnection, LLC (“PJM”) and California Independent System Operator “(CAISO”) facilities in the three months ended September 30, 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 September 30, 2023 to the three months ended September 30, 2022.

(Dollars in millions)

Electricity Segment

Total cost of revenues attributable to our Electricity segment for the three months ended September 30, 2023 was $107.2 million, compared to $97.1 million for the three months ended September 30, 2022. This increase was primarily attributable to: (i) the CD4 power plant which started commercial operation in July 2022; (ii) the Heber 1 power plant which resumed operations in May 2023 as described above; (iii) the Dixie Valley upgrade which was completed in May 2023; and (iv) $4.0 million income from business interruption insurance proceeds related to the fire at the Heber 1 power plant that occurred in February 2022 and which were recorded in the prior year period.

Our total Electricity segment cost of revenues for the three months ended September 30, 2023 was 68.2% of Electricity revenues, compared to 63.5% for the three months ended September 30, 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 September 30, 2023 was 16.6% of our total Electricity segment cost of revenues for this period compared to 16.9% for the same period in the prior year.

Product Segment

Total cost of revenues attributable to our Product segment for the three months ended September 30, 2023 was $32.4 million, compared to $11.7 million for the three months ended September 30, 2022, which represented a 177.7% increase. This increase is primarily attributable to the increase 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 September 30, 2023 and 2022, was 81.3% and 82.0%, respectively, which results from different profitability of the different projects.

Energy Storage Segment

Cost of revenues attributable to our Energy Storage segment for the three months ended September 30, 2023 were $8.5 million compared to $6.1 million for the three months ended September 30, 2022. This increase is related to the corresponding increase in Energy Storage revenues as described above.

Research and Development Expenses, Net

Research and development expenses for the three months ended September 30, 2023 were $1.4 million, compared to $1.2 million for the three months ended September 30, 2022. The increase in research and development expenses, net is primarily related to the timing of inputs invested in such related projects.

Selling and Marketing Expenses

Selling and marketing expenses for the three months ended September 30, 2023 were $4.7 million compared to $4.1 million for the three months ended September 30, 2022. Selling and marketing expenses for the three months ended September 30, 2023 and 2022 constituted 2.3% and 2.3% of total revenues, respectively.

General and Administrative Expenses

General and administrative expenses for the three months ended September 30, 2023 were $14.0 million compared to $16.1 million for the three months ended September 30, 2022. General and administrative expenses for the three months ended September 30, 2023 and 2022 constituted 6.8% and 9.1% of total revenues, respectively. The decrease in general and administrative expenses is primarily attributable to timing of incurring legal services in connection with the ongoing legal proceeding as described under Note 9 to the condensed consolidated financial statements.

Write-off of Energy Storage Project Assets and Unsuccessful Exploration Activities

Write-off of Energy Storage project assets and unsuccessful exploration activities for the three months ended September 30, 2023 and 2022 was $2.3 million and $0.8 million, respectively. These write-offs are related to accumulated costs of energy storage and geothermal exploration projects that the Company is no longer pursuing.

Interest Income

Interest Income for the three months ended September 30, 2023 was $2.8 million, compared to $1.7 million for the three months ended September 30, 2022. This increase is primarily related to higher interest rates on cash and cash equivalents, period over period.

Interest Expense, Net

Interest expense, net for the three months ended September 30, 2023 was $25.1 million, compared to $22.4 million for the three months ended September 30, 2022. This increase of $2.7 million was primarily attributable to the $1.6 million from the BHI Loan entered into in February 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 September 30, 2023 was a loss of $0.8 million, compared to $0.3 million for the three months ended September 30, 2022. Derivatives and foreign currency transaction gains (losses) 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 September 30, 2023 was $14.9 million, compared to $9.1 million for the three months ended September 30, 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 $5.8 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 $2.4 million, which was recorded in the third 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 September 30, 2023 was income of $0.1 million, compared to $0.7 million for the three months ended September 30, 2022. Other non-operating income (expense), net for the three months ended September 30, 2022, primarily consists of a gain from sale of equipment to a third party.

