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Section 1: 10-K (FORM 10-K)

ora20171231_10k.htm
 

Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

   
 

For the fiscal year ended December 31, 2017

 

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 001-32347

-

ORMAT TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

88-0326081

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

6225 Neil Road, Reno, Nevada 89511-1136

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code:

(775) 356-9029

(Registrant’s telephone number, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock $0.001 Par Value

New York Stock Exchange

 

Securities Registered Pursuant to Section 12(g) of the Act:

 

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐     No ☑

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes ☐     No ☑

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑     No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☑     No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large  accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller  reporting company ☐
       
    (Do not check if  a smaller reporting company) Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐     No ☑

 

As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $2,315,466,032 based on the closing price as reported on the New York Stock Exchange. Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: As of February 23, 2018, the number of outstanding shares of common stock, par value $0.001 per share was 50,609,051.

 

Documents incorporated by reference: Part III (Items 10, 11, 12, 13 and 14) incorporates by reference portions of the Registrant’s Proxy Statement for its Annual Meeting of Stockholders, which will be filed not later than 120 days after December 31, 2017.



 


 

 

ORMAT TECHNOLOGIES, INC.

 

FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2017

 

TABLE OF CONTENTS

 

   

Page No

PART I

ITEM 1.

BUSINESS

7

ITEM 1A.

RISK FACTORS

77

ITEM 1B.

UNRESOLVED STAFF COMMENTS

95

ITEM 2.

PROPERTIES

95

ITEM 3.

LEGAL.PROCEEDINGS

95

ITEM 4.

MINE SAFETY DISCLOSURES

96

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

97

ITEM 6.

SELECTED FINANCIAL DATA

100

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

102

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

137

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

138

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

206

ITEM 9A.

CONTROLS AND PROCEDURES

206

ITEM 9B.

OTHER INFORMATION

207

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

208

ITEM 11.

EXECUTIVE COMPENSATION

208

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

208

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

209

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

209

PART II

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

210

SIGNATURES

211

 

i

 

 

Glossary of Terms

 

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:

 

Term

Definition

Amatitlan Loan

$42,000,000 in initial aggregate principal amount borrowed by our subsidiary Ortitlan Limitada from Banco Industrial S.A. and Westrust Bank (International) Limited.

AMM

Administrador del Mercado Mayorista (administrator of the wholesale market — Guatemala)

ARRA

American Recovery and Reinvestment Act of 2009

Auxiliary Power

The power needed to operate a geothermal power plant’s auxiliary equipment such as pumps and cooling towers

Availability

The ratio of the time a power plant is ready to be in service, or is in service, to the total time interval under consideration, expressed as a percentage, independent of fuel supply (heat or geothermal) or transmission accessibility

Balance of Plant equipment

Power plant equipment other than the generating units including items such as transformers, valves, interconnection equipment, cooling towers for water cooled power plants, etc.

BESS

Battery Energy Storage Systems

BLM

Bureau of Land Management of the U.S. Department of the Interior

BOT

Build, operate and transfer

CAGR Compound annual growth rate

Capacity

The maximum load that a power plant can carry under existing conditions, less auxiliary power

Capacity Factor

The ratio of the average load on a generating resource to its generating capacity during a specified period of time, expressed as a percentage

CARB

California Air Resources Board

CDC Caisse des Dépôts et Consignations, a French state-owned financial organization

CFE

Comision Federal de Electricidad

C&I

Refers to the Commercial and Industrial sectors, excluding residential

CNE

National Energy Commission of Honduras

CNEE

National Electric Energy Commission of Guatemala

COD

Commercial Operation Date

Company

Ormat Technologies, Inc., a Delaware corporation, and its consolidated subsidiaries

COSO

Committee of Sponsoring Organizations of the Treadway Commission

CPI

Consumer Price Index

CPUC

California Public Utilities Commission

Cyrq

Cyrq Energy, Inc.

DEG

Deutsche Investitions-und Entwicklungsgesellschaft mbH

DFIs

Development Finance Institutions

DOE

U.S. Department of Energy

DOGGR

California Division of Oil, Gas, and Geothermal Resources

DSCR

Debt Service Coverage Ratio

DSIRE Database of State Incentives for Renewables and Efficiency

EBITDA

Earnings before interest, taxes, depreciation and amortization

EDF

Electricite de France S.A.

EGS

Enhanced Geothermal Systems

EIB

European Investment Bank

ENEE

Empresa Nacional de Energía Eléctrica

Enthalpy

The total energy content of a fluid; the heat plus the mechanical energy content of a fluid (such as a geothermal brine), which, for example, can be partially converted to mechanical energy in an Organic Rankine Cycle.

 

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Term

Definition

EPA

U.S. Environmental Protection Agency

EPC

Engineering, procurement and construction

EPS

Earnings per share

ERC

Kenyan Energy Regulatory Commission

ERCOT

Electric Reliability Council of Texas, Inc.

ESC

Energy Sales Contract

Exchange Act

U.S. Securities Exchange Act of 1934, as amended

FASB

Financial Accounting Standards Board

FERC

U.S. Federal Energy Regulatory Commission

FIT

Feed-in Tariff

FPA

U.S. Federal Power Act, as amended

GAAP

Generally accepted accounting principles

GCCU

Geothermal Combined Cycle Unit

GDC

Geothermal Development Company

GEA

Geothermal Energy Association

Geothermal Power Plant

The power generation facility and the geothermal field

Geothermal Steam Act

U.S. Geothermal Steam Act of 1970, as amended

GHG

Greenhouse gas

GNP

Gross National Product

GTM Green Tech Media
GW Giga watt
GWh Giga watt hour

HELCO

Hawaii Electric Light Company

IFC

International Finance Corporation

IID

Imperial Irrigation District

ILA

Israel Land Administration

INDE

Instituto Nacional de Electrification

IOUs investor-owned utilities

IPPs

Independent Power Producers

ISO

International Organization for Standardization

ITC

Investment tax credit

ITC Cash Grant

Payment for Specified Renewable Energy property in lieu of Tax Credits under Section 1603 of the ARRA

JBIC

Japan Bank for International Cooperation

John Hancock

John Hancock Life Insurance Company (U.S.A.)

JOC Joined operation contract

JPM

JPM Capital Corporation

KenGen

Kenya Electricity Generating Company Ltd.

Kenyan Energy Act

Kenyan Energy Act, 2006

KETRACO

Kenya Electricity Transmission Company Limited

KLP

Kapoho Land Partnership

KPLC

Kenya Power and Lighting Co. Ltd.

kVa

Kilovolt-ampere

kW

Kilowatt - A unit of electrical power that is equal to 1,000 watts

kWh

Kilowatt hour(s), a measure of power produced

LCOE

Levelized Costs of Energy

LSEs Load Serving Entities

Mammoth Pacific

Mammoth-Pacific, L.P.

MACRS

Modified Accelerated Cost Recovery System

MEMR

Ministry of Energy and Mineral Resources

MIGA

Multilateral Investment Guarantee Agency, a member of the World Bank Group

MW

Megawatt - One MW is equal to 1,000 kW or one million watts

MWh

Megawatt hour(s), a measure of energy produced

 

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Term

Definition

NBPL

Northern Border Pipe Line Company

NIS

New Israeli Shekel

NOC network operations center

NGI

Natural Gas-California SoCal-NGI Natural Gas price index

NV Energy

NV Energy, Inc.

NYSE

New York Stock Exchange

NYISO

New York Independent System Operator, Inc.

OEC

Ormat Energy Converter

OFC

Ormat Funding Corp., a wholly owned subsidiary of the Company

OFC Senior Secured Notes

$190,000,000 8.25% Senior Secured Notes, due 2020 issued by OFC

OFC 2

OFC 2 LLC, a wholly owned subsidiary of the Company

OFC 2 Senior Secured Notes

Up to $350,000,000 Senior Secured Notes, due 2034 issued by OFC 2

OMPC

Ormat Momotombo Power Company, a wholly owned subsidiary of the Company

Opal Geo Opal Geo LLC

OPC

OPC LLC, a consolidated subsidiary of the Company

OPC Transaction

Financing transaction involving four of our Nevada power plants in which institutional equity investors purchased an interest in our special purpose subsidiary that owns such plants.

OPIC

Overseas Private Investment Corporation

OrCal

OrCal Geothermal Inc., a wholly owned subsidiary of the Company

OrCal Senior Secured Notes

$165,000,000 6.21% Senior Secured Notes, due 2020 issued by OrCal

Organic Rankine Cycle

A process in which an organic fluid such as a hydrocarbon or fluorocarbon (but not water) is boiled in an evaporator to generate high pressure vapor. The vapor powers a turbine to generate mechanical power. After the expansion in the turbine, the low pressure vapor is cooled and condensed back to liquid in a condenser. A cycle pump is then used to pump the liquid back to the vaporizer to complete the cycle. The cycle is illustrated in the figure below:

   
 
   

Ormat International

Ormat International Inc., a wholly owned subsidiary of the Company

Ormat Nevada

Ormat Nevada Inc., a wholly owned subsidiary of the Company

Ormat Systems

Ormat Systems Ltd., a wholly owned subsidiary of the Company

ORPD  

ORPD LLC, a holding company subsidiary of the Company in which Northleaf Geothermal Holdings, LLC holds a 36.75% equity interest

ORPD Transaction  

Financing transaction involving the Puna complex and Don A. Campbell, OREG 1, OREG 2 and OREG 3 power plants in which Northleaf Geothermal Holdings, LLC purchased an equity interest in our special purpose subsidiary that owns such plants.

OrPower 4

OrPower 4 Inc., a wholly owned subsidiary of the Company

Ortitlan

Ortitlan Limitada, a wholly owned subsidiary of the Company

ORTP

ORTP, LLC, a consolidated subsidiary of the Company

 

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Term

Definition

ORTP Transaction

Financing transaction involving power plants in Nevada and California in which an institutional equity investor purchased an interest in our special purpose subsidiary that owns such plants.

Orzunil

Orzunil I de Electricidad, Limitada, a wholly owned subsidiary of the Company

PEC

Portfolio Energy Credits

PG&E

Pacific Gas and Electric Company

PGV

Puna Geothermal Venture, a wholly owned subsidiary of the Company

PJM

PJM Interconnection, L.L.C.

PLN

PT Perusahaan Listrik Negara

Power plant equipment

Interconnection equipment, cooling towers for water cooled power plant, etc., including the generating units

PPA

Power purchase agreement

ppm

Part per million

PTC

Production tax credit

PUA

Israeli Public Utility Authority

PUCH

Public Utilities Commission of Hawaii

PUCN

Public Utilities Commission of Nevada

PUHCA

U.S. Public Utility Holding Company Act of 1935

PUHCA 2005

U.S. Public Utility Holding Company Act of 2005

PURPA

U.S. Public Utility Regulatory Policies Act of 1978

Qualifying Facility(ies)

Certain small power production facilities are eligible to be “Qualifying Facilities” under PURPA, provided that they meet certain power and thermal energy production requirements and efficiency standards. Qualifying Facility status provides an exemption from PUHCA 2005 and grants certain other benefits to the Qualifying Facility

RAM

Renewable Auction Mechanism

REC

Renewable Energy Credit

REG

Recovered Energy Generation

RGGI

Regional Greenhouse Gas Initiative

RPS

Renewable Portfolio Standards

RTO

Regional Transmission Organization

SaaS

Software as a Service

SCADA

Supervisory Control and Data Acquisition

SCPPA

Southern California Public Power Authority

SEC

U.S. Securities and Exchange Commission

Securities Act

U.S. Securities Act of 1933, as amended

Senior Unsecured Bonds

7% Senior Unsecured Bonds Due 2017 issued by the Company

SO#4

Standard Offer Contract No. 4

SOL Sarulla Operations Ltd.

Solar PV

Solar photovoltaic

SOX Act

Sarbanes-Oxley Act of 2002

Southern California Edison

Southern California Edison Company

SPE(s)

Special purpose entity(ies)

SRAC

Short Run Avoided Costs

Southern California Edison Southern California Edison Company
SPE(s) Special purpose entity(ies)
SRAC Short Run Avoided Costs

Union Bank

Union Bank, N.A.

U.S.  

United States of America

U.S. Treasury

U.S. Department of the Treasury

VEI Viridity Energy, Inc.

Viridity

Viridity Energy Solutions Inc., our wholly owned subsidiary

WHOH

Waste Heat Oil Heaters

 

 

 

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Cautionary Note Regarding Forward-Looking Statements

 

This annual report 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 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 annual report, 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 annual report are primarily located in the material set forth under the headings Item 1 — “Business” contained in Part I of this annual report, Item 1A — “Risk Factors” contained in Part I of this annual report, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II of this annual report, and “Notes to Financial Statements” contained in Item 8 — “Financial Statements and Supplementary Data” contained in Part II of this annual report, 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 annual report completely and with the understanding that actual future results and developments may be materially different from what we expect due to a number of risks and uncertainties, many of which are beyond our control. Other than as required by law, we will not update forward-looking statements even though our situation may change in the future.

 

Specific factors that might cause actual results to differ from our expectations include, but are not limited to:

 

 

significant considerations, risks and uncertainties discussed in this annual report;

 

 

geothermal resource risk (such as the heat content, useful life and geological formation of the reservoir);

 

 

operating risks, including equipment failures and the amounts and timing of revenues and expenses;

 

 

financial market conditions and the results of financing efforts;

 

 

the impact of fluctuations in oil and natural gas prices and competition with other renewable sources on the energy price component under certain of our PPAs;

 

 

risks and uncertainties with respect to our ability to implement strategic goals or initiatives in segments of the clean energy industry or new or additional geographic focus areas;

 

 

risk and uncertainties associated with our future development of storage projects which may operate as "merchant" facilities without long-term sales agreements, including the variability of revenues and profitabilty of such projects; 

 

 

environmental constraints on operations and environmental liabilities arising out of past or present operations, including the risk that we may not have, and in the future may be unable to procure, any necessary permits or other environmental authorizations;

 

 

construction or other project delays or cancellations;

 

 

political, legal, regulatory, governmental, administrative and economic conditions and developments in the U.S. and other countries in which we operate and, in particular, the impact of recent and future federal, state and local regulatory proceedings and changes, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry, public policies and government incentives that support renewable energy and enhance the economic feasibility of our projects at the federal and state level in the United States and elsewhere, and carbon-related legislation;

 

 

the enforceability of long-term PPAs for our power plants;

 

 

contract counterparty risk;

 

 

weather and other natural phenomena including earthquakes, volcanic eruption, drought and other natural disasters;

 

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changes in environmental and other laws and regulations to which our company is subject, as well as changes in the application of existing laws and regulations;

 

 

current and future litigation;

 

 

our ability to successfully identify, integrate and complete acquisitions;

 

 

competition from other geothermal energy projects and new geothermal energy projects developed in the future, and from alternative electricity producing technologies;

 

 

market or business conditions and fluctuations in demand for energy or capacity in the markets in which we operate;

 

 

there can be no assurance regarding when, if and to what extent opportunities under our commercial cooperation agreement with ORIX Corporation will in fact materialize;

 

 

the direct or indirect impact on our company’s business of various forms of hostilities including the threat or occurrence of war, terrorist incidents or cyber-attacks or responses to such threatened or actual incidents or attacks, including the effect on the availability of and premiums on insurance;

 

 

our new strategic plan to expand our geographic markets, customer base and product and service offerings may not be implemented as currently planned or may not achieve our goals as and when implemented;

 

 

development and construction of Solar PV and energy storage projects, may not materialize as planned;

 

 

the effect of and changes in current and future land use and zoning regulations, residential, commercial and industrial development and urbanization in the areas in which we operate; and

 

 

other uncertainties which are difficult to predict or beyond our control and the risk that we may incorrectly analyze these risks and forces or that the strategies we develop to address them may be unsuccessful.

 

 

 

PART I

 

ITEM 1. BUSINESS

 

Certain Definitions

 

Unless the context otherwise requires, all references in this annual report to “Ormat”, “the Company”, “we”, “us”, “our company”, “Ormat Technologies”, or “our” refer to Ormat Technologies, Inc. and its consolidated subsidiaries. A glossary of certain terms and abbreviations used in this annual report appears at the beginning of this report.

 

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Overview

 

We are a leading vertically integrated company that is currently primarily engaged in the geothermal and recovered energy power business. With the objective of becoming a leading global provider of renewable energy, we focus on several key initiatives, under our new strategic plan, as described below.

 

We design, develop, build, sell, own, and operate clean, environmentally friendly geothermal and recovered energy-based power plants, usually using equipment that we design and manufacture.

 

Our geothermal power plants include both power plants that we have built and power plants that we have acquired, while we have built all of our recovered energy-based plants. We recently expanded our operations to include the provision of services in the energy storage, demand response and energy management markets. We currently conduct our business activities in two business segments:

 

 

In the Electricity segment we develop, build, own and operate geothermal and recovered energy-based power plants in the U.S. and geothermal power plants in other countries around the world and sell the electricity they generate. We also provide energy storage, demand response and energy management related services through our Viridity business; and

 

 

In the Product segment we design, manufacture and sell equipment for geothermal and recovered energy-based electricity generation and remote power units and provide services relating to the engineering, procurement, construction, operation and maintenance of geothermal and recovered energy-based power plants and in the future, other power generating units such as Solar PV and energy storage

 

In March 2017, we expanded our Electricity segment operations by entering the energy storage, demand response and energy management markets following the acquisition of substantially all of the business and assets of Viridity Energy, Inc. (VEI), a Philadelphia-based company. The acquired business and assets are owned and operated by our wholly owned subsidiary Viridity Energy Solutions Inc. (Viridity). We intend to use our Viridity business to accelerate long-term growth, expand our market presence in a growing market, and further develop our energy storage, demand response and energy management services, including the VPower™ software platform. We plan to continue providing services and products to existing Viridity customers, while expanding our service offerings to include development and EPC into new regions and targeting a broader potential customer base.

 

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The map below shows our worldwide portfolio of operating geothermal and recovered energy power plants as of March 1, 2018.

 

The charts below show the relative contributions of the Electricity segment and the Product segment to our consolidated revenues and the geographical breakdown of our segment revenues for the fiscal year ended December 31, 2017. Additional information concerning our segment operations, including year-over-year comparisons of revenues, the geographical breakdown of revenues, cost of revenues, results of operations, and trends and uncertainties is provided below in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 — “Financial Statements and Supplementary Data”.

 

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The following chart sets forth a breakdown of our revenues for each of the years ended December 31, 2017 and 2016:

 

 

 

 

The following chart sets forth the geographical breakdown of revenues attributable to our Electricity and Product segments for each of the years ended December 31, 2017 and 2016:

 

 

 

 Note: Electricity segment revenues for 2017 in the "Segment Contribution to Revenue" and "Geographic Breakdown of the Electricity Segment Revenue" charts above include our energy storage and demand response activity.

 

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Most of the power plants that we currently own or operate produce electricity from geothermal energy sources. Geothermal energy is a clean, renewable and generally sustainable form of energy derived from the natural heat of the earth. Unlike electricity produced by burning fossil fuels, electricity produced from geothermal energy sources is produced without emissions of certain pollutants such as nitrogen oxide, and with far lower emissions of other pollutants such as carbon dioxide. As a result, electricity produced from geothermal energy sources contributes significantly less to global warming and local and regional incidences of acid rain than energy produced by burning fossil fuels. In addition, compared to power plants that utilize other renewable energy sources, such as wind or solar, geothermal power plants are generally available all the time and can provide base-load electricity services. They can also be custom built to provide a range of services such as baseload, voltage regulation, reserves and flexible capacity. Geothermal energy is also an attractive alternative to other sources of energy as part of a national diversification strategy to avoid dependence on any one energy source or politically sensitive supply sources.

 

In addition to our geothermal energy business, we manufacture products that produce electricity from recovered energy or so-called “waste heat”. We also construct, own, and operate recovered energy-based power plants. Recovered energy comes from residual heat that is generated as a by-product of gas turbine-driven compressor stations, solar thermal units and a variety of industrial processes, such as cement manufacturing. Such residual heat, which would otherwise be wasted, may be captured in the recovery process and used by recovered energy power plants to generate electricity without burning additional fuel and without additional emissions.

 

Since 2015, we have implemented a number of elements of our new multi-year strategic plan which was reviewed by our Board of Directors (the “Board”) in 2017.  We expect the plan to evolve over time in response to market conditions and other factors.  At this time, however, we expect that our primary focus will be as follows:

 

 

Expand our geothermal geographical reach.  While we continue to evaluate opportunities worldwide, we currently see, Honduras, New Zealand, Philippines, Chile, Indonesia, Turkey, Kenya, Guatemala, China and Ethiopia as very attractive geothermal markets for us.  We are actively looking at ways to expand our presence in those countries. In addition, we are looking to expand and accelerate growth through acquisitions and other investments, both domestically and globally, such as our recent acquisition of a geothermal power plant in Guadeloupe in the Caribbean and our recent announcement of the execution of a definitive agreement to acquire U.S. Geothermal Inc., which has three operating power plants in the U.S.

 

 

Expand into new technologies.  We ultimately hope to be able to leverage our technological capabilities over a variety of renewable energy platforms, including solar power generation and energy storage.  Initially, however, we expect that our primary focus will be on expanding our core geothermal competencies to provide high efficiency solutions for high enthalpy applications by utilizing our binary enhanced cycle and technology, as well as expanding into steam geothermal generation equipment and facilities.  We may acquire companies with technological and integration capabilities we do not currently have, or develop new technology ourselves, where we can effectively leverage our expertise to implement this part of our strategic plan.

 

 

Expand our customer base.  We are evaluating a number of strategies for expanding our customer base to C&I customers.  In the near term, however, we expect that a majority of our revenues will continue to be generated as they currently are, with our traditional electrical utility customer base for the Electricity segment and our on-going business development efforts for new customers for our Product segment.

 

While we believe that long-term growth can be realized through our transformational efforts over time, there is no assurance if and when we will meet our objective to become a leading global provider of renewable energy or that such efforts will result in long-term growth. We see these new initiatives as incremental measures to enhance shareholder value.  While we implement the plan, we expect to continue, and expand, through organic growth, acquisitions, and other measures, our current business lines both in the Electricity and Product segments as well as other business lines as described above.

 

 

Company Contact and Sources of Information

 

We file annual, quarterly and periodic reports, proxy statements and other information with the SEC. You may obtain and copy any document we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington D.C. 20549. You may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet website at http://www.sec.gov that contains reports, proxy and other information statements, and other information regarding issuers that file electronically with the SEC. Our SEC filings are accessible via the internet at that website.

 

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Our reports on Form 10-K, 10-Q and 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available through our website at www.ormat.com for downloading, free of charge, as soon as reasonably practicable after these reports are filed with the SEC. Our Code of Business Conduct and Ethics, Code of Ethics Applicable to Senior Executives, Audit Committee Charter, Corporate Governance Guidelines, Nominating and Corporate Governance Committee Charter, Compensation Committee Charter, and Insider Trading Policy, as amended, are also available at our website address mentioned above. If we make any amendments to our Code of Business Conduct and Ethics or Code of Ethics Applicable to Senior Executives or grant any waiver, including any implicit waiver, from a provision of either code applicable to our Chief Executive Officer, Chief Financial Officer or principal accounting officer requiring disclosure under applicable SEC rules, we intend to disclose the nature of such amendment or waiver on our website. The content of our website, however, is not part of this annual report.

 

You may request a copy of our SEC filings, as well as the foregoing corporate documents, at no cost to you, by writing to the Company address appearing in this annual report or by calling us at (775) 356-9029.

 

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Our Power Generation Business (Electricity Segment)

 

Power Plants in Operation

 

The table below summarizes certain key non-financial information relating to our power plants and complexes as of March 1, 2018. The generating capacity of certain of our power plants and complexes listed below has been updated from our 2016 disclosure to reflect changes in the resource temperature and other factors that impact resource capabilities:

 

Type

Region

Plant

Ownership(1)

Generating

capacity

(MW) (2)

Region 2016 Capacity Factor

Geothermal

California

Ormesa Complex

100%

40

 
   

Heber Complex

100%

89

 
   

Mammoth Complex

100%

29

 
   

Brawley

100%

13

 
         

77%

 

West Nevada

Steamboat Complex

100%

70

 
   

Brady Complex

100%

18

 
         

87%

 

East Nevada

Tuscarora

100%

18

 
   

Jersey Valley

100%

10

 
   

McGinness Hills

100%

90

 
   

Don A. Campbell

63.3%

41

 
   

Tungsten Mountain

100%

26(3)

 
         

94%

 

Hawaii

Puna

63.3%

38

 
         

97%

 

International

Amatitlan (Guatemala)

100%

20

 
   

Zunil (Guatemala)

97%

23

 
   

Olkaria III Complex (Kenya)

100%

139

 
   

Bouillante (Guadeloupe Island)

60%(4)

15

 
   

Platanares (Honduras)

100%

35(5)

 
         

94%

           

Total Consolidated Geothermal

     

714

88%

           

Unconsolidated Geothermal

Indonesia

Sarulla (SIL & NIL 1)

12.75%

28

 
           

REG

 

OREG 1

63.3%

22

 
   

OREG 2

63.3%

22

 
   

OREG 3

63.3%

5.5

 
   

OREG 4

100%

   3.5(6)

 

Total REG

     

53

84%

           

Total

     

795

 

 

 

 

1.

We indirectly own and operate all of our power plants, although financial institutions hold equity interests in one of our subsidiaries, Opal Geo, which owns the McGinness Hills geothermal power plant complex, the Tuscarora and Jersey Valley power plants and the second phase of the Don A. Campbell power plant, all located in Nevada. In the table above, we list these power plants as being 100% owned because all of the generating capacity is owned by Opal Geo and we control the operation of the power plants. The nature of the equity interests held by the financial institution is described below in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Opal Geo Transaction”.

 

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Notwithstanding our approximately 60% equity interest in the Bouillante power plant and 63.25% direct equity interest in the Puna, the first phase of Don A. Campbell, OREG 1, OREG 2 and OREG 3 power plants as well as the indirect interest in the second phase of the Don A. Campbell power plant owned by our subsidiary, ORPD LLC (“ORPD”), we list 100% of the generating capacity of the Bouillante power plant and the power plants in the ORPD portfolio in the table above because we control their operation. We list our 12.75% share of the generating capacity of the Sarulla power plant as we own a 12.75% minority interest. The revenues from the Sarulla project are not consolidated and are presented under “Equity in earnings (losses) of investees, net” in our financial statements.

 

 

2.

References to generating capacity generally refer to the gross generating capacity less auxiliary power in the case of all of our existing power plants, except the Zunil power plant. We determine the generating capacity figures in these power plants by taking into account the resource and power plant capabilities. In the case of the Zunil power plant, revenues are calculated based on a 24 MW capacity unrelated to the actual performance of the reservoir. This column represents our net ownership of such generating capacity.

 

In any given year, the actual power generation of a particular power plant may differ from that power plant’s generating capacity due to variations in ambient temperature, the availability of the resource, and operational issues affecting performance during that year.

 

 

3.

The 26 MW Tungsten Mountain power plant in Nevada commenced commercial operation on December 1, 2017.

 

 

4.

We own 60%, and each of CDC and Sageos own 20%, of the Bouillante power plant. We and CDC hold our respective 60% and 20% equity interests in the Bouillante power plant through GB.

 

 

5.

The 35 MW Platanares power plant in Honduras commenced commercial operation on September 26, 2017.

 

 

6.

The OREG 4 power plant is not operating at full capacity because of low run time of the compressor station that serves as the power plant’s heat source. This results in lower power generation.

 

All of the revenues that we derive from the sale of electricity are pursuant to long-term PPAs. Approximately 45.8% of our total revenues in the year ended December 31, 2017 were derived from the sale of electricity by our power plants to power purchasers that currently have investment grade credit ratings. The purchasers of electricity from our foreign power plants are either state-owned or private entities.

 

New Power Plants

 

We are currently in various stages of construction of new power plants and expansion of existing power plants. Our construction and expansion plan include 72 MW in generating capacity from geothermal power plants in the U.S., Kenya and Indonesia that are fully released for construction. In addition, we have several projects in the U.S., Guadeloupe, Kenya and Honduras that are either under initial stages of construction or under different stages of development with an aggregate capacity of between 115 MW and 120 MW.

 

We have substantial land positions across 32 prospects in the U.S., Guatemala, Guadeloupe, Kenya, New Zealand, Honduras and Ethiopia that we expect will support future geothermal development, on which we have started or plan to start exploration activity. These land positions are comprised of various leases, exploration concessions for geothermal resources and an option to enter into geothermal leases.

 

In addition, we are currently developing three storage systems, one behind-the-meter system and two in-front-of-the-meter (IFM) systems in New Jersey.

 

New activity

 

On March 15, 2017, we completed the acquisition of our Viridity business as described above.

 

Our Viridity business currently manages curtailable customer loads of over 875 MW across 3,000 sites under contracts with leading U.S. retail energy providers and directly with large C&I customers, including management of a portfolio of non-utility storage assets located in the northeastern U.S. with over 80,000 operational market hours. We serve our distributed customers through a network operations center (NOC), which is operated 24/7 using our VPowerMarketsTM software platform and a SCADA platform. VPowerTM services are provided to customers using a SaaS model under which we receive license fees and/or a portion of the revenue and savings that are achieved for our Viridity customers.

 

We expect that the eco system we created, combining our Viridity capabilities and our overall capabilities, including among others, our global presence, experience in technology and system integration, EPC of power generation projects, flexible business models, and our reputation and experience in the geothermal and recovered energy sectors, will enable us to expand in the growing energy storage sector.

 

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In connection with the acquisition of our Viridity business, we assumed certain contractual duties and obligations that are regulated by the Federal Energy Regulatory Commission (FERC) and certain independent system operators (ISOs) and regional transmission organizations (RTOs).  Specifically, our Viridity business obtained and maintains authorization from FERC to make wholesale sales of power, capacity, and ancillary services at market-based rates, and we have confirmed membership status with eligibility to serve designated contractual functions within each of the following ISOs and RTOs: PJM Interconnection LLC (PJM), New York Independent System Operator, Inc. (NYISO), and the Electric Reliability Council of Texas (ERCOT).  Additionally, during the fourth quarter of 2017, we received formal notice of membership in Midcontinent Independent System Operator (MISO) and ISO New England Inc. and have filed for membership in Independent Electricity System Operator (IESO – Ontario Canada).  In the future, we may need to obtain and maintain similar membership and eligibility status with other ISO and RTO markets in which our Viridity business will operate.

 

Our Product Business (Product Segment)

 

We design, manufacture and sell products for electricity generation and provide the related services described below. We primarily manufacture products to fill customer orders, but in some situations, we may manufacture products as inventory for future internal and external projects.

 

Power Units for Geothermal Power Plants. We design, manufacture and sell power units for geothermal electricity generation, which we refer to as OECs. In geothermal power plants using OECs, geothermal fluid (either hot water (also called brine) or steam or both) is extracted from the underground reservoir and flows from the wellhead to a vaporizer that also heats a secondary working fluid, which is vaporized and used to drive the turbine. The secondary fluid is then condensed in a condenser, which may be cooled directly by air or by water from a cooling tower and sent back to the vaporizer. The cooled geothermal fluid is then reinjected back into the reservoir. Our customers include contractors and geothermal power plant developers, owners and operators.

 

Power Units for Recovered Energy-Based Power Generation. We design, manufacture and sell power units used to generate electricity from recovered energy, or so-called “waste heat”. This heat is generated as a residual by-product of gas turbine-driven compressor stations, solar thermal units and a variety of industrial processes, such as cement manufacturing, and is not otherwise used for any purpose. Our existing and target customers include interstate natural gas pipeline owners and operators, gas processing plant owners and operators, cement plant owners and operators, and other companies engaged in other energy-intensive industrial processes.

 

EPC of Power Plants. We serve as an EPC contractor for geothermal and recovered energy power plants on a turnkey basis, using power units we design and manufacture. Our customers are geothermal power plant owners as well as our target customers for the sale of our recovered energy-based power units as described above. Unlike many other companies that provide EPC services, we believe we have an advantage in that we are using equipment that we manufacture and thus have better quality and better control over the timing and delivery of required equipment and its related costs.

 

Remote Power Units and Other Generators. We design, manufacture and sell fossil fuel powered turbo-generators with capacities ranging from 200 watts to 5,000 watts, which operate unattended in extreme hot or cold climate conditions. Our customers include contractors who install gas pipelines in remote areas and off-shore platforms operators and contractors. In addition, we design, manufacture, and sell generators, including heavy duty direct-current generators, for various other uses. We are in the process of slowing down these activities.

 

 

History

 

Ormat Technologies, Inc. was formed as a Delaware corporation in 1994 by our former parent company Ormat Industries. Ormat Industries was one of the first companies to focus on the development of equipment for the production of clean, renewable and generally sustainable forms of energy. On February 12, 2015, we successfully completed the acquisition of Ormat Industries in an all-stock merger, eliminating its majority ownership and control of Ormat Technologies.

 

Industry Background 

 

Geothermal Energy

 

Most of our power plants in operation produce electricity from geothermal energy. There are several different sources or methods of obtaining geothermal energy, which are described below.

 

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Hydrothermal geothermal-electricity generation — Hydrothermal geothermal energy is derived from naturally occurring hydrothermal reservoirs that are formed when water comes sufficiently close to hot rock to heat the water to temperatures of 300 degrees Fahrenheit or more. The heated water then ascends toward the surface of the earth where, if geological conditions are suitable for its commercial extraction, it can be extracted by drilling geothermal wells. Geothermal production wells are normally located within several miles of the power plant, as it is not economically viable to transport geothermal fluids over longer distances due to heat and pressure loss. The geothermal reservoir is a renewable source of energy if: (i) natural ground water sources and reinjection of extracted geothermal fluids are adequate over the long-term to replenish the geothermal reservoir following the withdrawal of geothermal fluids and (ii) the well field is properly operated. Geothermal energy power plants typically have higher capital costs (primarily as a result of the costs attributable to well field development) but tend to have significantly lower variable operating costs (principally consisting of maintenance expenditures) than fossil fuel-fired power plants that require ongoing fuel expenses.

