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

ora20170930_10q.htm

 



 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 


 

Form 10-Q

 

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

   
 

For the quarterly period ended September 30, 2017

   
 

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, Reno, Nevada

89511-1136

(Address of principal executive offices)

 (Zip Code)

 

 

(775) 356-9029

(Registrant’s telephone number, including area code)

 

 

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

 

Large accelerated filer ☑

Accelerated filer ☐ Non-accelerated filer ☐

Smaller reporting company ☐

       

Emerging growth company ☐

     
    (Do not check if a smaller reporting 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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 5, 2017, the number of outstanding shares of common stock, par value $0.001 per share, was 50,597,124.



 

 

Table of Contents

 

ORMAT TECHNOLOGIES, INC.

 

 

FORM 10-Q

 

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

 

PART I — FINANCIAL INFORMATION

 
   

ITEM 1.

FINANCIAL STATEMENTS

4

     

ITEM 2.

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

28

     

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

62

     

ITEM 4.

CONTROLS AND PROCEDURES

62

     

PART II — OTHER INFORMATION

 
   

ITEM 1.

LEGAL PROCEEDINGS

63

     

ITEM 1A.

RISK FACTORS

64

     

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

64

     

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

64

     

ITEM 4.

MINE SAFETY DISCLOSURES

64

     

ITEM 5.

OTHER INFORMATION

64

     

ITEM 6.

EXHIBITS

65

     

SIGNATURES

66

 

 

ii

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.

 

iii

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

ASSETS

 

Current assets:

               

Cash and cash equivalents

  $ 77,212     $ 230,214  

Restricted cash and cash equivalents (primarily related to VIEs)

    42,559       34,262  

Receivables:

               

Trade

    98,384       80,807  

Other

    11,591       17,482  

Inventories

    18,685       12,000  

Costs and estimated earnings in excess of billings on uncompleted contracts

    42,087       52,198  

Prepaid expenses and other

    41,727       45,867  

Total current assets

    332,245       472,830  

Investment in an unconsolidated company

    25,367        

Deposits and other

    17,371       18,553  

Deferred charges

    43,972       43,773  

Property, plant and equipment, net ($1,518,962 and $1,483,224 related to VIEs, respectively)

    1,621,012       1,556,378  

Construction-in-process ($105,848 and $120,853 related to VIEs, respectively)

    350,872       306,709  

Deferred financing and lease costs, net

    5,426       3,923  

Intangible assets, net

    86,806       52,753  

Goodwill

    20,667       6,650  

Total assets

  $ 2,503,738     $ 2,461,569  

LIABILITIES AND EQUITY

 

Current liabilities:

               

Accounts payable and accrued expenses

  $ 103,335     $ 91,650  

Short term revolving credit lines with banks (full recourse)

    33,900        

Billings in excess of costs and estimated earnings on uncompleted contracts

    6,015       31,630  

Current portion of long-term debt:

               

Limited and non-recourse (primarily related to VIEs):

               

Senior secured notes

    27,847       32,234  

Other loans

    21,495       21,495  

Full recourse

    864       12,242  

Total current liabilities

    193,456       189,251  

Long-term debt, net of current portion:

               

Limited and non-recourse (primarily related to VIEs):

               

Senior secured notes (less deferred financing costs of $8,202 and $9,177, respectively)

    322,299       350,388  

Other loans (less deferred financing costs of $5,496 and $6,409, respectively)

    247,401       261,845  

Full recourse:

               

Senior unsecured bonds (less deferred financing costs of $617 and $755, respectively)

    203,715       203,577  

Other loans (less deferred financing costs of $1,043 and $1,346, respectively)

    48,957       57,063  

Investment in an unconsolidated company

          11,081  

Liability associated with sale of tax benefits

    46,803       54,662  

Deferred lease income

    52,273       54,561  

Deferred income taxes

    54,495       35,382  

Liability for unrecognized tax benefits

    6,188       5,738  

Liabilities for severance pay

    20,364       18,600  

Asset retirement obligation

    24,740       23,348  

Other long-term liabilities

    19,121       21,294  

Total liabilities

    1,239,812       1,286,790  

Commitments and contingencies (Note 10)

               
                 

Redeemable nonconrolling interest

    6,481       4,772  
                 

Equity:

               

The Company's stockholders' equity:

               

Common stock, par value $0.001 per share; 200,000,000 shares authorized; 50,597,124 and 49,667,340 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

    51       50  

Additional paid-in capital

    896,005       869,463  

Retained earnings

    289,561       216,644  

Accumulated other comprehensive income (loss)

