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March 2, 2020, 10:06 a.m. EST


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You should read the following discussion and analysis of our results of operations, financial condition and liquidity in conjunction with our consolidated financial statements and the related notes. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report including information with respect to our plans and strategies for our business, statements regarding the industry outlook, our expectations regarding the future performance of our business, and the other non-historical statements contained herein are forward-looking statements. See "Cautionary Note Regarding Forward-Looking Statements." You should also review Item 1A - "Risk Factors" for a discussion of important factors that could cause actual results to differ materially from the results described herein or implied by such forward-looking statements.


Overview of Fiscal Year 2019 Revenues

For the year ended December 31, 2019, our total revenues increased by 3.7% (from $719.3 million to $746.0 million) over the previous year.

For the year ended December 31, 2019, Electricity segment revenues were $540.3 million, compared to $509.9 million for the year ended December 31, 2018, an increase of 6.0%. Product segment revenues for the year ended December 31, 2019 were $191.0 million, compared to $201.7 million for the year ended December 31, 2018, a decrease of 5.3%. Energy Storage and Management Services segment revenues for the year ended December 31, 2019 were $14.7 million, compared to $7.6 million for the year ended December 31, 2018.

During the years ended December 31, 2019 and 2018, our consolidated power plants generated 6,238,272 MWh and 5,857,963 MWh, respectively, an increase of 6.5%.

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For the year ended December 31, 2019, our Electricity segment generated 72.4% of our total revenues (70.9% in 2018), while our Product segment generated 25.6% of our total revenues (28.0% in 2018), and our Energy Storage and Management Services segment generated 2.0% of our total revenues (1.1% in 2018).

For the year ended December 31, 2019, approximately 97.6% of our Electricity segment revenues were from PPAs with fixed energy rates which are not affected by fluctuations in energy commodity prices. We have variable price PPAs in California and Hawaii, which provide for payments based on the local utilities' avoided cost, which is the incremental cost that the power purchaser avoids by not having to generate such electrical energy itself or purchase it from others, as follows:

? The energy rates under the PPAs in California for each Heber 2 power plant in the Heber Complex and the G2 power plant in the Mammoth Complex, a total of between 30 to 40 MW, change primarily based on fluctuations in natural gas prices.

? 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. We recently signed a new PPA related to Puna with fixed prices (see "Recent Developments" below).

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, EPC contracts and the provision of various services to our customers. Product segment revenues may 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 and Management Services segment are derived primarily from BSAAS systems, demand response and energy management services and may fluctuate between period to period. Pricing of such services and products are dependent on market supply and demand trends, market volatility, the need and price for ancillary services and other factors that may change over time.

Our management assesses the performance of our operating segments differently. In the case of our Electricity segment, when making decisions about potential acquisitions or the development of new projects, management typically focuses on the internal rate of return of the relevant investment, technical and geological matters and other business considerations. Management evaluates our operating power plants based on revenues, expenses, and EBITDA, and our projects that are under development based on costs attributable to each such project. Management evaluates the performance of our Product segment based on the timely delivery of our products, performance quality of our products, revenues and costs actually incurred to complete customer orders compared to the costs originally budgeted for such orders. We evaluate Energy Storage and Management Services segment performance similar to the Electricity segment with respect to projects that we own and operate and similar to the Product segment when we provide services to third parties.

Recent Developments

The most significant recent developments for our company and business during 2019 and 2020 to date are described below.

In February 2020, we announced a transition of its senior management. Mr. Isaac Angel has decided to retire from his position as Chief Executive Officer, effective July 1, 2020, after six years of successful service to the Company, its employees and its shareholders. It is intended that Mr. Angel will become a member of Ormat's Board of Directors before his retirement as Chief Executive Officer and will continue to be employed by the Company through December 31, 2020 in order to assist with the management transition. Ormat's Board of Directors has appointed Mr. Blachar, the Company's President and Chief Financial Officer, to succeed Mr. Angel. Mr. Blachar will assume the role of Chief Executive Officer on July 1, 2020 upon Mr. Angel's retirement.

