SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

Or

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

For the transition period from                                              to                                                     

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, Suite 300, Reno, Nevada 89511-1136
(Address of principal executive offices)

Registrant’s telephone number, including area code: (775) 356-9029

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 [X]    No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]                         Accelerated filer [X]                         Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ]    No [X]

As of the date of this filing, the number of outstanding shares of common stock of Ormat Technologies, Inc. is 38,124,044, par value $0.001 per share.




ORMAT TECHNOLOGIES, INC

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007


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Table of Contents

Certain Definitions

Unless the context otherwise requires, all references in this quarterly report to ‘‘Ormat’’, ‘‘the Company’’, ‘‘we’’, ‘‘us’’, ‘‘our company’’, ‘‘Ormat Technologies’’ or ‘‘our’’ refer to Ormat Technologies, Inc. and its consolidated subsidiaries. The ‘‘OFC Senior Secured Notes’’ refers to the 8¼% Senior Secured Notes due 2020 that were issued in February 2004 by our subsidiary, Ormat Funding Corp. The ‘‘OrCal Senior Secured Notes’’ refers to the 6.21% Senior Secured Notes due 2020 that were issued in December 2005 by our subsidiary, OrCal Geothermal Inc.

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PART I — UNAUDITED FINANCIAL INFORMATION

ITEM 1.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


  March 31,
2007
December 31,
2006
  (in thousands)
Assets    
Current assets:    
Cash and cash equivalents $ 22,244 $ 20,254
Marketable securities 52,434 96,486
Restricted cash, cash equivalents and marketable securities 49,274 56,425
Receivables:    
Trade 33,682 36,463
Related entities 906 879
Other 7,520 5,277
Due from Parent 1,067 1,459
Inventories, net 8,572 7,403
Costs and estimated earnings in excess of billings on uncompleted contracts 14,082 11,216
Deferred income taxes 2,047 1,819
Prepaid expenses and other 4,795 4,911
Total current assets 196,623 242,592
Unconsolidated investments 37,749 37,207
Deposits and other 15,058 15,081
Deferred income taxes 5,700 6,172
Property, plant and equipment, net 648,299 624,089
Construction-in-process 170,339 169,075
Deferred financing and lease costs, net 15,430 15,800
Intangible assets, net 49,319 50,086
Total assets $ 1,138,517 $ 1,160,102
Liabilities and Stockholders’ Equity    
Current liabilities:    
Accounts payable and accrued expenses $ 79,399 $ 70,445
Billings in excess of costs and estimated earnings on uncompleted contracts 9,537 5,803
Current portion of long-term debt:    
Limited and non-recourse 8,632 8,482
Full recourse 1,000 1,000
Senior secured notes (non-recourse) 25,329 40,054
Due to Parent, including current portion of notes payable to Parent 82,854 82,379
Total current liabilities 206,751 208,163
Long-term debt, net of current portion:    
Limited and non-recourse 19,940 22,157
Full recourse 1,000 1,000
Senior secured notes (non-recourse) 299,316 299,316
Notes payable to Parent, net of current portion 50,827 57,841
Deferred lease income 78,212 78,883
Deferred income taxes 15,301 21,674
Liability for unrecognized tax benefits 3,558
Liabilities for severance pay 13,667 13,378
Asset retirement obligation 17,117 16,832
Total liabilities 705,689 719,244
Minority interest in net assets of a subsidiary 64 64
Contingencies (Note 8)    
Stockholders’ equity:    
Common stock, par value $0.001 per share; 200,000,000 shares authorized; 38,121,432 and 38,101,888 shares issued and outstanding, respectively 38 38
Additional paid-in capital 354,260 353,399
Retained earnings 76,211 85,053
Accumulated other comprehensive income 2,255 2,304
Total stockholders’ equity 432,764 440,794
Total liabilities and stockholders’ equity $ 1,138,517 $ 1,160,102

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)


  Three Months Ended March 31
  2007 2006
  (in thousands, except per
share amounts)
Revenues:    
Electricity:    
Energy and capacity $ 19,910 $ 25,165
Lease portion of energy and capacity 23,077 17,897
Lease income 671 671
Total electricity 43,658 43,733
Products:    
Related party 3,503
Other 18,089 13,085
Total products 18,089 16,588
Total revenues 61,747 60,321
Cost of revenues:    
Electricity:    
Energy and capacity 23,364 17,174
Lease portion of energy and capacity 15,047 8,382
Lease expense 1,311 1,311
Total electricity 39,722 26,867
Products 15,924 10,532
Total cost of revenues 55,646 37,399
Gross margin 6,101 22,922
Operating expenses:    
Research and development expenses 704 773
Selling and marketing expenses 1,986 2,695
General and administrative expenses 5,747 4,684
Operating income (loss) (2,336 )  14,770
Other income (expense):    
Interest income 1,415 1,115
Interest expense:    
Parent (1,633 )  (2,226 ) 
Other (7,615 )  (7,229 ) 
Less – amount capitalized 1,466 2,002
Foreign currency translation and transaction losses (716 )  (8 ) 
Other non-operating income 352 103
Income (loss) before income taxes and equity in income of investees (9,067 )  8,527
Income tax benefit (provision) 1,995 (1,914 ) 
Equity in income of investees 1,231 1,279
Net income (loss) (5,841 )  7,892
Other comprehensive income (loss), net of related taxes:    
Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge (net of related tax of ($52,000) and ($54,000), respectively) (83 )  (90 ) 
Change in unrealized gains or losses on marketable securities available-for-sale
(net of related tax of $19,000 and $72,000, respectively)
34 118
Comprehensive income (loss) $ (5,890 )  $ 7,920
Earnings (loss) per share – basic and diluted $ (0.15 )  $ 0.25
Weighted average number of shares used in computation of earnings (loss) per share:    
Basic 38,109 31,563
Diluted 38,109 31,697

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)


  Common Stock Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
 
  Shares Amount Total
  (in thousands, except per share data)
Balance at December 31, 2006 38,102 $ 38 $ 353,399 $ 85,053 $ 2,304 $ 440,794
Share based compensation 559 559
Cash dividend declared, $0.07 per share (2,673 )  (2,673 ) 
Exercise of options by employees 20   302     302
Tax benefit on exercise of options by employees            
Cumulative adjustment from adoption of FIN No. 48 (328 )  (328 ) 
Net loss (5,841 )  (5,841 ) 
Other comprehensive income (loss), net of related taxes:            
Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge (net of related tax of $52,000) (83 )  (83 ) 
Change in unrealized gains or losses on marketable securities available-for-sale
(net of related tax of $19,000)
34 34
Balance at March 31, 2007 38,122 $ 38 $ 354,260 $ 76,211 $ 2,255 $ 432,764

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


  Three Months Ended March 31,
  2007 2006
  (in thousands)
Cash flows from operating activities:    
Net income (loss) $ (5,841 )  $ 7,892
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
   