    (5,634 )     (7,732 )
      1,179,983       1,078,425  

Noncontrolling interest

    77,462       91,582  

Total equity

    1,257,445       1,170,007  

Total liabilities, redeemable nonconrolling interest and equity

  $ 2,503,738     $ 2,461,569  

 

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

 

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME

(Unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands,

except per share data)

   

(Dollars in thousands,

except per share data)

 

Revenues:

                               

Electricity

  $ 112,273     $ 109,795     $ 339,826     $ 321,664  

Product

    44,912       74,822       186,621       174,408  

Total revenues

    157,185       184,617       526,447       496,072  

Cost of revenues:

                               

Electricity

    65,774       66,481       197,249       192,410  

Product

    32,218       43,647       125,102       99,504  

Total cost of revenues

    97,992       110,128       322,351       291,914  

Gross profit

    59,193       74,489       204,096       204,158  

Operating expenses:

                               

Research and development expenses

    716       1,086       2,368       2,030  

Selling and marketing expenses

    3,630       4,793       12,083       12,136  

General and administrative expenses

    10,877       19,093       33,027       36,625  

Write-off of unsuccessful exploration activities

          1,294             2,714  

Operating income

    43,970       48,223       156,618       150,653  

Other income (expense):

                               

Interest income

    255       266       861       831  

Interest expense, net

    (11,692 )     (17,137 )     (41,155 )     (51,561 )

Derivatives and foreign currency transaction gains (losses)

    (1,001 )     (222 )     2,040       (2,592 )

Income attributable to sale of tax benefits

    3,506       3,463       14,019       12,380  

Other non-operating expense, net

    (1,592 )     (5,546 )     (1,678 )     (5,306 )

Income from continuing operations before income taxes and equity in losses of investees

    33,446       29,047       130,705       104,405  

Income tax provision

    (11,003 )     (11,988 )     (28,258 )     (29,387 )

Equity in earnings (losses) of investees, net

    337       (2,653 )     (1,690 )     (4,734 )

Income from continuing operations

    22,780       14,406       100,757       70,284  

Net income attributable to noncontrolling interest

    (3,599 )     (2,326 )     (11,228 )     (4,584 )

Net income attributable to the Company's stockholders

  $ 19,181     $ 12,080     $ 89,529     $ 65,700  

Comprehensive income:

                               

Net income

    22,780       14,406       100,757       70,284  

Other comprehensive income (loss), net of related taxes:

                               

Change in foreign currency translation adjustments

    1,005             2,544        

Change in unrealized gains or losses in respect of the Company's share in derivatives instruments of unconsolidated investment

    618       1,337       271       (3,829 )

Loss in respect of derivative instruments designated for cash flow hedge

    20       22       62       65  

Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge

    (18 )     (24 )     (57 )     (72 )

Comprehensive income

    24,405       15,741       103,577       66,448  

Comprehensive income attributable to noncontrolling interest

    (4,006 )     (2,326 )     (11,950 )     (4,584 )

Comprehensive income attributable to the Company's stockholders

  $ 20,399     $ 13,415     $ 91,627     $ 61,864  

Earnings per share attributable to the Company's stockholders:

                               

Basic:

                               

Net income

  $ 0.38     $ 0.24     $ 1.79     $ 1.33  

Diluted:

                               

Net income

  $ 0.38     $ 0.24     $ 1.77     $ 1.31  

Weighted average number of shares used in computation of earnings per share attributable to the Company's stockholders:

                               

Basic

    50,367       49,599       49,942       49,410  

Diluted

    50,867       50,289       50,669       50,097  

Dividend per share declared

  $ 0.08     $ 0.07     $ 0.33     $ 0.45  

 

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

 

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

   

The Company's Stockholders' Equity

                 
                           

Retained

   

Accumulated

                         
                   

Additional

   

Earnings

   

Other

                         
   

Common Stock

   

Paid-in

   

(Accumulated

   

Income

           

Noncontrolling

   

Total

 
   

Shares

   

Amount

   

Capital

   

Deficit)

   

(Loss)

   

Total

   

Interest

   

Equity

 
                                                                 
   

(Dollars in thousands, except per share data)

 
                                                                 

Balance at December 31, 2015

    49,107     $ 49     $ 849,223     $ 148,396     $ (7,667 )   $ 990,001     $ 93,873     $ 1,083,874  
                                                                 

Stock-based compensation

                3,383                   3,383             3,383  

Exercise of options by employees and directors

    528       1       7,249                   7,250             7,250  

Cash paid to non controlling interest

                                        (10,622 )     (10,622 )

Cash dividend declared, $0.45 per share

                      (22,469 )           (22,469 )           (22,469 )