 

EGSAn EGS is a subsurface system that may be artificially created to extract heat from hot rock where the permeability and aquifers required for a hydrothermal system are insufficient or non-existent. A geothermal power plant that uses EGS techniques recovers the thermal energy from the subsurface rocks by creating or accessing a system of open fractures in the rock through which water can be injected, heated through contact with the hot rock, returned to the surface in production wells and transferred to a power unit.

 

Co-produced geothermal from oil and gas fields, geo-pressurized resources Another source of geothermal energy is hot water produced as a by-product of oil and gas extraction. When oil and gas wells are deep, the extracted fluids are often at high temperatures and if the water volume associated with the extracted fluids is significant, the hot water can be used for power generation in equipment similar to a geothermal power plant.

 

Geothermal Power Plant Technologies

 

Geothermal power plants generally employ either binary systems or conventional flash design systems, as briefly described below. In our geothermal power plants, we also employ our proprietary technology of combined geothermal cycle systems.

 

Binary System

 

In a geothermal power plant using a binary system, geothermal fluid (either hot water (also called brine) or steam or both) is extracted from the underground reservoir and flows from the wellhead through a gathering system of insulated steel pipelines to a vaporizer that also heats a secondary working fluid. This is typically an organic fluid, such as pentane or butane, which is vaporized and is used to drive the turbine. The organic fluid is then condensed in a condenser, which may be cooled directly by air or by water from a cooling tower and sent back to the vaporizer through a pump. The cooled geothermal fluid is then reinjected back into the reservoir. The operation of our air-cooled binary geothermal power plant is depicted in the diagram below.

 

 

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Flash Design System

 

In a geothermal power plant using flash design, geothermal fluid is extracted from the underground reservoir and flows from the wellhead through a gathering system of insulated steel pipelines to flash tanks and/or separators. There, the steam is separated from the brine and is sent to a demister, where any remaining water droplets are removed. This produces a stream of dry saturated steam, which drives a steam turbine generator to produce electricity. In some cases, the brine at the outlet of the separator is flashed a second time (dual flash), providing additional steam at lower pressure used in the low pressure section of the steam turbine to produce additional electricity. Steam exhausted from the steam turbine is condensed in a surface or direct contact condenser cooled by cold water from a cooling tower. The non-condensable gases (such as carbon dioxide) are removed by means of a vacuum system in order to maintain the performance of the steam condenser. The resulting condensate is used to provide make-up water for the cooling tower. The hot brine remaining after separation of steam is injected (either directly or after passing through a binary plant to produce additional power from the residual heat remaining in the brine) back into the geothermal resource through a series of injection wells. The flash technology is depicted in the diagram below.

 

 

In some instances, the wells directly produce dry steam and the steam is fed directly to the steam turbine with the rest of the system similar to the flash technology described above.

 

Our Proprietary Technology

 

Our proprietary technology may be used either in power plants operating according to the Organic Rankine Cycle alone or in combination with various other commonly used thermodynamic technologies that convert heat to mechanical power, such as gas and steam turbines. It can be used with a variety of thermal energy sources, such as geothermal, recovered energy, biomass, solar energy and fossil fuels. Specifically, our technology involves original designs of turbines, pumps, and heat exchangers, as well as formulation of organic motive fluids (all of which are non-ozone-depleting substances). Using advanced computational fluid dynamics techniques and other computer aided design software as well as our test facilities, we continuously seek to improve power plant components, reduce operations and maintenance costs, and increase the range of our equipment and applications. We are always examining ways to increase the output of our plants by utilizing evaporative cooling, cold reinjection, configuration optimization, and topping turbines. In the geothermal as well as the recovered energy (waste heat) areas, we are examining two-level and three-level energy systems and other thermodynamic cycle alternations along with new motive fluids.

 

We also developed, patented and constructed GCCU power plants in which the steam first produces power in a backpressure steam turbine and is subsequently condensed in a vaporizer of a binary plant, which produces additional power. Our Geothermal Combined Cycle technology is depicted in the diagram below.

 

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In the conversion of geothermal energy into electricity, our technology has a number of advantages over conventional geothermal steam turbine plants. A conventional geothermal steam turbine plant consumes significant quantities of water, causing depletion of the aquifer and requiring cooling water treatment with chemicals and thus a need for the disposal of such chemicals. A conventional geothermal steam turbine plant also creates a significant visual impact in the form of an emitted plume from the cooling towers, especially during cold weather. By contrast, our binary and combined cycle geothermal power plants have a low profile with minimal visual impact and do not emit a plume when they use air-cooled condensers. Our binary and combined cycle geothermal power plants reinject all of the geothermal fluids utilized in the respective processes into the geothermal reservoir. Consequently, such processes generally have no emissions.

 

Other advantages of our technology include simplicity of operation and maintenance and higher yearly availability. For instance, the OEC employs a low speed and high efficiency organic vapor turbine directly coupled to the generator, eliminating the need for reduction gear. In addition, with our binary design, there is no contact between the turbine blade and geothermal fluids, which can often be very corrosive and erosive. Instead, the geothermal fluids pass through a heat exchanger, which is less susceptible to erosion and can adapt much better to corrosive fluids. In addition, with the organic vapor condensed above atmospheric pressure, no vacuum system is required.

 

We use the same elements of our technology in our recovered energy products. The heat source may be exhaust gases from a Brayton cycle gas turbine, low-pressure steam, or medium temperature liquid found in the process industries such as oil refining and cement manufacturing. In most cases, we attach an additional heat exchanger in which we circulate thermal oil or water to transfer the heat into the OEC’s own vaporizer in order to provide greater operational flexibility and control. Once this stage of each recovery is completed, the rest of the operation is identical to that of the OECs used in our geothermal power plants and enjoys the same advantages of using the Organic Rankine Cycle. In addition, our technology allows for better load following than conventional steam turbines, requires no water treatment (since it is air cooled and organic fluid motivated), and does not require the continuous presence of a licensed steam boiler operator on site.

 

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Our REG technology is depicted in the diagram below.

 

 

Patents

 

We have 77 U.S. patents that are in force (and have approximately 9 U.S. patents pending). These patents and patent applications cover our products (mainly power units based on the Organic Rankine Cycle) and systems (mainly geothermal power plants and industrial waste heat recovery plants for electricity production). The products-related patents cover components that include turbines, heat exchangers, seals and controls as well as control of operation of geothermal production well pumps. The system-related patents cover not only particular components but also the overall energy conversion system from the “fuel supply” (e.g., geothermal fluid, waste heat, biomass or solar) to electricity production.

 

The system-related patents also cover subjects such as waste heat recovery related to gas pipeline compressors and industrial waste heat, solar power systems, disposal of non-condensable gases present in geothermal fluids, power plants for very high pressure geothermal resources, two-phase fluids, low temperature geothermal brine as well as processes related to EGS. A number of our patents cover combined cycle geothermal power plants, in which the steam first produces power in a backpressure steam turbine and is subsequently condensed in a vaporizer of a binary plant, which produces additional power. The remaining terms of our patents range from one year to 16 years. The loss of any single patent would not have a material effect on our business or results of operations.

 

 

Research and Development

 

We are conducting research and development activities intended to improve plant performance, reduce costs, and increase the breadth of our product offerings. The primary focus of our research and development efforts is targeting power plant conceptual thermodynamic cycle and major equipment including continued performance, cost and land usage improvements to our condensing equipment, and development of new higher efficiency and higher power output turbines.

 

Our Viridity business continues to develop new optimization algorithms to optimize the life of a battery energy storage system (BESS), to optimize our and our customers’ economic return and to forecast the trends surrounding our customers’ electricity consumption and the electric grid including times of peak demands and the usage of ancillary services.

 

We have also focused our development efforts on the engineering and design of improved energy storage systems. These development efforts include, among others, further development of the control hardware and software for energy storage systems to follow electric grid and market signals and to optimize their delivery of energy into the markets using our VPower™ software and SCADA platform to accelerate system optimization through cloud base algorithms.

 

We have developed, and continue to develop, system integration capabilities that match the appropriate system and system sizing with the appropriate battery chemistry, electrical and physical components to accommodate our needs or needs of the customers that will own such energy storage systems in light of the markets in which they will operate. We are searching for alternative chemistries, products and combinations of hybrid solutions to best address our energy storage product customers’ needs.

 

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Additionally, we are continuing to evaluate investment opportunities in new companies with technology and/or product offerings for renewable energy and energy storage solutions.

 

 

Market Opportunity 

 

Geothermal Market Opportunities 

 

United States

 

Interest in geothermal energy in the U.S. remains strong for numerous reasons, including legislative support, RPS goals, coal and nuclear base-load retirements, and increasing awareness of the positive value of geothermal characteristics as compared to intermittent renewable technologies.

 

Today, electricity generation from geothermal resources is concentrated mainly in California, Nevada, Hawaii, Idaho, Oregon, and Utah, and we believe there are opportunities for development in other states such as New Mexico due to the potential of their geothermal resources.

 

In a report issued in March 2016, the GEA indicated that the U.S. geothermal industry had about 3,700 MW of installed nameplate capacity and over 80 active projects with a cumulative capacity of over 1,250 MW of geothermal projects under various phases of consideration or development in 10 U.S. states.

 

Geothermal energy provides numerous benefits to the U.S. grid and economy, according to another GEA report issued in January 2017. Geothermal development and operation brings economic benefits in the form of taxes and long term high-paying jobs, and it currently has one of the lowest LCOE of all power sources in the U.S. Additionally, improvements in geothermal production make it possible to provide ancillary and on-demand services. This helps load serving entities avoid additional costs from purchasing and then balancing intermittent resources with storage or new transmission.

 

State level legislation

 

In response to increasing demand for “green” energy, many states have adopted legislation requiring, and providing incentives for, electric utilities to sell electricity generated from renewable energy sources. In the U.S., 37 states plus the District of Colombia and four territories have enacted an RPS, renewable portfolio goals, or similar laws requiring or encouraging utilities in such states to generate or buy a certain percentage of their electricity from renewable energy or recovered heat sources.

 

According to the Database of State Incentives for Renewables and Efficiency (DSIRE), 30 states (including California, Nevada, and Hawaii, where we have been the most active in our geothermal energy development and in which all of our operating U.S. geothermal power plants are located), two territories, and the District of Columbia define geothermal resources as “renewable”. In addition, according to the EPA, 25 states have enacted RPS, Clean Energy Standards, Energy Efficiency Resource Standards or Alternative Portfolio Standards program guidelines that include some form of combined heat and power and/or waste heat recovery.

 

We see the impact of RPS legislation as the most significant driver for us to expand existing power plants and to build new projects.

 

California

 

California’s RPS program now requires Load Serving Entities (LSEs), including investor-owned utilities (IOUs), electric service providers, community choice aggregators, and publicly owned utilities to increase their share of procurement from eligible renewable energy resources as a percentage of their total procurement. The RPS requires LSEs to procure 33 percent of their energy from renewable resources by 2020, ramping up to 50 percent in 2030, with interim targets of 40 percent by 2024 and 45 percent by 2027. The expanded RPS target should benefit geothermal energy, which has the advantage of generating flexible base load power, helping California diversify its mix of renewable resources.

 

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In 2014, AB 2363 became effective, requiring the CPUC to adopt, by December 31, 2015, a methodology for determining the costs of integrating eligible renewable energy resources. The process has experienced some delays, and currently, the CPUC is incorporating the development of this methodology into its Integrated Resource Planning process. While the CPUC has issued draft guidelines for integrated resource planning in late 2017, the renewable integration issues assessment remain unresolved. The CPUC has implemented a capacity assessment mechanism that tends to favor dispatchable resources, including geothermal, giving them a higher overall capacity value than variable resources such as wind and solar.

 

Nevada

 

In 2016, Nevada’s RPS required that at least 20% of electricity sold to Nevada retail customers be from renewable energy resources and credits, and at least 6% of that amount be from solar resources. According to NV Energy’s Annual RPS Compliance Report, in 2016, both Nevada Power and Sierra Pacific Power exceeded 2016 RPS standard requirements, achieving a total of 22.2% and 26.6% respectively.

 

Hawaii

 

Hawaii established a renewable portfolio goal in 2001. Since 2001, the RPS targets were revised and expanded.  On June 2015, Hawaii became the only state with a legislative goal of 100% renewable energy by 2045 with the signing of HB 623. The new policy includes interim requirements of 15% by the end of 2015, 30% by the end of 2020, 40% by 2030, and 70% by 2040, ultimately reaching 100% renewable electricity by 2045.

 

In 2016, Hawaiian Electric Company and its subsidiaries exceeded the 2015 RPS requirement, achieving a consolidated RPS of 25.8% of retail electricity sales from eligible renewable energy resources.

 

 

Federal level legislation

 

On August 3, 2015, President Obama and the EPA announced the Clean Power Plan that sets standards for power plants and customized goals for states to cut carbon pollution. The goal of the proposed plan includes cutting carbon emissions from the power sector by 32% below 2005 levels nationwide by 2030. In February 2016, the Supreme Court of the U.S. granted a temporary stay halting implementation of the Clean Power Plan pending resolution of legal challenges to the proposed plan. The U.S. Court of Appeals for the District of Columbia Circuit heard oral arguments in the cases challenging the Clean Power Plan on September 27, 2016.

 

On March 28, 2017, President Donald Trump signed the Executive Order on Energy Independence (E.O. 13783), which in part calls for a review of the Clean Power Plan. On October 10, 2017, the EPA issued a Notice of Proposed Rulemaking (NPRM), proposing to repeal the Clean Power Plan. After reviewing the Clean Power Plan, the EPA has proposed to determine that the Obama-era regulation exceeds the agency’s statutory authority.

 

The federal government encourages production of electricity from geothermal resources or solar energy through certain tax subsidies. For a new geothermal power plant in the U.S. that started construction by December 31, 2017, we are permitted to claim an investment tax credit for 30 percent of the project cost in the year the project is put in service or production tax credits over time on the power produced. The production-based credits, which in 2017 were 2.4 cents per kWh, are adjusted annually for inflation and may be claimed for 10 years on the net electricity output sold to third parties after the project is first placed in service. Any project that started construction by December 2017 must ordinarily be put in service within four years after the end of the year in which construction started to qualify for tax credits at these rates.  For a new geothermal power plant in the U.S. that started construction after 2017, we are permitted to claim an investment tax credit of 10 percent of the project cost. 

 

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New solar projects that are under construction by December 2019 will qualify for a 30 percent investment tax credit. The credit will fall to 26 percent for projects starting construction in 2020 and 22 percent for projects starting construction in 2021. Projects that are under construction before these deadlines must be placed in service by December 31 2023 to qualify for investment tax credits at these rates. Solar projects placed in service after December 31, 2023 will only qualify for a 10 percent investment tax credit, on par with the permanent credit provided to geothermal. Under current tax rules, any unused tax credit has a one-year carry back and a twenty-year carry forward.

 

The tax credits are potentially exposed to claw back under a new base erosion and anti-abuse tax or "BEAT" that took effect on January 1, 2018.  See the discussion under Item 1A — “Risk Factors”.

 

New U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), enacted at the end of December 2017 reduced the corporate income tax rate from 35 percent to 21 percent starting in 2018.  This is likely to reduce the amount of tax equity that can be raised to finance renewable energy projects but should increase after-tax earnings from operating projects after the initial period when the project is being depreciated. 

 

The Tax Act also allows the cost of new or used equipment purchased from third parties to be "expensed" or deducted immediately.  This change applies to equipment put in service after September 27, 2017.  However, it does not apply to equipment that we contracted to acquire on or before September 27.  This full expensing applies to equipment put in service through 2022.  After that, the percentage that can be expensed drops by 20 percent a year until it reaches zero in 2027.

 

There are other changes in the Tax Act that are potentially favorable to us, such as U.S. corporations will no longer be taxed on dividends from foreign corporations in which they own at least a 10 percent interest to the extent the dividends are paid out of future earnings earned outside the U.S., and income from cross-border sales of turbines and other "inventory" will be treated as earned in the country where the items were manufactured rather than earned partially or entirely in the country where the inventory is sold.  There are also other potentially unfavorable provisions, such as a new annual tax on global intangible low--taxed income, or "GILTI."  We have not yet made a full assessment of the impact of the Tax Act on our future earnings or operations. See Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.

 

 

Global 

 

We believe the global markets continue to present growth and expansion opportunities in both established and emerging markets.

 

According to the GEA’s Geothermal Power: International Market Update, the global geothermal market was developing about 2.5 GW of planned capacity spread across 23 countries. Additionally, the GEA estimates that, based on current data, the global geothermal industry is expected to grow from 13.8 GW today to reach 23 GW by 2021.

 

The assessment conducted by the GEA is only an estimate that is based on projects and resource reporting by the geothermal industry. A developer’s ability to fully develop a geothermal resource is dependent upon its capabilities to identify the resource and conduct exploration, development and construction; therefore, this estimate may not be accurate. We refer to it only as a possible reference point, but we do not necessarily concur with this estimate.

 

Operations outside of the U.S. may be subject to and/or benefit from increasing efforts by governments and businesses around the world to fight climate change and move towards a low carbon, resilient and sustainable future. According to a 2017 report from the International Renewable Energy Agency entitled Rethinking Energy, to date, more than 170 countries have established renewable energy targets, and nearly 150 have enacted policies to catalyze investments in renewable energy technologies.

 

In December 2015, 197 countries signed an historic agreement at the COP21 UN Climate Change Conference held in Paris. For the first time, all countries committed to setting nationally determined climate targets and reporting on their progress. The agreement’s aim is to keep global temperature rise this century well below 2 degrees Celsius and to drive efforts to limit the temperature increase even further to 1.5 degrees Celsius above pre-industrial levels. According to the United Nations Framework Convention on Climate Change (UNFCCC), the submission of national targets in five-year cycles signals to investors and technology innovators that the world will demand clean power plants, energy efficient factories and buildings, and low-carbon transportation in the decades to come.

 

The Paris Agreement entered into force on November 4, 2016, thirty days after the date on which at least 55 parties to the Convention accounting in total for at least an estimated 55% of the total global greenhouse gas emissions deposited their instruments of ratification, acceptance, approval or accession with the Depositary. 127 Parties have ratified of 197 Parties to the Convention.

 

On June 1, 2017, President Donald J. Trump announced that the U.S. will withdraw from the Paris Climate Accord and begin negotiations to either re-enter or negotiate an entirely new agreement with more favorable terms for the U.S.

 

In support of the Paris agreement, the EIB has committed to provide $100 billion of new financing for climate action projects over the five years. The support of multilateral institutions such as EIB is expected to be an important factor in assisting countries in reaching their targets under the Paris Climate Change Agreement.

 

In November 2015, a group of 20 countries, including the US, UK, France, China and India, pledged to double their budget for renewable energy technology over the next five years as part of a separate initiative called Mission Innovation. 

 

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Also, in November 2015, the Breakthrough Energy Coalition was launched by a group of 28 private investors with the objective of bringing companies with the potential to deliver affordable, reliable and carbon free power from the research lab to the market.

 

We believe that these developments and governmental plans will create opportunities for us to acquire and develop geothermal power generation facilities internationally, as well as create additional opportunities for our Product segment.

 

Outside of the U.S., the majority of power generating capacity has historically been owned and controlled by governments. Since the early 1990s, however, many foreign governments have privatized their power generation industries through sales to third parties encouraging new capacity development and/or refurbishment of existing assets by independent power developers. These foreign governments have taken a variety of approaches to encourage the development of competitive power markets, including awarding long-term contracts for energy and capacity to independent power generators and creating competitive wholesale markets for selling and trading energy, capacity, and related products. Some foreign regions and countries have also adopted active government programs designed to encourage clean renewable energy power generation such as the following countries in which we operate and/or are conducting business development activities:

 

Europe

 

Turkey is the fastest growing geothermal market worldwide with the theoretical potential for 31 GW of geothermal capacity and with a proven geothermal capacity of 4.5 GW, according to the Turkish Mineral Technical Exploration Agency.

 

Since 2004, we have established strong relationships in the Turkish market and provided our full range of solutions including our state-of-the-art binary systems to 28 geothermal power plants with a total capacity of nearly 515 MW, of which 6 power plants are currently under construction.

 

In Turkey, the 'National Renewable Energy Action Plan' proposes to increase the country's renewable energy generation capacity to 61 GW by 2023, including 1.5 GW of electricity generation from geothermal resources. This plan is supported by the European Bank for Reconstruction and Development. The plan aims to increase Turkish energy security by diversifying its energy supply, making greater use of domestic resources, protecting the environment by relying on clean, renewable and low carbon technologies and fostering energy market efficiency through private sector investment and integration.

 

The plan also seeks to attract private investments in research and development and in geothermal exploitation for electricity production and to provide financial support to innovation and technology research in the field of renewable energy. Special emphasis and attention has been placed on using locally manufactured equipment in renewable energy based generating facilities, with a target set for the amount of major and critical equipment that is manufactured locally to be used in such facilities by the end of 2019.

 

To achieve its objective of having 30% of its power generated from renewable sources by 2023, Turkey has changed its renewable energy law first enacted in 2007. The law sets the feed-in-tariff (FIT) for electricity generated from geothermal resources at $105 per MWh for ten years from the COD of the relevant project and provides a further incentive of $13 per MWh for local manufacturing of turbine related parts for five years from the COD of the relevant project. This law, as amended, is effective until 2020. Renewable energy producers will also benefit from an 85% discount on transmission costs for 10 years and various priority rights over land usage. In order to benefit from the incentives under the renewable energy law, a renewable energy generation facility must hold a renewable energy resource certificate (the RER Certificate), which is issued by Turkey’s Energy Market Regulatory Authority. An RER certificate is valid for the term of the generation license of the relevant generation company. In addition, and to avoid rights and licenses manipulation, a pre-feasibility license must be issued and paid for upon request to hold a concession. These pre-licenses must be converted into full licenses for developed fields within three years of issuance, or they become void and the license rights may be re-assigned without fee reimbursement.

 

To address the demand for local production, we established a local subsidiary in Turkey, which has obtained all certifications required to be obtained by a local manufacturer of parts and equipment in accordance with the Turkish legislation described above.

 

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Latin America

 

Several Latin American countries have renewable energy programs. In November 2013, the national government of Guatemala, where our Zunil and Amatitlan power plants are located, approved a law creating incentives for power generation from renewable energy sources. These incentives include, among other things, providing economic and fiscal incentives such as exemptions from taxes on the importation of relevant equipment and various tax exemptions for companies implementing renewable energy projects. Additionally, the Energy Policy 2013-2027 identifies great untapped potential for renewable energy production in Guatemala, including 1,000 MW for geothermal. One of the main objectives of the Energy Policy is to secure a supply of electricity at competitive prices by diversifying the energy mix with an 80% renewable energy share target for 2027.

 

In Honduras, we recently completed the construction of the first geothermal power plant under a BOT agreement. The national government of Honduras approved the Incentives Act (Decree No.70-2007), which provide incentives in the form of tax exemptions for equipment, materials and services related to power generation development based on renewable resources. At the same time, ENEE, the national integrated utility, will buy energy from such projects and offer to pay rates that are above the marginal cost approved by the CNE. Honduras also set a target to reach at least 80% renewable energy production by 2034.

 

Mexico is the world’s fourth largest producer of geothermal energy. Recent studies suggest an over 9 GW geothermal potential, of which only approximately 12% is already developed. In December 2013, the Mexican Congress passed a constitutional reform in an attempt to increase the participation of private investors in the generation and commercialization of electric energy. This reform affects the electricity market by opening the generation and commercialization of electricity to private companies, transforming Mexico’s Federal Electricity Commission to a for-profit public company, and redefining the functions and attributions of the Ministry of Energy. The secondary legislation that establishes the attributions of the public entities, procurement regulations, and a normative framework for state-owned energy companies was finalized in 2014.

 

In July 2015, Mexico launched round zero and assigned the projects to be developed by Mexico's state-owned utility CFE, with the remainder to be put out to tender to the private sector. Thirteen geothermal areas and five concessions were given by the Mexican Secretariat of Energy to CFE. The government expects to award private companies with concessions for 30 years and exploration permits for up to 150 km2 for three years. We are in various discussions with local companies to identify attractive geothermal resources and projects.

 

Caribbean

 

Many island nations in general and specifically the Caribbean nations, depend almost entirely on petroleum to meet their electricity needs. With an average electricity price of approximately $35 per kWh in 2014, the lack of diversified power generation leaves Caribbean nations vulnerable to commodity market volatility, while the lack of new development leaves them reliant on what are believed to be outdated and often unreliable power plants. The larger issue hindering large-scale renewable energy deployments, however, is scale. Caribbean nations have quite significant renewable energy potential, yet most have small demand.  The majority of the Caribbean grids are relatively old, with the average diesel generator more than 20 years old. Furthermore, the power supply is relatively inefficient with high system losses.  Due to their sizes, each of the Caribbean countries is generally dominated by one local utility and simple market structures where electricity is regulated directly by local governments. Other than in Guadeloupe, where the geothermal power plant that we recently acquired has been operating since 1985, there are no other operating geothermal projects in the Caribbean region. Recently, some deep well drilling exploration was performed on a few islands, but the results of this exploration are still pending. Although few, we believe there are opportunities for us in the Caribbean islands of St. Kitts, Nevis, St. Lucia, Dominica, and Montserrat.

 

Oceania

 

In New Zealand, where we have been actively providing geothermal power plant solutions since 1988, the government’s policies to fight climate change include an unconditional GHG emissions reduction target of between 10% and 20% below 1990 levels by 2020 and a renewable electricity generation target of 90% of New Zealand’s total electricity generation by 2025. We continue selling power plant equipment to our New Zealand customers and secured two projects in the last two years.

 

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South East Asia

 

Ormat holds a 12.75% equity interest in the Sarulla project in Indonesia. The first 110 MW phase commenced commercial operation in March 2017, the second 110 MW phase commenced commercial operation in October 2017, and the third 110 MW phase is currently under construction, with plans to commence commercial operation in the second quarter of 2018.

 

The Indonesian government intends to increase the share of renewable energy sources in the energy mix, aiming to meet a target of 23% of domestic energy demand by 2025. In the IPP sector, certain regulations for geothermal projects have been implemented, providing incentives such as investment tax credits, accelerated depreciation, and pricing guidelines to allow for preferential power prices for generators.

 

The Indonesian government announced its intention to reduce the country’s carbon dioxide emissions by 26% by 2020 at the 2009 United Nations Climate Change Conference in Copenhagen and during 2015 in Paris.

 

In January 2016, the President of Indonesia issued new presidential regulations (PR No. 4 2016) to accelerate the Indonesian 35 GW Power Generation Program. The regulations introduce a new government guarantee for the development of power projects, which would cover both projects developed by the state-owned utility company, PLN, and those projects developed by PLN in cooperation with IPPs or their subsidiaries. Additionally, a shorter period to obtain necessary permits for development was introduced as well as clarifications that geothermal projects can be developed in high-conservation forest areas (e.g. national parks).

 

The Indonesian government is planning to revise negative investment regulation. According to Presidential Decree No. 39/2014, the development of geothermal power plants with a capacity of less than 10 MW is closed to foreign ownership. Currently, foreign investors may own up to 95% of power plants with generating capacities greater than 10 MW. The revised regulations will allow foreign investors to own up to 100% of geothermal power plants, with generating capacities greater than 10 MW and up to 67% of geothermal power plants with generating capacities of less than 10 MW.

 

In late 2016, the Indonesian government attempted to bring the national electricity provision with lower cost and minimized subsidies. In February 2017, the MEMR issued two regulations: No. 10/2017, which regulates the key terms of PPAs and No. 12/2017, which regulates the utilization of renewable energy for the provision of electricity. However, in August 2017, MEMR regulation No. 10/2017 was amended by the regulation MEMR No 49/2017, and regulation MEMR No. 12/2017 was replaced by regulation MEMR No. 50/2017.

 

Under MEMR No. 50/2017, the tariff policy for geothermal PPAs is mainly determined based on the location of the relevant power plant. For geothermal projects located in Java, Sumatera, Bali and certain other regions that have a local electricity generation cost (the “Local BPP”) below or equal to the national average electricity generation cost (the “National BPP”), the tariff will be based on rates negotiated by the developer and PLN.

 

For geothermal projects located in regions with a Local BPP that is higher than the National BPP, the ceiling tariff is set to the Local BPP.

 

In addition to project development, we are also pursuing various supply opportunities in Southeast Asia, including several optimization projects.

 

China

 

In China, where we recently supplied our equipment to one of our clients’ geothermal projects, the National Energy Administration adopted the 13th Renewable Energy Development Five Year Plan. The plan was adopted in December 2016 and establishes targets for renewable energy deployment until 2020. Key objectives under the plan include, among others, to increase the share of non-fossil fuel energy in total primary energy consumption to 15% by 2020 and to 20% by 2030, and to increase installed renewable power capacity to 680 GW by 2020.

 

 

East Africa

 

In East Africa the geothermal potential along the Rift Valley is estimated at several thousand MW. The different countries along the Rift Valley are at different stages of development of their respective geothermal potentials.

 

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In Kenya, there are already several geothermal power plants, including the only geothermal IPP in Africa, our 139 MW Olkaria III complex. The Kenyan government has identified the country's untapped geothermal potential as the most suitable indigenous source of electricity and it aspires to reach 5 GW of geothermal power generation by 2030. To attain this goal, GDC was formed to fast track the development of geothermal resources in Kenya. We have a 51% interest in a consortium that signed a PPA for a 35 MW geothermal power plant in the Menengai area.

 

The Kenyan government is aiming to reach 22.7GW of power generating capacity by 2033, under the Least-Cost Power Development Plan 2013-33 with a target of 42% of such capacity generated from renewable energy sources (including large hydro but excluding solar). 

 

In December 2012, FITs for various technologies were reviewed and the process of negotiating PPAs in Kenya streamlined. Geothermal projects subject to this regime have priority grid access at the cost of the developer. Geothermal projects from 35 MW to 70 MW have a USD $0.088 per kWh (up to 500 MW) FIT.

 

In 2015, the Departmental Committee of Finance, Planning, and Trade amended the Income Tax Act in view of the 2015 Finance Bill. The amendments include maintaining the enhanced investment deduction of 150% under section 17B and extending the period of deduction of tax losses to over 10 years.

 

The governments of Djibouti, Ethiopia, Eritrea, Tanzania, Uganda, Rwanda and Zambia are exploring ways to develop geothermal resources in their countries, mostly through the help of international development organizations such as the World Bank.

 

In Ethiopia, the new Geothermal Law Proclamation 981 became effective in 2016, and supporting regulations are under consideration. We hold rights for four concessions in Ethiopia. We are currently negotiating a power purchase agreement with the local government and we have started initial exploration studies on the secured concessions.

 

In January 2014, energy ministers and delegates from 19 countries committed to the creation of the Africa Clean Energy Corridor Initiative (Corridor), at a meeting in Abu Dhabi convened by the International Renewable Energy Agency. The Corridor will boost the deployment of renewable energy and aim to help meet Africa’s rising energy demand with clean, indigenous, cost-effective power from sources including hydro, geothermal, biomass, wind and solar.

 

 

Other opportunities

 

Recovered Energy Generation

 

In addition to our geothermal power generation activities, we are pursuing recovered energy-based power generation opportunities in North America and the rest of the world. We believe recovered energy-based power generation will ultimately benefit from the efforts to reduce GHG emissions. For example, in the U.S., FERC has expressed its position that one of the goals of new natural gas pipeline design should be to facilitate the efficient, low-cost transportation of fuel through the use of waste heat (recovered energy) from combustion turbines or reciprocating engines that drive station compressors to generate electricity for use at compressor stations or for commercial sale. FERC has, as a matter of policy, requested natural gas pipeline operators filing for a certificate of approval for new pipeline construction or expansion projects to examine “opportunities to enhance efficiencies for any energy consumption processes in the development and operation” of the new pipeline. We have built 22 power plants which generate electricity utilizing “waste heat” from gas turbine-driven compressor stations along interstate natural gas pipelines, from midstream gas processing facilities, and from processing industries in general.

 

Several states, and to a certain extent, the federal government, have recognized the environmental benefits of recovered energy-based power generation. For example, 18 states currently allow electric utilities to include recovered energy-based power generation in calculating such utilities' compliance with their mandatory or voluntary RPS and/or Energy Efficient Resources Standards. In addition, California modified the Self Generation Incentive Program to allow recovered energy-based power generation to qualify for a per watt incentive. 

 

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In Colorado, Xcel Energy, the largest utility in that state, now offers a $500 per kW incentive for recycled energy projects. This incentive is paid out over 10 years to developers and manufacturers who convert waste heat from stacks and process it into electricity. The tariff details the rates and a methodology for recycled energy projects that wish to take advantage of this incentive.

  

Recovery of waste heat is also considered “environmentally friendly” in the western Canadian provinces. On November 22, 2015, the Alberta Government released the Clean Leadership Plan that includes (a) phasing out of coal-fired electricity generation by 2030; (b) a commitment to generate 30 percent of Alberta’s electricity from renewable sources by 2030; (c) new financing for energy efficiency; and (d) an economy-wide price on carbon pollution. The plan also mandates that Alberta reduce methane emissions from oil and gas operations by 45% by 2025.  In 2016, the Canadian government ratified its commitments in the Paris Agreement, which features a commitment to reduce emissions by 30% from 2005 levels by 2030. The federal government has announced that Canadian provinces must have an emission reduction plan in place or be subject to a federal carbon tax in 2018. This comprehensive set of climate policies, once fully implemented, will encourage the development of renewable energy technologies, including waste heat recovery, in Alberta and other provinces. We believe that Europe and other markets worldwide may offer similar opportunities in recovered energy-based power generation.