Depreciation and amortization 12,012 10,201
Accretion of asset retirement obligation 285 223
Share-based compensation 559 211
Amortization of deferred lease income (671 )  (671 ) 
Equity in income of investees (1,231 )  (1,279 ) 
Distributions from unconsolidated investments 884 1,158
Unrealized loss in respect of derivative instruments, net (83 )  (90 ) 
Gain on severance pay fund asset (183 )  (190 ) 
Deferred income tax provision (benefit) (3,176 )  1,846
Liability for unrecognized tax benefits 84
Changes in operating assets and liabilities, net of acquisitions:    
Receivables 538 (352 ) 
Costs and estimated earnings in excess of billings on uncompleted contracts (2,866 )  7,593
Inventories, net (1,169 )  (967 ) 
Prepaid expenses and other 116 (171 ) 
Deposits and other 540 230
Accounts payable and accrued expenses 3,781 6,751
Due from/to related entities, net (27 )  (2,807 ) 
Billings in excess of costs and estimated earnings on uncompleted contracts 3,734 (7,459 ) 
Other liabilities (20 ) 
Liabilities for severance pay 289 679
Due from Parent 853 1,077
Net cash provided by operating activities 8,428 23,855
Cash flows from investing activities:    
Marketable securities, net 44,024 34,492
Net change in restricted cash, cash equivalents and marketable securities 7,232 759
Capital expenditures (31,228 )  (39,702 ) 
Cash paid for acquisitions, net of cash received (15,362 ) 
Increase in severance pay fund asset, net (334 )  (40 ) 
Repayment from unconsolidated investment 31 31
Net cash provided by (used in) investing activities 19,725 (19,822 ) 
Cash flows from financing activities:    
Due to Parent (7,000 )  (7,000 ) 
Proceeds from exercise of options by employees 302
Repayments of short-term and long-term debt (16,792 )  (4,717 ) 
Deferred debt issuance costs (198 ) 
Cash dividends paid (2,673 ) 
Net cash used in financing activities (26,163 )  (11,915 ) 
Net increase (decrease) in cash and cash equivalents 1,990 (7,882 ) 
Cash and cash equivalents at beginning of period 20,254 26,976
Cash and cash equivalents at end of period $ 22,244 $ 19,094
Supplemental non-cash investing and financing activities:    
Increase (decrease) in accounts payable related to purchases of property, plant and equipment $ 5,039 $ (1,280 ) 
Accrued liabilities related to financing activities $ 134 $ 887
Increase in asset retirement cost and asset retirement obligation $ $ 655
Cash dividend declared $ $ 947

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

These unaudited condensed consolidated interim financial statements of Ormat Technologies, Inc. and its subsidiaries (the ‘‘Company’’) have been prepared in accordance with accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’) and pursuant to the rules and regulations of the Securities and Exchange Commission (‘‘SEC’’) for interim financial statements. Accordingly, they do not contain all information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, the unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s consolidated financial position as of March 31, 2007 and the consolidated results of operations and cash flows for the three-month periods ended March 31, 2007 and 2006.

The financial data and other information disclosed in the notes to the condensed consolidated interim financial statements related to these periods are unaudited. The results for the three months ended March 31, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007.

These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2006. The condensed consolidated balance sheet data as of December 31, 2006 is derived from the audited consolidated financial statements for the year ended December 31, 2006, but does not include all disclosures required by U.S. GAAP.

Dollar amounts, except per share data, in the notes to these financial statements are rounded to the closest $1,000.

Certain comparative figures have been reclassified to conform to the current period’s presentation.

Concentration of credit risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of temporary cash investments and accounts receivable.

The Company places its temporary cash investments with high credit quality financial institutions located in the United States (‘‘U.S.’’) and in foreign countries. At March 31, 2007 and December 31, 2006, the Company had deposits totaling $7,562,000 and $13,068,000, respectively, in six U.S. financial institutions that were federally insured up to $100,000 per account. At March 31, 2007 and December 31, 2006, the Company’s deposits in foreign countries amounted to approximately $19,433,000 and $15,321,000, respectively.

At March 31, 2007 and December 31, 2006, accounts receivable related to operations in foreign countries amounted to approximately $14,888,000 and $16,957,000, respectively. At March 31, 2007 and December 31, 2006, accounts receivable from the Company’s major customers that have generated 10% or more of its revenues amounted to approximately 48% and 49% of the Company’s accounts receivable, respectively.

Southern California Edison Company (‘‘SCE’’) accounted for 24.8% and 27.5% of the Company’s total revenues for the three months ended March 31, 2007 and 2006, respectively. SCE is also the power purchaser and revenue source for the Company’s Mammoth project, which is accounted for separately under the equity method of accounting.

Sierra Pacific Power Company accounted for 10.3% and 16.3% of the Company’s total revenues for the three months ended March 31, 2007 and 2006, respectively.

Hawaii Electric Light Company accounted for 15.7% and 18.1% of the Company’s total revenues for the three months ended March 31, 2007 and 2006, respectively.

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Company performs ongoing credit evaluations of its customers’ financial condition. The Company has historically been able to collect on all of its receivable balances, and accordingly, no provision for doubtful accounts has been made.

NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS

New accounting pronouncements effective in the three month period ended March 31, 2007

SFAS No. 155 – Accounting for Certain Hybrid Financial Instruments

Effective January 1, 2007, the Company adopted Statement of Financial Accounting Standards (‘‘SFAS’’) No. 155, Accounting for Certain Hybrid Financial Instruments. SFAS No. 155 replaces certain provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. It clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133. SFAS No. 155 also establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. It also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after January 1, 2007. The adoption by the Company of SFAS No. 155, effective January 1, 2007, did not have any impact on its results of operations or financial position.

FIN No. 48 – Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (‘‘FASB’’) Interpretation (‘‘FIN’’) No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109. FIN No. 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN No. 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN No. 48 also provides guidance on derecognition, classification and disclosure of tax positions, as well as the accounting for interest and penalties. As a result of the implementation of FIN No. 48, on January 1, 2007, the Company recognized as a cumulative effect of change in accounting principle, a $328,000 increase in the liability for unrecognized tax benefits and a corresponding decrease in beginning retained earnings. See Note 10 for additional information about the Company’s unrecognized tax benefits

EITF Issue No. 06-3 – How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation)

Effective January 1, 2007, the Company adopted EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation). The requirements of EITF Issue No. 06-3 apply to any tax

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

assessed by a governmental authority that is imposed concurrently on a specific revenue-producing transaction between a seller and a customer. Examples of taxes subject to Issue No. 06-3 include sales, use, value added, and some excise taxes. EITF Issue No. 06-3 excludes taxes that are assessed on gross receipts or that are imposed during the process of obtaining inventory. Companies will be required to disclose their accounting policy regarding the presentation of taxes subject to EITF Issue No. 06-3, and the amounts of such taxes that are included in income on a gross basis, if those amounts are significant. The adoption by the Company of EITF Issue No. 06-3, effective January 1, 2007, did not have any impact on its financial statements.

New accounting pronouncements effective in future periods

SFAS No. 157 – Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Company) and interim periods within those fiscal years, with early adoption permitted. The Company is currently assessing the impact of SFAS No. 157, and has not yet determined the impact that its adoption will have on its results of operations or financial position.

NOTE 3 — EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing income (loss) available to common stock stockholders by the weighted average number of shares of common stock outstanding for the period. The Company does not have any equity instruments that are dilutive, except for employee stock options which were granted in 2004, 2005, 2006 and 2007. For the three months ended March 31, 2007, the employee stock options are anti-dilutive because of the Company’s net loss and therefore, have been excluded from the diluted loss per share calculation. The stock options granted to employees of the Company in Ormat Industries Ltd. (the ‘‘Parent’’) stock are not dilutive to the Company’s earnings (loss) per share in any period.