Increase in noncontrolling interest in Guadeloupe

                                        8,272       8,272  

Net income

                      65,700             65,700       4,390       70,090  

Other comprehensive income (loss), net of related taxes: cash flow hedge (net of related tax of $40)

                            65       65             65  

Change in unrealized gains or losses in respect of the Company's share in derivative instruments of unconsolidated investment (net of related tax of $0)

                            (3,829 )     (3,829 )           (3,829 )

Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge (net of related tax of $44)

                            (72 )     (72 )           (72 )
                                                                 

Balance at September 30, 2016

    49,635     $ 50     $ 859,855     $ 191,627     $ (11,503 )   $ 1,040,029     $ 95,913     $ 1,135,942  
                                                                 

Balance at December 31, 2016

    49,667     $ 50     $ 869,463     $ 216,644     $ (7,732 )   $ 1,078,425     $ 91,582     $ 1,170,007  
                                                                 

Stock-based compensation

                7,204                   7,204             7,204  

Exercise of options by employees and directors

    930       1       16,382                   16,383             16,383  

Cash paid to noncontrolling interest

                                        (18,032 )     (18,032 )

Cash dividend declared, $0.33 per share

                      (16,612 )           (16,612 )           (16,612 )

Buyout of Class B membership in ORTP

                2,956                   2,956       (6,964 )     (4,008 )

Net income

                      89,529             89,529       10,154       99,683  

Other comprehensive income (loss), net of related taxes:

                                                               

Currency translation adjustment

                            1,822       1,822       722       2,544  

Loss in respect of derivative instruments designated for cash flow hedge (net of related tax of $38)

                            62       62             62  

Change in unrealized gains or losses in respect of the Company's share in derivative instruments of unconsolidated investment (net of related tax of $0)

                            271       271             271  

Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge (net of related tax of $35)

                            (57 )     (57 )           (57 )
                                                                 

Balance at September 30, 2017

    50,597     $ 51     $ 896,005     $ 289,561     $ (5,634 )   $ 1,179,983     $ 77,462     $ 1,257,445  

 

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

 

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 
                 
   

(Dollars in thousands)

 

Cash flows from operating activities:

               

Net income

  $ 100,757     $ 70,284  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    81,010       77,565  

Amortization of premium from senior unsecured bonds

          (513 )

Accretion of asset retirement obligation

    1,392       1,243  

Stock-based compensation

    7,204       3,383  

Amortization of deferred lease income

    (2,014 )     (2,014 )

Income attributable to sale of tax benefits, net of interest expense

    (8,851 )     (5,920 )

Equity in losses of investees

    1,690       4,735  

Mark-to-market of derivative instruments

    (764 )     (381 )

Write-off of unsuccessful exploration activities

          2,714  

Gain on severance pay fund asset

    (1,463 )     (690 )

Deferred income tax provision

    16,506       20,742  

Liability for unrecognized tax benefits

    450       (125 )

Deferred lease revenues

    (274 )     (625 )

Other

    501        

Changes in operating assets and liabilities, net of amounts acquired:

               

Receivables

    (10,808 )     (13,711 )

Costs and estimated earnings in excess of billings on uncompleted contracts

    10,111       (12,905 )

Inventories

    (209 )     5,339  

Prepaid expenses and other

    (636 )     (5,364 )

Deposits and other

    1,231       (867 )

Accounts payable and accrued expenses

    (3,655 )     10,463  

Billings in excess of costs and estimated earnings on uncompleted contracts

    (25,344 )     3,242  

Liabilities for severance pay

    1,764       (369 )

Other long-term liabilities

    (2,065 )     1,801  

Net cash provided by operating activities

    166,533       158,027  

Cash flows from investing activities:

               

Net change in restricted cash, cash equivalents and marketable securities

    (8,297 )     (1,022 )

Capital expenditures

    (177,410 )     (107,951 )

Investment in unconsolidated companies

    (37,867 )      

Buyout of Class B membership in ORTP

    (2,357 )      

Cash paid for acquisition of controlling interest in a subsidiary, net of cash acquired

    (35,300 )     (18,135 )

Intangible assets acquired

    (868 )      

Decrease (increase) in severance pay fund asset, net of payments made to retired employees

    529       1,919  

Net cash used in investing activities

    (261,570 )     (125,189 )

Cash flows from financing activities:

               

Proceeds from exercise of options by employees

    16,382       7,250  

Proceeds from issuance of senior unsecured notes, net of transaction costs

          203,483  

Purchase of Senior unsecured notes

          (249,468 )

Prepayment of OFC Senior Secured Notes

    (14,270 )     (6,815 )