 

In summary, the market for the recovery of waste heat converted into electricity exists either when already available electricity is expensive or where the regulatory environment facilitates construction and marketing of power generated from recovered waste heat. However, such projects tend to be smaller than 9 MW and we expect any growth to be relatively slow and geographically scattered.

 

New activities under our strategic plan

 

The traditional grid is undergoing a major disruption. The continued decline in Solar PV prices is impacting renewable energy pricing and the growth in intermittent green energy is generating increasing strains on the grid, mainly in the U.S and Europe. The increasing amount of Solar PV power being supplied to the grid can create situations where a significant amount of power plant capacity must be available to ramp up and down to accommodate Solar PV daily output cycles and variations due to atmospheric conditions. The output from Solar PV power plants can change significantly over short periods of time due to environmental conditions like cloud movement and fog burn off and that can cause instability on the electric grid. 

 

As a result, energy management and specifically electricity storage is becoming a key component of the future grid. In parallel, we see movement of C&I and communities toward direct purchases of electricity and an increased focus on reliability of electricity supply.

 

Energy Storage

 

Energy storage systems utilize low cost, surplus, available electricity that enables utilities to optimize the operation of the grid and generators to run closer to full capacity for longer periods of time and operate more efficiently and effectively. With the increasing use of wind and solar energy, the need for storage services such as balancing services, frequency regulation, rapid generation ramping, reactive power, black start and movement of energy from times of excess to times of high demand is becoming more important.

 

The global energy storage market is still developing, with specific applications and geographies leading the overall market. After a record-breaking year in 2015, the energy battery storage industry is continuing to gain momentum globally. More than 1.6 GW of new deployments (approximately $2.0 billion) were announced worldwide in 2015. Various diversified battery storage technologies have been developed and deployed. According to GTM, total deployed MW in 2016 and 2017 represent continued growth of above 25% per year and forecasts for 2018 and beyond expect greater growth to be achieved as energy storage becomes cheaper and its technologies and markets more mature.    

 

Much of the BESS activity is focused on energy storage for the grid and ancillary services. Behind the meter deployments are growing fast to enable customers to increase savings from demand charge reductions and create revenues through active market participation (demand response programs). Also, grids and utilities are undergoing significant changes such as grid aging, grid congestion, coal retirement, implementation of carbon reduction rules and increasing renewable energy and intermittent energy penetration. BESS delivers many benefits to grids and end users (behind the customer meter, as well as to micro-grids). Real-time balancing services can reactively increase stability and reliability on the grid to offset renewables inherent flexibility, to store energy now to be used later and to promote business resiliency, power quality and physically distributed benefits for all segments of the grid or the end customer.

 

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According to Navigant research, BESS continues to be one of the fastest growing segments of the broader energy industry, set to reach an overall installed power capacity of 143.7 GW and a cumulative global market size of $162.3 billion in the next 10-year period. This represents a CAGR of approximately 30% over the 10-year period in both in-front-of-the meter grid connected and behind-the-meter C&I deployments.

 

According to a GTM report from December 2016, the U.S. behind-the-meter energy storage market today is small, with combined residential and non-residential deployments in 2015 accounting for only 15% of installed capacity in MW terms. By 2021, however, the behind-the-meter segment is expected to account for half of the annual U.S. market, driven by many factors including improved system economics, net-energy metering reform, changes to utility rate structures, increasing viability of demand-charge management for non-residential customers, and increased interest in reliability and resiliency. GTM is expecting total installations of more than 4 GW through 2021 in the U.S. These trends in the U.S. market are expected to be experienced in other leading global markets in Europe and Asia.

 

We plan to use our Viridity platform and services to expand our market presence in the energy storage market and further develop our VPower™ software platform to be utilized in optimizing and generating revenues from demand response including ownership and supply of BESS systems. We expect that the eco system we have created, combining our Viridity business’s capabilities with our global presence, experience in technology and system integration, EPC capabilities, flexible business models and reputation and experience in the geothermal and recovered energy sectors, will enable us to expand into this growing sector.

 

C&I

 

The C&I sector is shifting from centralized electricity generation systems to distributed resources supported by emerging models of direct PPAs with renewable power plants, on-site deployments, and customized solutions for energy management. Participants in the C&I sector are motivated to purchase renewable energy to reduce costs and diversify their energy supply, to lock in long-term energy price stability and carbon footprint reductions, to achieve renewable energy targets and to demonstrate leadership, innovation, and competitive first mover advantages. We see C&I customers as a natural expansion of our customer base from regulated utilities to medium and large C&I customers desiring to contract for renewable energy.

 

The advances in electricity storage technology together with high period demand charges, demand response programs, concern over electricity supply reliability and more aggressive goals for renewable energy content than those of centralized electricity suppliers are all factors that have supported the growth of the C&I market. The need for technical customized solutions to meet these varied C&I needs fits well with our Viridity business and our experience in providing customized geothermal and REG solutions to various customers around the world.

 

Solar PV

 

The market for Solar PV power grew significantly in recent years, driven by a combination of favorable government policies and a decline in equipment prices.  We are monitoring market drivers with the potential to develop Solar PV power plants in locations where we can offer competitively priced power generation. Our focus currently is in installing Solar PV systems in some of our operating geothermal power plants to reduce internal consumption loads. We are planning to install the first system in Tungsten Mountain. In addition, we are looking for hybrid projects that involve intermittent power (such as Solar PV) and energy storage.

 

 

Competitive Strengths

 

Competitive Assets. We believe our assets are competitive for the following reasons:

 

 

Contracted Generation. All of the electricity generated by our geothermal power plants is currently sold pursuant to long-term PPAs with an average remaining life of approximately 18 years.

 

 

Baseload Generation. All of our geothermal power plants supply all or a part of the baseload capacity of the electric system in their respective markets. This means they supply electric power on an around-the-clock basis. This provides us with a competitive advantage over other renewable energy sources, such as wind power, solar power or hydro-electric power (to the extent dependent on precipitation), which cannot provide baseload capacity because of their intermittent nature. It remains to be seen whether developments in the energy storage markets will erode this competitive advantage.

 

 

Ancillary Services. Geothermal power plants positively impact electrical grid stability and provide valuable ancillary services. Because of the baseload nature of their output, they have high transmission utilization efficiency, provide capacity, provide grid inertia and reduce the need for ancillary services such as voltage regulation, reserves and flexible capacity. Other intermittent renewables create integration costs, representing a significant value proposition for geothermal energy.  

 

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Competitive Pricing. Geothermal power plants, while site specific, are economically feasible in many locations, and the electricity they generate is generally price competitive under existing economic conditions and existing tax and regulatory regimes compared to electricity generated from fossil fuels or other renewable sources in many places around the world. Geothermal energy is recognized as one of the lower cost sources of energy from a LCOE perspective.

 

Ability to Finance Our Activities from Internally Generated Cash Flow. The cash flow generated by our portfolio of operating geothermal and REG power plants provides us with a robust and predictable base for certain exploration, development, and construction activities. We plan to evaluate various alternatives for financing the expansion of our business as we further develop and implement our new strategic plan.

 

Growing Legislative Demand for Environmentally-Friendly Renewable Resource Assets. Most of our currently operating power plants produce electricity from geothermal energy sources. The clean and sustainable characteristics of geothermal energy give us a competitive advantage over fossil fuel-based electricity generation as countries increasingly seek to balance environmental concerns with demands for reliable sources of electricity.

 

High Efficiency from Vertical Integration. Unlike our competitors in the geothermal industry, we are a fully integrated geothermal equipment, services, and power provider. We design, develop, and manufacture equipment that we use in our geothermal and REG power plants. Our intimate knowledge of the equipment that we use in our operations allows us to operate and maintain our power plants efficiently and to respond to operational issues in a timely and cost-efficient manner. Moreover, given the efficient communication among our subsidiaries that design and manufacture the products we use in our operations and our subsidiaries that own and operate our power plants, we are able to quickly and cost effectively identify and repair mechanical issues and to have technical assistance and replacement parts available to us as and when needed.

 

Exploration and Drilling Capabilities. We have in-house capabilities to explore and develop geothermal resources and have established a drilling operation that currently owns seven drilling rigs. We employ an experienced resource group that includes engineers, geologists, and drillers, which executes our exploration and drilling plans for projects that we develop.

 

Highly Experienced Management Team. We have a highly qualified senior management team with extensive experience in the geothermal power sector.

 

Technological Innovation. We have 77 U.S. patents in force (and have approximately 9 U.S. patents pending) relating to various processes and renewable resource technologies. All of our patents are internally developed. Our ability to draw upon internal resources from various disciplines related to the geothermal power sector, such as geological expertise relating to reservoir management, and equipment engineering relating to power units, allows us to be innovative in creating new technologies and technological solutions.

 

Limited Exposure to Fuel Price Risk. A geothermal power plant does not need to purchase fuel (such as coal, natural gas, or fuel oil) in order to generate electricity. Thus, once the geothermal reservoir has been identified and estimated to be sufficient for use in a geothermal power plant, the drilling of wells is complete, and the plant has a PPA, the plant is not exposed to fuel price or fuel delivery risk apart from the impact fuel prices may have on the price at which we sell power under PPAs that are based on the relevant power purchaser’s avoided costs.

 

Although we are confident in our competitive position in light of the strengths described above, we face various challenges in the course of our business operations, including as a result of the risks described in Item 1A — “Risk Factors” below, the trends and uncertainties discussed in “Trends and Uncertainties” under Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below, and the competition we face in our different business segments described under “Competition” below.

 

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Business Strategy

 

Our strategy is to continue building a geographically balanced portfolio of geothermal and recovered energy assets, and to continue to be a leader in the geothermal energy market with the objective of becoming a leading global provider of renewable energy. Since 2015, we have implemented a number of the elements of a new multi-year strategic plan.  We expect the plan to evolve over time in response to market conditions and other factors.  We intend to implement this strategy through:

 

 

Development and Construction of New Geothermal Power Plants — continuously seeking out commercially exploitable geothermal resources, developing and constructing new geothermal power plants and entering into long-term PPAs providing stable cash flows in jurisdictions where the regulatory, tax and business environments encourage or provide incentives for such development.

 

 

Expanding our Geographical Reach increasing our business development activities in an effort to grow our business in the global markets in both business segments. While we continue to evaluate global opportunities, we currently see Turkey, New Zealand, Chile, Kenya, Honduras, China, Indonesia and Ethiopia as very attractive markets for us.  We are actively looking at ways to expand our presence in those countries.

 

 

Acquisition of New Assets — expanding and accelerating growth through acquisition activities globally, aiming to acquire from third parties additional geothermal assets, such as our recent announcement that we signed an agreement to acquire U.S. Geothermal Inc., which owns approximately 38 MW of operating power plants, and companies and assets that we expect to expedite our entry into the storage and C&I markets, such as our March 2017 acquisition of substantially all of the assets that comprise our Viridity business today.

 

 

Manufacturing and Providing Products and EPC Services Related to Renewable Energy designing, manufacturing and contracting power plants for our own use and selling to third parties power units and other generation equipment for geothermal and recovered energy-based electricity generation.

 

 

Expanding into New Technologies  leveraging our technological capabilities over a variety of renewable energy platforms, including solar power generation and energy storage.  Initially, however, we expect that our primary focus will be on expanding our core geothermal competencies to provide high efficiency solutions for high enthalpy applications by utilizing our binary enhanced cycle and technology, as well as, expanding into steam geothermal generation equipment and facilities. We may acquire companies with integration and technological capabilities we do not currently have, or develop new technology ourselves, where we can effectively leverage our expertise to implement this part of our strategic plan.

 

 

Expand our Customer Base evaluating a number of strategies for expanding our customer base to the C&I market.  In the near term, however, we expect that a majority of our revenues will continue to be generated as they now are, with our traditional electrical utility customer base for the Electricity segment.

 

 

Increasing Output from Our Existing Power Plants — increasing output from our existing geothermal power plants by adding additional generating capacity, upgrading plant technology, and improving geothermal reservoir operations, including improving methods of heat source supply and delivery.

 

 

Cost Saving by Increasing Efficiencies — increasing efficiencies in our operating power plants and manufacturing facility including procurement by adding new technologies, restructuring of management control, automating part of our manufacturing work and centralizing our operating power plants.

 

 

Technological Expertise — investing in research and development of renewable energy technologies and leveraging our technological expertise to continuously improve power plant components, reduce operations and maintenance costs, develop competitive and environmentally friendly products for electricity generation and target new service opportunities.

 

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Recent Developments

 

The most significant recent developments in our company and business are described below.

 

 

On January 24, 2018, we announced that we entered into a definitive agreement to acquire U.S. Geothermal Inc. (NYSE American: HTM), a renewable energy company focused on the development, production and sale of electricity from geothermal energy. Under the terms of the merger agreement, holders of U.S. Geothermal common stock will receive $5.45 per share in cash. On a fully diluted basis, including payment to U.S. Geothermal’s option holders, we expect to pay total consideration of approximately $109.9 million from our corporate funds. The closing of the merger is subject to customary conditions, including receipt of regulatory approvals and approval by holders of a majority of the outstanding shares of US Geothermal’s common stock. The transaction is expected to close in the second quarter of 2018.

     
    U.S. Geothermal is currently operating geothermal power projects at Neal Hot Springs, Oregon, San Emidio, Nevada and Raft River, Idaho for a total designed net output of 45 MW that currently generate approximately 38 MW net. In addition, U.S. Geothermal is developing additional projects at the Geysers, California; a second phase project at San Emidio, Nevada; at Crescent Valley, Nevada; and the El Ceibillo project located near Guatemala City, Guatemala.

 

 

On December 13, 2017, we announced that the 24 MW Tungsten Mountain geothermal power plant located in Churchill County, Nevada, commenced commercial operation on December 1, 2017. The Tungsten Mountain power plant will sell its power under the 26-year PPA, dated as of October 20, 2016, between our wholly owned subsidiary ONGP, LLC and SCPPA (ONGP Portfolio PPA), which was announced in June 2017. SCPPA resells the entire output of the plant to LADWP. The power plant is expected to generate approximately $15 million in average annual revenue. The Tungsten Mountain geothermal power plant utilizes our latest turbine design and contains the largest OEC ever installed. The new and innovative turbine design will increase the OEC’s efficiency, capacity and availability.

 

 

On December 13, 2017, we announced that we signed an approximately $50 million EPC contract, with TOP ENERGY Ltd for the Ngawha extension geothermal project located in Ngawha, New Zealand. The project is expected to be completed in the first quarter of 2021. Under the EPC contract, we will provide our air-cooled OEC for the Ngawha extension project. This is the third EPC contract Ormat has signed with TOP ENERGY Ltd. The first was for the Ngawha I power plant in 1998 and the second for the Ngawha II power plant in 2008.

 

 

On October 10, 2017, we announced that the second unit of the Sarulla geothermal power plant located in the North Sumatra region of Indonesia, one of the world’s largest geothermal power plants, commenced commercial operation. The Sarulla power plant includes three units of approximately 110 MW each, utilizing both steam and brine extracted from the geothermal field to increase the power plant’s efficiency. The first unit of the power plant commenced commercial operation on March 17, 2017 and we expect the third unit to commence commercial operation in 2018. The Sarulla power plant is operated by Sarulla Operations Ltd. (SOL), a consortium consisting of Medco Energi Internasional Tbk, Inpex Corporation, Itochu Corporation, Kyushu Electric Power Co. Inc., and our subsidiary that holds a 12.75% equity interest in SOL.

 

 

On September 26, 2017, we announced that the 35 MW Platanares geothermal project in Honduras commenced commercial operation. We had previously signed a BOT contract for the Platanares geothermal project in Honduras with ELCOSA, a privately-owned Honduran energy company, for 15 years from COD. The Platanares power plant sells its power under a 30-year PPA with ENEE. We hold a portion of the land on which the power plant is located through a lease from a local municipality.  Because the term of the lease exceeds the term in office of the relevant municipal government, the lease remains subject to the additional approval of the Honduran Congress in order to be fully valid.  We have commenced the necessary steps to obtain such approval but the current elections in Honduras may result in a delay in obtaining such approval. The project is expected to generate average annual revenue of approximately $33 million.

 

 

On July 26, 2017, we announced that ORIX closed its acquisition of approximately 11 million shares of our common stock, representing an approximately 22% ownership stake in the Company, from FIMI ENRG Limited Partnership, FIMI ENRG, L.P., Bronicki Investments, Ltd. and certain senior members of our management team pursuant to a stock purchase agreement entered into by ORIX and the selling stockholders on May 4, 2017. In connection with the acquisition, on May 4, 2017, we entered into certain related agreements with ORIX, including a governance agreement (Governance Agreement), a commercial cooperation agreement (CCA) and a registration rights agreement (RRA), following the unanimous recommendation of a special committee of our Board that was formed to evaluate and negotiate the stockholder arrangements proposed by ORIX, and following approval by the full Board. The foregoing agreements between us and ORIX became effective on July 26, 2017.  

 

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    Under the Governance Agreement, ORIX has the right to designate three persons to our Board, which was expanded to nine directors, and propose a fourth person to be mutually agreed by the Company and ORIX to serve as a new independent director on our Board. In addition, for so long as ORIX is entitled to Board representation pursuant to the Governance Agreement, ORIX will be subject to certain customary standstill restrictions, including an effective 25% cap on its voting rights. Pursuant to the RRA, ORIX also has certain customary registration rights with respect to the shares of our common stock that it owns.
     
    Under the CCA, we have exclusive rights to develop, own, operate and provide equipment for ORIX geothermal energy projects in all markets outside of Japan. In addition, we have certain rights to serve as technical partner and co-invest in ORIX geothermal energy projects in Japan. ORIX will also assist us in obtaining project financing for our geothermal projects from a variety of leading providers of renewable energy debt financing with which ORIX has relationships in Asia and around the world.
     
 

On June 1, 2017, we announced that SCPPA received the final necessary approval from the City of Los Angeles that enabled SCPPA to execute the ONGP Portfolio PPA. Under the ONGP Portfolio PPA, SCPPA will purchase 150 MW of power generated by a portfolio of our new and existing geothermal power plants. Energy deliveries under the ONGP Portfolio PPA started in the fourth quarter of 2017 and the entire portfolio of geothermal power plants is expected to be online by the end of 2022. The ONGP Portfolio PPA contract capacity is 150 MW, with a minimum delivery requirement of 135 MW and a permitted maximum delivery of 185 MW. The ONGP Portfolio PPA is for a term of approximately 26 years, expiring in December 31, 2043, and has a fixed price of $75.50 per MWh with no escalation.

     
    The ONGP Portfolio PPA covers nine of our primary geothermal power plants, including new projects currently under construction or development, as well as existing geothermal power plants that will commence energy deliveries to SCPPA once their current PPAs terminate. The ONGP Portfolio PPA also covers sixteen secondary facilities that could be used to replace or supplement the primary facilities.

 

 

On March 15, 2017, we announced that we completed the acquisition of our Viridity business. At closing, we paid initial consideration of $35.3 million. Additional contingent consideration may be payable upon the achievement of certain performance milestones measured at the end of fiscal year 2020. This transaction marked our entry into the growing energy storage and demand response markets, with an established North American presence.

 

 

In February 2017, we began construction to expand the Olkaria III complex in Kenya by an additional 10 MW and increase the complex’s generating capacity to up to 150 MW during 2018.

 

Operations of our Electricity Segment

 

How We Own Our Power Plants. We customarily establish a separate subsidiary to own interests in each of our power plants. This ensures that the power plant, and the revenues generated by it, will be the only source for repaying indebtedness, if any, incurred to finance the construction or the acquisition (or to refinance the construction or acquisition) of the relevant power plant. If we do not own all of the interest in a power plant, we enter into a shareholders’ agreement or a partnership agreement that governs the management of the specific subsidiary and our relationship with our partner in connection with the specific power plant. Our ability to transfer or sell our interests in certain power plants may be restricted by certain purchase options or rights of first refusal in favor of our power plant partners or the power plant’s power purchasers and/or certain change of control and assignment restrictions in the underlying power plant and financing documents. All of our domestic geothermal and REG power plants are Qualifying Facilities under the PURPA and are eligible for regulatory exemptions from most provisions of the FPA and certain state laws and regulations.

 

How We Explore and Evaluate Geothermal Resources. Since 2006, we have expanded our exploration activities, initially in the U.S. and in the last few years with an increasing focus internationally. It normally takes two to three years from the time we start active exploration of a particular geothermal resource to the time we have an operating production well, assuming we conclude the resource is commercially viable and determine to pursue its development. Exploration activities generally involve the phases described below.

 

Initial Evaluation. Identifying and evaluating potential geothermal resources by sampling and studying new areas combined with information available from public and private sources. We generally adhere to the following process, although our process can vary from site to site depending on geological circumstances and prior evaluation:

 

 

We evaluate historic, geologic and geothermal information available from public and private databases, including geothermal, mining, petroleum and academic sources.

 

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We visit sites, sampling fluids for chemistry if necessary, to evaluate geologic conditions.

 

 

We evaluate available data, and rank prospects in a database according to estimated size and perceived risk. For example, pre-drilled sites with extensive data are considered lower risk than “green field” sites. Both prospect types are considered critical for our continued growth.

 

 

We generally create a digital, spatial geographic information systems (GIS) database and 3D geologic model containing all pertinent information, including thermal water temperature gradients derived from historic drilling, geologic mapping information (e.g., formations, structure, alteration, and topography), and any available archival information about the geophysical properties of the potential resource.

 

 

We assess other relevant information, such as infrastructure (e.g., roads and electric transmission lines), natural features (e.g., springs and lakes), and man-made features (e.g., old mines and wells).

 

Our initial evaluation is usually conducted by our own staff, although we might engage outside service providers for some tasks from time to time. The costs associated with an initial evaluation vary from site to site, based on various factors, including the acreage involved and the costs, if any, of obtaining information from private databases or other sources. On average, our expenses for an initial evaluation range from approximately $10,000 to $50,000 including travel, chemical analyses, and data acquisition.

 

If we conclude, based on the information considered in the initial evaluation, that the geothermal resource could support a commercially viable power plant, taking into account various factors described below, we proceed to land rights acquisition.

 

Land Acquisition. Acquiring land rights to any geothermal resources our initial evaluation indicates could potentially support a commercially viable power plant, taking into account various factors. For domestic power plants, we either lease or own the sites on which our power plants are located. For our foreign power plants, our lease rights for the power plant site are generally contained in the terms of a concession agreement or other contract with the host government or an agency thereof. In certain cases, we also enter into one or more geothermal resource leases (or subleases) or a concession or an option agreement or other agreement granting us the exclusive right to extract geothermal resources from specified areas of land, with the owners (or sublessors) of such land. In some cases, we first obtain the exploration license and once certain investment requirements are met, we can obtain the geothermal exploitation rights. This usually gives us the right to explore, develop, operate, and maintain the geothermal field, including, among other things, the right to drill wells (and if there are existing wells in the area, to alter them) and build pipelines for transmitting geothermal fluid. In certain cases, the holder of rights in the geothermal resource is a governmental entity and in other cases a private entity. Usually the duration of the lease (or sublease) and concession agreement corresponds to the duration of the relevant PPA, if any. In certain other cases, we own the land where the geothermal resource is located, in which case there are no restrictions on its utilization. Leasehold interests in federal land in the U.S. are regulated by the BLM and the Minerals Management Service. These agencies have rules governing the geothermal leasing process as discussed below under “Description of Our Leases and Lands”.

 

For most of our current exploration sites in the U.S., we acquire rights to use the geothermal resource through land leases with the BLM, with various states, or through private leases. Under these leases, we typically pay an up-front non-refundable bonus payment, which is a component of the competitive lease process. In addition, we undertake to pay nominal, fixed annual rent payments for the period from the commencement of the lease through the completion of construction. Upon the commencement of power generation, we begin to pay to the lessors long-term royalty payments based on the use of the geothermal resources as defined in the respective agreements. These payments are contingent on the power plant’s revenues. A summary of our typical lease terms is provided below under “Description of our Leases and Lands”.

 

The up-front bonus and royalty payments vary from site to site and are based on, among other things, current market conditions.

 

Surveys. Conducting geological, geochemical, and/or geophysical surveys on the sites acquired. Following the acquisition of land rights for a potential geothermal resource, we conduct additional surface water analyses, soil surveys, and geologic mapping to determine proximity to possible heat flow anomalies and up-flow/permeable zones. We augment our digital database with the results of those analyses and create conceptual and digital geologic models to describe geothermal system controls. We then initiate a suite of geophysical surveys (e.g., gravity, magnetics, resistivity, magnetotellurics, reflection seismic, LiDAR, and spectral surveys) to assess surface and sub-surface structure (e.g., faults and fractures) and improve the geologic model of fluid-flow conduits and permeability controls. All pertinent geological and geophysical data are used to create three-dimensional geologic models to identify drill locations. These surveys are conducted incrementally considering relative impact and cost, and the geologic model is updated continuously.

 

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We make a further determination of the commercial viability of the geothermal resource based on the results of this process, particularly the results of the geochemical surveys estimating temperature and the overall geologic model, including potential resource size. If the results from the geochemical surveys are poor (i.e., low derived resource temperatures or poor permeability) or the geologic model indicates small or deep resource, we re-evaluate the commercial viability of the geothermal resource and may not proceed to exploratory drilling. We generally only move forward with those sites that we believe have a high probability of successful development.

 

Exploratory Drilling. Drilling one or more exploratory wells on the high priority, relatively low risk sites to confirm and/or define the geothermal resource. If we proceed to exploratory drilling, we generally use outside contractors to create access roads to drilling sites and related activities. We have continued efforts to reduce exploration costs and therefore, after obtaining drilling permits, we generally drill temperature gradient holes and/or core holes that are lower cost than slim holes (used in the past) using either our own drilling equipment, whenever possible, or outside contractors. If the obtained data supports a conclusion that the geothermal resource can support a commercially viable power plant, it will be used as an observation well to monitor and define the geothermal resource. If the core hole indicates low temperatures or does not support the geologic model of anticipated permeability, it may be plugged, and the area reclaimed. In undrilled sites, we typically step up from shallow (500-1000 feet) to deeper (2000-4000 feet) wells as confidence improves. Following proven temperature in core wells, we typically move to slim and/or full- size wells to quantify permeability.

 

Each year we determine and approve an exploration budget for the entire exploration activity in such year. We prioritize budget allocation between the various geothermal sites based on commercial and geological factors. The costs we incur for exploratory drilling vary from site to site based on various factors, including the accessibility of the drill site, the geology of the site, and the depth of the resource. However, on average, exploration costs, prior to drilling of a full-size well are approximately $1.0 million to $3.0 million for each site, not including land acquisition. However, we only reach such spending levels for sites that proved to be successful in the early stages of exploration.

 

At various points during our exploration activities, we re-assess whether the geothermal resource involved will support a commercially viable power plant based on information available at that time. Among other things, we consider the following factors:

 

 

New data and interpretations obtained concerning the geothermal resource as our exploration activities proceed, and particularly the expected MW capacity power plant the resource can be expected to support. The MW capacity can be estimated using analogous systems and/or quantitative heat in place estimates until results from drilling and flow tests quantify temperature, permeability, and resulting resource size.

 

 

Current and expected market conditions and rates for contracted and merchant electric power in the market(s) to be serviced.

 

 

Availability of transmission capacity.

 

 

Anticipated costs associated with further exploration activities and the relative risk of failure.

 

 

Anticipated costs for design and construction of a power plant at the site.

 

 

Anticipated costs for operation of a power plant at the site, particularly taking into account the ability to share certain types of costs (such as control rooms) with one or more other power plants that are, or are expected to be, operating near the site.

 

If we conclude that the geothermal resource involved will support a commercially viable power plant, we proceed to constructing a power plant at the site.

 

How We Construct Our Power Plants. The principal phases involved in constructing one of our geothermal power plants are as follows:

 

 

Drilling production and injection wells.

 

 

Designing the well field, power plant, equipment, controls, and transmission facilities.

 

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Obtaining any required permits, electrical interconnection and transmission agreements.

 

 

Manufacturing (or in the case of equipment we do not manufacture ourselves, purchasing) the equipment required for the power plant.

 

 

Assembling and constructing the well field, power plant, transmission facilities, and related facilities.

 

In recent years, it takes approximately three years from the time we drill a production well, until the power plant becomes operational.

 

Drilling Production and Injection Wells. We consider completing the drilling of the first production well to be the beginning of our construction phase for a power plant. However, this is not always sufficient for a full release for construction. The number of production wells varies from plant to plant depending on, among other things, the geothermal resource, the projected capacity of the power plant, the power generation equipment to be used and the way geothermal fluids will be re-injected through injection wells to maintain the geothermal resource and surface conditions. We generally drill the wells ourselves although in some cases we use outside contractors.

 

The cost for each production and injection well varies depending on, among other things, the depth and size of the well and market conditions affecting the supply and demand for drilling equipment, labor and operators. In the last five years, our typical cost for each production and injection well is approximately $3.3 million with a range of $1.0 million to $13.0 million.

 

Design. We use our own employees to design the well field and the power plant, including equipment that we manufacture and that will be needed for the power plant. The designs vary based on various factors, including local laws, required permits, the geothermal resource, the expected capacity of the power plant and the way geothermal fluids will be re-injected to maintain the geothermal resource and surface conditions.

 

Permits. We use our own employees and outside consultants to obtain any required permits and licenses for our power plants that are not already covered by the terms of our site leases. The permits and licenses required vary from site to site, and are described below under “Environmental Permits”.

 

Manufacturing. Generally, we manufacture most of the power generating unit equipment we use at our power plants. Multiple sources of supply are generally available for all other equipment we do not manufacture.

 

Construction. We use our own employees to manage the construction work. For site grading, civil, mechanical, and electrical work we use subcontractors.

 

During fiscal year 2017, in the Electricity segment, we focused on the commencement of operations at Platanares power plant in Honduras and Tungsten Mountain in Nevada. We began with construction of the Olkaria III plant expansion in Kenya and enhancement work in some of our operating power plants. During fiscal year 2016, we focused on the commencement of operations at Olkaria III plant 4. During fiscal year 2015, we focused on the commencement of operations at the McGinness Hills phase 2 and the Don A. Campbell phase 2 power plants. We continued with construction of Olkaria III plant 4.

 

When deciding whether to continue holding lease rights and/or to pursue exploration activity, we diligently prioritize our prospective investments, taking into account resource and probability assessments in order to make informed decisions about whether a particular project will support commercial operation. As a result, during fiscal year 2017 we discontinued exploration activities at four prospective sites: the Ungaran region in Indonesia, Glass Buttes - Midnight Point in Oregon and  Tuscarora - phase 2 and Don A. Campbell - phase 3, in Nevada. During fiscal year 2016, we discontinued exploration activities at three future prospective sites, in the Kula region in Hawaii and the Aqua Quieta and Sollipulli regions in Chile. During fiscal year 2015, we discontinued exploration and development activities at ten future prospects, including Kona and Ulupalakua (Maui) in Hawaii, Warm Springs Tribe and Newberry - Twilight in Oregon, Whirlwind Valley in Utah, Argenta, Hycroft and South Jersey in Nevada and Mariman and Quinohuen in Chile.

  

After conducting exploratory studies at those sites, we concluded that the respective geothermal resources would not support commercial operations. Costs associated with exploration activities at these sites were expensed accordingly (see “Write-off of Unsuccessful Exploration Activities” under Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).

 

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We added to our exploration inventory two prospective sites in 2017 and ten prospective sites in each of the years ended December 31, 2016 and 2015.

 

How We Operate and Maintain Our Power Plants. In the U.S., our wholly owned subsidiary, Ormat Nevada, usually acts as the operator of our power plants pursuant to the terms of an operation and maintenance agreement. Operation and maintenance of our foreign projects are generally provided by our subsidiary that owns the relevant project. Our operations and maintenance practices are designed to minimize operating costs without compromising safety or environmental standards while maximizing plant flexibility and maintaining high reliability. Our operations and maintenance practices for geothermal power plants seek to preserve the sustainable characteristics of the geothermal resources we use to produce electricity and maintain steady-state operations within the constraints of those resources reflected in our relevant geologic and hydrologic studies. Our approach to plant management emphasizes the operational autonomy of our individual plant or complex managers and staff to identify and resolve operations and maintenance issues at their respective power plants; however, each power plant or complex draws upon our available collective resources and experience, and that of our subsidiaries. We have organized our operations such that inventories, maintenance, backup, and other operational functions are pooled within each power plant complex and provided by one operation and maintenance provider. This approach enables us to realize cost savings and enhances our ability to meet our power plant availability goals.

 

Safety is a key area of concern to us. We believe that the most efficient and profitable performance of our power plants can only be accomplished within a safe working environment for our employees. Our compensation and incentive program includes safety as a factor in evaluating our employees, and we have a well-developed reporting system to track safety and environmental incidents, if any, at our power plants.

 

How We Sell Electricity. In the U.S., the purchasers of power from our power plants are typically investor-owned electric utility companies or electric cooperatives including public owned utilities. Outside of the U.S., the purchaser is either a state-owned utility or a privately-owned entity and we typically operate our facilities pursuant to rights granted to us by a governmental agency pursuant to a concession agreement. In each case, we enter into long-term contracts (typically, PPAs) for the sale of electricity or the conversion of geothermal resources into electricity. Although previously our power plants’ revenues under a PPA generally consisted of two payments, energy payments and capacity payments, our recent PPAs provide for energy payments only. Energy payments are normally based on a power plant’s electrical output actually delivered to the purchaser measured in kWh, with payment rates either fixed or indexed to the power purchaser’s “avoided” power costs (i.e., the costs the power purchaser would have incurred itself had it produced the power it is purchasing from third parties) or rates that escalate at a predetermined percentage each year. Capacity payments are normally calculated based on the generating capacity or the declared capacity of a power plant available for delivery to the purchaser, regardless of the amount of electrical output actually produced or delivered. In addition, we have six domestic power plants located in California, Nevada and Hawaii that are eligible for capacity bonus payments under the respective PPAs upon reaching certain levels of generation, or subject to a capacity payment reduction if certain levels of generation are not reached.