NOTE 4 — INVENTORIES

Inventories consist of the following:


  March 31,
2007
December 31,
2006
  (dollars in thousands)
Raw materials and purchased parts for assembly $ 4,118 $ 3,397
Self-manufactured assembly parts and finished products 4,454 4,006
Total $ 8,572 $ 7,403

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 5 — UNCONSOLIDATED INVESTMENTS

Unconsolidated investments in power plant projects consist of the following:


  March 31,
2007
December 31,
2006
  (dollars in thousands)
Mammoth 32,504 31,913
OLCL 5,245 5,294
Total $ 37,749 $ 37,207

From time to time, the unconsolidated power plants make distributions to their owners. Such distributions are deducted from the investments in such power plants.

The Mammoth Project

The Company has a 50% interest in the Mammoth Project (‘‘Mammoth’’), which is comprised of three geothermal power plants located near the city of Mammoth, California. The purchase price was less than the underlying net equity of Mammoth by approximately $9.3 million. As such, the basis difference will be amortized over the remaining useful life of the property, plant and equipment and the power purchase agreements, which range from 12 to 17 years. The Company operates and maintains the geothermal power plants under an operating and maintenance (‘‘O&M’’) agreement. The Company’s 50% ownership interest in Mammoth is accounted for under the equity method of accounting as the Company has the ability to exercise significant influence, but not control, over Mammoth.

The condensed financial position and results of operations of Mammoth are summarized below:


  March 31,
2007
December 31,
2006
  (dollars in thousands)
Condensed balance sheets:    
Current assets $ 5,810 $ 3,425
Non-current assets 78,643 79,942
Current liabilities 655 667
Non-current liabilities 3,294 3,130
Partners’ Capital 80,504 79,570
     
  Three Months Ended
March 31,
  2007 2006
  (dollars in thousands)
Condensed statements of operations:    
Revenues $ 3,935 $ 3,685
Gross margin 1,009 605
Net income 948 548
Company’s equity in income of Mammoth:    
50% of Mammoth net income $ 474 $ 274
Plus amortization of basis difference 148 148
  622 422
Less income taxes (224 )  (160 ) 
Total $ 398 $ 262

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Leyte Project

The Company holds an 80% interest in Ormat Leyte Co. Ltd. (‘‘OLCL’’). OLCL is a limited partnership established for the purpose of developing, financing, operating, and maintaining a geothermal power plant in Leyte Provina, the Philippines. Upon the adoption of FIN No. 46R, Consolidation of Variable Interest Entities (revised December 2003) – an interpretation of ARB No. 51, on March 31, 2004, the Company concluded that OLCL should not be consolidated. As a result of such conclusion, the Company’s 80% ownership interest in OLCL is accounted for under the equity method of accounting.

The condensed financial position and results of operations of OLCL are summarized below:


  March 31,
2007
December 31,
2006
  (dollars in thousands)
Condensed balance sheets:    
Current assets $ 7,846 $ 7,548
Non-current assets 3,023 4,632
Current liabilities 3,868 4,782
Stockholders’ equity 7,001 7,398
  Three Months Ended
March 31,
  2007 2006
  (dollars in thousands)
Condensed statements of operations:    
Revenues $ 3,416 $ 3,373
Gross margin 1,660 1,677
Net income 711 859
Company’s equity in income of OLCL:    
80% of OLCL net income $ 569 $ 687
Plus amortization of deferred revenue on intercompany profit ($0.5 million unamortized balance at March 31, 2007) 264 604
Total $ 833 $ 1,291

NOTE 6 — STOCK-BASED COMPENSATION

On February 27, 2007, the Company granted to a non-employee director non-qualified stock options, under the Company’s 2004 Incentive Compensation Plan (‘‘2004 Incentive Plan’’), to purchase 7,500 shares of common stock at an exercise price of $38.85 per share, which amount represented the fair market value of the Company’s common stock on the day following the date of grant, since on the date of grant the Company released its results of operation for the fourth quarter of 2006. Such options will expire seven years from the date of grant and will vest on the first anniversary of the date of grant. The fair value of each option on the date of grant is $12.61 per share.

On March 29, 2007, the Company granted to employees incentive stock options, under the Company’s 2004 Incentive Plan, to purchase 397,150 shares of common stock at an exercise price of $42.08 per share, which amount represented the fair market value of the Company’s common stock on the date of grant. Such options will expire seven years from the date of grant and will cliff vest and are exercisable from the grant date as follows: 25% after 24 months, 25% after 36 months, and the remaining 50% after 48 months. The fair value of each option on the date of grant is $15.77 per share.

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Company calculated the fair value of each option on the date of grant using the Black-Scholes valuation model based on the following assumptions:


  Three Months
Ended
March 31,
2007
Risk-free interest rates 4.5 % 
Expected term (in years) 5.1
Dividend yield 0.54
Expected volatility 35.7
Forfeiture rate 5.0 % 

On May 8, 2007 the Company’s shareholders approved an amendment to the Company’s 2004 Incentive Plan to increase the number of shares of common stock authorized for issuance pursuant to the plan by 2,500,000. Following this increase, the number of shares available for future grant is 2,829,878.

NOTE 7 — BUSINESS SEGMENTS

The Company has two reporting segments that are aggregated based on similar products, market, and operating factors: electricity and products segments. Such segments are managed and reported separately as each offers different products and serves different markets. The electricity segment is engaged in the sale of electricity pursuant to power purchase agreements. The products segment is engaged in the manufacture, including design and development, of turbines and power units for the supply of electrical energy and in the associated construction of power plants utilizing the power units manufactured by the Company to supply energy from geothermal fields and other alternative energy sources. Transfer prices between the operating segments are determined based on current market values or cost plus markup of the seller’s business segment.

Summarized financial information concerning the Company’s reportable segments is shown in the following tables:


  Electricity Products Consolidated
  (dollars in thousands)
Three Months Ended March 31, 2007      
Net revenues from external customers $ 43,658 $ 18,089 $ 61,747
Intersegment revenues 3,985 3,985
Operating loss (1,532 )  (804 )  (2,336 ) 
Segment assets at period end* 1,073,171 65,346 1,138,517
* Including unconsolidated investments 37,749 37,749
Three Months Ended March 31, 2006      
Net revenues from external customers $ 43,733 $ 16,588 $ 60,321
Intersegment revenues 16,025 16,025
Operating income 11,312 3,458 14,770
Segment assets at period end* 900,050 42,903 942,953
* Including unconsolidated investments 40,241 40,241

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Reconciling information between reportable segments and the Company’s consolidated totals is shown in the following table:


  Three Months Ended
March 31,
  2007 2006
  (dollars in thousands)
Operating income (loss) $ (2,336 )  $ 14,770
Interest expenses, net (6,367 )  (6,338 ) 
Non-operating income (expense) and other, net (364 )  95
Total consolidated income (loss)
before income taxes and equity
in income of investees
$ (9,067 )  $ 8,527