Income Taxes

Income tax benefit for the three months ended September 30, 2023 was $7.1 million compared to income tax provision of $7.2 million for the three months ended September 30, 2022. Our effective tax rate for the three months ended September 30, 2023 and 2022, was (24.1)% and 26.1%, respectively. The effective rate differs from the federal statutory rate of 21% primarily due to the generation of investment tax credits of $6.6 million, a benefit associated with the statutory tax rate change in Kenya resulting from the Finance Act of $9.4 million, and jurisdictional mix of earnings at differing tax rates.

Equity in Earnings (losses) of Investees, Net

Equity in earnings of investees, net for the three months ended September 30, 2023 was earnings of $0.4 million, compared to $0.6 million for the three months ended September 30, 2022. Equity in earnings (losses) of investees, net is derived from our 12.75% share in the earnings or losses in the Sarulla Consortium ("Sarulla") and our 49% share in the earnings or losses in the Ijen geothermal project. The decrease in equity in earnings of investees is primarily related to increase in net income generated by the Ijen project starting in 2023. In the second quarter of 2022, Sarulla agreed with its banks on a framework that will enable it to perform remediation works that are aimed to restore the power plants' performance. The outcome of the first phase of the recovery plan is under evaluation towards the decision regarding the implementation of the second phase. 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 September 30, 2023 was $35.5 million, compared to $18.1 million for the three months ended September 30, 2022, which represents an increase of $17.3 million. This increase was attributable to an increase of $16.5 million in net income which was affected by the explanations described above, and an decrease of $0.8 million in net income attributable to noncontrolling interest in the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily as a result of lower performance by our Puna power plant, period over period.

Comparison of the Nine Months Ended September 30, 2023 to the Nine Months Ended September 30, 2022

Total Revenues

The table below compares revenues for the nine months ended September 30, 2023 to the nine months ended September 30, 2022.

(Dollars in millions)

Electricity Segment

Revenues attributable to our Electricity segment for the nine months ended September 30, 2023, were $482.8 million, compared to $466.5 million for the nine months ended September 30, 2022. The increase of $16.3 million in our Electricity segment revenues was mainly attributable to: (i) $9.2 million related to the CD4 power plant which started commercial operation in July 2022; (ii) $5.2 million related to the North Valley power plant which started commercial operations in April 2023; (iii) $2.1 million related to the Dixie Valley upgrade which was completed in May 2023; (iv) $7.1 million related to higher generation in Kenya and Guadeloupe; and (v) $3.9 million related to the Tungsten 2 power plant which started commercial operation in April 2022. This increase was partially offset by $12.3 million of lower revenues at the Puna power plant due to lower electricity prices and slightly lower generation.

Power generation in our power plants increased by 6.3% from 4,945,315 MWh in the nine months ended September 30, 2022 to 5,258,274 MWh in the nine months ended September 30, 2023.

Product Segment

Revenues attributable to our Product segment for the nine months ended September 30, 2023 were $83.3 million, compared to $39.2 million for the nine months ended September 30, 2022. This increase of $44.1 million, or 112.4% is primarily related to the progress in our projects which results in the timing of when revenues are recognized. During the nine months ended September 30, 2023, we recognized revenues from projects in New Zealand, Indonesia and the Philippines, which were higher than revenues during the same period of the previous year, from projects primarily in Indonesia, New Zealand, and Nicaragua.

Energy Storage Segment

Revenues attributable to our Energy Storage segment for the nine months ended September 30, 2023 were $21.9 million compared to $22.9 million for the nine months ended September 30, 2022. The decrease is mainly related to lower revenues at PJM and CAISO facilities due to lower energy rates in 2023, offset by the new energy storage facilities which commenced commercial operation during 2023.

Total Cost of Revenues

The table below compares cost of revenues for the nine months ended September 30, 2023 to the nine months ended September 30, 2022.