 

How We Finance Our Power Plants. Historically we have funded our power plants with different sources of liquidity such as a non-recourse or limited recourse debt, lease financing, tax monetization transactions, internally generated cash, which includes funds from operation, as well as proceeds from loans under corporate credit facilities and the sale of equity interests and other securities. Such leveraged financing permits the development of power plants with a limited amount of equity contributions, but also increases the risk that a reduction in revenues could adversely affect a particular power plant’s ability to meet its debt obligations. Leveraged financing also means that distributions of dividends or other distributions by our power plant subsidiaries to us are contingent on compliance with financial and other covenants contained in the applicable financing documents.

 

Non-recourse debt or lease financing refers to debt or lease arrangements involving debt repayments or lease payments that are made solely from the power plant’s revenues (rather than our revenues or revenues of any other power plant) and generally are secured by the power plant’s physical assets, major contracts and agreements, cash accounts and, in many cases, our ownership interest in our affiliate that owns that power plant. These forms of financing are referred to as “project financing”. Project financing transactions generally are structured so that all revenues of a power plant are deposited directly with a bank or other financial institution acting as escrow or security deposit agent. These funds are then payable in a specified order of priority set forth in the financing documents to ensure that, to the extent available, they are used to first pay operating expenses, senior debt service (including lease payments) and taxes, and to fund reserve accounts. Thereafter, subject to satisfying DSCR and certain other conditions, available funds may be disbursed for management fees or dividends or, where there are subordinated lenders, for the payment of subordinated debt service.

 

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In the event of a foreclosure after a default, our affiliate that owns the power plant would only retain an interest in the power plant assets, if any, remaining after all debts and obligations have been paid in full. In addition, incurrence of debt by a power plant may reduce the liquidity of our equity interest in that power plant because the equity interest is typically subject both to a pledge in favor of the power plant’s lenders securing the power plant’s debt and to transfer and change of control restrictions set forth in the relevant financing agreements.

 

Limited recourse debt refers to project financing as described above with the addition of our agreement to undertake limited financial support for our affiliate that owns the power plant in the form of certain limited obligations and contingent liabilities. These obligations and contingent liabilities may take the form of guarantees of certain specified obligations, indemnities, capital infusions and agreements to pay certain debt service deficiencies. To the extent we become liable under such guarantees and other agreements in respect of a particular power plant, distributions received by us from other power plants and other sources of cash available to us may be required to be used to satisfy these obligations. Creditors of a project financing of a particular power plant may have direct recourse to us to the extent of these limited recourse obligations.

 

We have used financing structures to monetize PTCs and depreciation, such as our recent tax equity partnership transaction involving Opal Geo, and an operating lease arrangement for our Puna complex power plants.

 

We have also used a sale of equity interests in two of our geothermal assets and nine of our REG facilities to fund corporate needs including funding for the construction of new projects. We may use of the same financing structure in the future. 

 

How We Mitigate International Political Risk. We generally purchase insurance policies to cover our exposure to certain political risks involved in operating in developing countries, as described below under “Insurance”. To date, our political risk insurance policies are with MIGA, a member of the World Bank Group, and Zurich Re, a private insurance and re-insurance company. Such insurance policies generally cover, subject to the limitations and restrictions contained therein, 80-90% of our losses resulting from specified governmental actions or responses thereto, such as confiscation, expropriation, riots, the inability to convert local currency into hard currency, and, in certain cases, the breach of agreements. We have obtained such insurance for the Olkaria, Zunil, Amatitlan, Platanares and Sarulla projects.

 

Description of Our Leases and Lands

 

We have domestic leases on approximately 320,500 acres of federal, state, and private land in California, Hawaii, Nevada, New Mexico, Utah and Oregon. The approximate breakdown between federal, state and private leases and owned land is as follows:

 

 

85% of the acreage under our control is leased from the U.S. government, acting mainly through the BLM;

 

 

11% is leased or subleased from private landowners and/or leaseholders;

 

 

2% is owned by us; and

 

 

the balance is leased from various states, none of which is currently material.

 

Each of the leases within each of the categories above has standard terms and requirements, as summarized below. Internationally, our land position includes approximately 122,500 acres, most of which are for geothermal prospects in Honduras.

 

BLM Geothermal Leases

 

Certain of our domestic project subsidiaries have entered into geothermal resources leases with the U.S. government, pursuant to which they have obtained the right to conduct their geothermal development and operations on federally-owned land. These leases are made pursuant to the Geothermal Steam Act and the lessor under such leases is the U.S. government, acting through the BLM.

 

BLM geothermal leases grant the geothermal lessee the right and privilege to drill for, extract, produce, remove, utilize, sell, and dispose of geothermal resources on certain lands, together with the right to build and maintain necessary improvements thereon. The actual ownership of the geothermal resources and other minerals beneath the land is retained in the federal mineral estate. The geothermal lease does not grant to the geothermal lessee the exclusive right to develop the lands, although the geothermal lessee does hold the exclusive right to develop geothermal resources within the lands. The geothermal lessee does not have the right to develop minerals unassociated with geothermal production and cannot prohibit others from developing the minerals present in the lands. The BLM may grant multiple leases for the same lands and, when this occurs, each lessee is under a duty to not unreasonably interfere with the development rights of the other. Because BLM leases do not grant to the geothermal lessee the exclusive right to use the surface of the land, BLM may grant rights to others for activities that do not unreasonably interfere with the geothermal lessee’s uses of the same land; such other activities may include recreational use, off-road vehicles, and/or wind or solar energy developments.

 

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Certain BLM leases issued before August 8, 2005 include covenants that require the projects to conduct their operations under the lease in a workmanlike manner and in accordance with all applicable laws and BLM directives and to take all mitigating actions required by the BLM to protect the surface of and the environment surrounding the land. Additionally, certain leases contain additional requirements, some of which concern the mitigation or avoidance of disturbance of any antiquities, cultural values or threatened or endangered plants or animals, the payment of royalties for timber, and the imposition of certain restrictions on residential development on the leased land.

 

BLM leases entered into after August 8, 2005 require the geothermal lessee to conduct operations in a manner that minimizes impacts to the land, air, water, to cultural, biological, visual, and other resources, and to other land uses or users. The BLM may require the geothermal lessee to perform special studies or inventories under guidelines prepared by the BLM. The BLM reserves the right to continue existing leases and to authorize future uses upon or in the leased lands, including the approval of easements or rights-of-way. Prior to disturbing the surface of the leased lands, the geothermal lessee must contact the BLM to be apprised of procedures to be followed and modifications or reclamation measures that may be necessary. Subject to BLM approval, geothermal lessees may enter into unit agreements to cooperatively develop a geothermal resource. The BLM reserves the right to specify rates of development and to require the geothermal lessee to commit to a communalization or unitization agreement if a common geothermal resource is at risk of being overdeveloped.

 

Typical BLM leases issued to geothermal lessees before August 8, 2005 have a primary term of ten years and will renew so long as geothermal resources are being produced or utilized in commercial quantities but cannot exceed a period of forty years after the end of the primary term. If at the end of the forty-year period geothermal steam is still being produced or utilized in commercial quantities and the lands are not needed for other purposes, the geothermal lessee will have a preferential right to renew the lease for a second forty-year term, under terms and conditions as the BLM deems appropriate.

 

BLM leases issued after August 8, 2005 have a primary term of ten years. If the geothermal lessee does not reach commercial production within the primary term, the BLM may grant two five-year extensions if the geothermal lessee: (i) satisfies certain minimum annual work requirements prescribed by the BLM for that lease, or (ii) makes minimum annual payments. Additionally, if the geothermal lessee is drilling a well for the purposes of commercial production, the primary term (as it may have been extended) may be extended for five years and as long thereafter as steam is being produced and used in commercial quantities (meaning the geothermal lessee either begins producing geothermal resources in commercial quantities or has a well capable of producing geothermal resources in commercial quantities and is making diligent efforts to utilize the resource) for thirty-five years. If, at the end of the extended thirty-five-year term, geothermal steam is still being produced or utilized in commercial quantities and the lands are not needed for other purposes, the geothermal lessee will have a preferential right to renew the lease for fifty-five years, under terms and conditions as the BLM deems appropriate.

 

For BLM leases issued before August 8, 2005, the geothermal lessee is required to pay an annual rental fee (on a per acre basis), which escalates according to a schedule described therein, until production of geothermal steam in commercial quantities has commenced. After such production has commenced, the geothermal lessee is required to pay royalties (on a monthly basis) on the amount or value of (i) steam, (ii) by-products derived from production, and (iii) commercially de-mineralized water sold or utilized by the project (or reasonably susceptible to such sale or use).

 

For BLM leases issued after August 8, 2005, (i) a geothermal lessee who has obtained a lease through a non-competitive bidding process will pay an annual rental fee equal to $1.00 per acre for the first ten years and $5.00 per acre each year thereafter; and (ii) a geothermal lessee who has obtained a lease through a competitive process will pay a rental equal to $2.00 per acre for the first year, $3.00 per acre for the second through tenth year and $5.00 per acre each year thereafter. Rental fees paid before the first day of the year for which the rental is owed will be credited towards royalty payments for that year. For BLM leases issued, effective, or pending on August 5, 2005 or thereafter, royalty rates are fixed between 1.0-2.5% of the gross proceeds from the sale of electricity during the first ten years of production under the lease. The royalty rate set by the BLM for geothermal resources produced for the commercial generation of electricity but not sold in an arm’s length transaction is 1.75% for the first ten years of production and 3.5% thereafter. The royalty rate for geothermal resources sold by the geothermal lessee or an affiliate in an arm’s length transaction is 10.0% of the gross proceeds from the arm’s length sale. The BLM may readjust the rental or royalty rates at not less than twenty-year intervals beginning thirty-five years after the date geothermal steam is produced.

 

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In the event of a default under any BLM lease, or the failure to comply with any of the provisions of the Geothermal Steam Act or regulations issued under the Geothermal Steam Act or the terms or stipulations of the lease, the BLM may, 30 days after notice of default is provided to the relevant project, (i) suspend operations until the requested action is taken, or (ii) cancel the lease.

 

Private Geothermal Leases

 

Certain of our domestic project subsidiaries have entered into geothermal resources leases with private parties, pursuant to which they have obtained the right to conduct their geothermal development and operations on privately owned land. In many cases, the lessor under these private geothermal leases owns only the geothermal resource and not the surface of the land.

 

Typically, the leases grant our project subsidiaries the exclusive right and privilege to drill for, produce, extract, take and remove from the leased land water, brine, steam, steam power, minerals (other than oil), salts, chemicals, gases (other than gases associated with oil), and other products produced or extracted by such project subsidiary. The project subsidiaries are also granted certain non-exclusive rights pertaining to the construction and operation of plants, structures, and facilities on the leased land. Additionally, the project subsidiaries are granted the right to dispose geothermal fluid as well as the right to re-inject into the leased land water, brine, steam, and gases in a well or wells for the purpose of maintaining or restoring pressure in the productive zones beneath the leased land or other land in the vicinity. Because the private geothermal leases do not grant to the lessee the exclusive right to use the surface of the land, the lessor reserves the right to conduct other activities on the leased land in a manner that does not unreasonably interfere with the geothermal lessee’s uses of the same land, which other activities may include agricultural use (farming or grazing), recreational use and hunting, and/or wind or solar energy developments.

 

The leases provide for a term consisting of a primary term in the range of five to 30 years, depending on the lease, and so long thereafter as lease products are being produced or the project subsidiary is engaged in drilling, extraction, processing, or reworking operations on the leased land.

 

As consideration under most of our project subsidiaries’ private leases, the project subsidiary must pay to the lessor a certain specified percentage of the value “at the well” (which is not attributable to the enhanced value of electricity generation), gross proceeds, or gross revenues of all lease products produced, saved, and sold on a monthly basis. In certain of our project subsidiaries’ private leases, royalties payable to the lessor by the project subsidiary are based on the gross revenues received by the lessee from the sale or use of the geothermal substances, either from electricity production or the value of the geothermal resource “at the well”.

 

In addition, pursuant to the leases, the project subsidiary typically agrees to commence drilling, extraction or processing operations on the leased land within the primary term, and to conduct such operations with reasonable diligence until lease products have been found, extracted and processed in quantities deemed “paying quantities” by the project subsidiary, or until further operations would, in such project subsidiary’s judgment, be unprofitable or impracticable. The project subsidiary has the right at any time within the primary term to terminate the lease and surrender the relevant land. If the project subsidiary has not commenced any such operations on said land (or on the unit area, if the lease has been unitized), or terminated the lease within the primary term, the project subsidiary must pay to the lessor, in order to maintain its lease position, annually in advance, a rental fee until operations are commenced on the leased land.

 

If the project subsidiary fails to pay any installment of royalty or rental when due and if such default continues for a period of fifteen days specified in the lease, for example, after its receipt of written notice thereof from the lessor, then at the option of the lessor, the lease will terminate as to the portion or portions thereof as to which the project subsidiary is in default. If the project subsidiary defaults in the performance of any obligations under the lease, other than a payment default, and if, for a period of 90 days after written notice is given to it by the lessor of such default, the project subsidiary fails to commence and thereafter diligently and in good faith take remedial measures to remedy such default, the lessor may terminate the lease.

 

We do not regard any property that we lease as material unless and until we begin construction of a power plant on the property, that is, until we drill a production well on the property.

 

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Description of Our Power Plants

 

Domestic Operating Power Plants

 

The following descriptions summarize certain industry metrics for our domestic operating power plants:

 

Brady Complex  
   
Location Churchill County, Nevada
   
Generating Capacity 18 MW
   
Number of Power Plants Two (Brady and Desert Peak 2 power plants).
   
Technology The Brady complex utilizes binary and flash systems. The complex uses air and water-cooled systems.
   
Subsurface Improvements 12 production wells and nine injection wells are connected to the plants through a gathering system.
   
Major Equipment Three OECs and three steam turbines along with the Balance of Plant equipment.
   
Age The Brady power plant commenced commercial operation in 1992 and a new OEC was added in 2004. The Desert Peak 2 power plant commenced commercial operation in 2007.
   
Land and Mineral Rights The Brady complex is comprised mainly of BLM leases that are held by production. The scheduled expiration dates for all of these leases are after the end of the expected useful life of the power plants in the Brady complex. The complex’s rights to use the geothermal and surface rights under the leases are subject to various conditions, as described in “Description of Our Leases and Lands”.
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted pursuant to the leases, and the Brady power plant holds rights of way from the BLM and from a private owner that allows access to and from the plant.
   
Resource Information The resource temperatures at the Brady and Desert Peak 2 power plants are 270 degrees Fahrenheit and 338 degrees Fahrenheit, respectively.
   
  The Brady and Desert Peak geothermal systems are located within the Hot Springs Mountains, approximately 60 miles northeast of Reno, Nevada, in northwestern Churchill County.
   
  The dominant geological feature of the Brady area is a linear north-northeast-trending band of hot ground that extends two miles.
   
  The Desert Peak geothermal field is located within the Hot Springs Mountains, which form part of the western boundary of the Carson Sink. The structure is characterized by east-titled fault blocks and north-northeast-trending folds.
   
  The geologic structure in the area is dominated by high-angle normal faults of varying displacement.
   
Resource Cooling During the last three years the cooling at the Brady power plant has levelled off to a rate of one degree Fahrenheit per year. The temperature decline at the Desert Peak 2 power plant is approximately two degrees Fahrenheit per year.
   
Sources of Makeup Water Condensed steam is used for makeup water.
   
Power Purchaser The Sierra Pacific Power Company and Nevada Power Company purchase power generated by the Brady power plant and Desert Peak 2 power plant, respectively.
   
PPA Expiration Date Brady power plant — 2022. Desert Peak 2 power plant — 2027.
   
Financing The prior financing transactions covering the Brady complex have been fully paid off.
   
Supplemental Information We are currently in the process of enhancing the Brady power plant. We are replacing its equipment with new OECs, following which we expect the capacity of the complex to increase by 4 MW to approximately 22 MW. Engineering and manufacturing have been completed, and transportation and construction are ongoing. We expect the enhancement to be completed in the first half of 2018.

 

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Brawley Complex

 

Location Imperial County, California
   
Generating Capacity 13 MW (See supplemental information below)
   
Number of Power Plants One
   
Technology The Brawley power plant utilizes a water-cooled binary system.
   
Subsurface Improvements 36 wells have been drilled and are connected to the Brawley power plant through its gathering system. As we improved our knowledge of the geothermal resource, we changed some of the wells from production to injection (and vice versa) and left others idle. Currently, we have 13 wells connected to the production header and 23 wells, connected to the injection header.
   
Major Equipment Five OECs together with the Balance of Plant equipment.
   
Age The Brawley power plant commenced commercial operation on March 31, 2011.
   
Land and Mineral Rights The Brawley area is comprised entirely of private leases. The leases are held by production. The scheduled expiration date for all of these leases is after the end of the expected useful life of the power plant.
   
  The plant’s rights to use the geothermal and surface rights under the leases are subject to various conditions, as described above in “Description of Our Leases and Lands”.
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted pursuant to the leases.
   
Resource Information Brawley production is from deltaic and marine sedimentary sands and sandstones deposited in the subsiding Salton Trough of the Imperial Valley. Based on seismic refraction surveys the total thickness of these sediments in the Brawley area is over 15,000 feet. The shallow production reservoir (from depths of 1,500 to 4,500 feet) that was developed is fed by fractures and matrix permeability and is conductively heated from the underlying fractured reservoir which convectively circulates magmatically heated fluid. Produced fluid salinity ranges from 20,000 to 50,000 ppm, and the moderate scaling and corrosion potential is chemically inhibited. The temperature of the deeper fractured reservoir fluids exceed 525 degrees Fahrenheit, but the fluid is not yet developed because of severe scaling and corrosion potential. The deep reservoir is not dedicated to the Brawley power plant.
   
  The average produced fluid resource temperature is 310 degrees Fahrenheit.
   
Resource Cooling The temperature of the geothermal resource depends on the mix of operating production wells that we use.
   
Sources of Makeup Water Water is provided by the IID.
   
Power Purchaser Southern California Edison
   
PPA Expiration Date 2031.
   
Financing Corporate funds and ITC cash grant from the U.S. Treasury.
   
Supplemental Information We are currently selling the power generated by the Brawley complex to Southern California Edison under an existing PPA at a capacity level of approximately 8 MW and we are planning to increase this level to 11 MW by the end of 2018 and further thereafter. With a new chemical supply system, we plan to activate several idle wells and we recently drilled a well in eastern Brawley and connected it to the power plant. As a result, we expect to see an increase in generation.

 

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Don A. Campbell Complex

 

Location Mineral County, Nevada
   
Generating Capacity 41 MW
   
Number of Power Plants Two (phase 1 and phase 2)
   
Technology The Don A. Campbell power plants utilize an air-cooled binary system.
   
Subsurface Improvements Nine production wells and five injection wells are connected to the plants.
   
Material Equipment Two air-cooled OECs with the Balance of Plant equipment.
   
Age The phase 1 power plant commenced commercial operation on January 1, 2014 and the phase 2 power plant commenced commercial operation on September 27, 2015.
   
Land and Mineral Rights The Don A. Campbell area is comprised of BLM leases.
   
  The complex’s rights to use the geothermal and surface rights under the leases are subject to various conditions, as described above in “Description of Our Leases and Lands”.
   
Resource Information The Don A. Campbell geothermal reservoir consists of highly fractured, silicified alluvium over at least two square miles. Production and injection are very shallow with nine pumped production wells (from depths of 1,350 feet to 1,900 feet) and five injection wells (from depths of 649 feet to 2,477 feet), all targeting northwest-dipping fractures. The thermal fluids are thought to be controlled by a combination of conductive heat transfer from deeper bedrock and through mixing of upwelling thermal fluids from a deeper geothermal system also contained in the bedrock. The system is considered blind with no surface expression of thermal features.
   
  The temperature of the resource is approximately 254 degrees Fahrenheit.
   
Resource Cooling Temperature started declining in mid-2016. An injection well was drilled in 2017 and testing is in process to confirm the impact on temperature decline.  Injection tests and tracer studies, along with reservoir modeling, will further develop a plan to mitigate temperature decline of the reservoir.
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted in leases from BLM.
   
Power Purchaser Two separate PPAs with SCPPA.
   
PPA Expiration Date The phase 1 PPA expires in 2034 and the phase 2 PPA expires in 2036
   
Financing The phase 1 power plant was financed through our sale of our 4.03% Senior Secured Notes and a cash grant that we received from the U.S. Treasury.
   
  The phase 2 power plant was financed using corporate funds and the proceeds of the tax equity transaction involving Opal Geo.
   
Supplemental Information In April 2015, we closed an equity transaction with Northleaf in which Northleaf acquired a 36.75% equity interest in ORPD. ORPD owns the Puna complex, the Don A. Campbell phase 1 power plant, and the OREG 1, OREG 2, and OREG 3 power plants.
   
  In November 2016, Northleaf purchased a 36.75% equity interest in the Don A. Campbell phase 2 power plant, which was initially added to the existing ORPD portfolio and then later contributed to Opal Geo, which is indirectly owned by ORPD, in connection with the tax equity partnership transaction as described below.

 

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Heber Complex  
   
Location Heber, Imperial County, California
   
Generating Capacity 89 MW
   
Number of Power Plants Five (Heber 1, Heber 2, Heber South, Gould 1 and Gould 2).
   
Technology The Heber 1 plant utilizes a dual flash system and a binary bottoming unit called Gould 1 and the Heber 2, Gould 2 and Heber South plants all utilize binary systems. The complex uses a water cooled system.
   
Subsurface Improvements 27 production wells and 38 injection wells connected to the plants through a gathering system.
   
Major Equipment 17 OECs and one steam turbine with the Balance of Plant equipment.
   
Age The Heber 1 plant, Heber 2, Heber South, Gould 1 and Gould 2 plants commenced commercial operation in 1985, 1993, 2008, 2006 and 2005, respectively.
   
Land and Mineral Rights The Heber complex is comprised mainly of private leases. The leases are held by production. The scheduled expiration dates for all of these leases are after the end of the expected useful life of the power plants.
   
  The complex’s rights to use the geothermal and surface rights under the leases are subject to various conditions, as described above in “Description of Our Leases and Lands”.
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted pursuant to the leases.
   
Resource Information The resource supplying the flash flowing Heber 1 wells averages 341 degrees Fahrenheit. The resource supplying the pumped Heber 2 wells averages 316 degrees Fahrenheit.
   
  The Heber complex’s production is from deltaic sedimentary sandstones deposited in the subsiding Salton Trough of California’s Imperial Valley. Produced fluids rise from near the magmatic heated basement rocks (18,000 feet) via fault/fracture zones to the near surface. Heber 1 wells produce directly from deep (4,000 to 8,000 feet) fracture zones. Heber 2 wells produce from the nearer surface (2,000 to 4,000 feet) matrix permeability sandstones in the horizontal outflow plume fed by the fractures from below and the surrounding ground waters.
   
  Scale deposition in the flashing Heber 1 producers is controlled by down hole chemical inhibition supplemented with occasional mechanical cleanouts and acid treatments. There is no scale deposition in the Heber 2 production wells.
   
Resource Cooling Average cooling of one degree Fahrenheit per year was observed during the past 20 years of production.
   
Sources of Makeup Water Water is provided by condensate and by the IID.
   
Power Purchaser One PPA with Southern California Edison and two PPAs with SCPPA.

 

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PPA Expiration Date Heber 1 — 2025, Heber 2 — 2023, and Heber South — 2031. The output from the Gould 1 and Gould 2 power plants is sold under the PPAs with SCPPA.
   
Financing The Heber complex was financed through the sale of OrCal Senior Secured Notes and the proceeds of the transaction involving our subsidiary ORTP described below
   
Supplemental Information We are currently in the process of enhancing the Heber 1 power plant. We are planning to convert artesian wells to pumped wells, add a new water cooling unit and replace one of the OECs, following which we expect the capacity of the complex to reach 89 MW. Construction is ongoing and completion of the enhancement is expected in the first quarter of 2018.
   
   
   
Jersey Valley Power Plant  
   
Location Pershing County, Nevada
   
Generating Capacity 10 MW
   
Number of Power Plants One
   
Technology The Jersey Valley power plant utilizes an air cooled binary system.
   
Subsurface Improvements Two production wells and four injection wells are connected to the plant through a gathering system. A third production well is not connected to the power plant and will be used in the future as required.
   
Major Equipment Two OECs together with the Balance of Plant equipment.
   
Age Construction of the power plant was completed at the end of 2010 and the off-taker approved commercial operation under the PPA on August 30, 2011.
   
Land and Mineral Rights The Jersey Valley site is comprised of BLM leases. The leases are held by production. The scheduled expiration dates for all of these leases are after the end of the expected useful life of the power plant.
   
  The power plant’s rights to use the geothermal and surface rights under the leases are subject to various conditions, as described above in “Description of Our Leases and Lands”.
   
Access to Property Direct access to public roads from leased property and access across leased property are provided under surface rights granted in leases from BLM.
   
Resource Information The Jersey Valley geothermal reservoir consists of a small high-permeability area surrounded by a large low-permeability area. The high-permeability area has been defined by wells drilled along an interpreted fault trending west-northwest. Static water levels are artesian; two of the wells along the permeable zone have very high productivities, as indicated by Permeability Index (PI) values exceeding 20 gpm/psi. The average temperature of the resource is 310 degrees Fahrenheit.
   
Resource Cooling The rate of cooling was four degrees Fahrenheit in 2015, but we have moderated such cooling by reducing the injection rate in a well near the production wells. To offset the reduction of injection in this well, we diverted more fluid to farther away wells (by increasing injection pressure).
   
Power Purchaser Nevada Power Company
   
PPA Expiration Date 2032

 

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Financing The Jersey Valley power plant was financed through the sale of our OFC 2 Senior Secured Notes, corporate funds, an ITC cash grant from the U.S. Treasury and the proceeds of the Opal Geo tax equity partnership transaction.
   
Mammoth Complex  
   
Location Mammoth Lakes, California
   
Generating Capacity 29 MW
   
Number of Power Plants Three (G-1, G-2, and G-3).
   
Technology The Mammoth complex utilizes air cooled binary systems.
   
Subsurface Improvements Ten production wells and five injection wells are connected to the plants through a gathering system.
   
Major Equipment Two new OECs and six turbo-expanders together with the Balance of Plant equipment.
   
Age The G-1 plant commenced commercial operation in 1984 and the G-2 and G-3 power plants commenced commercial operation in 1990. We recently replaced the equipment at the G-1 plant with new OECs.
   
Land and Mineral Rights The Mammoth complex is comprised mainly of BLM leases. The leases are held by production. The scheduled expiration dates for all of these leases are after the end of the expected useful life of the power plants.
   
  The complex’s rights to use the geothermal and surface rights under the leases are subject to various conditions, as described above in “Description of Our Leases and Lands”.
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted pursuant to the leases.
   
Resource Information The average resource temperature is 339 degrees Fahrenheit.
   
  The Casa Diablo/Basalt Canyon geothermal field at Mammoth lies on the southwest edge of the resurgent dome within the Long Valley Caldera. It is believed that the present heat source for the geothermal system is an active magma body underlying the Mammoth Mountain to the northwest of the field. Geothermal waters heated by the magma flow from a deep source (greater than 3,500 feet) along faults and fracture zones from northwest to southeast east into the field area.
   
  The produced fluid has minimal scaling potential.
   
Resource Cooling In the last three years the temperature has stabilized and there has been no notable decline.
   
Power Purchaser G1 and G3 plants — PG&E and G2 plant — Southern California Edison.
   
PPA Expiration Date G-1 and G-3 plants — 2034 and G-2 plant — 2027.
   
Financing The prior financing transactions covering the Mammoth complex have been fully paid off.
   
   
McGinness Hills Complex  
   
Location Lander County, Nevada
   
Generating Capacity 90 MW
   
Number of Power Plants Two (first phase and second phase)

 

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Technology The McGinness Hills complex utilizes an air cooled binary system.
   
Subsurface Improvements Ten production wells and six injection wells are connected to the power plant.
   
Material Equipment Six air cooled OECs with the Balance of Plant equipment.
   
Age The first phase power plant commenced commercial operation on July 1, 2012, and the second phase power plant commenced commercial operation on February 1, 2015.
   
Land and Mineral Rights The McGinness Hills complex is comprised of private and BLM leases.
   
  The leases require annual rental payments, as described above in “Description of Our Leases and Lands”.
   
  The rights to use the geothermal and surface rights under the leases are subject to various conditions, as described above in “Description of Our Leases and Lands”.
   
Resource Information The McGinness Hills geothermal reservoir is contained within a network of fractured rocks over an area at least three square miles.  The reservoir is contained in both Tertiary intrusive and Paleozoic sedimentary (basement) rocks.   The thermal fluids within the reservoir are inferred to flow upward through the basement rocks along the NNE-striking faults at several fault intersections.  The thermal fluids then generally outflow laterally to the NNE and SSW along the NNE-striking faults.  No modern thermal manifestations exist at McGinness Hills, although hot spring deposits encompass an area of approximately 0.25 square miles and indicate a history of surface thermal fluid flow.  The resource temperature averages 335 degrees Fahrenheit and the fluids are sourced from the reservoir between 2,000 and 5,000 feet below the surface.
   
Resource Cooling

The temperature has been stable with no notable cooling since the first phase power plant began operation.

   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted in leases from BLM.
   
Power Purchaser Nevada Power Company
   
PPA Expiration Date 2033
   
Financing The power plants were financed through the sale of our OFC 2 Senior Secured Notes, an ITC cash grant from the U.S. Treasury for the first phase power plant and the proceeds of the Opal Geo tax equity partnership transaction.
   
   
   
OREG 1 Power Plant  
   
Location Four gas compressor stations along the Northern Border natural gas pipeline in North and South Dakota.
   
Generating Capacity 22 MW
   
Number of Units Four
   
Technology The OREG 1 power plant utilizes our air cooled OECs.
   
Major Equipment Four WHOH and four OECs together with the Balance of Plant equipment.
   
Age The OREG 1 power plant commenced commercial operation in 2006.
   
Land Easement from NBPL.
   
Access to Property Direct access to the plant from public roads.
   
Power Purchaser Basin Electric Power Cooperative

 

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PPA Expiration Date 2031
   
Financing Corporate funds.
   
Supplemental Information In April 2015, we closed an equity transaction with Northleaf in which Northleaf acquired a 36.75% equity interest in ORPD, which has a direct ownership interest in the Puna complex, the Don A. Campbell phase 1 power plant, the OREG 1, OREG 2, and OREG 3 power plants as well as an indirect ownership interest in the Don A. Campbell phase 2 power plant.
   
OREG 2 Power Plant     
   
Location Four gas compressor stations along the Northern Border natural gas pipeline; one in Montana, two in North Dakota, and one in Minnesota.
   
Generating Capacity 22 MW
   
Number of Units Four
   
Technology The OREG 2 power plant utilizes our air cooled OECs.
   
Major Equipment Four WHOH and four OECs together with the Balance of Plant equipment.
   
Age The OREG 2 power plant commenced commercial operation during 2009.
   
Land Easement from NBPL.
   
Access to Property Direct access to the plant from public roads.
   
Power Purchaser Basin Electric Power Cooperative
   
PPA Expiration Date 2034
   
Financing Corporate funds.
   
Supplemental Information In April 2015, we closed an equity transaction with Northleaf in which Northleaf acquired a 36.75% equity interest in ORPD, which has a direct ownership interest in the Puna complex, the Don A. Campbell phase 1 power plant, the OREG 1, OREG 2, and OREG 3 power plants as well as an indirect ownership interest in the Don A. Campbell phase 2 power plant.
   
OREG 3 Power Plant  
   
Location A gas compressor station along Northern Border natural gas pipeline in Martin County, Minnesota.
   
Generating Capacity 5.5 MW
   
Number of Units One
   
Technology The OREG 3 power plant utilizes our air cooled OECs.
   
Major Equipment One WHOH and one OEC along with the Balance of Plant equipment.
   
Age The OREG 3 power plant commenced commercial operation during 2010.
   
Land Easement from NBPL.
   
Access to Property Direct access to the plant from public roads.
   
Power Purchaser Great River Energy
   

PPA Expiration Date

2029
   
Financing Corporate funds.
   
Supplemental Information In April 2015, we closed an equity transaction with Northleaf in which Northleaf acquired a 36.75% equity interest in ORPD, which has a direct ownership interest in the Puna complex, the Don A. Campbell phase 1 power plant, the OREG 1, OREG 2, and OREG 3 power plants as well as an indirect ownership interest in the Don A. Campbell phase 2 power plant.

 

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OREG 4 Power Plant  
   
Location A gas compressor station along natural gas pipeline in Denver, Colorado.
   
Generating Capacity 3.5 MW
   
Number of Units One
   
Technology The OREG 4 power plant utilizes our air cooled OECs.
   
Major Equipment Two WHOH and one OEC together with the Balance of Plant equipment.
   
Age The OREG 4 power plant commenced commercial operation during 2009.
   
Land Easement from Trailblazer Pipeline Company.
   
Access to Property Direct access to the plant from public roads.
   