NOTE 8 — CONTINGENCIES

One of the Company’s U.S. Subsidiaries (the ‘‘subsidiary’’) is a party to a third-party complaint originally filed on November 15, 2005 by Lacy M. Henry and Judy B. Henry (the ‘‘Henrys’’) in a bankruptcy proceeding in the United States Bankruptcy Court for the Eastern District of North Carolina. The Henrys are debtors in a Chapter 11 bankruptcy filed in the Bankruptcy Court. The Henrys were the sole shareholders of MPS Generation, Inc. (‘‘MPSG’’). The subsidiary entered into a supply contract with MPSG dated as of December 29, 2003, under which the subsidiary was retained as a subcontractor to produce four waste heat energy converters for a project for which MPSG had entered into a contract with Basin Electric Power Cooperative (‘‘Basin’’). Basin filed a lawsuit on February 24, 2005 against, among others, MPSG and the Henrys in the United States District Court for the District of North Dakota, alleging various causes of action including breach of contract, actual and constructive fraud, and conversion, and demanding the piercing of MPSG’s corporate veil to establish the personal liability of the Henrys for MPSG’s debts. On September 15, 2005, Basin filed a complaint commencing the bankruptcy adversary proceeding, seeking a determination that the claims which Basin alleged against the Henrys in the North Dakota lawsuit were not dischargeable. On November 15, 2005, the Henrys answered Basin’s complaint in the bankruptcy proceeding and also filed a third-party complaint against the subsidiary, alleging that to the extent the Henrys are found personally liable to Basin for MPSG’s debts, the Henrys have claims against the subsidiary for breach of contract/breach of warranty, tortious interference with contract, unfair or deceptive trade practices and fraud. The Henrys alleged damages in excess of $100 million. On December 15, 2005, the subsidiary filed an answer denying the Henrys’ claims and asserting counterclaims against the Henrys. The subsidiary filed a motion to dismiss the Henrys’ claims on January 31, 2006. On March 21, 2006, Basin filed an Amended Complaint in the bankruptcy proceeding, consolidating the causes of action it brought in the North Dakota lawsuit. In their answer to Basin’s Amended Complaint, the Henrys raised the same third party claims against the subsidiary. On May 11, 2006, the Bankruptcy Court entered an order denying the subsidiary’s motion to dismiss the Henrys’ claims against it, but staying the Henrys’ litigation against the subsidiary pending the resolution of Basin’s alter ego claims against the Henrys. In its answer to Basin’s Amended Complaint, MPSG asserted third party claims against the subsidiary similar to those claims raised by the Henrys. A trial on all issues raised in the bankruptcy proceeding is scheduled to begin in September 2007 in the Bankruptcy Court. The case is also scheduled for mediation in June 2007. The Company believes that the subsidiary has no liability to the Henrys or to MPSG and intends to defend vigorously against the Henrys’ and MPSG’s claims in the bankruptcy proceeding. Therefore, no provision is included in the financial statements in respect of the claim.

The Company is a defendant in various other legal and regulatory proceedings in the ordinary course of business. It is the opinion of the Company’s management that the expected outcome of

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

these matters, individually or in the aggregate, will not have a material effect on the results of operations and financial condition of the Company.

Refer to discussion of contingencies settled subsequent to March 31, 2007 in Note 11.

NOTE 9 — CASH DIVIDEND

On February 27, 2007, the Company’s Board of Directors declared, approved and authorized payment of a quarterly dividend of $2.7 million ($0.07 per share) to all holders of the Company’s issued and outstanding shares of common stock on March 21, 2007. Such dividend was paid on March 29, 2007.

NOTE 10 — INCOME TAXES

The Company’s effective tax rate for the three months ended March 31, 2007 was 22.0%, which differs from the federal statutory rate of 34% primarily due to: (i) lower tax rates in Israel; (ii) a tax credit related to the Company’s subsidiaries in Guatemala; and (iii) the benefit of production tax credits for new power plants placed in service since 2005.

As disclosed in Note 2, the Company adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the adoption of FIN No. 48, the Company recognized as a cumulative effect of change in accounting principle, a $328,000 increase in the liability for unrecognized tax benefits and a corresponding decrease in beginning retained earnings. This amount consists of interest and penalties related to uncertain tax positions. In addition, on January 1, 2007, the Company reclassified its liability for uncertain tax positions in the amount of $3,146,000 from long-term deferred income tax liabilities to liability for unrecognized tax benefits. During the three months ended March 31, 2007, the Company increased its liability for unrecognized tax benefits by $84,000. The liability for unrecognized tax benefits of $3,558,000 at March 31, 2007 would impact the Company’s effective tax rate, if recognized. Interest and penalties assessed by taxing authorities on an underpayment of income taxes are included as a component of income tax provision (benefit) in the consolidated statements of operations.

The Company and its U.S. subsidiaries file consolidated income tax returns for federal and state purposes. As of March 31, 2007, the Company has not been subject to U.S. federal or state income tax examinations. The Company remains open to examination by the Internal Revenue Service for the years 2000-2006 and by local state jurisdictions for the years 2002-2006.

The Company’s foreign subsidiaries remain open to examination by the local income tax authorities in the following countries:


Israel 2003 – 2006
Nicaragua 2003 – 2006
Kenya 2000 – 2006
Guatemala 2002 – 2006
Philippines 2004 – 2006

Management believes that the liability for unrecognized tax benefits is adequate for all open tax years based on its assessment of many factors, including among others, past experience and interpretations of local income tax regulations. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. As a result, it is possible that federal, state and foreign tax examinations will result in assessments in future periods. To the extent any such assessments occur, the Company will adjust its liability for unrecognized tax benefits.

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11 — SUBSEQUENT EVENTS

Legal Proceedings    

In connection with the Company’s power purchase agreements for the Ormesa project, SCE expressed its intent not to pay the contract rate for power supplied by the GEM 2 and GEM 3 plants to the Ormesa project. SCE contended that California ISO real-time prices should apply, while management believed that SP-15 prices quoted by NYMEX should apply. The parties signed an Interim Agreement in 2005 whereby SCE agreed to procure GEM 2 and GEM 3 power at the then-current energy rate under the July 18, 1984 Ormesa power purchase agreement of 5.37 cents per kWh until May 1, 2007. On April 23, 2007, Ormesa LLC, a wholly owned subsidiary, finalized an agreement with SCE with terms that are similar to the arrangement agreed to in the Interim Agreement, whereby 6.5 MW of power from GEM 2 and GEM 3 will be sold to SCE at the current energy rate of the July 18, 1984 Ormesa power purchase agreement. For the period commencing May 1, 2007, the energy rate is 6.15 cents per kWh. The parties simultaneously entered into other agreements and agreed to release each other from any and all claims relating to the Ormesa project. Pursuant to these agreements, Ormesa LLC paid SCE an immaterial amount to consolidate the June 13, 1984 and July 18, 1984 power purchase agreements. Combining these agreements will reduce scheduling fees over the term of the agreement and provide other operational benefits.

Steamboat Geothermal LLC (‘‘SG’’), a wholly owned subsidiary, was party to litigation related to a dispute over amounts owed to the plaintiffs under certain operating agreements. On December 31, 2005 and January 9, 2006, SG entered into a sales, settlement and release agreement and an assignment agreement, respectively, with an assignee of the right of one of the plaintiffs to 37% of net operating revenues, whereby SG was assigned 37% of the net operating revenues of Steamboat 1 in partial settlement of the dispute with the plaintiff. On April 11, 2007, SG entered into a settlement agreement with the plaintiff, Geothermal Development Associates (‘‘GDA’’), to settle the remaining claims. As a result of the settlement, the Company recorded an additional provision of $0.8 million as of March 31, 2007 and paid the total settlement amount to GDA in April 2007. The settlement agreement provides for the mutual release of any and all claims, demands and causes of action by and between the parties and stipulates that the settlement should not be construed as an admission of liability or fault by any party.