Mr. Blachar will be succeeded in his role as Chief Financial Officer by Assaf Ginzburg, effective May 10, 2020, at which point Mr. Blachar will serve as President of the Company until assuming his role as Chief Executive Officer on July 1, 2020. Mr. Ginzburg currently serves as Executive Vice President and Chief Financial Officer of Delek US Holdings, Inc. /zigman2/quotes/202983090/composite DK -0.25% and Delek Logistics Partners, LP /zigman2/quotes/205075247/composite DKL -1.80% , and has over 15 years of experience in the energy industry. In his financial positions, Mr. Ginzburg supervised teams of senior financial professionals and has significant experience in all aspects of corporate finance, financial planning, tax, accounting and investor relations.

As of February 2020, the reconstruction efforts at Puna continue. Building permits that are required for the construction and operation of the substation were delayed and were received in mid February 2020. HELCO continue with their efforts to complete the upgrade of the transmission network. On the field side, we completed the drilling of one production well that was blocked immediately after flow test of the well. We continue our field recovery work, which includes redrilling of existing wells, cleanouts and drilling of new wells and we expect initial power generation for testing during the second quarter of 2020. Commercial operation of the full generating capacity of the Puna power plant is expected in the third quarter assuming all permits are received, transmission network upgrade is complete and field recovery is successfully achieved.

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In January 2020, we signed two similar PPAs with Silicon Valley Clean Energy (SVCE) and Monterey Bay Community Power (MBCP). Under the PPAs, SVCE and MBCP will each purchase 7 MW (for a total of 14 MW) of power generated by the expected 30 MW Casa Diablo-IV (CD4) geothermal project located in Mammoth Lakes, California that is under construction. The PPAs are for a term of 10 years and have a fixed MWh price, which includes energy, capacity, environmental attributes, and all other ancillary benefits. The remaining 16 MW of generating capacity will be sold under an additional PPA with Southern California Public Power Authority, which was signed in early 2019. The CD4 power plant is expected to be on-line by the end of 2021, will be the first geothermal power plant built within the California Independent System Operator (CAISO) balancing authority in the last 30 years and will be the first in Ormat's portfolio that will sell its output to a Community Choice Aggregator.

In December 2019, PGV and Hawaiian Electric's Hawaii Electric Light subsidiary reached an agreement on an amended and restated PPA for dispatchable geothermal power sold from Ormat's Puna complex, located on the Big Island of Hawaii. The new PPA extends the term until 2052 with an increased contract capacity of 46MW and a fixed price with no escalation, regardless of changes to fossil fuel pricing. The energy rate under the contract is fixed at $70 per MWh for all energy purchased during any contract year up to 227,000 MWh and $40 per MWh above 227,000 MWh. In addition, annual capacity payments under the contract are approximately $19.5 million. The amended PPA was filed with the Public Utilities Commission (PUC) on December 31, 2019 for its review and approval, which is anticipated during 2020. We are planning to replace ten 25-year-old steam units with two new Ormat binary units and to upgrade the existing auxiliary equipment. This upgraded facility will utilize the same amount of geothermal resource that the existing 38 MW facility requires. The COD of the new plant is expected during the first half of 2022. The existing PPA remains in effect, with current terms, until the expansion is completed, and the new plant reaches its COD.

In December 2019, the tax extenders package was signed into law and retroactively revived and extended the full PTC for geothermal facilities. The PTC rules provide a tax credit for each kWh of electricity produced by the taxpayer from qualified renewable energy facilities. The PTC for geothermal facilities that expired at the end of 2017 was retroactively revived and extended through 2020, continuing U.S. support for the geothermal industry. This extension will drive and enhance our development of geothermal projects. This support contributes to the ongoing creation of new jobs in the geothermal industry as well as to the nation's energy independence.

In November 2019, we announced that Mr. Doron Blachar, our CFO, was appointed to serve as our President, effective immediately. As President, Mr. Blachar assists our CEO, Isaac Angel, with the Company's strategic direction and operational management until he assumes Mr. Angel's position in July 1, 2020.