(Dollars in millions)

Electricity Segment

Total cost of revenues attributable to our Electricity segment for the nine months ended September 30, 2023 was $311.3 million, compared to $287.1 million for the nine months ended September 30, 2022. This increase of $24.3 million is primarily attributable to: (i) the start of commercial operation of CD4 in July 2022, North Valley in April 2023, Dixie Valley upgrade in May 2023 and Tungsten 2 in April 2022; and (ii) business interruption insurance income of $9.2 million recorded in the nine months ended September 30, 2022, compared to only $6.3 million recorded in the nine months ended September 30, 2023.

Our total Electricity segment cost of revenues for the nine months ended September 30, 2023 was 64.5% of Electricity revenues, compared to 61.5% for the nine months ended September 30, 2022, including the impact from business interruption insurance proceeds described above. The cost of revenues attributable to our international power plants for the nine months ended September 30, 2023 was 17.5% of our total Electricity segment cost of revenues for this period compared to 18.0% for the same period in the prior year.

Product Segment

Total cost of revenues attributable to our Product segment for the nine months ended September 30, 2023 was $71.7 million, compared to $35.6 million for the nine months ended September 30, 2022, which represented a 101.2% increase. This increase was primarily attributable to the increase 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 nine months ended September 30, 2023 and 2022, was 86.1% and 90.8%, respectively, which results from different profitability of the different projects.

Energy Storage Segment

Cost of revenues attributable to our Energy Storage segment for the nine months ended September 30, 2023 were $19.4 million compared to $17.3 million for the nine months ended September 30, 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 nine months ended September 30, 2023 were $4.8 million, compared to $3.7 million for the nine months ended September 30, 2022. The increase is mainly attributable to the timing of research and development projects that took place during the nine months ended September 30, 2023 compared to the corresponding period in 2022.

Selling and Marketing Expenses

Selling and marketing expenses for the nine months ended September 30, 2023 were $14.0 million compared to $12.4 million for the nine months ended September 30, 2022. Selling and marketing expenses for the nine months ended September 30, 2023, constituted 2.4% of total revenues for such period, compared to 2.3% for the nine months ended September 30, 2022, and the increase period over period is associated with the corresponding increase in total revenues.

General and Administrative Expenses

General and administrative expenses for the nine months ended September 30, 2023 were $49.5 million compared to $47.2 million for the nine months ended September 30, 2022. The increase of $2.4 million is primarily attributable to services related to the implementation of our new enterprise resource planning system and timing of incurring legal services in connection with the ongoing legal proceeding as described under Note 9 to the condensed consolidated financial statements.

General and administrative expenses for the nine months ended September 30, 2023 constituted 8.4% of total revenues for such period, compared to 8.9% for the nine months ended September 30, 2022.

Write-off of Energy Storage Project Assets and Unsuccessful Exploration Activities

Write-off of Energy Storage project assets and unsuccessful exploration activities for the nine months ended September 30, 2023 was $2.3 million, compared to $2.8 million for the nine months ended September 30, 2022. The write-off in both periods is primarily related to accumulated costs of energy storage and geothermal exploration projects that the Company is no longer pursuing.

Interest Income

Interest Income for the nine months ended September 30, 2023 was $9.6 million, compared to $2.2 million for the nine months ended September 30, 2022. This increase is primarily related to higher interest rates on cash and cash equivalents, period over period.

Interest Expense, Net

Interest expense, net for the nine months ended September 30, 2023 was $73.1 million, compared to $63.9 million for the nine months ended September 30, 2022. This increase of $9.2 million was primarily due to: (i) $3.8 million related to the BHI Loan closed in February 2023; (ii) $5.1 million related to the convertible senior note issued in June 2022; and (iii) $1.4 million related to the higher amount of interest expenses that were capitalized to projects under construction in the nine months ended September 30, 2022 compared to the same period 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 losses for the nine months ended September 30, 2023 were $4.0 million, compared to $4.0 million for the nine months ended September 30, 2022. Derivatives and foreign currency transaction losses 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 nine months ended September 30, 2023 was $42.5 million, compared to $26.3 million for the nine months ended September 30, 2022. This income primarily represents the value of PTCs and taxable income or loss generated by certain of our power plants allocated to investors under tax equity transactions. This increase of $16.1 million is attributable 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 $6.9 million, which was recorded in the nine months ended September 30, 2023 under the new IRA regulations.

