ORA

Ormat Technologies, Inc. - 10-Q Summary (Period Ended September 30, 2006)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2006, and the nine-month period ended September 30, 2006. Ormat Technologies, Inc. is a vertically integrated company engaged in the geothermal and recovered energy power business. Operations are divided into two segments: Electricity (sale of electricity from owned/operated power plants) and Products (design, manufacture, and sale of power generation equipment and services).

Key Financial Metrics

Segment Performance (Nine Months 2006):

• Electricity Segment: Revenues of $148.9 million; Operating Income of $42.9 million.
• Products Segment: Revenues of $53.4 million; Operating Income of $12.1 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 12.9% to $202.3 million compared to $179.2 million in the prior year period. Electricity revenues rose 10.9%, and Products revenues rose 18.6%.
• Profitability: Net income increased 48.8% to $30.2 million from $20.3 million. This was driven by an $11.1 million increase in gross margin and a $6.0 million decrease in net interest expense.
• Acquisitions: The company consolidated the Zunil project in Guatemala (acquired 100% ownership in August 2006), adding $7.2 million in revenues for the nine-month period.
• Capital Structure: In April 2006, the company completed a follow-on public offering, raising net proceeds of approximately $135.1 million. This significantly increased cash and marketable securities.
• Cost of Revenues: Total cost of revenues increased 10.7% to $123.4 million. Electricity segment costs rose 16.7% due to the consolidation of Zunil, increased depreciation/royalties, and repair costs at the Puna project.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Management expects revenues from the Products Segment in 2006 to be higher than 2005 levels, driven by demand for recovered energy generation products.
• Organic growth through construction of new projects and enhancements to existing plants is the primary activity, expected to increase generating capacity and revenues in 2006 compared to 2005.
• Recent developments include the completion of the OREG 1 project (22 MW) in North/South Dakota and new power purchase agreements in Nevada (Carson Lake, Buffalo Valley, Galena 3).

Risks and Contingencies:

• Project Delays: Phase II of the Olkaria III project in Kenya faces construction deadlines; failure to meet them could result in loss of investment. Negotiations with Kenya Power & Lighting Co. Ltd. were completed in October 2006 to amend terms.
• Legal Proceedings: The company is a defendant in a third-party complaint in a bankruptcy proceeding involving MPS Generation, Inc., with alleged damages exceeding $100 million. Management intends to defend vigorously and believes there is no liability.
• Customer Concentration: Southern California Edison accounted for 31.8% of total revenues for the nine months ended September 30, 2006.
• Regulatory: Changes in federal regulations regarding geothermal leasing and royalty calculations (Proposed Rules) could impact future projects.

Key Facts for Investor Verification

• Debt Covenants: Verify compliance with Debt Service Coverage Ratios for the OFC Senior Secured Notes and Zunil project loans, as dividend payments were previously restricted due to covenant breaches.
• Acquisition Integration: Confirm the final purchase price allocation for the Zunil project acquisitions, which was preliminary as of the filing date.
• Capital Expenditure Schedule: Monitor the completion dates for major projects (e.g., Desert Peak 2, Galena 2, Amatitlan) as delays could impact revenue recognition.
• Legal Exposure: Track the status of the MPS Generation bankruptcy litigation and the Ormesa pricing dispute with Southern California Edison.
• Regulatory Approvals: Verify the receipt of necessary regulatory approvals for the amended Olkaria III project documentation and new Nevada power purchase agreements.