Cash Dividend

On May 8, 2007, the Company’s Board of Directors declared, approved and authorized payment of a quarterly dividend of $1.9 million ($0.05 per share) to all holders of the Company’s issued and outstanding shares of common stock on May 22, 2007, payable on May 29, 2007.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This quarterly report on Form 10-Q includes ‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect or anticipate will or may occur in the future, including such matters as our projections of annual revenues, expenses and debt service coverage with respect to our debt securities, future capital expenditures, business strategy, competitive strengths, goals, development or operation of generation assets, market and industry developments and the growth of our business and operations, are forward-looking statements. When used in this quarterly report on Form 10-Q, the words ‘‘may’’, ‘‘will’’, ‘‘could’’, ‘‘should’’, ‘‘expects’’, ‘‘plans’’, ‘‘anticipates’’, ‘‘believes’’, ‘‘estimates’’, ‘‘predicts’’, ‘‘projects’’, ‘‘potential’’, or ‘‘contemplate’’ or the negative of these terms or other comparable terminology are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this report are primarily located in the material set forth under the headings ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’, ‘‘Risk Factors’’, and ‘‘Notes to Condensed Consolidated Financial Statements’’, but are found in other locations as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management’s current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this quarterly report on Form 10-Q completely and with the understanding that actual future results and developments may be materially different from what we expect due to a number of risks and uncertainties, many of which are beyond our control. 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 quarterly report;
  operating risks, including equipment failures and the amounts and timing of revenues and expenses;
  geothermal resource risk (such as the heat content of the reservoir, useful life and geological formation);
  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 authorization;
  construction or other project delays or cancellations;
  financial market conditions and the results of financing efforts;
  political, legal, regulatory, governmental, administrative and economic conditions and developments in the United States and other countries in which we operate;
  the enforceability of the long-term power purchase agreements for our projects;
  contract counterparty risk;
  weather and other natural phenomena;
  the impact of recent and future federal and state regulatory proceedings and changes, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry and incentives for the production of renewable energy in the United States and elsewhere;
  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;

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  current and future litigation;
  our ability to successfully identify, integrate and complete acquisitions;
  competition from other similar geothermal energy projects, including any such new geothermal energy projects developed in the future, and from alternative electricity producing technologies;
  the effect of and changes in economic conditions in the areas in which we operate;
  market or business conditions and fluctuations in demand for energy or capacity in the markets in which we operate;
  the direct or indirect impact on our company’s business resulting from terrorist incidents or responses to such incidents, including the effect on the availability of and premiums on insurance;
  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;
  the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2006 and any updates contained herein which may have a significant impact on our business, operating results or financial condition;
  other uncertainties which are difficult to predict or beyond our control and the risk that we incorrectly analyze these risks and forces or that the strategies we develop to address them could be unsuccessful; and
  other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (SEC).

Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. We undertake no obligation to update forward-looking statements even though our situation may change in the future. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included elsewhere in this report and the ‘‘Risk Factors’’ section of our annual report on Form 10-K for the year ended December 31, 2006 and any updates contained herein as well as those set forth in our reports and other filings made with the SEC.

General

Overview

We are a leading vertically integrated company engaged in the geothermal and recovered energy power business. We design, develop, build, own and operate clean, environmentally friendly geothermal and recovered energy-based power plants using equipment that we design and manufacture. In addition, we sell the equipment we design and manufacture for geothermal electricity generation, recovered energy-based electricity generation, and other equipment for electricity generation to third parties. Our operations consist of two business segments. The first consists of the sale of electricity from our power plants, which we refer to as the Electricity Segment. The second consists of the design, manufacturing and sale of equipment for electricity generation, the installation thereof and the provision of services relating to the engineering, procurement, construction, operation and maintenance of geothermal and recovered energy power plants, which we refer to as the Products Segment.

Our Electricity Segment currently consists of our investment in power plants producing electricity from geothermal resources and, as of recently, from recovered energy resources. Our geothermal

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power plants include both power plants that we have built and power plants that we have acquired, while all of our recovered energy-based plants have been constructed by us. Our Products Segment consists of the design, manufacture and sale of equipment that generates electricity, principally from geothermal and recovered energy resources, but also using other fuel sources as well. Our Products Segment also includes, to the extent requested by our customers, the installation of our equipment and other related power plant installations and the provision of services relating to the engineering, procurement, construction, operation and maintenance of geothermal and recovered energy power plants. For the three months ended March 31, 2007, our Electricity Segment represented approximately 70.7% of our total revenues, while our Products Segment represented approximately 29.3% of our total revenues during such period.

During the three months ended March 31, 2007, total Electricity Segment revenues from the sale of electricity by our consolidated power plants were $43.7 million. In addition, revenues from our 50% ownership of the Mammoth Project and from our 80% ownership of the Leyte Project for the three months ended March 31, 2007 were $4.7 million. This additional data is a Non-Generally Accepted Accounting Principles (Non-GAAP) financial measure, as defined by the SEC. There is no comparable GAAP measure. Management believes that such Non-GAAP data is useful to the readers as it provides a more complete view of the scope of activities of the power plants that we operate. Our investments in the Mammoth and Leyte projects are accounted for in our consolidated financial statements under the equity method and the revenues are not included in our consolidated revenues for the three months ended March 31, 2007.

Our Electricity Segment operations are conducted in the United States and throughout the world. Since January 1, 2001, we have completed various acquisitions of geothermal power plants with an aggregate acquisition cost, net of cash received, of $526.7 million. We currently own or control, as well as operate geothermal projects in the United States, Guatemala, Kenya, Nicaragua and the Philippines, as well as recovered energy generation (REG) plants in the United States.

Our Products Segment operations are also conducted in the United States and throughout the world. During the three months ended March 31, 2007, revenues attributable to our Products Segment were $18.1 million.

We have identified recovered energy-based power generation as a significant market opportunity for us in the United States and throughout the world. We expect that recovered energy generation projects will increase our revenues in both the Electricity Segment and the Products Segment.

During the three months ended March 31, 2007, we recognized revenues in our Products Segment of approximately $6.3 million from REG compared to $6.2 million in the same period last year. During the three months ended March 31, 2007 we received purchase orders for the supply and construction of REG plants in a total amount of $20.7 million.

Our Electricity Segment is characterized by relatively predictable revenues generated by our power plants pursuant to long-term power purchase agreements, with terms which are generally up to 20 years. However, in the first quarter of 2007, we experienced several operational issues, which resulted in both reduced revenues and increased costs. The price for electricity under all but one of our power purchase agreements is effectively a fixed price. The exception is the power purchase agreement of the Puna project. It has a variable energy rate based on the local utility’s short run avoided cost, which is the incremental cost that the power purchaser avoids by not having to generate such electrical energy itself or purchase it from others. In the three months ended March 31, 2007, 80.3% of the electricity revenues generated was derived from contracts with fixed energy rates, and therefore such revenues were not affected by the fluctuations in energy commodity prices.