Other Non-Operating Income (Expense), Net

Other non-operating income (expense), net for the nine months ended September 30, 2023 was income of $0.2 million, compared to an expense of $0.5 million for the nine months ended September 30, 2022. Other non-operating income (expense), net for the nine months ended September 30, 2022, primarily includes a make-whole premium of $1.1 million from the prepayment of Series 3 Bonds during the second quarter of 2022.

Income Taxes

Income tax benefit for the nine months ended September 30, 2023 was $2.2 million compared to income tax provision of $23.5 million for the nine months ended September 30, 2022. Our effective tax rate for the nine months ended September 30, 2023 and 2022, was 2.4% and 28.5%, respectively. The effective rate differs from the federal statutory rate of 21% for the nine months ended September 30, 2023 primarily due to the generation of investment tax credits of $17.2 million, a benefit associated with the statutory tax rate change in Kenya resulting from the Finance Act of $9.4 million, and the jurisdictional mix of earnings at differing tax rates.

Equity in Earnings (losses) of Investees, Net

Equity in earnings (losses) of investees, net for the nine months ended September 30, 2023 was losses of $1.9 million, compared to earnings of $1.6 million for the nine months ended September 30, 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 and our 49% share in the earnings or losses in the Ijen geothermal project. The increase in equity in earnings of investees is primarily related to increase in net income generated by the Ijen project starting in 2023. In the second quarter of 2022, Sarulla agreed with its banks on a framework that will enable it to perform remediation works that are aimed to restore the power plants' performance. The outcome of the first phase of the recovery plan is under evaluation towards the decision regarding the implementation of the second phase. 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 nine months ended September 30, 2023 was $88.7 million, compared to $47.8 million for the nine months ended September 30, 2022, which represents an increase of $40.9 million. This increase was attributable to the increase of $36.7 million in net income which was affected by the explanations described above, as well as a decrease in net income attributable to noncontrolling interest primarily due to the lower performance by our Puna power plant, period over period.

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 September 30, 2023, we had access to (i) $78.1 million in cash and cash equivalents, of which $46.2 million is held by our foreign subsidiaries; and (ii) $390.5 million of unused corporate borrowing capacity under existing committed lines for credit and letters of credit with different commercial banks.

Our estimated capital needs for the remainder of 2023 include $110.0 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, $31.7 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 September 30, 2023, we continue to maintain our assertion to no longer indefinitely reinvest foreign funds held by our foreign subsidiaries, and have accrued the incremental foreign withholding taxes. Accordingly, during the nine months ended September 30, 2023, we included a foreign income tax expense of $1.5 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 September 30, 2023: (i) total equity was $2,405.0 million and the actual equity to total assets ratio was 48.0% and (ii) the 12-month debt, net of cash, cash equivalents, to Adjusted EBITDA ratio was 3.82. During the nine months ended September 30, 2023, we distributed interim dividends in an aggregate amount of $21.2 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 September 30, 2023, we did not meet the dividend distribution criteria related to the DAC 1 Senior Secured Notes, which resulted in certain equity distribution restrictions from this related subsidiary.

Future minimum payments

Future minimum cash payments under long-term obligations (including long-term debt, lease obligations and financing liability), as of September 30, 2023, are as follows:

(Dollars in thousands)

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; (iv) convertible senior notes issued in the second quarter of 2022; and (v) short term revolving credit lines with banks.