Power Purchaser Highline Electric Association
   
PPA Expiration Date 2029
   
Financing Corporate funds.
   
   

Ormesa Complex

 
   
Location  East Mesa, Imperial County, California
   
Generating Capacity 40 MW
   
Number of Power Plants Three (OG I, OG II and GEM 3). The GEM 2 plant was taken off line during 2015 due to plant operation optimization.
   
Technology The OG I and OG II plants utilize a binary system and the GEM 3 plant utilizes a flash system. The complex uses a water cooling system.
   
Subsurface Improvements 24 production wells and 57 injection wells connected to the plants through a gathering system.
   
Material Major Equipment 8 OECs and one steam turbine with the Balance of Plant equipment.
   
Age The various OG I plants commenced commercial operation between 1987 and 1989, and the OG II plant commenced commercial operation in 1988. Between 2005 and 2007 a significant portion of the old equipment in the OG plants was replaced (including turbines through repowering). The GEM plant commenced commercial operation in 1989, and a new bottoming unit was added in 2007.
   
Land and Mineral Rights The Ormesa complex is comprised of BLM leases. The leases are held by production. The scheduled expiration dates for all of these leases are after the end of the expected useful life of the power plants.
   
 

The complex’s rights to use the geothermal and surface rights under the leases are subject to various conditions, as described above in “Description of Our Leases and Lands”.

   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted pursuant to the leases.
   
Resource Information The resource temperature ranges from 280 degrees Fahrenheit to 343 degrees Fahrenheit depending on which production wells are used. Production is from sandstones.
   
 

Productive sandstones are from 1,800 to 6,000 feet, and have only matrix permeability. The currently developed thermal anomaly was created in geologic time by conductive heating and direct outflow from an underlying convective fracture system. Produced fluid salinity ranges from 2,000 ppm to 13,000 ppm, and minor scaling and corrosion potential is chemically inhibited.

 

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Resource Cooling In the last year, the temperature has declined by one degree Fahrenheit.
   
Sources of Makeup Water Water is provided by the IID.
   
Power Purchaser SCPPA under a single PPA.
   
PPA Expiration Date November 30, 2042.
   
Financing The prior financing transactions covering the Mammoth complex have been fully paid off.
   
Supplemental Information On November 30, 2017 we started to sell the electricity generated by the Ormesa complex power plants under a 25-year PPA with SCPPA. This PPA replaced the 30-year SO#4 contract with Southern California Edison. Under the terms of the new PPA, energy from the power plant is sold to SCPPA at a rate of $77.25 per MWh with no annual escalation. Contract capacity is 35 MW with a maximum generation equivalent to a net capacity of about 43 MW.
   
   
   

Puna Complex

 
   
Location Puna district, Big Island, Hawaii
   
Generating Capacity 38 MW
   
Number of Power Plants Two
   
Technology The Puna plants utilize our geothermal combined cycle and binary systems. The plants use an air cooled system.
   
Subsurface Improvements Six production wells and five injection wells connected to the plants through a gathering system.
   
Major Equipment The first plant consists of ten OECs made up of ten binary turbines, ten steam turbines and two bottoming units along with the Balance of Plant equipment. The second plant consists of two OECs along with Balance of Plant equipment.
   
Age The first plant commenced commercial operation in 1993. The second plant was placed in service in 2011 and commenced commercial operation in 2012.
   
Land and Mineral Rights The Puna complex is comprised of a private lease. The private lease is between PGV and KLP and it expires in 2046. PGV pays an annual rental payment to KLP, which is adjusted every five years based on the CPI.
   
  The state of Hawaii owns all mineral rights (including geothermal resources) in the state. The state has issued a Geothermal Resources Mining Lease to KLP, and KLP in turn has entered into a sublease agreement with PGV, with the state’s consent. Under this arrangement, the state receives royalties of approximately three percent of the gross revenues.
   
Access to Property Direct access to the leased property is readily available via county public roads located adjacent to the leased property. The public roads are at the north and south boundaries of the leased property.
   
Resource Information The geothermal reservoir at Puna is located in volcanic rock along the axis of the Kilauea Lower East Rift Zone. Permeability and productivity are controlled by rift-parallel subsurface fissures created by volcanic activity. They may also be influenced by lens-shaped bodies of pillow basalt which have been postulated to exist along the axis of the rift at depths below 7,000 feet.

 

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  The distribution of reservoir temperatures is strongly influenced by the configuration of subsurface fissures and temperatures are among the hottest of any geothermal field in the world, with maximum measured temperatures consistently above 650 degrees Fahrenheit.
   
Resource Cooling The resource temperature is stable.
   
Power Purchaser Three PPAs with HELCO (see “Supplemental Information” below).
   
PPA Expiration Date 2027
   
Financing The Puna complex was financed through an operating lease, an ITC cash grant from the U.S. Treasury and the proceeds of the Northleaf transaction described above.
   
Supplemental Information Energy pricing under the PPA with HELCO is:

 

  For the first on-peak 25 MW, based on HELCO's avoided cost.
     
  For the next on-peak 5 MW, a flat rate of 11.8 cents per kWh escalating by 1.5% per year.
     
  For the new on-peak 8 MW, 9 cents per kWh for up to 30,000 MWh/year and 6 cents per kWh above 30,000 MWh/year, escalated by 1.5% per year. We signed an agreement for the period between February 1, 2017 and December 31, 2017 that waives the 30,000 kWh threshold requirements such that the price for energy delivered during on-peak hours will be 6 cents per kWh regardless of the amount of MWh delivered. We recently extended the waiver until the end of 2018.
     
  For the first off-peak 22 MW, based on HELCO’s avoided cost.

 

  The off-peak energy above 22 MW is dispatchable:
     
  1. For the first off-peak 5 MW, a flat rate of 11.8 cents per kWh escalating by 1.5% per year.
     
  2. For the energy above 27 MW and up to 38 MW, 6 cents per kWh escalating by 1.5% per year.
     
  The capacity payment for the first 30 MW $160 kW/year for the first 25 MW and $100.95 kW/year for the additional 5 MW. For the new eight MW power plant the annual capacity payment is $2 million.

 

   
Steamboat Complex  
   
Location Steamboat, Washoe County, Nevada
   
Generating Capacity 70 MW
   
Number of Power Plants Six (Steamboat 2 and 3, Burdette (Galena 1), Steamboat Hills, Galena 2 and Galena 3).
   
Technology The Steamboat complex utilizes a binary system (except for Steamboat Hills, which utilizes a single flash system). The complex uses air and water cooling systems.
   
Subsurface Improvements 25 production wells and 12 injection wells connected to the plants through a gathering system.
   
Major Equipment Nine individual air-cooled OECs and one water-cooled OEC, and one steam turbine together with the Balance of Plant Equipment.

 

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Age The power plants commenced commercial operation in 1992, 2005, 2007 and 2008. During 2008, the Rotoflow expanders at Steamboat 2 and 3 were replaced with four turbines manufactured by us.
   
Land and Mineral Rights The total Steamboat area is comprised of 41% private leases, 41% BLM leases and 18% private land owned by us. The leases are held by production. The scheduled expiration dates for all of these leases are after the end of the expected useful life of the power plants.
   
  The complex’s rights to use the geothermal and surface rights under the leases are subject to various conditions, as described above in “Description of Our Leases and Lands”.
   
  We have easements for the transmission lines we use to deliver power to our power purchasers.
   
Resource Information The resource temperature at the lower area averages 270 degrees Fahrenheit. The resource at Steamboat Hills averages 325 degrees Fahrenheit.
   
  The Steamboat geothermal field is a typical basin and range geothermal reservoir. Large and deep faults that occur in the rocks allow circulation of ground water to depths exceeding 10,000 feet below the surface. Horizontal zones of permeability permit the hot water to flow eastward in an out-flow plume.
   
  The Steamboat Hills and Galena 2 power plants produce hot water from fractures associated with normal faults. The rest of the power plants acquire their geothermal water from the horizontal out-flow plume.
   
  The water in the Steamboat reservoir has a low total solids concentration. Scaling potential is very low unless the fluid is allowed to flash which will result in calcium carbonate scale. Injection of cooled water for reservoir pressure maintenance prevents flashing.
   
Resource Cooling The Steamboat Hills area resource temperature decline rate is 4°F per year and the Lower Steamboat decline rate is 3°F per year.
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted pursuant to the leases.
   
Sources of Makeup Water Water is provided by condensate and the local utility.
   
Power Purchaser Sierra Pacific Power Company (for Steamboat 2 and 3, Burdette (Galena1), Steamboat Hills, and Galena 3) and Nevada Power Company (for Galena 2).
   
PPA Expiration Date Steamboat 2 and 3 — 2022, Burdette (Galena1) — 2026, Steamboat Hills — 2018, Galena 3 — 2028, and Galena 2 — 2027.
   
Financing Financings were fully paid.
   
Supplemental information

In 2017 we ceased operation of a well due to pump failures and connected a cooler well that created a significant reduction in the temperature compared to last year.  

   
   
Tungsten Mountain (U.S.)  
   
Location Churchill County, Nevada
   
Generating Capacity 26 MW
   
Number of Power Plants One
   
Technology The Tungsten Mountain power plant utilizes an air cooled binary system.

 

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Subsurface Improvements Four production and three injection wells are connected to the power plant.
   
Major Equipment One air cooled OEC with the Balance of Plant equipment.
   
Age The power plant commenced commercial operation on December 1, 2017.
   
Land and Mineral Rights The Tungsten Mountain area is comprised of BLM land.
   
Resource Information The project exploits blind resource (no hot springs or fumaroles) in an area of complex faulting associated with the range front fault on the western side of Edwards Creek Valley. Wells are 1,650 to 4,500 feet deep. Production temperature is approximately 290 degrees Fahrenheit with measured high permeability.
   
Resource Cooling The resource temperature is stable.
   
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted in leases from BLM.
   
Power Purchaser SCPPA PPA until 2043.
   
Financing Corporate funds during construction.
   
   
Tuscarora Power Plant  
   
Location 

Elko County, Nevada

   
Generating Capacity 18 MW
   
Number of Power Plants One
   
Technology The Tuscarora power plant utilizes a water cooled binary system.
   
Subsurface Improvements Four production and six injection wells are connected to the power plant. A fifth production well is planned for 2018 and should be in place in early 2018.
   
Major Equipment Two water cooled OECs with the Balance of Plant equipment.
   
Age The power plant commenced commercial operation on January 11, 2012.
   
Land and Mineral Rights The Tuscarora area is comprised of private and BLM leases.
   
  The leases are currently held by payment of annual rental payments, as described above in “Description of Our Leases and Lands”.
   
 

The plant’s rights to use the geothermal and surface rights under the leases are subject to various conditions, as described above in “Description of Our Leases and Lands”.

   
Resource Information The Tuscarora geothermal reservoir consists of an area of approximately 2.5 square miles. The reservoir is contained in both Tertiary and Paleozoic (basement) rocks. The Paleozoic section consists primarily of sedimentary rocks, overlain by tertiary volcanic rocks. Thermal fluid in the native state of the reservoir flows upward and to the north through apparently southward-dipping, basement formations. At an elevation of roughly 2,500 feet with respect to mean sea level, the upwelling thermal fluid enters the tertiary volcanic rocks and flows directly upward, exiting to the surface at Hot Sulphur Springs.
   
  The average resource temperature is 332 degrees Fahrenheit.

 

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Resource Cooling We expect gradual decline in the cooling trend from two degrees Fahrenheit per year in the next two to three years, to less than one degree Fahrenheit per year over the long term.
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted in leases from BLM.
   
Sources of Makeup Water Water is provided from five water makeup wells.
   
Power Purchaser Nevada Power Company
   
PPA Expiration Date 2032
   
Financing OFC 2 Senior Secured Notes, ITC cash grant from the U.S. Treasury and the OrLeaf transaction.
   
Supplemental information Due to the drought years, supply of make-up water for the plant cooling system is declining. With the increase in ambient temperatures, during the summer months we have experienced shortfall at levels that required at certain times reduction in plant generation. At the beginning of 2018 a new well started production.  Cooling water supply continues to curtail production in the summer.
   
   
   
Foreign Operating Power Plants  
   
The following descriptions summarize certain industry metrics for our foreign operating power plants:
   
Amatitlan Power Plant (Guatemala)  
   
Location Amatitlan, Guatemala
   
Generating Capacity 20 MW
   
Number of Power Plants One
   
Technology The Amatitlan power plant utilizes an air cooled binary system and a small back pressure steam turbine (one MW).
   
Subsurface Improvements Six production wells and two injection wells connected to the plants through a gathering system.
   
Major Equipment Two OECs and one steam turbine together with the Balance of Plant equipment.
   
Age The plant commenced commercial operation in 2007.
   
Land and Mineral Rights Total resource concession area (under usufruct agreement with INDE) is for a term of 25 years starting in April 2003. Leased and company owned property is approximately 3% of the concession area. Under the agreement with INDE, the power plant company pays royalties of 3.5% of revenues up to 20.5 MW generated and 2% of revenues exceeding 20.5 MW generated.
   
  The generated electricity is sold at the plant fence. The transmission line is owned by INDE.
   
Resource Information The resource temperature is an average of 518 degrees Fahrenheit.
   
  The Amatitlan geothermal area is located on the north side of the Pacaya Volcano at approximately 5,900 feet above sea level.
   
  Hot fluid circulates up from a heat source beneath the volcano, through deep faults to shallower depths, and then cools as it flows horizontally to the north and northwest to hot springs on the southern shore of Lake Amatitlan and the Michatoya River Valley.

 

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Resource Cooling Approximately two degrees Fahrenheit per year.
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted pursuant to the lease agreement.
   
Power Purchasers INDE and another local purchaser.
   
PPA Expiration Date The PPA with INDE expires in 2028.
   
Financing Senior secured limited recourse project finance loan from Banco Industrial S.A. and Westrust Bank (International) Limited.
   
   
Bouillante power plant (Guadeloupe)  
   
Location Guadeloupe, a French territory in the Caribbean
   
Generating Capacity 15 MW
   
Number of Power Plants One
   
Technology The Bouillante power plant uses direct steam turbines.
   
Subsurface Improvements Two production wells and one injection well connected to the plant through a gathering system.
   
Major Equipment Two steam turbines together with the Balance of Plant equipment.
   
Age The first turbine commenced commercial operation in 1995 and the second turbine commenced operation in 2004.
   
Land and Mineral Rights Geothermal concession of roughly 24 square miles valid through April 30, 2050. Facilities located on land held in fee, as well as long-term leases and easements.
   
Resource Information The resource temperature is an average of 485 degrees Fahrenheit. Production comes from a fault that extends from the mountain into the ocean.
   
Resource Cooling The resource temperature is stable.
   
Access to Property Direct access to site through public roads.
   
Power Purchaser EDF pursuant to a PPA.
   
PPA Expiration Date December 31, 2030.
   
Financing Corporate funds
   
Supplemental information 80% of the project is owned jointly by Ormat and CDC allocated 75% to Ormat and 25% to CDC. Ormat and CDC will gradually increase their combined interest in the project to 85% and Sageos will hold the remaining balance.
   
  We plan to convert two idle wells to injection wells to improve reservoir pressure support.
   
   
   
   

Olkaria III Complex (Kenya)

 
   
Location Naivasha, Kenya
   
Generating Capacity 139 MW
   
Number of Power Plants Four (Plant 1, Plant 2, Plant 3 and Plant 4).
   
Technology The Olkaria III complex utilizes an air cooled binary system.

 

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Subsurface Improvements 18 production wells and five injection wells connected to the plants through a gathering system.
   
Major Equipment 13 OECs together with the Balance of Plant equipment.
   
Age Plant 4 commenced commercial operation in January 2016, Plant 3 in January 2014 and Plant 2 in April 2013. The first phase of Plant 1 commenced operation in 2000 and the second phase in 2009.
   
Land and Mineral Rights The total Olkaria III area is comprised of government leases. A license granted by the Kenyan government provides exclusive rights of use and possession of the relevant geothermal resources for an initial period of 30 years, expiring in 2029, which initial period may be extended for two additional five-year terms. The Kenyan Minister of Energy has the right to terminate or revoke the license in the event work in or under the license area stops during a period of six months, or there is a failure to comply with the terms of the license or the provisions of the law relating to geothermal resources. Royalties are paid to the Kenyan government monthly based on the amount of power supplied to the power purchaser and an annual rent.
   
  The power generated is purchased at the metering point located immediately after the power transformers in the 220 kV sub-station within the power plant, before the transmission lines, which belong to the utility.
   
Resource Information The average resource temperature is 570 degrees Fahrenheit.
   
  The Olkaria III geothermal field is on the west side of the greater Olkaria geothermal area located at approximately 6,890 feet above sea level within the Rift Valley.
   
  Hot geothermal fluids rise up from deep in the northeastern portion of the concession area, penetrating a low permeability zone below 3,280 feet above sea level to a high productivity, two-phase zone identified between 3,280 and 4,270 feet above sea level.
   
Resource Cooling The resource temperature is stable.
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted pursuant to the lease agreement.
   
Power Purchaser KPLC
   
PPA Expiration Date Plant 2 - 2033, Plant 1 - 2034, Plant 3 - 2034 and Plant 4 - 2036
   
Financing Senior secured project finance loan from OPIC and a subordinated loan from DEG.
   
Supplemental information We are planning to add additional 10 MW that will come online during 2018.
   
   
   
Platanares (Honduras)  
   
Location Copan, Honduras
   
Generating Capacity 35 MW
   
Number of Power plants One
   
Technology The Platanares power plant utilizes an air cooled binary system.

 

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Subsurface Improvements Four production wells and two injection wells connected to the plant through a gathering system.
   
Major Equipment Two OECs together with the Balance of Plant equipment.
   
Age The plant commenced commercial operation in September 2017.
   
Land and Mineral Rights The Platanares site is located within a geothermal concession granted by the Department of Energy, Natural Resources, Environment, and Mines (SERNA) on fee land owned by GeoPlatanares and on land leased from various private and public entities. The concession conveys to GeoPlatanares the right to exploit the geothermal resources contained within. The transmission corridor consists of easement agreements between GeoPlatanares and various private and public entities.
   
Resource Information The Platanares site is located along a narrow river valley in western Honduras. The field is covered mostly by Miocene volcanic deposits.  Numerous boiling hot springs and fumaroles emit along active faults along an area around two miles in length.  The geothermal reservoir is supported by highly fractured volcanic and metasedimentary rock units. Wells are less than 800 meters deep. Production temperature is 352 degrees Fahrenheit with high productivity.
   
Resource Cooling The resource temperature is stable.
   
Access to Property Public roads provide access to the Platanares site. In order to improve access for heavy equipment and large loads, GeoPlatanares has entered into a lease agreement with a private landowner for a small segment of road linking two leased parcels
   
Power Purchaser ENEE pursuant to a PPA.
   
PPA Expiration Date 2047
   
Financing Corporate funds.
   
Supplemental Information We hold the assets, including the project’s wells, land, permits and a PPA, under a BOT structure for 15 years from the date the Platanares plant commenced commercial operation on September 26, 2017. A portion of the land on which the project is located is held by us through a lease from a local municipality.  The lease is subject to approval by the Honduran Congress because the term of the lease exceeds the term in office of the relevant municipal government.  Our project subsidiary has commenced the necessary steps to obtain such approval.
   
  We are negotiating project finance debt that will be provided by the OPIC. The financing is expected to be signed and closed following the fulfillment of certain conditions precedent set forth in the loan documents.
   
   
Sarulla – SIL and NIL 1(Indonesia)  
   
Location Tapanuli Utara North Sumatra Namura I Langit area, Indonesia.
   
Ownership SOL is a consortium consisting of Medco Energi Internasional Tbk, Inpex Corporation, Itochu Corporation, Kyushu Electric Power Co. Inc., and one of our indirect wholly owned subsidiaries that holds a 12.75% interest.
   
Generating Capacity Currently two phases (SIL and NIL 1) are operating with a total capacity of approximately 220 MW (Ormat’s ownership share is approximately 28 MW). Ormat’s own equipment is producing approximately 40% of the power.

 

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Number of Power plants Two (SIL and NIL 1)
   
Technology Integrated Geothermal Combined Cycle Unit comprised of one back pressure steam turbines and six OECs for each phase (together two steam turbines and 12 OECs.
   
Subsurface Improvements About 16 production wells and the same number of injection wells are connected to the plant through a gathering system.
   
Major Equipment Two pressure steam turbines and 12 OECs together with its ancillary systems as well as field separation systems; sub-station, internal HV transmission line and other Balance of Plant equipment.
   
Age SIL and NIL 1 power plants commenced commercial operation in March and October 2017, respectively.
   
Land and Mineral Rights Most of the above ground land for the project was acquired from private owners with some land leased from governmental agencies. Mineral rights are state owned with special agreement for its usage by the project.
   
Resource Information Two field areas, NIL and SIL host a steam-liquid-dominated system. Previously drilled wells have temperatures from 275°C to 310°C. Currently most wells are flowing at an average rate of about 750T/Hr per well which is sufficient for over 20 MW electrical production.
   
Resource Cooling Since the project commenced operation the resource temperature has been stable.
   
Access to Property Access to property for the project has been secured.
   
Power Purchaser 30-year Energy Sales Contract with PLN (the state electric utility)
   
PPA Expiration Date  2047
   
Financing In May 2014, SOL reached financial closing on $1.17 billion to finance the development of the Sarulla project with a consortium of lenders comprised of JBIC, the Asian Development Bank and six other commercial banks. The project company obtained construction and term loans under a limited recourse financing package backed by political risk guarantee from JBIC.
   
Supplemental Information The Sarulla project is owned and operated by the consortium members under the framework of a JOC and ESC. Under the JOC, PT Pertamina Geothermal Energy, the concession holder for the project, has provided the consortium with the right to use the geothermal field, and under the ESC, PLN, the state electric utility, will be the off-taker at Sarulla for a period of 30 years.
   
  In addition to our equity holdings in the consortium (12.75%), we provided (under a separate supply contract) the initial conceptual design, the control system and the OECs for the Sarulla power plant.
   
  We are progressing with construction of the third phase, NIL 2, as discussed below.

 

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Zunil Power Plant (Guatemala)  
   
Location  Zunil, Guatemala
   
Generating Capacity 23 MW (see “Supplemental Information” below for information on current generating capacity)
   
Number of Power Plants One
   
Technology The Zunil power plant utilizes an air cooled binary system.
   
Subsurface Six production wells and two injection wells are connected to the plant through a gathering system.
   
Major Equipment Seven OECs together with the Balance of Plant equipment.
   
Age The Zunil power plant commenced commercial operation in 1999.
   
Land and Mineral Rights The land owned by the Zunil power plant includes the power plant, workshop and open yards for equipment and pipes storage.
   
  Pipelines for the gathering system transit through a local agricultural area’s right of way acquired by us.
   
  The geothermal wells and resource are owned by INDE.
   
  The power generated by the Zunil power plant is sold at our property line; power transmission lines are owned and operated by INDE.
   
Resource Information The Zunil geothermal reservoir is hosted in Tertiary volcanic rocks which include overly fractured granodiorite. Production wells produce a reservoir from 536-572 degrees Fahrenheit to a depth of approximately 2,860 to 4,300 feet. A shallow steam cap exists in the production area of the field, and most of the wells produce high enthalpy fluid due to the presence of two-phase conditions in their feed zones. The wells target northwest- and northeast-trending fractures for permeability. These fractures are also thought to control upwelling from the volcanically-heated source. The upwelling fluids form a steam cap, and fluids and steam reach the surface along fractures, forming springs and fumaroles throughout the geothermal field.
   
Resource Cooling The resource temperature is stable.
   
Access to Property Direct access to public roads.
   
Power Purchaser INDE
   
PPA Expiration Date 2034
   
   
Supplemental Information In January 2014, we signed an amendment to the PPA with INDE to extend its term by 15 years until 2034.
   
  The PPA amendment also transfers operation and management responsibilities of the Zunil geothermal field from INDE to Ormat for the term of the amended PPA in exchange for an increase in tariff. Additionally, INDE exercised its right under the PPA to become a partner in the Zunil power plant and to hold a three percent equity interest.
   
  The power plant generates approximately 16 MW due to lack of sufficient geothermal resources. We successfully improved the heat supply and gradually increased the generation capacity. We expect that this improvement and the increased tariff will increase the energy portion of revenues.

 

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  According to the PPA amendment, payments for the Zunil plant will be made as follows:
  1.   Capacity payment:  
    a. Until 2019, the capacity payment will be calculated based on a 24 MW generating capacity regardless of the actual performance of the power plant.
    b. From 2019 and thereafter, the capacity payment will be based on actual delivered capacity and the capacity rate will be reduced.
  2.   Energy payment:
    a. From 2014 until 2034, the energy payment will include a geothermal field operation and maintenance rate based on actual delivered energy in addition to the energy rate on actual delivered energy.
    b. From 2019 and thereafter, the energy rate on delivered energy will increase and will compensate the reduction in the capacity rate.

 

 

 

Projects under Construction 

 

We have several projects in various stages of construction, including three projects that we have fully released for construction and three projects that are in initial stages of construction.

 

The following is a description of projects in the U.S., Kenya and Indonesia that were released for, and are in different stages of, construction. These projects are expected to have a total generating capacity of 72 MW (representing our interest). In addition, we are planning to add 4 MW to the Brady complex, as described above.

 

McGinness Hills Phase 3 (U.S.)  
   
Location Lander County, Nevada
   
Projected Generating Capacity 48 MW
   
Projected Technology The power plant will utilize an air cooled binary system.
   
Condition Engineering and procurement is ongoing, and drilling is in process.
   
Subsurface Improvement We plan to drill five new production wells and three injection wells.
   
Land and Mineral Rights The McGinness Hills site is comprised of private and BLM leases.
  The leases require annual rental payments, as described above in “Description of Our Leases and Lands”.
  The rights to use the geothermal and surface rights under the leases are subject to various conditions, as described above in “Description of Our Leases and Lands”.
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted in leases from BLM. 
   
Resource Information

The McGinness Hills geothermal reservoir is contained within a network of fractured rocks over an area of at least three square miles.  The reservoir is contained in both Tertiary intrusive and Paleozoic sedimentary (basement) rocks.   The thermal fluids within the reservoir are inferred to flow upward through the basement rocks along the NNE-striking faults at several fault intersections.  The thermal fluids then generally outflow laterally to the NNE and SSW along the NNE-striking faults.  No modern thermal manifestations exist at McGinness Hills, although hot spring deposits encompass an area of approximately 0.25 square miles and indicate a history of surface thermal fluid flow.  The resource temperature averages 335 degrees Fahrenheit and the fluids are sourced from the reservoir at elevations between 2,000 to 5,000 feet below the surface.

 

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Power Purchaser SCPPA.
   
Financing Corporate finance.
   
Projected Operation By the end of 2018.
   
Supplemental Information  Western Watersheds Project (WWP) filed a notice of appeal and petition for standing with respect to a BLM decision approving Addendum 2 to Operation Plan & Utilization Plan for the MGH project. The appeal alleges that the BLM decision authorizing construction and operation of MGH Phase 3 causes harm to WWP and its members by allowing degradation of the wildlife habitat of the Greater sage-grouse in that area.
   
   
Olkaria III – Plant 1 Repowering (Kenya)  
   
Location Naivasha, Kenya
   
Projected Generating Capacity 10 MW
   
Projected Technology The power plant will utilize an air cooled binary system.
   
Condition Engineering and manufacturing are completed. Plant construction is ongoing. The power plant is planned to be on line early in 2018
   
Subsurface Improvement Two wells were drilled successfully in 2017.
   
Land and Mineral Rights The Olkaria III site is comprised of government leases. See description above under “Olkaria III Complex”.
   
Resource Information The Olkaria III geothermal field is located on the west side of the greater Olkaria geothermal area within the Rift Valley at approximately 6,890 feet above sea level.
   
  Hot geothermal fluids rise up from deep in the northeastern portion of the concession area through low permeability at a shallow depth to a high productivity two-phase region from 3,280 to 4,270 feet above sea level.
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted pursuant to the lease agreement.
   
Power Purchaser KPLC.
   
Financing Corporate finance.
   
Projected Operation In the second half of 2018.
   
Supplemental Information We plan to add an additional OEC to the existing Olkaria III Plant 1. The electricity generated from the new unit will be sold under the Olkaria III Plant 1 PPA.

 

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Sarulla NIL 2 (Indonesia)  
   
Location Tapanuli Utara North Sumatra Namura I Langit area, Indonesia.
   
Ownership SOL is a consortium consisting of Medco Energi Internasional Tbk, Inpex Corporation, Itochu Corporation, Kyushu Electric Power Co. Inc., and one of our indirect wholly owned subsidiaries that holds a 12.75% interest.
   
Projected Generating Capacity One phase, NIL 2, has a total projected generating capacity of approximately 110 MW (Ormat’s share is approximately 14 MW).
   
Projected Technology Integrated Geothermal Combined Cycle Unit comprised of one back pressure steam turbine and six OECs.
   
Condition The first two phases (SIL and NIL 1, with a combined generating capacity of 220 MW) commenced commercial operation in March and October 2017, respectively. For the third phase, NIL 2, engineering, procurement and construction work at the site are in progress and all of Ormat’s equipment has been delivered and installed. Drilling for the third phase is still ongoing and the project has achieved to date, based on preliminary estimates, 100% of the required production and injection capacity.
   
Land and Mineral Rights Most of the aboveground land for the project was acquired from private owners with some land leased from governmental agencies. Mineral rights are state owned with special agreement for its usage by the project.
   
Resource Information Two field areas, NIL and SIL host a steam-liquid-dominated system. Previously drilled wells have temperatures from 275°C to 310°C. Currently most wells are flowing at an average rate of about 750T/Hr per well which is sufficient for over 20 MW electrical production.
   
Access to Property Access to property for the project has been secured.
   
Power Purchaser 30-year Energy Sales Contract with PLN (the state electric utility)
   
Financing In May 2014, SOL reached financial closing on $1.17 billion to finance the development of the project with a consortium of lenders comprised of JBIC, the Asian Development Bank and six other commercial banks. Under this financing, the project company obtained construction and term loans under a limited recourse financing package backed by political risk guarantee from JBIC.
   
Projected Operation NIL 2 will be commissioned in two stages. Approximately 80 MW will be commissioned in the first quarter of 2018 and approximately 30 MW will be commissioned by mid-April 2018.
   
Supplemental Information The Sarulla project is owned and operated by the consortium members under the framework of a JOC and ESC. Under the JOC, PT Pertamina Geothermal Energy, the concession holder for the project, has provided the consortium with the right to use the geothermal field, and under the ESC, PLN, the state electric utility, is the off-taker at Sarulla for a period of 30 years.

 

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In addition to our equity holdings in the consortium, we designed the Sarulla power plant and supplied our OECs to the power plant.

   
  The project has missed a few milestones defined under the loan documents but has received waivers from the lenders and the project is currently in compliance with the lenders’ requirements. The project experienced delays in field development and cost overruns resulting from delays and excess drilling costs. Due to the cost overrun in drilling, the lenders have requested from the sponsors to commit to contributing additional equity. The sponsors have agreed, and financing documents were revised to reflect this request. With respect to our role as a supplier, all contractual milestones under the supply agreement were achieved.

 

The following is a description of projects in California and Nevada with an expected total generating capacity of 42 MW that are in an initial stage of construction:

 

 

Carson Lake Project (U.S.)  
   
Location Churchill County, Nevada
   
Projected Generating Capacity 10 MW
   
Projected Technology The Carson Lake power plant will utilize a binary system.
   
Condition Initial stage of construction.
   
Subsurface Improvements We drilled one well in 2016 that did not meet our commercial criteria and another in 2017 that tested favorably. Planning is in process for next steps including a flow test to evaluate reservoir volume.
   
Land and Mineral Rights The Carson Lake project site is comprised of BLM leases.
   
  The leases are currently held by the payment of annual rental payments, as described above in “Description of Our Leases and Lands.”
   
  Ormat holds the leases under the initial extension of the primary term which expires in 2021. An additional extension of the primary term may be filed in 2021 for an additional 5 years. If commercial production occurs during either of these periods, the leases will be extended for 35 years with the possibility of additional extension for 55 years. The project’s rights to use the geothermal and surface rights under the leases are subject to various conditions, as described above in “Description of Our Leases and Lands”.
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted in leases from BLM.
   
Resource Information The expected average temperature of the resource cannot be estimated as field development has not been completed yet.
   
Power Purchaser SCPPA.
   
PPA Expiration Date 2043
   
Financing Corporate funds.

 

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Projected Operation We are currently continuing with drilling activity and based on these results, we will evaluate the next development steps for the project and its COD.
   
Supplemental Information We signed a Small Generator Interconnection Agreement with NV Energy in December 2017.
   
   
   
CD4 Project (Mammoth Complex) (U.S.)  
   
Location Mammoth Lakes, California
   
Projected Generating Capacity 25 MW
   
Projected Technology The CD4 power plant will utilize an air cooled binary system.
   
Condition Initial stage of construction.
   
Subsurface Improvements We have completed two production wells, one of which was previously considered an injection well. In 2017 we drilled a core well to begin baseline monitoring, as required by our permit. Continued drilling is planned for 2018.
   
Land and Mineral Rights The Mammoth complex is comprised mainly of BLM leases, which are held by production and are subject to a unitization agreement.
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted pursuant to the leases.
   
Resource Information The expected average temperature of the resource is 350-370 degrees Fahrenheit.
   
Power Purchaser We have not executed a PPA.
   
Financing Corporate funds.
   
Projected Operation 2020, subject to PPA execution.
   
Supplemental Information We signed a Wholesale Distribution Access Tariff Cluster Large Generator Interconnection Agreement with SCE in December 2017.
   