Revenues attributable to our Products Segment are based on the sale of equipment and the provision of various services to our customers. These revenues may vary from period to period because of the timing of our receipt of purchase orders and the progress of our execution of each project.

Our management assesses the performance of our two segments of operation differently. In the case of our Electricity Segment, when making decisions about potential acquisitions or the

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development of new projects, we typically focus on the internal rate of return of the relevant investment, relevant technical and geological matters and other relevant business considerations. We evaluate our operating projects based on revenues and expenses and our projects that are under development, based on costs attributable to each such project. By contrast, we evaluate the performance of our Products Segment based on the timely delivery of our products, performance quality of our products and costs actually incurred to complete customer orders as compared to the costs originally budgeted for such orders.

During the three months ended March 31, 2007 our total revenues increased by 2.4% (from $60.3 million to $61.7 million) over the same period last year. Revenues from the Electricity Segment remained the same, and revenues from the Product Segment increased by 9.0%, from the same period last year.

During the three months ended March 31, 2007 and 2006, our U.S. projects generated 464,704 MWh and 481,427 MWh, respectively, which includes our 50% share in the Mammoth project.

Recent Developments

  During the first quarter of 2007 and through the beginning of May 2007, we have achieved several milestones related to our projects:
  We finalized our minority interest share in the Indonesian special purpose company that will own and operate the 340 MW Sarulla project in Indonesia at 12.75%.
  We have declared commercial operation of the 11 MW Desert Peak 2 project.
  We have completed the construction of additional Ormat Energy Converter (OEC) units, which increased the capacity of the Ormesa complex by 10MW bringing its generating capacity to 57 MW.
  We have declared commercial operation of the 10 MW Galena 2 project.
  We have completed the construction of additional OEC unit in the Steamboat Hill project and increased the generating capacity of the project by 4 MW.
  In April 2007, we received a 21 million New Zealand dollars (approximately $15.4 million) order from Geothermal Development Ltd (GDL), a company in which we own 49%, to supply and construct a geothermal power plant in Kawerau, New Zealand. Ormat will also provide the required construction loan. GDL expects to sell electricity produced by the project to Bay of Plenty Electricity of New Zealand under an existing 7-year power purchase agreement extendable an additional 5 years by mutual agreement. We have an option to acquire the remaining 51% of GDL before the completion of construction. Construction is expected to be completed in the first half of 2009.
  In March 2007, we entered into an $11.5 million contract with ENAGAS, S.A. of Madrid, Spain for the supply of one OEC for a REG plant. The REG plant is being specially designed to use the residual energy from the vaporization process of a Liquefied Natural Gas regasification terminal located in Huelva, Spain. The equipment is scheduled to be supplied and installed within 26 months from the receipt of a notice to proceed, which is expected in the next few months.
  In February 2007, the Nevada Public Utilities Commission approved two new 20-year power purchase agreements that two of our subsidiaries entered into on August 3, 2006 with Nevada Power Company, a subsidiary of Sierra Pacific Resources, for the sale of energy to be produced from the Carson Lake (near Fallon) and Buffalo Valley power plants, two new geothermal power plants to be built in Lander and Churchill Counties in northern Nevada. The Carson Lake and Buffalo Valley projects are both projected to come on line in late 2009. These new plants are expected to increase the total output we supply to Sierra Pacific Resources by between 36 and 60 MW.

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  In January 2007, we entered into two contracts with a combined value of $9.0 million with Enpower Green Energy Generation, Inc. for the supply of two OEC units for two REG plants to be located on the Duke Energy T South Pipeline System in British Columbia, Canada. The equipment is to be supplied by the end of April 2008.
  In January 2007, our subsidiary developing the Olkaria III project entered into an Amended and Restated Power Purchase Agreement and a Project Security Agreement, with Kenya Power and Lighting Co., the Kenyan parastatal electricity transmission and distribution company, with respect to Phase II of the Olkaria III project. These agreements were executed after receipt of appropriate regulatory approvals from the Kenyan authorities. The construction of Phase II of the project is expected, upon completion, to add approximately 35 MW to the existing facility, bringing the project’s total capacity to approximately 48 MW. Following completion of Phase II, total anticipated annual revenues from the project will be approximately $32 million.
  In January 2007, one of our subsidiaries entered into a Power Purchase Option Agreement with Basin Electric Power Cooperative (Basin Electric) regarding five new REG power plants located along the Northern Border Pipeline in the States of Montana, North Dakota and Minnesota. According to the Option Agreement, Basin Electric will work towards fulfilling certain conditions with the goal to confirm that it is ready to enter into a definitive 25-year power purchase agreement. These conditions include the interconnection and rights to the site on which the power plants will be constructed. We have already secured the rights to the waste heat for two of the new power plants and will continue to work towards obtaining the rights to the remaining three new power plants. The approval for construction of the new power plants is expected during 2007 after both parties have fulfilled their prerequisite obligations under the Power Purchase Option Agreement.
  In January 2007, two of our subsidiaries entered into supply and engineering, procurement and construction contracts with Ngawha Generation Ltd., a subsidiary of Top Energy Limited, for a new geothermal power plant in Ngawha, New Zealand. The contracts are for a total of approximately $20 million. The construction of the power plant is expected to be completed within 20 months from the contract date.

Trends and Uncertainties

The geothermal industry in the United States has historically experienced significant growth followed by a consolidation of owners and operators of geothermal power plants. During the 1990s, growth and development in the geothermal industry occurred primarily in foreign markets and only minimal growth and development occurred in the United States. Since 2001, there has been increased demand for energy generated from geothermal resources in the United States as production costs for electricity generated from geothermal resources have become more competitive relative to fossil fuel generation. This is partly due to increasing natural gas and oil prices and newly enacted legislative and regulatory incentives, such as state renewable portfolio standards. We see the increasing demand for energy generated from geothermal and other renewable resources in the United States and the further introduction of renewable portfolio standards as the most significant trends affecting our industry today and in the immediate future. The recent relative decline in oil and gas prices does not appear to have impacted the increasing demand for renewable energy. Our operations and the trends that from time to time impact our operations are subject to market cycles.

Although other trends, factors and uncertainties may impact our operations and financial condition, including many that we do not or cannot foresee, we believe that our results of operations and financial condition for the foreseeable future will be affected by the following trends, factors and uncertainties:

  In 2005, 2006 and in the first quarter of 2007, our primary activity has been the implementation of our organic growth through the construction of new projects and enhancements of several of our existing projects. As a result, growth in revenues and overall