In August 2019, we announced that one of our wholly owned subsidiaries that indirectly owns the 48MW McGinness Hills Phase 3 geothermal power plant entered into a partnership agreement with a private investor. Pursuant to the transaction agreement, the private investor acquired membership interests in the project for an initial purchase price of approximately $59.3 million and for which it will pay additional annual installments that are expected to amount to a total of approximately $9 million and can reach up to $22 million based on the actual generation. We will continue to consolidate, operate and maintain the power plant and will receive substantially all of the distributable cash flow generated by the power plant, and prior to December 2027 the private investor will receive substantially all of the tax attributes.

In July 2019, we commenced commercial operation of our first-ever geothermal and solar hybrid project, a 7MW AC solar expansion of our Tungsten Mountain geothermal project in Churchill County, Nevada. The electricity generated from the Tungsten solar power plant will be used to offset the equipment's energy use at the Tungsten geothermal facility, thus increasing the renewable energy delivered by the project under the Southern California Public Power Authority ("SCPPA") portfolio contract. SCPPA and the Los Angeles Department of Water and Power had the vision to enable this development through their innovative portfolio contract, which sought to maximize the output of their renewable facilities and furthering the transition away from coal power while maintaining a reliable power supply for Los Angeles.

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In July 2019 we announced that we signed and closed a set of agreements to acquire 49% of the Ijen geothermal project company, which is holding a PPA and geothermal license to develop the Ijen project in East Java, Indonesia, from a Medco Power subsidiary. Under the terms of the agreements, Ormat acquired 49% of the shares of the Ijen geothermal project company and committed to make additional funding for the project exploration and development, subject to specific conditions. A subsidiary of Medco Power retains 51% ownership of Our company. Ormat and Medco will develop the project jointly.

The Ijen project assets, whose final capacity will be determined after exploration, include a geothermal concession and 30-year PPA for up to 110 MW capacity. The project is ready for exploration and development with some slim holes already drilled.

In May 2019, we completed the drawdown of $23.5 million under a non-recourse loan agreement with Siemens Financial Services for the financing of Plumsted and Stryker, two 20 MW battery energy storage projects located in New Jersey. The loan bears interest of three months U.S. LIBOR plus 3.5% margin and its final maturity date is May 30, 2026.

In March 2019, we entered into a first addendum ("First Addendum") to the Migdal Loan Agreement with several entities within the Migdal Group, a leading Israeli insurance company and institutional investor in Israel. The First Addendum provides us with an additional loan by the lenders in an aggregate principal amount of $50.0 million that will be repaid in 15 semi-annual payments of $2.1 million each, commencing on September 15, 2021, with a final payment of $18.5 million on March 15, 2029. The $50.0 million loan bears interest at a fixed rate of 4.6% per annum, payable semi-annually.

In March 2019, we announced the signing of a PPA between one of our subsidiaries and SCPPA. Under the PPA, SCPPA will purchase 16MW of power generated by the expected 30MW Casa Diablo-IV ("CD4") geothermal project located in Mammoth Lakes, California. SCPPA will resell the output to the City of Colton. The CD4 power plant will be the first geothermal power plant built within the California Independent System Operator ("CAISO") balancing authority in the last 30 years. The 16MW of energy deliveries under the PPA will begin no later than the end of 2021 with an extension option. The PPA is for a term of 25 years and has a fixed price of $68 per MWh. We are in negotiations to sell the balance of 14MW to other offtakers or at the spot market.

In January 2019, we entered into a $41.5 million subordinated loan agreement with Deutsche Investitions-und Entwicklungsgesellschaft mbH ("DEG") and on February 28, 2019, we completed a drawdown of the full loan amount, with a fixed interest rate of 6.04% for the duration of the loan. The loan is being repaid in 19 equal semi-annual principal installments, which commenced on June 21, 2019, with a final maturity date of June 21, 2028. Proceeds of the loan were used to refinance upgrades to Plant 1 of the Olkaria III Complex.