Non-Recourse and Limited-Recourse Third-Party Debt

(Dollars in millions)

1. Secured by equity interest.

2. Secured by the assets.

3. 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 outstanding amount as of September 30, 2023 is $225.8 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 September 30, 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 September 30, 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 September 30, 2021:

Historical Cash Flows

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

(Dollars in thousands)

For the Nine Months Ended September 30, 2023

Net cash provided by operating activities for the nine months ended September 30, 2023 was $170.3 million, compared to $206.2 million for the nine months ended September 30, 2022. The net decrease of $36.0 million was primarily attributable to higher net income, adjusted for certain non-cash items, and: (i) a net decrease of $4.7 million in costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts, period over period, as a result of timing of billing to our customers; (ii) an increase in receivables of $52.4 million primarily related to the timing of payments by our customers; (iii) a net increase in change in inventories of $20.7 million related to timing of allocating costs to projects under construction and; (iv) an increase in deposits and other of $9.4 million, related to deposit payments made in connection with our operations. This net decrease was offset by: (i) an increase in other long-term liabilities of $13.3 million primarily related to a prepayment made by one of our customers and; (ii) an increase in the change in accounts payable and accrued expenses of $33.9 million, mainly due to timing of payments to our supplier and construction of power plants.

Net cash used in investing activities for the nine months ended September 30, 2023 was $458.2 million, compared to $369.6 million for the nine months ended September 30, 2022. The principal factors that affected our net cash used in investing activities during the nine months ended September 30, 2023 and 2022 were: capital expenditures of $448.8 million, and $408.4 million, respectively, primarily for our facilities under construction that support our growth plan. Net cash used in investing activities for the nine months ended September 30, 2022 was partially offset by cash inflow from transactions in marketable securities in the amount of $42.8 million.

Net cash provided by financing activities for the nine months ended September 30, 2023 was $247.6 million, compared to net cash provided by financing activities of $73.6 million for the nine months ended September 30, 2022. The principal factors that affected the net cash provided by financing activities during the nine months ended September 30, 2023 were: (i) net proceeds of $341.7 million, $35.0 million, and $99.9 million from issuance of common stock, proceeds from revolving lines of credit, and proceeds from the Hapoalim Loan 2023, respectively; and (ii) cash received from noncontrolling interest in the amount of $7.3 million. These cash inflows were primarily offset by: (i) repayment of long-term debt in the amount of $175.9 million, including the prepayments of the Plumstriker and Amatitlan loans; (ii) cash dividend payment of $21.2 million, and (iii) $34.5 million cash paid to noncontrolling interest. The principal factors that affected our net cash provided by financing activities during the nine months ended September 30, 2022 were: (i) net proceeds of $419.7 million and $75.0 million from issuance of convertible notes and proceeds from the Mizrahi Loan, respectively, primarily offset by: (i) prepayment of the Series 3 Bonds in the amount of $219.1 million; (ii) repayments of long-term debt in the amount of $135.7 million; (iii) cash paid to noncontrolling interest of $5.9 million; (iv) cash dividend payment of $20.2 million; (v) purchase of capped call instruments in the amount of $24.5 million, and (vi) purchase of treasury stock in the amount of $18.0 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 energy storage projects and 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 and nine months ended September 30, 2023, however, the prior year has not been recast to include accretion expenses as the amounts were immaterial.

Net income for the three and nine months ended September 30, 2023 was $36.3 million and $94.3 million, respectively, compared to $19.8 million and $57.6 million for the three and nine months ended September 30, 2022, respectively.

Adjusted EBITDA for the three and nine months ended September 30, 2023 was $118.3 million and $342.7 million, respectively, compared to $102.2 million and $310.8 million for the three and nine months ended September 30, 2022, respectively.

The following table reconciles net income to EBITDA and Adjusted EBITDA for the three and nine months period ended September 30, 2023 and 2022:

(Dollars in thousands)

(Dollars in thousands)

In May 2014, the Sarulla consortium ("SOL") closed $1,170 million in financing through SOL. As of September 30, 2023, the SOL credit facility had an outstanding balance of $796.5 million. Our proportionate share in the SOL credit facility is $101.6 million. In the second quarter of 2022, Sarulla agreed with its banks on a framework that will enable it to perform remediation works that are aimed to restore the power plants' performance. The outcome of the first phase of the recovery plan is under evaluation towards the decision regarding the implementation of the second phase. 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.

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 progressing and commercial operation is expected in the fourth quarter 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, Institute Nacional de Electrification or “INDE”. Construction has been completed and drilling is still ongoing. Commercial operation is expected in 2024.