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  generating capacity has been more moderate than in 2003 and 2004, in which we made significant acquisitions. Nevertheless, we expect that this investment in organic growth will increase our total generating capacity, consolidated revenues and operating income attributable to our Electricity Segment in 2007, as compared with 2006.
  We continue to experience increases in the cost of raw materials required for our equipment manufacturing activities and equipment used in our power plants. We have experienced an increase in drilling costs and a shortage in drilling equipment. We believe this is the result of the high oil prices resulting in increased drilling activity in the marketplace. We also have experienced, and expect to continue to experience, an increase in construction costs. This is particularly true in the United States, where a significant increase in construction activities has caused higher prices. An increase in our raw materials, drilling, construction and other costs may have an adverse effect on our financial condition and results of operations.
  We expect that the increased awareness of climate change may result in significant changes in the energy, business and regulatory environments, which may create business opportunities for us going forward.
  In the United States, we expect to continue to benefit from the increasing demand for renewable energy as a result of favorable legislation adopted by 23 states and the District of Columbia, including California, Nevada and Hawaii (where we have been most active in geothermal development and where all of our U.S. geothermal projects are located). These laws require that an increasing percentage of the electricity supplied by electric utility companies operating in such states be derived from renewable energy resources until certain pre-established goals are met. We expect that the additional demand for renewable energy from utilities in such states will create additional opportunities for us to expand existing projects and build new power plants.
  On September 27, 2006, the California Global Warming Solutions Act of 2006 (the Act) was signed into law. The Act regulates most sources of greenhouse gas emissions and is expected to result in a reduction of carbon emissions to 1990 levels by 2020, representing a twenty-five percent reduction in greenhouse gas emissions. To accomplish this, the Act provides a framework for greenhouse gas emissions reductions through the use of emissions control technologies and other cost-effective reduction strategies, one of which may involve the use of market-based trading of emissions rights. The California Air Resources Board must adopt standards for implementing the Act by 2011. Although programs under the Act will take some time to develop, its requirements, particularly the creation of a market-based trading mechanism to achieve compliance with emissions caps, should be highly advantageous to in-state energy generating sources that have low carbon emissions such as geothermal energy.
  On September 27, 2006, California also enacted legislation requiring that its renewable portfolio standard of 20% generation from renewable energy resources per year be met by December 2010, ahead of the previous legislative mandated target of December 2017. The California legislature is currently considering an increase to 33% by December 31, 2020.
  Outside of the United States, we expect that a variety of governmental initiatives, will create new opportunities for the development of new projects, as well as create additional markets for our remote power units and other products. These initiatives include the award of long-term contracts to independent power generators, the creation of competitive wholesale markets for selling and trading energy, capacity and related energy products and the adoption of programs designed to encourage ‘‘clean’’ renewable and sustainable energy sources.
  We expect to continue to generate the majority of our revenues from our Electricity Segment through the sale of electricity from our power plants. All of our current revenues from the sale of electricity are derived from fully-contracted payments under long-term power purchase agreements. However, we intend to continue to pursue growth in our recovered energy business, and we expect that the portion of revenues from our recovered energy business, as a percentage of the total revenues from our Products Segment, will increase.

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  Over the last two years, competition from the wind and solar power generation industry has increased. While the current demand for renewable energy is large enough that this increased competition has not impacted our ability to obtain new power purchase agreements, it may contribute to a reduction in electricity prices.
  The viability of our geothermal power plants depends on various factors such as the heat content of the geothermal reservoir, useful life of the reservoir (the term during which such geothermal reservoir has sufficient extractable fluids for our operations) and operational factors relating to the extraction of the geothermal fluids. Our geothermal power plants may experience an unexpected decline in the capacity of their respective geothermal wells. Such factors, together with the possibility that we may fail to find commercially viable geothermal resources in the future, represent significant uncertainties we face in connection with our operations.
  As our power plants age, they may require increased maintenance with a resulting decrease in their availability.
  Our foreign operations are subject to significant political, economic and financial risks, which vary by country. These risks include the ongoing privatization of the electricity industry in the Philippines, the partial privatization of the electricity sector in Guatemala, labor unrest in Nicaragua and the political uncertainty currently prevailing in Kenya. Although we maintain political risk insurance to mitigate these risks,    insurance does not provide complete coverage with respect to all such risks.
  The United States extended a tax subsidy and increased the amount of the tax subsidy for companies that use geothermal steam or fluid to generate electricity as part of the Energy Policy Act of 2005 that became law on August 8, 2005. The tax subsidy is a ‘‘production tax credit’’, which in 2006 was 1.9 cents per kWh and is adjusted annually for inflation. The production tax credit may be claimed for ten years on the electricity output of new geothermal power plants put into service by December 31, 2008.
  The Energy Policy Act of 2005 authorizes the Federal Energy Regulatory Commission (FERC) to revise the Public Utility Regulatory Policy Act (PURPA) so as to terminate the obligation of electric utilities to purchase the output of a Qualifying Facility if FERC finds that there is an accessible competitive market for energy and capacity from the Qualifying Facility. The legislation does not affect existing power purchase agreements. We do not expect this change in law to affect our U.S. projects significantly, as all except one of our current contracts (our Steamboat 1 project, which sells it electricity to Sierra Pacific Power Company on a year-by-year basis) are long-term. FERC has recently issued a final rule that could eliminate the utility’s purchase obligation in four regions of the country. None of those regions includes a state in which our current projects operate. However, FERC has the authority under the Energy Policy Act of 2005 to act, on a case-by-case basis, to eliminate the mandatory purchase obligation in other regions. In the final rule, FERC expressly noted that the California Independent System Operator (CAISO) has satisfied one but not all of the criteria for relief from the mandatory purchase obligation. If the utilities in the regions in which our domestic projects operate were to be relieved of the mandatory purchase obligation, they would not be required to purchase energy from us upon termination of the existing power purchase agreement, which could have an adverse effect on our revenues.
  On May 2, 2007, the Bureau of Land Management and the Minerals Management Service (each part of the Department of the Interior) issued separate final rules to implement relevant provisions of the Energy Policy Act of 2005. These rules revise existing federal regulations dealing with the general geothermal leasing process for federal land, lease durations, work commitments, annual rental and credit of rental toward royalties, and royalty calculations. The new rules include: a requirement that geothermal resources be offered through a competitive lease process; the introduction of a new royalty methodology, calculated on the basis of gross proceeds from the sale of electricity, rather than the ‘‘netback’’ calculation previously in use; the introduction of increased rental payments (that

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  are creditable toward royalties owed); and a new scheme of lease terms and extensions. The rules also establish ‘‘production incentives’’ for new facilities and qualified expansion facilities that are put into commercial operation by August 8, 2011, in the form of a four year 50% reduction in royalties from what would otherwise be due. The 50% reduction applies to all of the electricity generated from a new facility, and to the incremental electricity generated by a qualified expansion facility. The provisions of the rules dealing with fees, rental payments, and royalties apply to geothermal leases issued after August 8, 2005. However, lessees under leases issued prior to August 8, 2005 may elect to convert their leases to the new regulatory framework. We are currently evaluating the impact of these final rules but do not expect a material impact on our financial condition and results of operations.

Revenues

We generate our revenues from the sale of electricity from our geothermal and recovered energy-
based power plants; the design, manufacturing and sale of equipment for electricity generation; and the construction, installation and engineering of power plant equipment.

Revenues attributable to our Electricity Segment are relatively predictable as they are derived from the sale of electricity from our power plants pursuant to long-term power purchase agreements. However, such revenues are subject to seasonal variations, as more fully described below in the section entitled ‘‘Seasonality’’. Electricity Segment revenues may also be affected by higher-than-
average ambient temperature, which could cause a decrease in the generating capacity of our plants and by unplanned major maintenance activities related to our projects.