Opportunities, Trends and Uncertainties

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

? There has been increased demand for energy generated from geothermal and other renewable resources in the United States as costs for electricity generated from renewable resources have become more competitive. Much of this is attributable to legislative and regulatory requirements and incentives, such as state RPS and federal tax credits such as PTCs or ITCs (which are discussed in more detail in the section entitled "Government Grants and Tax Benefits" below). We believe that future demand for energy generated from geothermal and other renewable resources in the United States will be driven primarily by further commitment to, and implementation of, state RPS and greenhouse gas reduction initiatives.

? We accelerated our efforts to expand business development activities in developing countries where geothermal is considered a local resource that can provide a stable and cost effective solution to increase access to power. We expect that a variety of local governmental initiatives will create new opportunities for the development of new projects with the potential to realize higher returns on our equity as well as to create additional markets for our products. These initiatives include the award of long-term contracts to independent power generators, the creation of competitive wholesale markets for selling and trading energy, capacity and related energy products and the adoption of programs designed to encourage "clean" renewable and sustainable energy sources.

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? In the Electricity segment, we expect intense domestic competition from the solar and wind power generation industries to continue and increase as well as increased competition from the solar combined with storage projects. While we believe the expected demand for renewable energy will be large enough to accommodate increased competition, any such increase in competition, including increasing amounts of renewable energy under contract as well as any further decline in natural gas prices attributable to increased production and reduction in energy storage costs are contributing to a reduction in electricity prices. However, despite increased competition from the solar and wind power generation industries, we believe that firm and flexible, base-load electricity, such as geothermal-based energy, will continue to be an important source of renewable energy in areas with commercially viable geothermal resources.

? In the Product segment, we see new opportunities in New Zealand, Turkey, the U.S., Asia Pacific and Central and South America. 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 leads to further reductions in the prices that we are able to charge for our binary equipment, as we recently experienced in Turkey, which in turn reduces our profitability. We are experiencing such competition in other locations where we operate which may have an adverse impact on the prices we can charge and our profitability.

? The average price per MWh, which is one of the metrics some investors may use to evaluate power plant revenues, can fluctuate from period to period. Based on total Electricity segment, we earned, on average, $86.6 and $87.0 per MWh in 2019 and 2018, respectively. Oil and natural gas prices, together with other factors that affect our Electricity segment revenues, could cause changes in our average price per MWh in the future.

? Turkey's geothermal market is one of the fastest growing markets in the geothermal industry worldwide, mainly due to governmental and regulatory support. Turkey is ranked fourth globally with an installed geothermal capacity of over 1,600 MW. Our revenue exposure to the Turkish market remained significant in 2019 and expects to reduce in 2020, due to slowdown in project development in the Turkish market. The continued deterioration in the Turkish economy, devaluation in the Turkish Lira and increase in local interest rates or a decline in government support for the development of geothermal power in the country could affect local demand for the geothermal equipment and services we provide, collection from our customers or the prices we may charge for such equipment and services. In addition, the impact of threatened or actual U.S. sanctions on the Turkish economy and the straining of U.S.-Turkey diplomatic relations may harm regional demand or price competitiveness for the geothermal equipment and services we provide in the Turkish market, in turn decreasing our Product segment profit margins, cash flows and financial condition. For the year ended December 31, 2019, we derived 12% and 47% of our Total revenues and Product revenues, respectively, from our Turkish operations. We are monitoring any change in the political and business environments that may affect our future business and operations in the country.

? Ormat established a manufacturing facility in Turkey in order to locally produce several power plant components that entitle our customer for increased incentives under the renewable energy laws. The use of local equipment in renewable energy based generating facilities in Turkey entitles such facilities to significant benefits under Turkish law, provided such facilities have obtained an RER Certificate from EMRA, which requires the issuance of a local certificate. If we do not obtain the local certificate, then some of our customers under the relevant supply agreements in Turkey may not be issued a RER Certificate based on the equipment we supply to them, and we will be required to make a payment to such customers equal to the amount of the expected lost benefit.

? In Kenya, we received three letters of assessment and preliminary findings from the KRA in relation to its review of the 2013 to 2017 tax years in which the KRA demanded we pay approximately $228.0 million including interest and penalties ($177.0 million principal). We are currently in different stages of discussions with the KRA on the matters included in their letters of assessment and preliminary findings and believe our tax positions for the issues raised during the audit are sustainable based on the technical merits under Kenyan tax law. See further details under our Item 8 below.