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. Commercial operation is expected in the first half of 2024.

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 is progressing, equipment deliveries are ongoing 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. Construction commenced and expect commercial operation in the fourth quarter 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. Construction commenced and we expect commercial operation in the second quarter of 2024.

Bouillante repowering (Guadeloupe). We are currently in the process of upgrading the Bouillante project and planning to install a new Ormat energy converter that will add net capacity of 10 MW. Engineering and procurement in ongoing. We expect commercial operation in the first half of 2025.

Topp 2 (New Zealand). We are developing the 50 MW Topp 2 geothermal power plant in New Zealand which was recently released for construction. We signed an agreement with Eastland Generation Limited (EGL), under which the Company will design, build, commission and own the power plant. EGL will operate and maintain the power plant under a separate services arrangement. As part of the development agreement with EGL, the Company has granted EGL a contractual option to purchase the power plant at an agreed purchase price, subject to certain conditions. We expect commercial operation by the end of 2025.

In addition, we are in the process of repowering the Ormesa, Neal Hot Springs, Puna and Desert Peak power plants. In the Energy Storage segment, we commenced operation of five assets since the beginning of the year and we are in the process of constructing several facilities as detailed below, two of which recently were released:

The following is an overview of projects that are in the 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 September 30, 2023, we are planning to begin the drilling activity next year.

We have budgeted approximately $537.0 million in capital expenditures for construction of new projects and enhancements to our existing power plants, of which we had invested $265.0 million as of September 30, 2023. We expect to invest approximately $35.0 million in the rest of 2023 and the remaining approximately $237.0 million thereafter.

In addition, we estimate approximately $75.0 million in additional capital expenditures in 2023 to be allocated as follows: (i) approximately $20.0 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 $15.0 million for maintenance capital expenditures for our operating power plants; (iii) approximately $35.0 million for the construction and development of energy storage projects; and (iv) approximately $5.0 million for enhancements to our production facilities.

In the aggregate, we estimate our total capital expenditures for the last quarter of 2023 to be approximately $110.0 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 were determined by reference to the relevant power purchaser’s short run avoided cost until the end of 2022. A decline in the price of natural gas would have resulted in a decrease in the incremental cost that the power purchaser avoided by not generating its electrical energy needs from natural gas, or by reducing the price of purchasing its electrical energy needs from a natural gas power plant, which in turn, would have reduced the energy payments that we may have charged under the relevant PPA for this power plant. 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 the Heber 2 power plant, we signed a new PPA and for Puna, we are waiting for PUC approval for a new PPA with a fixed energy rate, as discussed above.

As of September 30, 2023, following the full prepayment of the Plumstriker and Amatitlan loans in April and September of 2023, respectively, 100.0% of our consolidated long-term debt was at a fixed rate, and therefore was not subject to interest rate volatility 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 September 30, 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 September 30, 2023 and December 31, 2022 are presented below:

(Dollars in thousands)

53

Effect of Inflation

We have experienced an increase in overall operating and other costs since early 2022 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 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 September 30, 2023, the amount overdue from KPLC in Kenya was $50.6 million of which $0.5 million was paid in October 2023. In Honduras, as of September 30, 2023, the total amount overdue from Empresa Nacional de Energía Eléctrica ("ENEE") was $10.0 million of which $0.7 million was paid in October 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 in this report.

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 September 30, 2023. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 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 third 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:

Conditions in Israel, where the majority of our senior management and our main production and manufacturing facilities are located, including the ongoing war with Hamas, may adversely affect our operations and may limit our ability to produce and sell our products.

We are a multinational company and do not derive the majority of our revenues from Israel, however, the majority of our senior management and our main production and manufacturing facilities are located in Israel, approximately 26 miles from the border with the Gaza Strip. As such, political, economic and security conditions in Israel and the Middle East region directly affect our operations.