Our power purchase agreements generally provide for the payment of capacity payments, energy payments, or both. Generally, capacity payments are payments calculated based on the amount of time that our power plants are available to generate electricity. Some of our power purchase agreements provide for bonus payments in the event that we are able to exceed certain target levels and the potential forfeiture of payments if we fail to meet minimum target levels. Energy payments, on the other hand, are payments calculated based on the amount of electrical energy delivered to the relevant power purchaser at a designated delivery point. The rates applicable to such payments are either fixed (subject, in certain cases, to certain adjustments) or are based on the relevant power purchaser’s short run avoided costs (the incremental costs that the power purchaser avoids by not having to generate such electrical energy itself or purchase it from others). Our more recent power purchase agreements provide generally for energy payments alone with an obligation to compensate the off-taker for its incremental costs as a result of shortfalls in our supply.

The lease income related to the Puna lease transactions, which are accounted for as operating leases, is included as a separate line item in our Electricity Segment revenues (See ‘‘Liquidity and Capital Resources’’). For management purposes, we analyze such revenue on a combined basis with other revenues in our Electricity Segment.

As required by Emerging Issues Task Force (EITF) Issue No. 01-8, Determining Whether an Arrangement Contains a Lease, we have assessed all of our power purchase agreements agreed to, modified or acquired in business combinations on or after July 1, 2003, and concluded that all such agreements contain a lease element requiring lease accounting. Accordingly, revenue related to the lease element of the agreements is presented as ‘‘lease portion of energy and capacity’’ revenue, with the remaining revenue related to the production and delivery of the energy presented as ‘‘energy and capacity’’ revenue in our consolidated financial statements.

As the lease revenue and the energy and capacity revenues are derived from the same arrangement and both fall within our Electricity Segment, we analyze such revenues, and related costs, on a combined basis for management purposes.

Revenues attributable to our Products Segment are generally less predictable than revenues from our Electricity Segment. This is because larger customer orders for our products are typically a result of our participating in, and winning, tenders issued by potential customers in connection with projects they are developing. Such projects often take a long time to design and develop and are often subject

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to various contingencies such as the customer’s ability to raise the necessary financing for a project. As a result, we are generally unable to predict the timing of such orders for our products and may not be able to replace existing orders that we have completed with new ones. As a result, our revenues from our Products Segment fluctuate (and at times, extensively) from period to period.

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


  Revenues in Thousands % of Revenues for Period Indicated
  Three Months Ended March 31, Three Months Ended March 31,
  2007 2006 2007 2006
Revenues        
Electricity Segment $ 43,658 $ 43,733 70.7 %  72.5 % 
Products Segment 18,089 16,588 29.3 27.5
Total $ 61,747 $ 60,321 100.0 %  100.0 % 

Geographical Breakdown of Revenues

For the three months ended March 31, 2007, 78.3% of our revenues attributable to our Electricity Segment were generated in the United States, as compared to 86.9% for the same period in 2006.

The following table sets forth the geographic breakdown of the revenues attributable to our Electricity Segment for the periods indicated:


  Revenues in Thousands % of Revenues for Period Indicated
  Three Months Ended March 31, Three Months Ended March 31,
  2007 2006 2007 2006
United States $ 34,188 $ 38,015 78.3 %  86.9 % 
Foreign 9,470 5,718 21.7 13.1
Total $ 43,658 $ 43,733 100.0 %  100.0 % 

For the three months ended March 31, 2007, 48.3% of our revenues attributable to our Products Segment were generated in the United States, as compared to 0% for the same period in 2006.

Seasonality

The prices paid for the electricity generated by our domestic projects pursuant to our power purchase agreements are subject to seasonal variations. The prices paid for electricity under the power purchase agreements with Southern California Edison Company (Southern California Edison): the Heber 1 and 2 projects, the Mammoth project and the Ormesa project are higher in the summer months of June through September and as a result we receive higher revenues during such months. The prices paid for electricity pursuant to the power purchase agreements of our projects in Nevada have no significant changes during the year. In the winter, due principally to the lower ambient temperature our power plants produce more energy and as a result we receive higher energy revenues. However, the higher capacity payments payable by Southern California Edison in California in the summer months have a more significant impact on our revenues than that of the higher energy revenues generally generated in winter due to increased efficiency, and as a result our revenues are generally higher in the summer than in the winter. The prices paid for electricity pursuant to the power purchase agreement of the Puna project are partially volatile and are impacted by oil prices; therefore, our revenues may be volatile during the year.

Breakdown of Expenses

Electricity Segment

The principal expenses attributable to our operating projects include operation and maintenance expenses such as salaries and related employee benefits, equipment expenses, costs of parts and

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chemicals, costs related to third-party services, major maintenance, lease expenses, royalties, startup and auxiliary electricity purchases, property taxes and insurance and, for the California projects, transmission charges, scheduling charges and purchases of sweet water for use in our plant cooling towers. Some of these expenses, such as parts, third-party services and major maintenance, are not incurred on a regular basis. This results in fluctuations in our expenses and our results of operations for individual projects from quarter to quarter. The lease expense related to the Puna lease transactions is included as a separate line item in our Electricity Segment cost of revenues (See ‘‘Liquidity and Capital Resources’’). For management purposes we analyze such costs on a combined basis with other cost of revenues in our Electricity Segment.

Payments made to government agencies and private entities on account of site leases where plants are located are included in cost of revenues. Royalty payments, included in cost of revenues, are made as compensation for the right to use certain geothermal resources and are paid as a percentage of the revenues derived from the associated geothermal rights. For the three months ended March 31, 2007, royalties constituted approximately 4.5% of the Electricity Segment revenues.

Products Segment

The principal expenses attributable to our Products Segment include materials, salaries and related employee benefits, expenses related to subcontracting activities, transportation expenses, and sales commissions to sales representatives. Some of the principal expenses attributable to our Products Segment, such as a portion of the costs related to labor, utilities and other support services are fixed. As a result, the cost of revenues attributable to our Products Segment, expressed as a percentage of total revenues, fluctuates. Another reason for such fluctuation is that in responding to bids for our products, we price our products and services in relation to existing competition and other prevailing market conditions, which may vary substantially from order to order.

Cash, Cash Equivalents and Marketable Securities

Our cash, cash equivalents and marketable securities as of March 31, 2007 decreased to $74.7 million from $116.7 million as of December 31, 2006. This decrease is principally due to the combination of the funding of capital expenditures in the amount of $31.2 million and repayments of long-term debt to our parent and third parties in the amount of $23.8 million, offset by $8.4 million of cash flow from operating activities.

Critical Accounting Policies

A comprehensive discussion of our critical accounting policies is included in the ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ section in our annual report on Form 10-K for the year ended December 31, 2006.

New Accounting Pronouncements

See Note 2 to our Condensed Consolidated Financial Statements set forth in Item 1 of this quarterly report for information regarding new accounting pronouncements.

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Results of Operations

Our historical operating results in dollars and as a percentage of total revenues are presented below. A comparison of the different periods described below may be of limited utility as a result of each of the following: (i) our recent construction of new projects and enhancement of acquired projects, and (ii) fluctuation in revenues from our Products Segment. In the first quarter of 2007, an accumulation of operational issues resulted in both reduced revenues and increased costs. Such operational issues are not expected to continue and are not indicative of future trends.


  Three Months Ended
March 31,
  2007 2006
  (in thousands, except per share data)
Statements of Operations Historical Data:    
Revenues:    
Electricity Segment $ 43,658 $ 43,733
Products Segment 18,089 16,588
  61,747 60,321
Cost of revenues:    
Electricity Segment 39,722 26,867
Products Segment 15,924 10,532
  55,646