   

Tungsten Mountain Solar (U.S.)

 
   
Location Churchill County, Nevada
   
Projected Generating Capacity 7 MW AC (8.5 MW DC)
   
Projected Technology Solar PV
   
Condition Development (engineering and permitting)
   
Land The Tungsten Mountain Solar site is comprised of BLM leases
   
Access to Property Direct access to public roads from the leased property and access across the leased property are provided under surface rights granted in leases from BLM.
   
Power Purchaser SCPPA
   
PPA Expiration Date 2043
   
Financing Corporate funds
   
Projected Operation By the end of 2018

 

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Supplemental Information We plan to install Solar PV systems in the Tungsten Mountain geothermal power plant to reduce internal (i.e. parasitic) load.
   
  We are in the process of amending the Tungsten Mountain geothermal Large Generator Interconnection Agreement with NV Energy to reflect this addition of solar PV systems.

 

 

Future Projects 

 

 

Projects under Various Stages of Development

 

We also have projects under various stages of development in the U.S., Guadeloupe and Kenya. We expect to continue to explore these and other opportunities for expansion so long as they continue to meet our business objectives and investment criteria.

 

The following is a description of the projects currently under various stages of development and for which we are able to estimate their expected generating capacity. Upon completion of these projects, the generating capacity of our geothermal projects would increase by approximately 73 MW to 78 MW (representing our interest). However, we prioritize our investments based on their readiness for continued construction and expected economics and therefore we are not planning to invest in all of such projects in 2018.

 

 

Bouillante power plant (Guadeloupe)

 

We are planning to increase the capacity of the Bouillante project by an additional 10 MW. The power plant currently sells its electricity under a 15-year PPA with EDF that was entered into in February 2016 and allows us to sell up to 14.75 MW. We expect this expansion to be completed in 2020, subject to PPA execution.

 

 

Menengai Project (Kenya)

 

On November 3, 2014, our majority owned Kenyan subsidiary (Project Company) signed a 25-year PPA with KPLC and a project implementation and steam supply agreement (PISSA) with GDC for the 35 MW Menengai geothermal project in Kenya. The Project Company is owned by Ormat (51%), Symbion Power LLC (24.5%) and Civicon Ltd. (24.5%).

 

Under the PISSA, the Project Company will finance, design, construct, install, operate and maintain the 35 MW Menengai steam power plant on a build-own-operate (BOO) basis for 25 years. GDC, which is wholly owned by the Kenyan government, will develop the geothermal resource, supply the steam for conversion to electricity and maintain the geothermal field through the term of the agreement. The Project Company expects to start construction upon financial closing.

 

 

Puna Enhancement Project (Hawaii)

 

We are planning to replace 10 old steam units with two new OECs and to upgrade the existing auxiliary equipment. This upgrade will increase the Puna complex generating capacity by 8 MW to 46 MW. We have entered into negotiations with HELCO to secure a PPA for increased generation during the original term of the existing PPAs and to extend the period beyond 2027. We expect the upgrade to be completed by late 2019 or early 2020.

 

Dixie Meadows

 

We are currently developing the 15 MW to 20 MW Dixie Meadows geothermal power plant in Churchill County, Nevada. Following evaluation of drilling results, we have concluded that injection wells should be located in an area which is currently designated as protected land. We are exploring ways to remove the federal designation. Until we complete this process, we have put this project on hold.

 

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Steamboat Solar

 

We are planning to develop a 5 MW Solar PV project on the site of the Steamboat geothermal complex. We plan to install Solar PV systems to reduce internal consumption loads.

 

 

Future Prospects

 

We have a substantial land position that is expected to support future development and on which we have started or plan to start exploration activity. When deciding whether to continue holding lease rights and/or to pursue exploration activity, we diligently prioritize our prospective investments, taking into account resource and probability assessments in order to make informed decisions about whether a particular project will support commercial operation.

 

As a result, during fiscal year 2017, we discontinued exploration activities at four prospects, the Ungaran prospect in Indonesia, Glass Buttes - Midnight Point in Oregon, and Tuscarora - Phase 2 and Don A. Campbell - phase 3 in Nevada. We added two new prospects in 2017, the Tungsten Mountain – Phase 2 and Twin Buttes in Nevada.

 

Our current land position is comprised of various leases, concessions and private land for geothermal resources of approximately 264,000 acres in 32 prospects including the following:

 

Nevada (15)

 

1.

Alum

Exploration studies in progress;

2.

Baltazor

Under exploration drilling;

3.

Colado

Under exploration drilling;

4.

Dixie Comstock

Exploration studies in progress;

5.

Edwards Creek

Under exploration drilling;

6.

Horsehaven (formerly Beowawe)

Exploration studies in progress;

7.

North Valley

Exploration studies in progress;

8.

New York Canyon

Exploration studies in progress;

9.

Pearl Hot Springs

Lease acquired but no further action has been taken yet;

10.

Ruby Valley

Lease acquired but no further action has been taken yet;

11.

Rhodes Marsh

Exploration studies in progress;

12.

South Brady

Exploration studies in progress;

13.

Trinity

Exploration studies in progress;

14.

Tungsten Mountain – Phase 2

Assessment for future expansion; and

15.

Twin Buttes

Lease acquired but no further action has been taken yet.

 

 

California (3)

 

1.

Glamis

Exploration studies in progress;

2.

Rhyolite Plateau

Exploration studies in progress; and

3.

Truckhaven

Exploration studies in progress.

 

 

Oregon (2)

 

1.

Crump Geyser

Under exploration drilling; and

2.

Lakeview/ Goose Lake

Exploration studies in progress

 

 

New Mexico (1)

 

1.

Rincon

Exploration studies in progress.

 

 

Utah (2)

 

1.

Pavant

Exploration studies in progress;

2.

Roosevelt Hot Springs

Exploration studies in progress.

 

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Guatemala (2)

 

1.

Amatitlan Phase II

Exploration studies in progress; and

2.

Tecumburu

Waiting for additional land acquisition.

 

 

Guadeloupe (1)

 

1. Bouillante

Exploration studies in progress.

 

 

New Zealand (1)

 

1. Tikitere Signed BOT agreement; exploratory drilling is pending resource consent acceptance.

 

 

Honduras (1)

 

1.

San Ignacio (12 Tribes)

Exploration studies in progress.

 

 

Ethiopia (4)

 

1. Boku

Under exploration studies;

2. Dofan

Under exploration studies;

3. Dugumo Fango

Under exploration studies; and

4. Shashamane

Under exploration studies;

 

 

Storage Projects

 

In addition to our Geothermal activity, we are currently working to develop energy storage projects in the U.S. including the following:

 

ACUA

 

We are developing a 1 MW/1 MWh behind the meter energy storage system that will be installed in the Atlantic County Utility Authority’s (ACUA) wastewater treatment plant in Atlantic City, New Jersey. We will own and operate the battery energy storage systems to create energy savings for ACUA, including by participating in PJM’s frequency regulation market. Commercial operation is expected in March 2018.

 

Stryker and Plumstead

 

We are developing two 20 MW/20 MWh IFM energy storage systems. The Stryker project is located near Allentown, NJ and the Plumsted project is  located near Trenton, NJ. We are acting as EPC lead and owner and operator of both projects. The energy storage systems will participate in PJM’s frequency regulation market.

 

 

Operations of our Product Segment

 

Power Units for Geothermal Power Plants. We design, manufacture, and sell power units for geothermal electricity generation, which we refer to as OECs. Our customers include contractors and geothermal plant owners and operators.

 

The power units are usually paid for in installments, in accordance with milestones set forth in the supply agreement. Sometimes we agree to provide the purchaser with spare parts (or alternatively, with a non-exclusive license to manufacture such parts). We provide the purchaser with at least a 12-month warranty for such products. We usually also provide the purchaser (often upon receipt of advances made by the purchaser) with a guarantee, which partially terminates upon delivery of the equipment to the site and terminates in full at the end of the warranty period. The guarantees are typically supported by letters of credit.

 

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Power Units for Recovered Energy-Based Power Generation. We design, manufacture, and sell power units used to generate electricity from recovered energy or so-called “waste heat”. Our existing and target customers include interstate natural gas pipeline owners and operators, gas processing plant owners and operators, cement plant owners and operators, and other companies engaged in other energy-intensive industrial processes. We have two different business models for this product line.

 

 

The first business model, which is similar to the model utilized in our geothermal power generation business, consists of the development, construction, ownership, and operation of recovered energy-based generation power plants. Pursuant to this business model, we enter into agreements to purchase industrial waste heat, and long-term PPAs with off-takers to sell the electricity generated by the REG unit that utilizes such industrial waste heat. The power purchasers in such cases generally are investor-owned electric utilities or local electrical cooperatives. This is the business model for our OREG 1, 2, 3 and 4 power plants.

 

 

Pursuant to the second business model, we construct and sell the power units for recovered energy-based power generation to third parties for use in “inside-the-fence” installations or otherwise. Our customers include gas processing plant owners and operators, cement plant owners and operators and companies in the process industry.

 

Remote Power Units and other Generators. We design, manufacture and sell fossil fuel powered turbo-generators with capacities ranging from 200 watts to 5,000 watts, which operate unattended in extreme hot or cold climate conditions. The remote power units supply energy to remote unmanned installations and along communications lines, and provide cathodic protection along gas and oil pipelines. Our customers include contractors installing gas pipelines in remote areas. In addition, we manufacture and sell generators, including heavy duty direct current generators, for various other uses. The terms for sale of the turbo-generators are similar to those for the power units we produce for power plants.

 

EPC of Power Plants. We engineer, procure and construct, as an EPC contractor, geothermal and recovered energy power plants on a turnkey basis, using power units we design and manufacture. Our customers are geothermal power plant owners as well as our target customers for the sale of our recovered-energy based power units described above. Unlike many other companies that provide EPC services, we believe we have an advantage in that we are using our own manufactured equipment and thus have better quality and control over the timing and delivery of equipment and related costs. The consideration for such services is usually paid in installments, in accordance with milestones set forth in the EPC contract and related documents. We usually provide performance guarantees or letters of credit securing our obligations under the contract. Upon delivery of the plant to its owner, such guarantees are replaced with a warranty guarantee, usually for a period ranging from 12 to 36 months. The EPC contract usually places a cap on our liabilities for failure to meet our obligations thereunder.

 

In connection with the sale of our power units for geothermal power plants, power units for recovered energy-based power generation, remote power units and other generators, we enter into sales agreements, from time to time, with sales representatives for the marketing and sale of such products pursuant to which we are obligated to pay commissions to such representatives upon the sale of our products in the relevant territory covered by such agreements by such representatives or, in some cases, by other representatives in such territory.

 

Our manufacturing operations and products are certified ISO 9001, ISO 14001, American Society of Mechanical Engineers, and TÜV, and we are an approved supplier to many electric utilities around the world.

 

Backlog

 

We have a product backlog of approximately $243.0 million as of February 26, 2018, which includes revenues for the period between January 1, 2018 and February 26, 2018, compared to $251.0 million as of February 27, 2017, which included revenues for the period between January 1, 2017 and February 27, 2017.

 

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The following is a breakdown of the Product segment backlog as of March 1, 2018 ($ in millions):

 

 

Expected

Completion

of the

Contract

 

Sales Expected to

be Recognized in

2018

   

Sales Expected

to be

Recognized in

the years

following 2018

   

Expected Until

End of Contract

 
                           

Geothermal

2019

    177.5       57       234.5  

Recovered Energy

2018

    0.9       0.0       0.9  

Other

2018

    7.6       0.0       7.6  

Total

    186.0       57.0       243.0  

 

Competition

 

In our Electricity segment, we face competition from geothermal power plant owners and developers as well as other renewable energy providers.

 

In our Product segment, we face competition from power plant equipment manufacturers and system integrators as well as engineering or projects management companies.

 

As we implement our new strategic plan, we will face competition from a number of sources, many of which may have resources, industry experience, market acceptance or other advantages we do not have. For example, expanding into new technologies, such as energy storage, or new markets, such as C&I, will involve competition from companies that already have established businesses in those technologies and markets as well as companies seeking to acquire established businesses and other new market entrants like us.

 

 

    Electricity Segment

 

Competition in the Electricity segment is particularly marked in the very early stage of either obtaining the rights to the resource for development of future projects or acquiring a site already in a more advanced stage of development. Once we or other developers obtain such rights or own a power plant, competition is limited. From time to time and in different jurisdictions competing geothermal developers become our customers in the Product segment.

 

Our main competitors in the geothermal sector in the U.S. are CalEnergy, Calpine Corporation, Terra-Gen Power LLC, Enel Green Power S.p.A and other smaller pure play developers. Outside the U.S., in many cases our competitors are companies that are gaining experience developing geothermal projects in their own countries such as Mercury (formerly Mighty River Power) and Contact Energy in New Zealand, and local developers and steam turbine manufacturers in Indonesia. Some of our competitors are now seeking to take the local experience they have gained and develop geothermal projects in other countries. These competitors include Energy Development Corporation from the Philippines and Enel Green Power from Italy. Some Turkish developers are also focusing on the international market. Additionally, we face competition from small country-specific companies.

 

In obtaining new PPAs, we also face competition from companies engaged in the power generation business from other renewable energy sources, such as wind power, biomass, solar power and hydro-electric power. In the last few years, competition from the wind and solar power generation industries has increased significantly.

 

As a geothermal company, we are focused on niche markets where our baseload and flexibility advantages can allow us to develop competitive projects.

 

In the demand response markets, our Viridity business competes primarily with specialized demand management providers rather than with the traditional curtailment service providers. Viridity differentiates itself from its competitors by its proprietary software and analytical strengths, wider use cases, customer base, business model, and market presence.

 

The energy storage and energy management space is comprised of many companies divided into different verticals and sub verticals like OEMs, integrators, battery management systems, energy management systems, battery producers, power conversion systems, DER system design and optimization, micro grids design, monitoring and control and companies that are realizing storage assets' economic value through the optimization of storage assets' operation in real time electricity markets. Our proprietary software, analytical operational platform and significant differentiated experience in storage operation and integration with electricity markets, allow us to provide multiple value streams (value stacking) from a single storage installation. We have continued and plan to continue to grow our Viridity business in these markets.     

 

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  Product Segment

 

Our competitors among power plant equipment suppliers are divided into high enthalpy and low enthalpy competitors. Our main high enthalpy competitors are industrial steam turbine manufacturers such as Mitsubishi Hitachi Power Systems, Fuji Electric Co., Ltd. and Toshiba Corporation of Japan, GE/Nuovo Pignone brand and Ansaldo Energia of Italy. As noted above, in 2015, we signed a strategic collaboration agreement with one of these competitors, Toshiba Corporation.

 

Our low enthalpy competitors are binary systems manufacturers using the Organic Rankine Cycle such as Fuji Electric Co., Ltd of Japan, Exergy of Italy, Mitsubishi Hitachi Power Systems (which acquired Turboden) and recently Egesim, a Turkish electrical contractor who is collaborating with Atlas Copco in the Turkish market. While we believe that we have a distinct competitive advantage based on our accumulated experience and current worldwide share of installed binary generation capacity (which is approximately 85%), an increase in competition, which we are currently experiencing, has started to impact our ability to secure new purchase orders from potential customers. The increased competition led to a reduction in the prices that we are able to charge for our binary equipment, which in turn impacted our profitability.

 

In the REG business, our competitors are other Organic Rankine Cycle manufacturers (such as GE and Mitsubishi/Turboden), manufacturers that use Kalina technology (such as Geothermal Energy Research & Development Co., Ltd in Japan), other manufacturers of conventional steam turbines and small developers of small scale ORCs.

 

Currently, none of our competitors compete with us in both the Electricity and the Product segments.

 

In the case of proposed EPC projects, we also compete with other service suppliers, such as project/engineering companies.

 

Customers

 

All of our revenues from the sale of electricity in the year ended December 31, 2017 were derived from fully-contracted energy and/or capacity payments under long-term PPAs with governmental and private utility entities. Southern California Edison, Sierra Pacific Power Company and Nevada Power Company (subsidiaries of NV Energy), HELCO, SCPPA and KPLC accounted for 4.3%, 18.1%, 5.5%, 10.1% and 15.9% of total revenues, respectively, for the year ended December 31, 2017.

 

Based on publicly available information, as of December 31, 2017, the issuer ratings of Southern California Edison, HELCO, Sierra Pacific Power Company, Nevada Power Company, SCPPA, Pacific Gas & Electric and EDF were as set forth below:

 

Issuer

Standard & Poor’s Ratings Services

Moody’s Investors Service Inc.

Southern California Edison

BBB+ (Stable)

A2 (Stable)

HELCO

BBB- (Stable)

Rating withdrawn

Sierra Pacific Power Company

A (Stable)

Baa1 (Stable)

Nevada Power Company

A (Stable)

Baa1 (Stable)

SCPPA

BBB+ (Stable)

Aa2 (Stable)

Pacific, Gas and Electric

A- (Watch Negative)

A2 (Rating under review)

EDF

A- (Negative)

A3 (Stable)

     

 

The credit ratings of any power purchaser may change from time to time. There is no publicly available information with respect to the credit rating or stability of the power purchasers under the PPAs for our foreign power plants.

 

Our revenues from the Product segment are derived from contractors or owners or operators of power plants, process companies, and pipelines.

 

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Raw Materials, Suppliers and Subcontractors

 

In connection with our manufacturing activities, we use raw materials such as steel and aluminum. We do not rely on any one supplier for the raw materials used in our manufacturing activities, as all of these raw materials are readily available from various suppliers.

 

We use subcontractors for some of the manufacturing activities with respect to our products components and for construction activities with respect to our power plants, which allows us to expand our construction and development capacity on an as-needed basis. We are not dependent on any one subcontractor and expect to be able to replace any subcontractor or assume such manufacturing and construction activities ourselves, if necessary or desirable, without adverse effect to our operations.

 

Employees

 

As of December 31, 2017, we employed 1,303 employees, of which 527 were located in the U.S., 579 were located in Israel and 197 were located in other countries. We expect that future growth in the number of our employees will be mainly attributable to the purchase and/or development of new power plants.

 

As of December 31, 2017, the only employees that are represented by a labor union are the employees of our recently acquired Bouillante power plant located in Guadeloupe. The employees in Guadeloupe are represented by the Confédération Générale du Travail de Guadeloupe. We have never experienced any labor dispute, strike or work stoppage. We consider our relations with our employees to be satisfactory. We believe our future success will depend on our continuing ability to hire, integrate, and retain qualified personnel.

 

In the U.S., we currently do not have employees represented by unions recognized by the Company under collective bargaining agreements. However, a union filed a petition with the NLRB seeking to organize the operations and maintenance employees at the Puna complex.  A global settlement was reached with the union in February 2016 in which the union withdrew their petition and all issues were settled and closed. 

 

We have no collective bargaining agreements with respect to our Israeli employees. However, by order of the Israeli Ministry of Economy and Industry, the provisions of a collective bargaining agreement between the Histadrut (the General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (which includes the Industrialists Association) may apply to some of our Israeli non-managerial, finance and administrative, and sales and marketing personnel. This collective bargaining agreement principally concerns cost of living pay increases, length of the workday, minimum wages and insurance for work-related accidents, annual and other vacation, sick pay, and determination of severance pay, pension contributions, and other conditions of employment. We currently provide such employees with benefits and working conditions, which are at least as favorable as the conditions specified in the collective bargaining agreement.

 

Insurance

 

We maintain business interruption insurance, casualty insurance, including flood, volcanic eruption, earthquake and cyber coverage, and primary and excess liability insurance, control of wells, construction all risk, as well as customary worker’s compensation and automobile, marine transportation insurance and such other commercial insurance as is generally carried by companies engaged in similar businesses and owning similar properties in the same general areas as us or as may be required by any of our PPAs, leases, financing arrangements, or other contracts. To the extent any such casualty insurance covers both us and/or our power plants, and any other person and/or plants, we generally have specifically designated as applicable solely to us and our power plants “all risk” property insurance coverage in an amount based upon the estimated replacement value of our power plants (provided that earthquake, volcanic eruption and flood coverage may be subject to annual aggregate limits depending on the type and location of the power plant) and business interruption insurance coverage in an amount that also varies from power plant to power plant.

 

We generally purchase insurance policies to cover our exposure to certain political risks involved in operating in developing countries. We hold and maintain a global political risk insurance program for three years covering the significant political risk we identified as described below. This global program is issued by the global lead insurers in the private sector. Currently we hold such insurance for our Zunil, Amatitlan, Olkaria, Platanares and Sarulla operating power plants. Such insurance policies generally cover, subject to the limitations and restrictions contained therein, losses derived from a specified governmental act, such as confiscation, expropriation, riots, and the inability to convert local currency into hard currency and, in certain cases, the breach of agreements with governmental entities, up to approximately 90% of our net equity investment.

 

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Regulation of the Electric Utility Industry in the United States

 

The following is a summary overview of the electric utility industry and applicable federal and state regulations and should not be considered a full statement of the law or all issues pertaining thereto.

 

PURPA

 

PURPA provides the owners of power plants certain benefits described below if a power plant is a “Qualifying Facility”. A small power production facility is a Qualifying Facility if: (i) the facility does not exceed 80 MW; (ii) the primary energy source of the facility is biomass, waste, renewable resources, or any combination thereof, and at least 75% of the total energy input of the facility is from these sources, and fossil fuel input is limited to specified uses; and (iii) the facility, if larger than one megawatt, has filed with FERC a notice of self-certification of qualifying status, or has filed with FERC an application for FERC certification of qualifying status that has been granted. The 80 MW size limitation, however, does not apply to a facility if (i) it produces electric energy solely by the use, as a primary energy input, of solar, wind, waste or geothermal resources; and (ii) an application for certification or a notice of self-certification of qualifying status of the facility was submitted to FERC prior to December 21, 1994, and construction of the facility commenced prior to December 31, 1999.

 

FERC's regulations under PURPA exempt owners of small power production Qualifying Facilities that use geothermal resources as their primary source and other Qualifying Facilities that are 30 MW or under in size from regulation under the PUHCA 2005, from many provisions of the FPA and from state laws relating to the financial, organization and rate regulation of electric utilities.

 

With respect to the FPA, FERC's regulations under PURPA do not exempt from the rate provisions of the FPA sales of energy or capacity from Qualifying Facilities larger than 20 MW in size that are made (a) pursuant to a contract executed after March 17, 2006 that is not a contract made pursuant to a state regulatory authority’s implementation of PURPA or (b) not pursuant to another provision of a state regulatory authority’s implementation of PURPA. The practical effect of these regulations is to require owners of Qualifying Facilities that are larger than 20 MW in size to obtain market-based rate authority from FERC if they seek to sell energy or capacity other than pursuant to a contract executed before March 17, 2006 pursuant to a state regulatory authority’s implementation of PURPA or pursuant to a provision of a state regulatory authority’s implementation of PURPA. Until that contract expires, is terminated or is materially modified, a Qualifying Facility, under a PURPA contract executed prior to March 17, 2006, will not be required to file for authorization to charge for market based rates.

 

In addition, PURPA and FERC’s regulations under PURPA require that electric utilities offer to purchase electricity generated by Qualifying Facilities at a rate based on the purchasing utility’s incremental cost of purchasing or producing energy (also known as “avoided cost”). However, FERC's regulations under PURPA also allow FERC, upon request of a utility, to terminate a utility’s obligation to purchase energy from Qualifying Facilities upon a finding that Qualifying Facilities have nondiscriminatory access to either: (i) independently administered, auction-based day ahead, and real time markets for energy and wholesale markets for long-term sales of capacity; (ii) transmission and interconnection services provided by a FERC-approved regional transmission entity and administered under an open-access transmission tariff that affords nondiscriminatory treatment to all customers, and competitive wholesale markets that provide a meaningful opportunity to sell capacity and energy, including long and short term sales; or (iii) wholesale markets for the sale of capacity and energy that are at a minimum of comparable competitive quality as markets described in (i) and (ii) above. FERC regulations protect a Qualifying Facility’s rights under any contract or obligation involving purchases or sales that are entered into before FERC has determined that the contracting utility is entitled to relief from the mandatory purchase obligation. FERC has granted the request of California investor-owned utilities for a waiver of the mandatory purchase obligation for Qualifying Facilities larger than 20 MW in size and is currently re-evaluating the 20 MW threshold for such waiver as well as other aspects of its PURPA regulations.

 

We expect that our power plants in the U.S will continue to meet all of the criteria required for Qualifying Facilities under PURPA. However, since the Heber power plants have PPAs with Southern California Edison that require Qualifying Facility status to be maintained, maintaining Qualifying Facility status remains a key obligation. If any of the Heber power plants loses its Qualifying Facility status our operations could be adversely affected. Loss of Qualifying Facility status would eliminate the Heber power plants’ exemption from the FPA and thus, among other things, the rates charged by the Heber power plants in the PPAs with Southern California Edison and SCPPA would become subject to FERC regulation. Further, it is possible that the utilities that purchase power from the power plants could successfully obtain a waiver of the mandatory-purchase obligation in their service territories. For example, the three California investor-owned utilities have received such a waiver from FERC for projects larger than 20 MW. If this occurs or if FERC reduces the 20 MW threshold or eliminates the mandatory purchase obligation, the power plants’ existing PPAs will not be affected, but the utilities will not be obligated under PURPA to renew or extend these PPAs or execute new PPAs upon the existing PPAs’ expiration, if the size is above the waiver threshold.

 

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PUHCA

 

Under PUHCA 2005, the books and records of a utility holding company, its affiliates, associate companies, and subsidiaries are subject to FERC and state commission review with respect to transactions that are subject to the jurisdiction of either FERC or the state commission or costs incurred by a jurisdictional utility in the same holding company system. However, if a company is a utility holding company solely with respect to Qualifying Facilities, exempt wholesale generators, or foreign utility companies, it will not be subject to review of books and records by FERC under PUHCA 2005. Qualifying Facilities or exempt wholesale generators that make only wholesale sales of electricity are not subject to state commissions’ rate regulations and, therefore, in all likelihood would not be subject to any review of their books and records by state commissions pursuant to PUHCA 2005 as long as the Qualifying Facility is not part of a holding company system that includes a utility subject to regulation in that state.

 

FPA

 

Pursuant to the FPA, FERC has exclusive jurisdiction over the rates for most wholesale sales of electricity and transmission in interstate commerce. These rates may be based on a cost of service approach or may be determined on a market basis through competitive bidding or negotiation. FERC's regulations under PURPA exempt owners of small power production Qualifying Facilities that use geothermal resources as their primary source and other Qualifying Facilities that are 30 MW or under in size from many provisions of the FPA. If any of the power plants were to lose its Qualifying Facility status, such power plant could become subject to the full scope of the FPA and applicable state regulations. The application of the FPA and other applicable state regulations to the power plants could require our power plants to comply with an increasingly complex regulatory regime that may be costly and greatly reduce our operational flexibility. Even if a power plant does not lose Qualifying Facility status, if a PPA with a power plant expires, is terminated or is materially modified, the owner of a Qualifying Facility power plant in excess of 20 MW will become subject to rate regulation under the Federal Power Act.

 

If a power plant in the U.S. were to become subject to FERC’s ratemaking jurisdiction under the FPA as a result of loss of Qualifying Facility status and the PPA remains in effect, FERC may determine that the rates currently set forth in the PPA are not just and reasonable and may set rates that are lower than the rates currently charged. In addition, FERC may require that the power plant refund a portion of amounts previously paid by the relevant power purchaser to such power plant. Such events would likely result in a decrease in our future revenues or in an obligation to disgorge revenues previously earned by from the power plant, either of which would have an adverse effect on our revenues.

 

Moreover, the loss of the Qualifying Facility status of any of our power plants selling energy to Southern California Edison could also permit Southern California Edison, pursuant to the terms of its PPA, to cease taking and paying for electricity from the relevant power plant and to seek refunds for past amounts paid and/or a reduction in future payments. In addition, the loss of any such status would result in the occurrence of an event of default under the indenture for the OFC Senior Secured Notes and the OrCal Senior Secured Notes and hence would give the indenture trustee the right to exercise remedies pursuant to the indenture and the other financing documents.

 

 State Regulation

 

Our power plants in California and Nevada, by virtue of being Qualifying Facilities that make only wholesale sales of electricity, are not subject to rate, financial and organizational regulations applicable to electric utilities in those states. The power plants each sell or will sell their electrical output under PPAs to electric utilities (Sierra Pacific Power Company, Nevada Power Company, Southern California Edison or SCPPA). All of the utilities except SCPPA are regulated by their respective state public utilities commissions. Sierra Pacific Power Company and Nevada Power Company, which merged and are doing business as NV Energy, are regulated by the PUCN. Southern California Edison is regulated by the CPUC.

 

Under Hawaii law, non-fossil generators are not subject to regulation as public utilities. Hawaii law provides that a geothermal power producer is to negotiate the rate for its output with the public utility purchaser. If such rate cannot be determined by mutual accord, the PUCH will set a just and reasonable rate. If a non-fossil generator in Hawaii is a Qualifying Facility, federal law applies to such Qualifying Facility and the utility is required to purchase the energy and capacity at its avoided cost. The rates for our power plant in Hawaii are established under a long-term PPA with HELCO.

 

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Environmental Permits

 

U.S. environmental permitting regimes with respect to geothermal projects center upon several general areas of focus. The first involves land use approvals. These may take the form of Special Use Permits or Conditional Use Permits from local planning authorities or a series of development and utilization plan approvals and right of way approvals where the geothermal facility is entirely or partly on BLM or U.S. Forest Service lands. Certain federal approvals require a review of environmental impacts in conformance with the federal National Environmental Policy Act. In California, some local permit approvals require a similar review of environmental impacts under a state statute known as the California Environmental Quality Act. These federal and local land use approvals typically impose conditions and restrictions on the construction, scope and operation of geothermal projects.

 

The second category of permitting focuses on the installation and use of the geothermal wells themselves. Geothermal projects typically have three types of wells: (i) exploration wells designed to define and verify the geothermal resource, (ii) production wells to extract the hot geothermal liquids (also known as brine) for the power plant, and (iii) injection wells to inject the brine back into the subsurface resource. For example, in Nevada and on BLM lands, the well permits take the form of geothermal drilling permits for well installation. Approvals are also required to modify wells, including for use as production or injection wells. For all wells drilled in Nevada, a geothermal drilling permit must be obtained from the Nevada Division of Minerals. Those wells in Nevada to be used for injection will also require Underground Injection Control permits from the Nevada Division of Environmental Protection. Geothermal wells on private lands in California require drilling permits from the California Department of Conservation’s DOGGR. The eventual designation of these installed wells as individual production or injection wells and the ultimate closure of any wells is also reviewed and approved by DOGGR pursuant to a DOGGR-approved Geothermal Injection Program.

 

A third category of permits involves the regulation of potential air emissions associated with the construction and operation of wells and power plants and surface water discharges associated with construction and operations activities. Generally, each well and plant requires a preconstruction air permit and storm water discharge permit before earthwork can commence. In addition, in some jurisdictions the wells that are to be used for production require and those used for injection may require air emissions permits to operate. Internal combustion engines and other air pollutant emissions sources at the projects may also require air emissions permits. For our projects, these permits are typically issued at the state or county level. Permits are also required to manage storm water during project construction and to manage drilling muds from well construction, as well as to manage certain discharges to surface impoundments, if any.

 

A fourth category of permits, that are required in both California and Nevada, includes ministerial permits such as building permits, hazardous materials storage and management permits, and pressure vessel operating permits. We are also required to obtain water rights permits in Nevada if water cooling is being used at the power plant. In addition to permits, there are various regulatory plans and programs that are required, including risk management plans (federal and state programs) and hazardous materials management plans (in California).

 

In some cases our projects may also require permits, issued by the applicable federal agencies or authorized state agencies, regarding threatened or endangered species, permits to impact wetlands or other waters and notices of construction of structures which may have an impact on airspace. Environmental laws and regulations may change in the future, which may modify the time to receive such permits and associated costs of compliance.

 

As of the date of this report, all of the material environmental permits and approvals currently required for our operating power plants have been obtained. We sometimes experience regulatory delays in obtaining various environmental permits and approvals required for projects in development and construction. These delays may lead to increases in the time and cost to complete these projects. Our operations are designed and conducted to comply with applicable environmental permit and approval requirements. Non-compliance with any such requirements could result in fines and penalties and could also affect our ability to operate the affected project.

 

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Environmental Laws and Regulations

 

Our facilities and operations are subject to a number of environmental laws and regulations relating to development, construction and operation. In the U.S, these may include the Clean Air Act, the Clean Water Act, the Emergency Planning and Community Right-to-Know Act, the Endangered Species Act, the National Environmental Policy Act, the Resource Conservation and Recovery Act, and related state laws and regulations.

 

Our geothermal operations involve significant quantities of brine (substantially, all of which we reinject into the subsurface) and scale, both of which can contain materials (such as arsenic, antimony, lead, and naturally occurring radioactive materials) in concentrations that exceed regulatory limits used to define hazardous waste. We also use various substances, including isopentane and industrial lubricants that could become potential contaminants and are generally flammable. Hazardous materials are also used in our equipment manufacturing operations in Israel. As a result, our projects are subject to domestic and foreign federal, state and local statutory and regulatory requirements regarding the use, storage, fugitive emissions, and disposal of hazardous substances. The cost of investigation and removal or remediation activities associated with a spill or release of such materials could be significant.

 

Although we are not aware of any mismanagement of these materials, including any mismanagement prior to the acquisition of some of our power plants that has materially impaired any of the power plant sites, any disposal or release of these materials onto the power plant sites, other than by means of permitted injection wells, could lead to contamination of the environment and result in material cleanup requirements or other responsive obligations under applicable environmental laws. We believe that at one time there may have been a gas station located on the Mammoth complex site, but because of significant surface disturbance and construction since that time further physical evaluation of the environmental condition of the former gas station site has been impractical. We believe that, given the subsequent surface disturbance and construction activity in the vicinity of the suspected location of the service station, it is likely that environmental contamination, if any, associated with the former facilities and any associated underground storage tanks would have already been encountered if they still existed.