On October 7, 2023, Hamas terrorists and members of other terrorist organizations infiltrated Israel’s southern border from the Gaza Strip and conducted a series of attacks on civilian and military targets, including widespread killings and kidnappings. They also launched extensive rocket attacks on the Israeli civilian population. Shortly following the attack, Israel declared war against Hamas, and several hundred thousand Israeli reservists were drafted to perform immediate military service.

The intensity and duration of Israel’s current war against Hamas is difficult to predict, as are its economic implications on the Company’s business and operations in Israel and on Israel’s economy in general. As of the date of this report, approximately ten percent of our workforce in Israel (approximately four percent of our total global workforce), the vast majority of whom work in our Product segment, have been called up for military service, and may be absent for an extended period. Operations in our Product segment (which accounted for approximately 9.6% of our total revenues and $83.4 million in intersegment revenues for first 9 months of 2023), may be disrupted by such absences, thus materially and adversely affecting our business and operating results. Clashes between Israel and Hezbollah around the Lebanon-Israel border are also ongoing and may escalate in the future into a greater regional conflict.

Our facilities in Israel, as well as the Port of Ashdod via which we receive supplies for and ship products for our Product segment, are within the range of rockets fired from the Gaza Strip in the war and are close to Gaza’s coastline, and some rockets have landed near our facilities in the ongoing war. The war has also increased the cost of insurance premiums for shipments into and out of the port. In anticipation of possible operational delays in our Product segment, we have issued force majeure notices preemptively to several customers. If, due to the current war or future similar hostilities, our facilities in Israel are damaged or their operations disrupted, or our access to the Port of Ashdod (or alternative ports at Hifa or Eilat) is impaired, our ability to perform on our contractual obligations to our Product segment customers or to continue growing that business could be impacted. The conflict could additionally result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements. Limitations on travel to Israel from abroad could make it harder for us to secure contracts in the Product segment with new business partners. We have shelter-in-place and work-from-home measures, government-imposed restrictions on movement and travel and other precautions taken to address the ongoing conflict and which may temporarily disrupt our management and employees’ ability to effectively perform their daily tasks. All of the foregoing factors could negatively affect operations within our Product segment or delay growth in our Electricity segment.

Finally, political conditions within Israel affect our operations. Israel has held five general elections in the last four years (twice in 2019, once in 2020, once in 2021 and once in 2022), and in late July 2023, after months of public protest, Israel’s governing coalition voted in favor of the adoption of one of its proposed reforms to the judicial system, and the Supreme Court announced that it would hear challenges against the proposed law. Individuals, organizations and institutions, both within and outside of Israel, have voiced concerns that Israeli’s political instability may negatively impact the business environment there, including due to reluctance of foreign investors to invest or conduct business in Israel, increased currency fluctuations, downgrades in credit rating, increased interest rates, increased volatility in securities markets, adverse impacts on the labor market, and other related changes in macroeconomic conditions. We cannot be certain whether this will adversely impact perception of our business and our share price, or impact our business operations in Israel.

Responses in various countries where we have business operations to Israel’s ongoing war with Hamas or future similar conflicts may adversely affect our operations and may limit our ability to produce and sell our products.

Although we are a multinational company and we do not derive a majority of our revenues from Israel, we have known ties to Israel through the presence of our senior management and a significant portion of our Product segment there. The perception that we are an Israeli company could impair our business and results of operations due to the international response to Israel’s ongoing war with Hamas or future similar conflicts. Our business could be substantially harmed by the interruption or curtailment of trade between Israel and its trading partners or the use of restrictive laws, policies or practices directed toward Israel or companies having operations in Israel. These restrictions may limit materially our ability to obtain raw materials from these countries or to sell our products to companies and customers in these countries. Deterioration in political relations between Israel and other countries, and/or violence from popular movements or terrorist activities in countries where we do business motivated by anti-Israel sentiment, such as Turkey or Indonesia, could impact our ability to secure new contracts, renew existing contracts and/or carry on business in those countries. Moreover, there have been increased efforts by activists to cause companies and consumers to boycott Israeli companies. Such efforts, particularly if they become more widespread, may materially and adversely impact our ability to sell our products outside of Israel.