? While the recently enacted Tax Act reduces the corporate tax rate, it is also expected to increase the cost of capital for renewable energy projects. Such projects often rely on "tax equity" as a core financing tool. Tax equity is a form of financing that is repaid partly or wholly in tax benefits and sometimes partly in cash. There are two types of federal income tax benefits on renewable energy projects: a tax credit and depreciation, or the ability to deduct the cost of the project. The reduction in the corporate tax rate from 35 percent to 21 percent reduces the value of the depreciation. Therefore, less tax equity can be raised on projects. The gap in the capital structure must be filled with debt and/or more expensive sponsor equity. The Tax Act allowed the full cost of equipment placed in service between September 28, 2017 and December 31, 2022 to be deducted immediately. However, the tax equity market is not expected to take advantage of this tax benefit and, because of the way tax equity works, we have had to take depreciation on a straight-line basis over 12 years rather than on a front-loaded basis over five years in some tax equity transactions, which leads to some further erosion in the present value of the depreciation. Other effects of the Tax Act are discussed later under Note 18 - Income Taxes to our consolidated financial statements.

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Sources of Revenues

We generate our revenues from the sale of electricity from our geothermal and recovered energy-based power plants; the design, manufacture and sale of equipment for electricity generation; the construction, installation and engineering of power plant equipment; the sale of energy storage services from our operating facilities and the sale of BSAAS systems and demand response and energy management services.

Revenues attributable to our Electricity segment are derived from the sale of electricity from our power plants pursuant to long-term PPAs. While approximately 97.6% of our Electricity revenues for the year ended December 31, 2019 were derived from PPAs with fixed price components, we have variable price PPAs in California and Hawaii. Accordingly, our revenues from those power plants may fluctuate.

Our Electricity segment revenues are also subject to seasonal variations, as more fully described in "Seasonality" below.

Our PPAs generally provide for energy payments alone, or energy and capacity payments. Generally, capacity payments are payments calculated based on the amount of time and capacity that our power plants are available to generate electricity. Some of our PPAs provide for bonus payments in the event that we are able to exceed certain capacity target levels and the potential forfeiture of payments if we fail to meet certain minimum capacity target levels. Energy payments, on the other hand, are payments calculated based on the amount of electrical energy delivered to the relevant power purchaser at a designated delivery point. Our more recent PPAs generally provide for energy payments alone with an obligation to compensate the off-taker for its incremental costs as a result of shortfalls in our supply.

Revenues attributable to our Product segment fluctuate between periods, primarily based on our ability to receive customer orders, the status and timing of such orders, delivery of raw materials and the completion of manufacturing. Larger customer orders for our products are typically the result of our sales efforts, our participation in, and winning tenders or requests for proposals issued by potential customers in connection with projects they are developing and orders by returning customers. Such projects often take a significant amount of time to design and develop and are subject to various contingencies, such as the customer's ability to raise the necessary financing for a project. Consequently, we are generally unable to predict the timing of such orders for our products and may not be able to replace existing orders that we have completed with new ones. As a result, revenues from our Product segment fluctuate (sometimes extensively) from period to period.

Revenues attributable to our Energy Storage and Management Services segment are derived primarily from BSAAS systems, demand response and energy management services and may fluctuate period to period.

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BSAAS are battery storage deals that are financed, owned and operated by us. BSAAS revenues are a combination of sales of the electricity back to the utilities and energy markets based on the prevailing market price for the electricity or for the energy or ancillary services. The energy and ancillary services revenue includes frequency regulation, standby capacity, synchronized . . .

Mar 02, 2020

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$ 19.98
-0.05 -0.25%
Volume: 1.34M
Jan. 15, 2021 4:00p
P/E Ratio
Dividend Yield
Market Cap
$1.48 billion
Rev. per Employee
$ 35.00
-0.64 -1.80%
Volume: 148,887
Jan. 15, 2021 4:00p
P/E Ratio
Dividend Yield
Market Cap
$1.55 billion
Rev. per Employee

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