 

Regulation Related to New Activity

 

Our recent entry into the energy storage space and planned provision of energy management, demand response and load shedding services require us to obtain and maintain certain additional authorizations and approvals.  These include (1) authorization from FERC to make wholesale sales of power, capacity, and ancillary services at market-based rates, and (2) membership status with eligibility to serve designated contractual functions in the RTOs of PJM, the NYISO, and the ERCOT.   In the future, we may need to obtain and maintain similar membership and eligibility status with other RTOs in order to offer such services in their respective areas.

 

Regulation of the Electric Utility Industry in our Foreign Countries of Operation

 

The following is a summary overview of certain aspects of the electric industry in the foreign countries in which we have an operating geothermal power plant. As such, it should not be considered a full statement of the laws in such countries or all of the issues pertaining thereto.

 

Guatemala. The General Electricity Law of 1996, Decree 93-96, created a wholesale electricity market in Guatemala and established a new regulatory framework for the electricity sector. The law created a new regulatory commission, the CNEE, and a new wholesale power market administrator, the AMM, for the regulation and administration of the sector. The AMM is a private not-for-profit entity. The CNEE functions as an independent agency under the Ministry of Energy and Mines and is in charge of regulating, supervising, and controlling compliance with the electricity law, overseeing the market and setting rates for transmission services, and distribution to medium and small customers. All distribution companies must supply electricity to such customers pursuant to long-term contracts with electricity generators. Large customers can contract directly with the distribution companies, electricity generators or power marketers, or buy energy in the spot market. Guatemala has approved a Law of Incentives for the Development of Renewable Energy Power plants, Decree 52-2003, in order to promote the development of renewable energy power plants in Guatemala. This law provides certain benefits to companies utilizing renewable energy, including a 10-year exemption from corporate income tax and VAT on imports and customs duties. On September 16, 2008, CNEE issued a resolution which approved the Technical Norms for the Connection, Operation, Control and Commercialization of the Renewable Distributed Generation and Self-producers Users with Exceeding Amounts of Energy. This Technical Norm was created to regulate all aspects of generation, connection, operation, control and commercialization of electric energy produced with renewable sources to promote and facilitate the installation of new generation plants, and to promote the connection of existing generation plants which have exceeding amounts of electric energy for commercialization. It is applicable to projects with a capacity of up to 5 MW. At present, the General Electricity Law and the Law of Incentives for the Development or Renewable Energy Power Plants are still in force.

 

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Kenya. The electric power sector in Kenya is regulated by the Kenyan Energy Act.  Among other things, the Kenyan Energy Act provides for the licensing of electricity power producers and public electricity suppliers or distributors. KPLC is the only licensed public electricity supplier and has a virtual monopoly in the distribution of electricity in the country. The Kenyan Energy Act permits IPPs to install power generators and sell electricity to KPLC, which is owned by various private and government entities, and which currently purchases energy and capacity from other IPPs in addition to our Olkaria III complex. The electricity sector is regulated by the ERC which was created under the Kenyan Energy Act. KPLC’s retail electricity rates are subject to approval by the ERC. The ERC has an expanded mandate to regulate not just the electric power sector but the entire energy sector in Kenya. Transmission of electricity is now undertaken by KETRACO while another company, GDC, is responsible for geothermal assessment, drilling of wells and sale of steam for electricity operations to IPPs and KenGen.  Both KETRACO and GDC are wholly owned by the government of Kenya.  Under the new national constitution enacted in August 2010, formulation of energy policy (including electricity) and energy regulation are functions of the national government. However, the constitution lists the planning and development of electricity and energy regulation as a function of the county governments (i.e. the regional or local level where an individual power plant is or is intended to be located).

 

Indonesia. The 2009 Electricity Law divided the power business into two broad categories: (1) activities that supply electrical power, both public supply and captive supply (own use), such as electrical power generation, electrical power transmission, electrical power distribution and the sale of electrical power and (2) the activities involved in electrical power support such as service businesses (consulting, construction, installation, operation & maintenance, certification & training, testing etc.) and industry businesses (power tools & power equipment supply). The power generation is dominated by PLN (state owned company) which controls around 70% of generating assets in Indonesia. Private sector participation is allowed through IPPs arrangement. IPP appointment is most often through tender although IPPs can be directly appointed or selected. The law provides PLN with priority rights to conduct its business throughout Indonesia. As the sole owner of transmission and distribution assets, PLN remains the only business entity involved in transmitting and distributing although the Law allows for private participation. While the 2014 Geothermal Law endorses private participation as Geothermal IPP, the Geothermal IPP appointment is through tender held by the Central Government. The Central Government also awards the tender winner a Geothermal License. Accordingly, the Geothermal License holder will conduct exploration and feasibility studies within five years subject to two one-year extensions, conduct well development and power plant construction and sell the electricity generated to PLN for a maximum of 30 years. Prior to the expiration of the Geothermal License, the IPP can propose to extend for another 20 years. Starting in 2017, the regulatory framework with respect to tariffs is based on PLN's existing average cost of generation (known by its Indonesian acronym, BPP) with respect to the relevant local grid and excludes transmission and distribution costs. The Minister of Energy releases each year a list of local BPPs and the national BPP (which is an average of the local BPPs).  The BPPs for a particular year are based on PLN's previous year audited generation costs. For 2017, the national BPP was set at Rp 983 (equivalent to US$ cent 7.39/kWh at Rp 13,307/US$) based on PLN's 2016 audited generation costs. For geothermal, the tariff is measured as follows: (i) if the local BPP is higher than the national BPP, the maximum tariff is the local BPP, (ii) if the local BPP is lower than or the same as the national BPP, the tariff is based on mutual agreement between PLN and the IPP.

 

 

Guadeloupe. EDF is the transmission and distribution utility in Guadeloupe and also operates a significant portion of Guadeloupe’s fossil energy generation. There are also a number of IPPs in Guadeloupe, primarily producing renewable electricity. The electricity sector in Guadeloupe is regulated by the Commission Regulation of Energy (CRE), which also regulates EDF’s operations in mainland France and its other overseas territories. The electricity sector in Guadeloupe is characterized by both enabling features and obstacles with respect to renewable energy. One of the most influential enabling features is a French law requiring the utility to purchase power from any interconnected renewable generator. The major obstacle preventing further uptake of renewable electricity generation is the cap on variable generation at 30% of instantaneous system load.

 

Honduras.  In 2014, Honduras approved its new Law of Electrical Industry (Decree 404-2013), which provides the legal framework for the electricity sector and replaces the previous Electricity Subsector Framework Law (Decree 158 of 1994, regulated by Accord 934 of 1997).   The Law establishes technology-specific auctions for renewable energy. It creates the Regulatory Commission of Electric Power (CREE) as the entity in charge of supervising the bidding processes and the awarding of PPAs. The CREE is also responsible for granting study permits for the construction of generation projects that use renewable natural resources. Permits will have a maximum duration of two years, and will be revoked if no studies have been initiated within a period of six months and the reports required by the CREE have not been submitted. The new Law also establishes that all new capacity must be contracted through auctions and that the government can set a minimum quota for renewables in each auction. With respect to metering, after previous regulation applied legal incentives to renewable energy metering, the new law mandates utilities to buy excess power and credit it towards monthly bills and to install bi-directional meters. 

 

Among others, the objectives of the law are to adapt the electricity sector’s legislation to the Framework Treaty for the Central American Electricity Market, which Honduras is a party to, and update the operating rules in the country’s electricity industry by incorporating structures and modern practices to increase the sector’s efficiency and competency in the production and marketing of electricity services.

 

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With the passage of this new law, Honduras is moving into a new and open market.  Under this legislation, all aspects of the market have been opened to private parties. This legislation is still being implemented within the market.

 

Honduras has also approved a Law of Incentives for Renewable Energy Projects, Decree 70-2007, further amended by Decree 138-2013, with additional incentives to solar PV projects, etc.  The purpose, as in other countries of the region, is to promote the development of renewable energy power plants.  Laws provide certain benefits to companies that generate power through renewable sources, including a 10-year exemption from corporate income tax and VAT on imports and customs duties, a fast track process for certain permits and a Sovereign Guaranty by the Central Government for the payments of the off-taker, the Public Utility Company, ENEE.  At present, the Law of the Electrical Industry and the Laws of Incentives for Renewable Energy Projects are still in force.

 

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ITEM 1A. RISK FACTORS

 

Because of the following factors, as well as other variables affecting our business, operating results or financial condition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

 

 

Concentration of customers may expose us to heightened financial exposure.

 

We often rely on single customers at our facilities, exposing such facilities to financial risks if any customer should fail to perform its obligations.

 

Our businesses often rely on a single customer to purchase all or a significant portion of a facility’s output. The financial performance of these facilities depends on such customer continuing to perform its obligations under the long-term agreement. A facility’s financial results could be materially and adversely affected if any of our customer fails to fulfill its contractual obligations and we are unable to find other customers to produce the same level of profitability. We cannot assure that such performance failures by third parties will not occur, or that if they do occur, such failures will not adversely affect the cash flows or profitability of our businesses.

 

For example, we are exposed to the credit and financial condition of SCPPA and its municipal utility members, as customers that buy the output from six of our geothermal power plant. Because our contracts with SCPPA are long-term, we may be adversely affected if the credit quality of any of these customers were to decline or if their respective financial conditions were to deteriorate or if they are otherwise unable to perform their obligations under our long-term contracts.

 

A significant portion of our Product segment revenues are concentrated in one region and expose us to regional economic or market declines.

 

A significant portion of our Product segment revenues are concentrated in Turkey and rely on the continued geothermal development growth and government support for geothermal development in the country. Adverse political developments in the relationship between Turkey and the U.S., adverse economic developments in this region or a decline in government support for the development of geothermal power in the country could materially and adversely affect regional demand for the geothermal equipment and services we provide in the Turkish market or the prices we may charge for such equipment and services, which in turn could materially and adversely affect our Product segment profit margins and, consequently, our business, financial condition, future results and cash flows.

 

 

Our financial performance depends on the successful operation of our geothermal power and REG plants, which is subject to various operational risks.

 

Our financial performance depends on the successful operation of our subsidiaries’ geothermal and REG power plants. In connection with such operations, we derived approximately 67.6% of our total revenues for the year ended December 31, 2017 from the sale of electricity. The cost of operation and maintenance and the operating performance of our subsidiaries’ geothermal power and REG plants may be adversely affected by a variety of factors, including some that are discussed elsewhere in these risk factors and the following:

 

 

regular and unexpected maintenance and replacement expenditures;

 

 

shutdowns due to the breakdown or failure of our equipment or the equipment of the transmission serving utility;

 

 

labor disputes;

 

 

the presence of hazardous materials on our power plant sites;

 

 

continued availability of cooling water supply;

 

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catastrophic events such as fires, explosions, earthquakes, volcanic activity, landslides, floods, releases of hazardous materials, severe weather storms, or similar occurrences affecting our power plants or any of the power purchasers or other third parties providing services to our power plants; and

 

 

the aging of power plants (which may reduce their availability and increase the cost of their maintenance).

 

Any of these events could significantly increase the expenses incurred by our power plants or reduce the overall generating capacity of our power plants and could significantly reduce or entirely eliminate the revenues generated by one or more of our power plants, which in turn would reduce our net income and could materially and adversely affect our business, financial condition, future results and cash flow.

 

As mentioned above, the aging of our power plants may reduce their availability and increase maintenance costs due to the need to repair or replace our equipment.

 

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.

 

Our primary business involves the exploration, development, and operation of geothermal energy resources. These activities are subject to uncertainties that, in certain respects, are similar to those typically associated with oil and gas exploration, development, and exploitation, such as dry holes, uncontrolled releases, and pressure and temperature decline. Any of these uncertainties may increase our capital expenditures and our operating costs, or reduce the efficiency of our power plants. We may not find geothermal resources capable of supporting a commercially viable power plant at exploration sites where we have conducted tests, acquired land rights, and drilled test wells, which would adversely affect our development of geothermal power plants. Further, since the commencement of their operations, several of our power plants have experienced geothermal resource cooling, uncontrolled flow and/or reservoir pressure decline in the normal course of operations. Because geothermal reservoirs are complex geological structures, we can only estimate their geographic area and sustainable output. The viability of geothermal power plants depends on different factors directly related to the geothermal resource (such as the temperature, pressure, storage capacity, transmissivity, and recharge) as well as operational factors relating to the extraction or reinjection of geothermal fluids. For example, at our North Brawley power plant, instability of the sands and clay in the geothermal resource and variability in the chemical composition of the geothermal fluid have all combined to increase our capital expenditures for the plant, as well as our ongoing operating expenses, and have so far prevented the plant from operation at its intended design capacity. Another example is the Sarulla project, where we are both an equity investor and equipment supplier, which has experienced delays and budget cost overruns in the drilling program. Our geothermal energy power plants may also suffer an unexpected decline in the capacity of their respective geothermal wells and are exposed to a risk of geothermal reservoirs not being sufficient for sustained generation of the electrical power capacity desired over time.

 

Another aspect of geothermal operations is the management and stabilization of subsurface impacts caused by fluid injection pressures of production and injection fluids to mitigate subsidence. In the case of the geothermal resource supplying the Heber complex, pressure drawdown in the center of the well field has caused some localized ground subsidence, while pressure in the peripheral areas has caused localized ground inflation. Inflation and subsidence, if not controlled, can adversely affect farming operations and other infrastructure at or near the land surface. Potential costs, which cannot be estimated and may be significant, of failing to stabilize site pressures in the Heber complex area include repair and modification of gravity-based farm irrigation systems and municipal sewer piping and possible repair or replacement of a local road bridge spanning an irrigation canal.

 

Additionally, active geothermal areas, such as the areas in which our power plants are located, are subject to frequent low-level seismic disturbances, volcanic eruptions and lava flows. Serious seismic disturbances, volcanic eruptions and lava flows are possible and could result in damage to our power plants (or transmission lines used by customers who buy electricity from us) or equipment or degrade the quality of our geothermal resources to such an extent that we could not perform under the PPA for the affected power plant, which in turn could reduce our net income and materially and adversely affect our business, financial condition, future results and cash flow. If we suffer a serious seismic disturbance, volcanic eruptions and lava flows, our business interruption and property damage insurance may not be adequate to cover all losses sustained as a result thereof. In addition, insurance coverage may not continue to be available in the future in amounts adequate to insure against such seismic disturbances, volcanic eruptions and lava flows.

 

Furthermore, absent additional geologic/hydrologic studies, any increase in power generation from our geothermal power plants, failure to reinject the geothermal fluid or improper maintenance of the hydrological balance may affect the operational duration of the geothermal resource and cause it to decline in value over time, and may adversely affect our ability to generate power from the relevant geothermal power plant.

 

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Reduced levels of recovered energy required for the operation of our REG power plants may result in decreased performance of such power plants.

 

Our REG power plants generate electricity from recovered energy or so-called “waste heat” that is generated as a residual by-product of gas turbine-driven compressor stations and a variety of industrial processes. Any interruption in the supply of the recovered energy source, such as a result of reduced gas flows in the pipelines or reduced level of operation at the compressor stations, or in the output levels of the various industrial processes, may cause an unexpected decline in the capacity and performance of our recovered energy power plants.

 

Our business development activities may not be successful and our projects under construction may not commence operation as scheduled.

 

We are in the process of developing and constructing a number of new power plants. Our success in developing a particular project is contingent upon, among other things, negotiation of satisfactory engineering and construction agreements and obtaining PPAs and transmission services agreements, receipt of required governmental permits, obtaining adequate financing, and the timely implementation and satisfactory completion of field development, testing and power plant construction and commissioning. We may be unsuccessful in accomplishing any of these matters or doing so on a timely basis. Although we may attempt to minimize the financial risks attributable to the development of a project by securing a favorable PPA and applicable transmission services agreements, obtaining all required governmental permits and approvals and arranging, in certain cases, adequate financing prior to the commencement of construction, the development of a power project may require us to incur significant expenses for preliminary engineering, permitting and legal and other expenses before we can determine whether a project is feasible, economically attractive or capable of being financed.

 

Currently, we have geothermal projects and prospects under exploration, development or construction in the U.S., Kenya, Guatemala, Guadeloupe, New Zealand, Honduras, Indonesia and Ethiopia, and we intend to pursue the expansion of some of our existing plants and the development of other new plants. Our completion of these facilities is subject to substantial risks, including:

 

 

inability to secure a PPA;

 

 

inability to secure transmission services agreements;

 

 

inability to secure the required financing;

 

 

cost increases and delays due to unanticipated shortages of adequate resources to execute the project such as equipment, material and labor;

 

 

work stoppages resulting from force majeure event including riots, strikes and whether conditions;

 

 

inability to obtain permits, licenses and other regulatory approvals;

 

 

failure to secure sufficient land positions for the wellfield, power plant and rights of way;

 

 

failure by key contractors and vendors to timely and properly perform, including where we use equipment manufactured by others;

 

 

failure by key suppliers to provide steam for electricity generation, including at the Menengai project in Kenya.

 

 

inability to secure or delays in securing the required transmission line and/or capacity;

 

 

adverse environmental and geological conditions (including inclement weather conditions);

 

 

adverse local business law; and

 

 

our attention to other projects and activities, including those in the solar energy and energy storage sectors.

 

 

Any one of these could give rise to delays, cost overruns, the termination of the plant expansion, construction or development or the loss (total or partial) of our interest in the project under development, construction, or expansion.

 

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We rely on power transmission facilities that we do not own or control.

 

We depend on transmission facilities owned and operated by others to deliver the power we sell from our power plants to our customers. If transmission is disrupted, or if the transmission capacity infrastructure is inadequate, our ability to sell and deliver power to our customers may be adversely impacted and we may either incur additional costs or forego revenues. In addition, lack of access to new transmission capacity may affect our ability to develop new projects. Existing congestion of transmission capacity, as well as expansion of transmission systems and competition from other developers seeking access to expanded systems, could also affect our performance.

 

We may be unable to obtain the financing we need to pursue our growth strategy and any future financing we receive may be less favorable to us than our current financing arrangements, either of which may adversely affect our ability to expand our operations.

 

Most of our geothermal power plants generally have been financed using leveraged financing structures, consisting of non-recourse or limited recourse debt obligations. Each of our projects under development or construction and those projects and businesses we may seek to acquire or construct will require substantial capital investment. Our continued access to capital on acceptable terms is necessary for the success of our growth strategy. Our attempts to obtain future financings may not be successful or on favorable terms.

 

Market conditions and other factors may not permit future project and acquisition financings on terms similar to those our subsidiaries have previously received. Our ability to arrange for financing on a substantially non-recourse or limited recourse basis, and the costs of such financing, are dependent on numerous factors, including general economic conditions, conditions in the global capital and credit markets, investor confidence, the continued success of current power plants, the credit quality of the power plants being financed, the political situation in the country where the power plant is located, and the continued existence of tax and securities laws which are conducive to raising capital. If we are not able to obtain financing for our power plants on a substantially non-recourse or limited recourse basis, we may have to finance them using recourse capital such as direct equity investments or the incurrence of additional debt by us.

 

Also, in the absence of favorable financing options, we may decide not to build new plants or acquire facilities from third parties. Any of these alternatives could have a material adverse effect on our growth prospects.

 

We may also need additional financing to implement our strategic plan. For example, our cash flow from operations and existing liquidity facilities may not be adequate to finance any acquisitions we may want to pursue or new technologies we may want to develop or acquire. Financing for acquisitions or technology development activities may not be available on the non-recourse or limited recourse basis we have historically used for our business, or on other terms we find acceptable.

 

Our use of joint ventures may limit our flexibility with jointly owned investments.

 

We have sold minority equity interests in four of our consolidated subsidiaries, through which we hold a large number of our domestic geothermal power plants and recovered energy generation plants, to different third parties and we have partners that hold a minority equity interest in our geothermal power plant in Guadeloupe. We may continue in the future to develop and/or acquire and/or hold properties in joint ventures with other entities when circumstances warrant the use of these structures. Ownership of assets in joint ventures is subject to risks that may not be present with other methods of ownership, including:

 

 

we could experience an impasse on certain decisions because we do not have sole decision-making authority, which could require us to expend additional resources on resolving such impasses or potential disputes, including litigation or arbitration;

 

 

our joint venture partners could have investment goals that are not consistent with our investment objectives, including the timing, terms and strategies for any investments in the projects that are owned by the joint ventures, which could affect decisions about future capital expenditures, major operational expenditures and retirement of assets, among other things;

 

 

our ability to transfer our interest in a joint venture to a third party may be restricted and the market for our interest may be limited;

 

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our joint venture partners may be structured differently than us for tax purposes, and this could impact our ability to fully take advantage of federal tax incentives available for renewable energy projects;

 

 

our joint venture partners might become bankrupt, fail to fund their share of required capital contributions or fail to fulfill their obligations as a joint venture partner, which may require us to infuse our own capital into the venture on behalf of the partner despite other competing uses for such capital; and

 

 

our joint venture partners may have competing interests in our markets and investments in companies that compete directly or indirectly with us that could create conflict of interest issues.

 

 

Our international operations expose us to risks related to the application of foreign laws, taxes, economic conditions, labor supply and relations, political conditions, and policies of foreign governments, any of which may adversely affect our business, financial condition, future results and cash flow.

 

We have substantial operations outside of the U.S., both in our Electricity segment and our Product segment. Our foreign operations are subject to regulation by various foreign governments and regulatory authorities and are subject to the application of foreign laws. Such foreign laws or regulations may not provide the same type of legal certainty and rights, in connection with our contractual relationships in such countries, as are afforded to our operations in the U.S., which may adversely affect our ability to receive revenues or enforce our rights in connection with our foreign operations. Furthermore, existing laws or regulations may be amended or repealed, and new laws or regulations may be enacted or issued. In addition, the laws and regulations of some countries may limit our ability to hold a majority interest in some of the power plants that we may develop or acquire, thus limiting our ability to control the development, construction and operation of such power plants, or our ability to import our products into such countries. Our foreign operations are also subject to significant political, economic and financial risks, which vary by country, and include:

 

 

changes in government policies or personnel;

 

 

changes in general economic conditions;

 

 

restrictions on currency transfer or convertibility;

 

 

changes in labor relations;

 

 

political instability and civil unrest;

 

 

changes in the local electricity and/or geothermal markets;

 

 

breach or repudiation of important contractual undertakings by governmental entities; and

 

 

expropriation and confiscation of assets and facilities.

 

 

In particular, with respect to our Electricity segment, in Guatemala the electricity sector was partially privatized, and it is currently unclear whether further privatization will occur in the future. Such developments may affect our Amatitlan and Zunil power plants if, for example, they result in changes to the prevailing tariff regime or in the identity and creditworthiness of our power purchasers. In Kenya, any break-up or potential privatization of KPLC, the power purchase for our power plants located in Kenya, may adversely affect our Olkaria III complex. Although we generally obtain political risk insurance in connection with our foreign power plants, such political risk insurance does not mitigate all of the above-mentioned risks. In addition, insurance proceeds received pursuant to our political risk insurance policies, where applicable, may not be adequate to cover all losses sustained as a result of any covered risks and may at times be pledged in favor of the power plant lenders as collateral. Also, insurance may not be available in the future with the scope of coverage and in amounts of coverage adequate to insure against such risks and disturbances.

 

With respect to our Product segment, since we primarily engage in sales in those markets where there is a geothermal reservoir, any such change might adversely affect geothermal developers in those markets and, subsequently, the ability of such developers to purchase our products. In Turkey, we are involved as a major equipment supplier in a significant number of projects that are currently under construction. We have faced, and anticipate that we will continue to face, obstacles in the Turkish market that may materially and adversely affect our future business and operations in Turkey, including the recent failed coup, devaluation of the Turkish Lira, a general slowdown in the Turkish economy and an inability to obtain project and bank financing on terms acceptable to us, together with political uncertainties, all of which are causing our cost of revenues in Turkey to increase.

 

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 Any or all of the changes discussed above could materially and adversely affect our business, financial condition, future results and cash flow.

 

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.

 

Risks attributable to fluctuations in currency exchange rates can arise when 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 addition, the imposition by foreign governments of restrictions on the transfer of foreign currency abroad, or restrictions on the conversion of local currency into foreign currency, would have an adverse effect on the operations of our foreign power plants and foreign manufacturing operations, and may limit or diminish the amount of cash and income that we receive from such foreign power plants and operations.

 

A significant portion of our electricity revenues is attributed to payments made by power purchasers under PPAs. The failure of any such power purchaser to perform its obligations under the relevant PPA or the loss of a PPA due to a default would reduce our net income and could materially and adversely affect our business, financial condition, future results and cash flow. 

 

A significant portion of our revenues is attributable to electricity our power plants sell to power purchasers under the relevant PPAs. There is a risk that any one or more of the power purchasers may not fulfill their respective payment obligations under their PPAs. If any of the power purchasers fails to meet its payment obligations under its PPA(s), such failure could materially and adversely affect our business, financial condition, future results and cash flow.

 

Storage projects that we are currently developing or plan to develop in the future may operate as "merchant" facilities without long-term power sales agreements for some or all of their generating capacity and output and therefore such projects will be exposed to market fluctuations.

 

Storage projects that we are currently developing or plan to develop in the future may operate as "merchant" facilities without long-term sales agreements for some or all of their generating capacity and output and therefore such projects will be exposed to market fluctuations.  Without the benefit of long-term sales agreements for these assets, we cannot be sure that we will be able to sell any or all of the power and ancillary services generated by these facilities at commercially attractive rates or that these facilities will be able to operate profitably. This could lead to future impairments of our property, plant and equipment or to the closing of certain of our storage facilities, resulting in economic losses and liabilities, which could have a material adverse effect on our results of operations, financial condition or cash flows.

 

Seasonal variations may cause fluctuations in our cash flows, which may cause the market price of our common stock to fall in certain periods.

 

Our results of operations are subject to seasonal variations. This is primarily because some of our power plants may experience reduced generation during warm periods due to the lower heat differential between the geothermal fluid and the ambient surroundings. Some of our domestic power plants receive higher capacity payments under the relevant PPAs during the summer months, and due to the generally higher time-of-use energy factor during the summer months. Such seasonal variations could materially and adversely affect our business, financial condition, future results and cash flow. If our operating results fall below the public’s or analysts’ expectations in some future period or periods, the market price of our common stock will likely fall in such period or periods.

 

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.

 

Pursuant to the terms of certain of our PPAs, we may be required to make payments to the relevant power purchaser under certain conditions, such as shortfall in delivery of renewable energy and energy credits, and not meeting certain performance threshold requirements, as defined in the relevant PPA. The amount of payment required is dependent upon the level of shortfall in delivery or performance requirements and is recorded in the period the shortfall occurs. In addition, if we do not meet certain minimum performance requirements, the capacity of the relevant power plant may be permanently reduced. Any or all of these considerations could materially and adversely affect our business, financial condition, future results and cash flow.

 

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The Energy Choice Initiative (ECI), a pending amendment to the Constitution of the State of Nevada, may permit our customer to terminate its PPAs with us.

 

The ECI is a proposed amendment to the Constitution of the State of Nevada that would require the Nevada Legislature to adopt new statutes or amend existing statutes in order to establish an open and competitive retail electricity market and prevent the concentration of the electricity generation market among only a few generators of electricity. This ballot question passed with over 72% of Nevada voters in favor in November 2016, and if it passes again in November 2018, the Nevada Legislature will be required to amend state law in the manner described above by no later than 2023.

 

It is unclear what impact the ECI would have on our existing PPAs and the Nevada RPS. NV Energy, the offtaker of our Brady, SB Complex, Tuscarora, Jersey Valley and McGinness Hills power plants, is taking the position that the ECI would require the termination of our existing PPAs and potentially the termination of the RPS. Whether existing PPAs could be terminated will remain unclear until the scope of the Nevada Legislature’s implementation of the ECI becomes known. If the Nevada Legislature adopts any new laws pursuant to the ECI that terminate or require the termination of, our existing PPAs with NV Energy, we could lose significant amounts of revenue derived from the sale of electricity to NV Energy under such PPAs which could materially and adversely affect our business, financial condition, future results and cash flow.

 

The SRAC for our power purchasers may decline, which would reduce our power plant revenues and could materially and adversely affect our business, financial condition, future results and cash flow.

 

Under two of the PPAs for our power plants in California, the price that Southern California Edison pays is based upon its SRAC, which are the incremental costs that it would have incurred had it generated the relevant electricity itself or purchased such electricity from others. Under settlement agreements between Southern California Edison and a number of power generators in California that are Qualifying Facilities, including our subsidiaries, the energy price component payable by Southern California Edison was fixed through April 2012, but since then is based on Southern California Edison’s SRAC, as determined by the CPUC. The SRAC may vary substantially on a monthly basis, and are expected to be based primarily on natural gas prices for gas delivered to California as well as other factors. The levels of SRAC prices paid by Southern California Edison may decline following the expiration date of the settlement agreements, which in turn would reduce our power plant revenues derived from Southern California Edison under our PPAs and could materially and adversely affect our business, financial condition, future results and cash flow.

 

Under the terms of a global settlement approved by CPUC (Global Settlement) SRAC for our Heber 2 and Mammoth G2 PPAs are tied to a formula with energy market heat rates. The Global Settlement further provides that after July 1, 2015 if the term of any of the PPAs we have for these power plants expires, Southern California Edison would have no obligation to purchase power from any of these plants that has a generating capacity in excess of 20 MW, which would apply to the PPAs for our Heber 2 power plant (37 MW contract capacity) with Southern California Edison. Our Mammoth G2 plant (10.5 MW contract capacity) will be entitled to a new standard offer PPA, with SRAC pricing and capacity payments as determined from time to time by the CPUC. The joint parties to the Global Settlement agreed that the utilities can request from FERC a waiver of the mandatory purchase obligation under PURPA for Qualifying Facilities above 20 MW and FERC has granted such waiver for these California utilities.

 

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.

 

Most of our domestic power plants are Qualifying Facilities pursuant to PURPA, which largely exempts the power plants from the FPA, and certain state and local laws and regulations regarding rates and financial and organizational requirements for electric utilities.

 

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If any of our domestic power plants were to lose its Qualifying Facility status, such power plant could become subject to the full scope of the FPA and applicable state regulation. The application of the FPA and other applicable state regulation to our domestic power plants could require our operations to comply with an increasingly complex regulatory regime that may be costly and greatly reduce our operational flexibility.

 

If a domestic power plant were to lose its Qualifying Facility status, it would become subject to full regulation as a public utility under the FPA, and the rates charged by such power plant pursuant to its PPAs would be subject to the review and approval of FERC. FERC, upon such review, may determine that the rates currently set forth in such PPAs are not appropriate and may set rates that are lower than the rates currently charged. In addition, FERC may require that the affected domestic power plant refund amounts previously paid by the relevant power purchaser to such power plant. Even if a power plant does not lose its Qualifying Facility status, pursuant to regulations issued by FERC for Qualifying Facility power plants above 20 MW, if a power plant’s PPA is terminated or otherwise expires, and the subsequent sales are not made pursuant to a state’s implementation of PURPA, that power plant will become subject to FERC’s ratemaking jurisdiction under the FPA. Moreover, a loss of Qualifying Facility status also could permit the power purchaser, pursuant to the terms of the particular PPA, to cease taking and paying for electricity from the relevant power plant or, consistent with FERC precedent, to seek refunds of past amounts paid. This could cause the loss of some or all of our revenues payable pursuant to the related PPAs, result in significant liability for refunds of past amounts paid, or otherwise impair the value of our power plants. If a power purchaser were to cease taking and paying for electricity or seek to obtain refunds of past amounts paid, there can be no assurance that the costs incurred in connection with the power plant could be recovered through sales to other purchasers or that we would have sufficient funds to make such payments. In addition, the loss of Qualifying Facility status would be an event of default under the financing arrangements currently in place for some of our power plants, which would enable the lenders to exercise their remedies and enforce the liens on the relevant power plant.

 

Pursuant to the Energy Policy Act of 2005, FERC also has the authority to prospectively lift the mandatory obligation of a utility under PURPA to offer to purchase the electricity from a Qualifying Facility if the utility operates in a workably competitive market. Our existing PPAs between a Qualifying Facility and a utility are not affected. If, in addition to the California utilities’ waiver of the mandatory purchase obligation for QF projects that exceed 20 MW described in the risk factor above, the utilities in the other regions in which our domestic power plants operate were to be relieved of the mandatory purchase obligation, they would not be required to purchase energy from the power plant in the region under Federal law upon termination of the existing PPA or with respect to new power plants, which could materially and adversely affect our business, financial condition, future results and cash flow. Moreover, FERC has the authority to modify its regulations relating to the utility’s mandatory purchase obligation under PURPA, which could result in the reduction in the purchase obligation of California and other utilities to a level below 20 MW, or the elimination of the purchase obligation. If that were to occur it could materially and adversely affect our business, financial condition, future results and cash flow.

 

The reduction or elimination of government incentives could adversely affect our business, financial condition, future results and cash flows.

 

Construction and operation of our geothermal power plants and recovered energy-based power plants has benefited, and may benefit in the future, from public policies and government incentives that support renewable energy and enhance the economic feasibility of these projects in regions and countries where we operate. Such policies and incentives include PTCs and ITCs, accelerated depreciation tax benefits, renewable portfolio standards, carbon trading mechanisms, rebates, and mandated feed-in-tariffs, and may include similar or other incentives to end users, distributors, system integrators and manufacturers of geothermal, solar and other power products. Some of these measures have been implemented at the federal level, while others have been implemented by different states within the U.S. or countries outside the U.S. where we operate.

 

The availability and continuation of these public policies and government incentives have a significant effect on the economics and viability of our development program and continued construction of new geothermal, recovered energy-based, Solar PV power plants and, recently, energy storage projects. Any changes to such public policies, or any reduction in or elimination or expiration of such government incentives could affect us in different ways. For example, any reduction in, termination or expiration of renewable portfolio standards may result in less demand for generation from our geothermal and recovered energy-based, power plants. Any reductions in, termination or expiration of other government incentives could reduce the economic viability of, and cause us to reduce, the construction of new geothermal, recovered energy-based, Solar PV or any other power plants. Similarly, any such changes that affect the geothermal energy industry in a manner that is different from other sources of renewable energy, such as wind or solar, may put us at a competitive disadvantage compared to businesses engaged in the development, construction and operation of renewable power projects using such other resources. Any of the foregoing outcomes could have a material adverse effect on our business, financial condition, future results, and cash flows.

 

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Our financial performance could be adversely affected by changes in the legal and regulatory environment affecting our power plants.

 

All of our power plants are subject to extensive regulation, and therefore changes in applicable laws or regulations, or interpretations of those laws and regulations, could result in increased compliance costs, the need for additional capital expenditures or the reduction of certain benefits currently available to our power plants. The structure of domestic and foreign federal, state and local energy regulation currently is, and may continue to be, subject to challenges, modifications, the imposition of additional regulatory requirements, and restructuring proposals. We or our power purchasers may not be able to obtain all regulatory approvals that may be required in the future, or any necessary modifications to existing regulatory approvals, or maintain all required regulatory approvals. In addition, the cost of operation and maintenance and the operating performance of geothermal power plants may be adversely affected by changes in certain laws and regulations, including tax laws.

 

Any changes to applicable laws and regulations could significantly increase the regulatory-related compliance and other expenses incurred by the power plants and could significantly reduce or entirely eliminate the revenues generated by one or more of the power plants, which in turn would reduce our net income and could materially and adversely affect our business, financial condition, future results and cash flow.

 

The costs of compliance with environmental laws and of obtaining and maintaining environmental permits and governmental approvals required for construction and/or operation may increase in the future and these costs (as well as any fines or penalties that may be imposed upon us in the event of any non-compliance with such laws or regulations) could materially and adversely affect our business, financial condition, future results and cash flow.

 

Environmental laws, ordinances and regulations affecting us can be subject to change and such change could result in increased compliance costs, the need for additional capital expenditures, or otherwise adversely affect us. In addition, our power plants are required to comply with numerous domestic and foreign, federal, regional, state and local statutory and regulatory environmental standards and to maintain numerous environmental permits and governmental approvals required for construction and/or operation. We may not be able to renew, maintain or obtain all environmental permits and governmental approvals required for the continued operation or further development of the power plants. We have not yet obtained certain permits and government approvals required for the completion and successful operation of power plants under construction or enhancement. Our failure to renew, maintain or obtain required permits or governmental approvals, including the permits and approvals necessary for operating power plants under construction or enhancement, could cause our operations to be limited or suspended. Finally, some of the environmental permits and governmental approvals that have been issued to the power plants contain conditions and restrictions, including restrictions or limits on emissions and discharges of pollutants and contaminants, or may have limited terms. If we fail to satisfy these conditions or comply with these restrictions, or with any statutory or regulatory environmental standards, we may become subject to regulatory enforcement action and the operation of the power plants could be adversely affected or be subject to fines, penalties or additional costs.

 

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.

 

Our power plants are subject to numerous domestic and foreign federal, regional, state and local statutory and regulatory standards relating to the use, storage and disposal of hazardous substances. We use butane, pentane, industrial lubricants, and other substances at our power plants which are or could become classified as hazardous substances. If any hazardous substances are found to have been released into the environment at or by the power plants in concentrations that exceed regulatory limits, we could become liable for the investigation and removal of those substances, regardless of their source and time of release. If we fail to comply with these laws, ordinances or regulations (or any change thereto), we could be subject to civil or criminal liability, the imposition of liens or fines, and large expenditures to bring the power plants into compliance. Furthermore, in the U.S., we can be held liable for the cleanup of releases of hazardous substances at other locations where we arranged for disposal of those substances, even if we did not cause the release at that location. The cost of any remediation activities in connection with a spill or other release of such substances could be significant.

 

We believe that at one time there may have been a gas station located on the Mammoth complex site, but because of significant surface disturbance and construction since that time, further physical evaluation of the environmental condition of the former gas station site has been impractical. There may be soil or groundwater contamination and related potential liabilities of which we are unaware related to this site, which may be significant and could materially and adversely affect our business, financial condition, future results and cash flow.

 

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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 as implemented may not achieve its goal to enhance shareholder value through long-term growth of the Company

 

We adopted a multi-year strategic plan to:

 

 

expand our geographical base;

 

 

expand into new technologies, such as energy storage and solar PV electric power generation both in large “utility scale” projects and smaller C&I projects for commercial, industrial, governmental, educational and other institutional customers; and

 

 

expand our customer base.

 

 

There are uncertainties and risks associated with the plan, both as to implementation and outcome. Implementation of the plan may be affected by a number of factors, including that:

 

 

we are still developing some elements of the plan and evaluating how and when some elements of the plan will be implemented;

 

 

we may decide to change, or not implement, one or more elements of the plan over time; and

 

 

we may not be successful in implementing one or more elements of the plan, in each case for a number of reasons.

 

For example, we may face significant challenges and risks expanding into new technologies (or expanding our geographical or customer base for those new technologies), including:

 

 

our ability to compete with the large number of other companies pursuing similar business opportunities in energy storage and solar PV power generation, many of which already have established businesses in these areas and/or have greater financial, strategic, technological or other resources than we have;

 

 

our ability to obtain financing on terms we consider acceptable, or at all, which we may need, for example, to obtain any technology, personnel, intellectual property, or to acquire one or more existing businesses as a platform for our expansion, or to fund internal research and development, for energy storage and solar PV electric power generation products and services;

 

 

our ability to provide energy storage or solar electric power generation products or services that keep pace with rapidly changing technology, customer preferences, equipment costs, market conditions and other factors that will impact these markets;

 

 

our ability to devote the amount of management time and other resources required to implement this plan, consistent with continuing to grow our core geothermal and recovered energy businesses; and

 

 

our ability to recruit appropriate employees.

 

Expanding our geothermal and recovered energy businesses to new customers and geographical areas will have many of the same risks and uncertainties as those outlined above. These or other factors could mean that we decide to change or even abandon, or are otherwise unable to implement, one or more elements of the plan.

 

Implementing the plan may involve various costs, including, among other things:

 

 

opportunity costs associated with foregone alternative uses of our resources;

 

 

various expense items that will impact our current financial results; and

 

 

asset revaluations (for example, businesses or other assets acquired for new energy storage or solar PV power generation products or services may suffer impairment charges, as a result of rapidly changing technology, market conditions or otherwise).

 

These costs may not be recovered, in whole or in part, if one or more elements of the plan are not successfully implemented. These costs, or the failure to implement successfully one or more elements of the plan, could adversely affect our reputation and the reputation of our subsidiaries and could materially and adversely affect our business, financial condition, future results and cash flow and the price at which our common stock is traded.

 

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Apart from the risks associated with implementing the plan, the plan itself will expose us to other risks and uncertainties once implemented. For example, expanding our customer base may expose us to different credit profile customers than our current customers. As another example, expanding our geographic base will subject us to risks associated with doing business in new foreign countries in which we will have to learn the business and political environment, and expanding into new technologies will expose us to risks associated with those products and services. Some of these risks may be similar to those we now face, as described in other risks factors; others may differ or be unknown to us now. The success of the plan, once implemented, will depend, among other things, on our ability to manage these risks effectively.

 

The trading price of our common stock could decline if securities, industry analysts or our investors disagree with our strategic plan or the way we implement it, either as a result of the factors outlined above or for other reasons.

 

Accordingly, there is no assurance that the plan will enhance shareholder value through long-term growth of the Company to the extent currently anticipated by our management or at all.

 

We may not be able to successfully integrate companies, which we acquired and may acquire in the future, which could materially and adversely affect our business, financial condition, future results and cash flow.

 

Our strategy is to continue to expand in the future, including through acquisitions. Integrating acquisitions is often costly, and we may not be able to successfully integrate our acquired companies with our existing operations without substantial costs, delays or other adverse operational or financial consequences. Integrating our acquired companies involves a number of risks that could materially and adversely affect our business, including:

 

 

failure of the acquired companies to achieve the results we expect;

 

 

inability to retain key personnel of the acquired companies;

 

 

risks associated with unanticipated events or liabilities; and

 

 

the difficulty of establishing and maintaining uniform standards, controls, procedures and policies, including accounting controls and procedures.

 

If any of our acquired companies suffers customer dissatisfaction or performance problems, this could adversely affect the reputation of our group of companies and could materially and adversely affect our business, financial condition, future results and cash flow.

 

The power generation industry is characterized by intense competition, and we encounter competition from electric utilities, other power producers, and power marketers that could materially and adversely affect our business, financial condition, future results and cash flow.

 

The power generation industry is characterized by intense competition from electric utilities, other power producers and power marketers. In recent years, there has been increasing competition in the sale of electricity, in part due to excess capacity in a number of U.S. markets and an emphasis on short-term or “spot” markets, and competition has contributed to a reduction in electricity prices. For the most part, we expect that power purchasers interested in long-term arrangements will engage in “competitive bid” solicitations to satisfy new capacity demands. This competition could adversely affect our ability to obtain PPAs and the price paid for electricity by the relevant power purchasers. There is also increasing competition between electric utilities. This competition has put pressure on electric utilities to lower their costs, including the cost of purchased electricity, and increasing competition in the future will put further pressure on power purchasers to reduce the prices at which they purchase electricity from us.

 

We face increasing competition from other companies engaged in the solar, energy storage, demand response and energy management sectors.

 

The solar power market is intensely competitive and rapidly evolving. We compete with many companies that have longer operating histories in this sector, larger customer bases, and greater brand recognition, as well as, in some cases, significantly greater financial and marketing resources than us. In some cases, these competitors are vertically integrated in the solar energy sector, manufacturing Solar PV, silicon wafers, and other related products for the solar industry, which may give them an advantage in developing, constructing, owning and operating solar power projects. Our limited experience in the Solar PV sector may affect our ability to successfully develop, construct, finance, and operate Solar PV power projects.

 

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While our Viridity business does not currently experience intense competition in the younger, less mature energy storage, demand response and energy management markets, this is expected to change in light of recent rapid growth observed in these markets. We expect that our competitors in the energy storage, demand response and energy management markets will include utilities, independent entities, new start-ups, and third party investors, who may compete more successfully in these markets than our Viridity business. If we are unable, as a result of increased competition, to expand our customer base or increase our market share in these rapidly growing markets, our business, financial condition, future results and cash flow could be materially and adversely affected.

 

The existence of a prolonged force majeure event or a forced outage affecting a power plant or the transmission system of the IID could reduce our net income and materially and adversely affect our business, financial condition, future results and cash flow.

 

The operation of our subsidiaries’ geothermal power plants is subject to a variety of risks discussed elsewhere in these risk factors, including events such as fires, explosions, earthquakes, landslides, floods, severe storms, volcanic eruptions, lava flow or other similar events. If a power plant experiences an occurrence resulting in a force majeure event, although our subsidiary that owns that power plant would be excused from its obligations under the relevant PPA, the relevant power purchaser may not be required to make any capacity and/or energy payments with respect to the affected power plant for as long as the force majeure event continues and, pursuant to certain of our PPAs, will have the right to prematurely terminate the PPA. Additionally, to the extent that a forced outage has occurred, the relevant power purchaser may not be required to make any capacity and/or energy payments to the affected power plant, and if as a result the power plant fails to attain certain performance requirements under certain of our PPAs, the power purchaser may have the right to permanently reduce the contract capacity (and correspondingly, the amount of capacity payments due pursuant to such agreements in the future), seek refunds of certain past capacity payments, and/or prematurely terminate the PPA. As a consequence, we may not receive any net revenues from the affected power plant other than the proceeds from any business interruption insurance that applies to the force majeure event or forced outage after the relevant waiting period, and may incur significant liabilities in respect of past amounts required to be refunded.

 

In addition, if the transmission system of the IID experiences a force majeure event or a forced outage which prevents it from transmitting the electricity from the Heber complex, the Ormesa complex or the North Brawley power plant to the relevant power purchaser, the relevant power purchaser would not be required to make energy payments for such non-delivered electricity and may not be required to make any capacity payments with respect to the affected power plant for as long as such force majeure event or forced outage continues. The impact of such force majeure would depend on the duration thereof, with longer outages resulting in greater loss of revenues. In the event of any such force majeure event, our business, financial condition, future results and cash flows could be materially and adversely affected.

 

Some of our leases will terminate if we do not extract geothermal resources in “commercial quantities”, 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.

 

Most of our geothermal resource leases are for a fixed primary term, and then continue for so long as geothermal resources are extracted in “commercial quantities” or pursuant to other terms of extension. The land covered by some of our leases is undeveloped and has not yet produced geothermal resources in commercial quantities. Leases that cover land which remains undeveloped and does not produce, or does not continue to produce, geothermal resources in commercial quantities and leases that we allow to expire, will terminate. In the event that a lease is terminated and we determine that we will need that lease once the applicable power plant is operating, we would need to enter into one or more new leases with the owner(s) of the premises that are the subject of the terminated lease(s) in order to develop geothermal resources from, or inject geothermal resources into, such premises or secure rights to alternate geothermal resources or lands suitable for injection. We may not be able to do this or may not be able to do so without incurring increased costs, which could materially and adversely affect our business, financial condition, future results and cash flow.

 

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Our BLM leases may be terminated if we fail to comply with any of the provisions of the Geothermal Steam Act or if we fail to comply with the terms or stipulations of such leases, which could materially and adversely affect our business, financial condition, future results and cash flow.

 

Pursuant to the terms of our BLM leases, we are required to conduct our operations on BLM-leased land in a workmanlike manner and in accordance with all applicable laws and BLM directives and to take all mitigating actions required by the BLM to protect the surface of and the environment surrounding the relevant land. Additionally, certain BLM leases contain additional requirements, some of which relate to the mitigation or avoidance of disturbance of any antiquities, cultural values or threatened or endangered plants or animals. In the event of a default under any BLM lease, or the failure to comply with such requirements, or any non-compliance with any of the provisions of the Geothermal Steam Act or regulations issued thereunder, the BLM may, 30 days after notice of default is provided to our relevant project subsidiary, suspend our operations until the requested action is taken or terminate the lease, either of which could materially and adversely affect our business, financial condition, future results and cash flow.

 

Some of our leases (or subleases) could terminate if the lessor (or sublessor) under any such lease (or sublease) defaults on any debt secured by the relevant property, thus terminating our rights to access the underlying geothermal resources at that location.

 

The fee interest in the land which is the subject of some of our leases (or subleases) may currently be or may become subject to encumbrances securing loans from third-party lenders to the lessor (or sublessor). Our rights as lessee (or sublessee) under such leases (or subleases) are or may be subject and subordinate to the rights of any such lender. Accordingly, a default by the lessor (or sublessor) under any such loan could result in a foreclosure on the underlying fee interest in the property and thereby terminate our leasehold interest and result in the shutdown of the power plant located on the relevant property and/or terminate our right of access to the underlying geothermal resources required for our operations.

 

In addition, a default by a sublessor under its lease with the owner of the property that is the subject of our sublease could result in the termination of such lease and thereby terminate our sublease interest and our right to access the underlying geothermal resources required for our operations.

 

Current and future urbanizing activities and related residential, commercial, and industrial developments may encroach on or limit geothermal or Solar PV activities in the areas of our power plants, thereby affecting our ability to utilize access, inject and/or transport geothermal resources on or underneath the affected surface areas.

 

Current and future urbanizing activities and related residential, commercial and industrial development may encroach on or limit geothermal activities in the areas of our power plants or construction and operation of Solar PV facilities, thereby affecting our ability to utilize, access, inject, and/or transport geothermal resources on or underneath the affected surface areas or build Solar PV facilities, which require large areas of relatively flat land. In particular, the Heber power plants rely on an area, which we refer to as the Heber Known Geothermal Resource Area, or Heber KGRA, for the geothermal resource necessary to generate electricity at the Heber power plants. Imperial County has adopted a “specific plan area” that covers the Heber KGRA, which we refer to as the “Heber Specific Plan Area”. The Heber Specific Plan Area allows commercial, residential, industrial and other employment oriented development in a mixed-use orientation, which currently includes geothermal uses. Several of the landowners from whom we hold geothermal leases have expressed an interest in developing their land for residential, commercial, industrial or other surface uses in accordance with the parameters of the Heber Specific Plan Area. Currently, Imperial County’s Heber Specific Plan Area is coordinated with the cities of El Centro and Calexico. There has been ongoing underlying interest since the early 1990s to incorporate the community of Heber. While any incorporation process would likely take several years, if Heber were to be incorporated, the City of Heber could replace Imperial County as the governing land use authority, which, depending on its policies, could have a significant effect on land use and availability of geothermal resources.

 

Current and future development proposals within Imperial County and the City of Calexico, applications for annexations to the City of Calexico, and plans to expand public infrastructure may affect surface areas within the Heber KGRA, thereby limiting our ability to utilize, access, inject and/or transport the geothermal resource on or underneath the affected surface area that is necessary for the operation of our Heber power plants, which could adversely affect our operations and reduce our revenues.

 

Current construction works and urban developments in the vicinity of our Steamboat complex of power plants in Nevada may also affect future permitting for geothermal operations relating to those power plants. Such works and developments include plans for the construction of a new casino hotel and other commercial or industrial developments on land in the vicinity of our Steamboat complex.

 

We depend on key personnel for the success of our business.

 

In general, our success depends to a significant extent on the performance of our senior management, particularly the continued service of our key employees. Our success also depends on our ability to identify, hire and retain other qualified and experienced key personnel. Although to date we have been successful in identifying, hiring and retaining the services of senior management, we face risks associated with our ability to locate or employ on acceptable terms qualified replacements for our senior management or key employees if their services were no longer available, and with the inherent difficulties and uncertainties of transitioning the Company under the leadership of new management.

 

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In the demand response industry, there is a relatively small pool of experienced personnel. In the relatively new energy storage market, there is an even smaller pool of experienced personnel. Our plans to grow the Viridity business are dependent on our ability to attract and retain highly specialized demand response and energy storage personnel.

 

Our inability to successfully identify, hire and retain any key employee could materially and adversely affect our business, financial condition, future results and cash flow.

 

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.

 

Our power plants have generally been financed using a combination of our corporate funds and limited or non-recourse project finance debt or lease financing. Limited recourse project finance debt refers to our additional agreement, as part of the financing of a power plant, to provide limited financial support for the power plant subsidiary in the form of limited guarantees, indemnities, capital contributions and agreements to pay certain debt service deficiencies. Non-recourse project finance debt or lease financing refers to financing arrangements that are repaid solely from the power plant’s revenues and are secured by the power plant’s physical assets, major contracts, cash accounts and, in many cases, our ownership interest in the project subsidiary. If our project subsidiaries default on their obligations under the relevant debt documents, creditors of a limited recourse project financing will have direct recourse to us, to the extent of our limited recourse obligations, which may require us to use distributions received by us from other power plants, as well as other sources of cash available to us, in order to satisfy such obligations. In addition, if our project subsidiaries default on their obligations under the relevant debt documents (or a default under such debt documents arises as a result of a cross-default to the debt documents of some of our other power plants) and the creditors foreclose on the relevant collateral, we may lose our ownership interest in the relevant project subsidiary or our project subsidiary owning the power plant would only retain an interest in the physical assets, if any, remaining after all debts and obligations were paid in full.

 

Changes in costs and technology may significantly impact our business by making our power plants and products less competitive.

 

A basic premise of our business model is that generating baseload power at geothermal power plants produces electricity at a competitive price. However, traditional coal-fired systems and gas-fired systems may under certain economic conditions produce electricity at lower average prices than our geothermal plants. In addition, there are other technologies that can produce electricity such as hydroelectric systems, fuel cells, microturbines, wind turbines, energy storage systems and solar PV systems. Some of these alternative technologies currently produce electricity at a higher average price than our geothermal plants while others produce electricity at a lower average price, It is possible that technological advances and economies of scale will further reduce the cost of alternate methods of power generation. It is also possible that energy technologies will compete with our basic premise of a firm (non-intermittent) renewable baseload power source by combining renewable technologies with energy storage to provide an alternative to firm baseload energy. If this were to happen, the competitive advantage of our power plants may be significantly impaired.

 

Our expectations regarding the market potential for the development of recovered energy-based power generation may not materialize, and as a result we may not derive any significant revenues from this line of business.

 

Demand for our recovered energy-based power generation units may not materialize or grow at the levels that we expect. We currently face competition in this market from manufacturers of conventional steam turbines and may face competition from other related technologies in the future. If this market does not materialize at the levels that we expect, we will not generate any material revenues.

 

Our intellectual property rights may not be adequate to protect our business.

 

Our existing intellectual property rights, including those we acquired in connection with the acquisition of our Viridity business, may not be adequate to protect our business. While we occasionally file patent applications, patents may not be issued on the basis of such applications or, if patents are issued, they may not be sufficiently broad to protect our technology. In addition, any patents issued to us or for which we have use rights may be challenged, invalidated or circumvented.

 

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In order to safeguard our unpatented proprietary know-how, trade secrets and technology, we rely primarily upon trade secret protection and non-disclosure provisions in agreements with employees and others having access to confidential information. These measures may not adequately protect us from disclosure or misappropriation of our proprietary information.

 

Even if we adequately protect our intellectual property rights, litigation may be necessary to enforce these rights, which could result in substantial costs to us and a substantial diversion of management attention. Also, while we have attempted to ensure that our technology and the operation of our business do not infringe other parties’ patents and proprietary rights, our competitors or other parties may assert that certain aspects of our business or technology may be covered by patents held by them. Infringement or other intellectual property claims, regardless of merit or ultimate outcome, can be expensive and time-consuming and can divert management’s attention from our core business.

 

Threats of terrorism and catastrophic events that could result from terrorism, cyber-attacks, or individuals and/or groups attempting to disrupt our business, or the businesses of third parties, may impact our operations in unpredictable ways and could adversely affect our business, financial condition, future results and cash flow.

 

We are subject to the potentially adverse operating and financial effects of terrorist acts and threats, as well as cyber-attacks, including, among others, malware, viruses and attachments to e-mails, and other disruptive activities of individuals or groups. Our generation and transmission facilities, information technology systems and other infrastructure facilities, systems and physical assets, including our Viridity business’s VPowerTM software platform, could be directly or indirectly affected by such activities. Terrorist acts or other similar events could harm our business by limiting our ability to generate or transmit power and by delaying the development and construction of new generating facilities and capital improvements to existing facilities. These events, and governmental actions in response, could result in a material decrease in revenues and significant additional costs to repair and insure our assets, and could adversely affect operations by contributing to the disruption of supplies and markets for geothermal and recovered energy. Such events could also impair our ability to raise capital by contributing to financial instability and lower economic activity.

 

We operate in a highly regulated industry that requires the continued operation of sophisticated information technology systems and network infrastructure. Despite our implementation of security measures, all of our technology systems (and any programs or data stored thereon or therein) are vulnerable to security breaches, failures, data leakage or unauthorized access due to such activities. Those breaches and events may result from acts of our employees, contractors or third parties. If our technology systems were to fail or be breached and we were unable to recover in a timely way, we would be unable to fulfill critical business functions, and sensitive confidential and other data could be compromised, which could adversely affect our business, financial condition, future results and cash flow.

 

The implementation of security guidelines and measures and maintenance of insurance, to the extent available, addressing such activities could increase costs. These types of events could adversely affect our business, financial condition, future results and cash flow. In addition such events could require significant management attention and resources and could adversely affect our reputation among customers and the public.

 

A disruption of transmission or the transmission infrastructure facilities of third parties could negatively impact our business. Because generation and transmission systems are part of an interconnected system, we face the risk of possible loss of business due to a disruption caused by the impact of an event on the interconnected system within our systems or within a neighboring system. Any such disruption could adversely affect our business, financial condition, future results and cash flow.

 

Possible fluctuations in the cost of construction, raw materials, commodities and drilling may materially and adversely affect our business, financial condition, future results, and cash flow.

 

Our manufacturing operations are dependent on the supply of various raw materials, including primarily steel and aluminum, commodities and industrial equipment components that we use. We currently obtain all such raw materials, commodities and equipment at prevailing market prices. We are not dependent on any one supplier and do not have any long-term agreements with any of our suppliers. Future cost increases of such raw materials, commodities and equipment, to the extent not otherwise passed along to our customers, could adversely affect our profit margins.

 

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Conditions in and around Israel, where the majority of our senior management and our main production and manufacturing facilities are located, may adversely affect our operations and may limit our ability to produce and sell our products or manage our power plants.

 

The majority of our senior management and our main production and manufacturing facilities are located in Israel. As such, political, economic and security conditions in Israel directly affect our operations.

 

Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and the continued state of hostility, varying in degree and intensity, has led to security and economic problems for Israel.

 

Negotiations between Israel and representatives of the Palestinian Authority in an effort to resolve the state of conflict have been sporadic and have failed to result in peace. The establishment in 2006 of a government in the Gaza territory by representatives of the Hamas militant group has created additional unrest and uncertainty in the region. In each of December 2008, November 2012 and July 2014, Israel engaged in an armed conflict with Hamas, each of which involved additional missile strikes from the Gaza Strip into Israel and disrupted most day-to-day civilian activity in the proximity of the border with the Gaza Strip. Our production facilities in Israel are located approximately 26 miles from the border with the Gaza Strip.

 

The political instability and civil unrest in the Middle East and North Africa (including the ongoing civil war in Syria) as well as the increased tension between Iran and Israel have raised new concerns regarding security in the region and the potential for armed conflict or other hostilities involving Israel. We could be adversely affected by any such hostilities, the interruption or curtailment of trade between Israel and its trading partners, or a significant downturn in the economic or financial condition of Israel. In addition, the sale of products manufactured in Israel may be adversely affected in certain countries by restrictive laws, policies or practices directed toward Israel or companies having operations in Israel.

 

In addition, some of our employees in Israel are subject to being called upon to perform military service in Israel, and their absence may have an adverse effect upon our operations. Generally, unless exempt, male adult citizens of Israel under the age of 41 are obligated to perform up to 36 days of military reserve duty annually. Additionally, all such citizens are subject to being called to active duty at any time under emergency circumstances.

 

These events and conditions could disrupt our operations in Israel, which could materially and adversely affect our business, financial condition, future results, and cash flow.

 

We are a holding company and our revenues depend 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.

 

We are a holding company whose primary assets are our ownership of the equity interests in our subsidiaries. We conduct no other business and, as a result, we depend entirely upon our subsidiaries’ earnings and cash flow.

 

The agreements pursuant to which most of our subsidiaries have incurred debt restrict the ability of these subsidiaries to pay dividends, make distributions or otherwise transfer funds to us prior to the satisfaction of other obligations, including the payment of operating expenses, debt service and replenishment or maintenance of cash reserves. In the case of some of our power plants that are owned jointly with other partners, there may be certain additional restrictions on dividend distributions pursuant to our agreements with those partners. In all of the foreign countries where our existing power plants are located, dividend payments to us are also subject to withholding taxes. Each of the events described above may reduce or eliminate the aggregate amount of revenues we can receive from our subsidiaries.

 

We have identified a material weakness in our internal control over financial reporting which, if not timely remediated, may adversely affect the accuracy and reliability of our financial statements, and our reputation, business and the price of our common stock, as well as lead to a loss of investor confidence in us.

 

In connection with the change in our repatriation strategy and the related release of the US income tax valuation allowance in the second quarter of 2017, we did not perform an effective risk assessment related to our internal controls over the accounting for income taxes.  As a result, we identified a deficiency in the design of our internal control over financial reporting related to our accounting for income taxes, which affected the recording of income tax accounts by us in our interim and annual consolidated financial statements during 2017, including audit adjustments to the income tax accounts. As described under “Item 9A. Controls and Procedures” below, our management has concluded that this deficiency constitutes a material weakness in our internal control over financial reporting and, accordingly, internal control over financial reporting was not effective as of December 31, 2017.

 

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

  While we have developed and are in the process of implementing a remediation plan to remediate this material weakness and believe, based on our most recent assessment, that this material weakness will be remediated during 2018, there can be no assurance that this will occur within the expected timeline.  We may identify additional material weaknesses in our internal control over financial reporting in the future.  If we are unable to remediate this material weakness or we identify additional material weaknesses in our internal control over financial reporting in the future, our ability to analyze, record and report financial information accurately, to prepare our financial statements within the time periods specified by the rules and forms of the SEC and to otherwise comply with our reporting obligations under the federal securities laws, will likely be adversely affected.  The occurrence of, or failure to remediate, this material weakness and any future material weaknesses in our internal control over financial reporting may adversely affect the accuracy and reliability of our financial statements, and our reputation, business and the price of our Common Stock or any other securities we may issue, as well as lead to a loss of investor confidence in us.

 

 

U.S. federal income tax reform could adversely affect us.

 

On December 22, 2017, U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law, significantly reforming the U.S. Internal Revenue Code. The Tax Act, among other things, includes changes to U.S. federal tax rates (including reduction of the corporate tax rate from 35% to 21%), imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, puts into effect the migration from a “worldwide” system of taxation to a territorial system and modifies or repeals many business deductions and credits.

 

The Tax Act is likely to make some borrowing more expensive.  It denies interest deductions on debt starting in 2018 to the extent a company's net interest expense exceeds 30 percent of its adjusted taxable income.  Its income for this purpose means income ignoring interest expense, interest income, net operating losses and -- only through 2021 -- depreciation, amortization and depletion.  Thus, the 30-percent limit is more likely to come into play after 2021 when depreciation, amortization and depletion are no longer added back to the 30-percent base. Any interest that cannot be deducted in a year can be carried forward indefinitely. 

 

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The Tax Act subjects U.S. corporations with offshore subsidiaries to a one-time U.S. tax on untaxed earnings in offshore holding companies as if the earnings had been brought back to the U.S. thereby triggering a tax.  All post-1986 net "earnings and profits" in offshore holding companies will be taxed at a 15.5 percent rate to the extent they are being held in cash or cash equivalents and at an eight percent rate otherwise.  Companies must calculate the earnings as of November 2, 2017 and December 31, 2017 and pay U.S. tax on whichever amount is higher. The tax can be paid ratably over eight years.  Eight percent of the tax would have to be paid in each of the first five years starting in 2017, increasing to 15 percent in year six, 20 percent in year seven and 25 percent in year eight.

 

Corporations will no longer be able to use net operating losses incurred after 2017 to reduce income by more than 80 percent in a year, and corporations will no longer be able to carry such losses back two years as they have been allowed to do in the past. 

 

Starting in 2018, the U.S. will no longer allow some cross-border interest and royalty payments to related companies to be deducted. This would happen if the other country treats the payments as something other than interest or royalties for its tax purposes or the two countries treat the U.S. company making the payments differently: for example, one treats it as a corporation and the other treats it as fiscally transparent or vice versa. Once the provision is triggered, deductions would be denied in the U.S. to the extent the payment does not have to be reported as income in the foreign country.

 

We continue to examine the impact the Tax Act may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain, and our business, financial condition, future results and cash flow, as well as our stock price, could be adversely affected.

 

Possible application of the new base erosion anti-avoidance tax in the U.S. may adversely affect us. 

 

     The recently enacted Tax Act in the U.S. included a base erosion and anti-abuse tax, or BEAT, that could apply to us and, more importantly, could reduce the amount of tax equity that can be raised on geothermal projects on which PTCs will be claimed.  The aim of the base erosion tax is to prevent multinational companies from reducing their U.S. taxes by “stripping” earnings across the U.S. border by making payments to foreign affiliates that can be deducted in the U.S. An example of such a payment is interest on an intercompany loan or a payment to a back office in a foreign country for equipment or services. The goal of the base erosion tax is to ensure that multinational companies do not use cross-border payments to reduce their U.S. taxes to less than 10 percent of an expanded definition of taxable income. The base erosion tax requires an annual calculation.  The tax only applies to companies with at least $500 million in average annual gross receipts in the three prior years before the calculation.  If the tax applies to us, our tax equity raised on geothermal projects on which PTCs can be claimed may be reduced, which in turn may materially and adversely affect our business, financial condition, future results and cash flow.

 

The Israeli Tax Ruling we obtained in connection with our acquisition of Ormat Industries imposes conditions that may limit our flexibility in operating our business and our ability to enter into certain corporate transactions.

 

The Israel Tax Ruling we obtained in connection with the acquisition of Ormat Industries imposes a number of conditions that limit our flexibility in operating our business and in engaging in certain corporate transactions. Until the end of 2018, we agreed to maintain (and, to the extent that our operations expand, likewise expand) the production activities we currently carry out in Israel. Under certain circumstances, these conditions may not allow us the flexibility that we need to operate our business and may prevent us from taking advantage of strategic opportunities that would benefit our business and our stockholders.

 

A substantial percentage of our common stock is held by stockholders whose interests may conflict with the interests of our other stockholders.

 

On July 26, 2017, ORIX Corporation (“ORIX”) purchased approximately 22% of our shares of common stock outstanding. Pursuant to the Governance Agreement between the Company and ORIX entered into in connection with this stock purchase transaction, ORIX has the right to designate three directors to our Board for as long as ORIX and its affiliates collectively hold at least 18% of the voting power of all of the outstanding voting securities of the Company as well as the right to representation on certain committees of our Board. ORIX may also exercise certain re