Proceeds from revolving credit lines with banks

    695,600       259,900  

Repayment of revolving credit lines with banks

    (661,700 )     (259,900 )

Cash received from noncontrolling interest

    2,017       1,972  

Repayments of long-term debt

    (55,226 )     (40,997 )

Cash paid to noncontrolling interest

    (18,032 )     (17,296 )

Payments of capital leases

    (1,472 )     (845 )

Deferred debt issuance costs

    (4,652 )     (3,506 )

Cash dividends paid

    (16,612 )     (22,469 )

Net cash used in financing activities

    (57,965 )     (128,691 )

Net change in cash and cash equivalents

    (153,002 )     (95,853 )

Cash and cash equivalents at beginning of period

    230,214       185,919  

Cash and cash equivalents at end of period

  $ 77,212     $ 90,066  

Supplemental non-cash investing and financing activities:

               

Increase (decrease) in accounts payable related to purchases of property, plant and equipment

  $ 982     $ (4,517 )

Accrued liabilities related to financing activities

  $     $ 6,291  

 

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

 

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — GENERAL AND BASIS OF PRESENTATION

 

These unaudited condensed consolidated interim financial statements of Ormat Technologies, Inc. and its subsidiaries (collectively, 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, these 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 September 30, 2017, the consolidated results of operations and comprehensive income (loss) for the three and nine-month periods ended September 30, 2017 and 2016 and the consolidated cash flows for the nine-month periods ended September 30, 2017 and 2016.

 

The financial data and other information disclosed in the notes to the condensed consolidated financial statements related to these periods are unaudited. The results for the three and nine-month periods ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017.

 

These condensed unaudited consolidated 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, 2016. The condensed consolidated balance sheet data as of December 31, 2016 was derived from the Company’s audited consolidated financial statements for the year ended December 31, 2016, 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.

 

Platanares geothermal power plant

 

On September 26, 2017, the Company announced that its 35 MW Platanares geothermal project in Honduras commenced commercial operation. The Company constructed the Platanares geothermal project under a Build, Operate, and Transfer (BOT) contract with ELCOSA, a privately owned Honduran energy company. The Company will operate the project for 15 years from commercial operation date (COD). Platanares sells its power under a 30-year power purchase agreement with the national utility of Honduras, ENEE. A portion of the land on which the project is located at is held by us through a lease from a local municipality.  Because the term of the lease exceeds the term in office of the relevant municipal government, it remains subject to an additional approval of the Honduran Congress in order to be fully valid.  The Company has commenced the necessary steps to obtain such approval but the current elections in Honduras may result in a delay in obtaining such approval.

 

OFC Senior Secured Notes prepayment

 

In September 2017, the Company fully prepaid all of its outstanding OFC Senior Secured Notes for $14.3 million. As a result of the prepayment, the Company recognized a loss of $1.5 million, including amortization of deferred financing costs of $0.2 million, which was included in other non-operating income (expense), net in the consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2017.

 

DEG Loan prepayment

 

In September 2017, the Company fully prepaid its DEG loan for $11.8 million. As a result of the prepayment, the Company recognized a loss of $0.5 million, including amortization of deferred financing costs of $0.4 million, which was included in other non-operating income (expense), net in the consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2017.

 

ORIX transaction 

 

On July 26, 2017, we announced that ORIX Corporation (“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, a Commercial Cooperation Agreement and a Registration Rights Agreement, following the unanimous recommendation of a Special Committee of the board of directors of the Company (the “Board”) that was formed to evaluate and negotiate the stockholder arrangements proposed by ORIX, and following approval by the Board. The closing of the transactions contemplated by the related agreements between ORIX and the Company also occurred on July 26, 2017.  

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Under the Governance Agreement, ORIX has the right to designate three persons to the Board, which was expanded to nine directors, and also propose a fourth person to be mutually agreed by the Company and ORIX to serve as a new independent director on the 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 Registration Rights Agreement, ORIX also has certain customary registration rights with respect to the shares of the Company’s common stock that it owns.

 

Under the Commercial Cooperation Agreement, the Company has exclusive rights to develop, own, operate and provide equipment for ORIX geothermal energy projects in all markets outside of Japan. In addition, the Company has certain rights to serve as technical partner and co-invest in ORIX geothermal energy projects in Japan. ORIX will also assist the Company in obtaining project financing for its geothermal energy projects from a variety of leading providers of renewable energy debt financing with which ORIX has relationships in Asia and around the world.

 

ORTP buyout

 

On March 30, 2017, the Company’s partner JPM Capital Corporation (“JPM”) achieved its target after-tax yield on its investment in ORTP, LLC (“ORTP”) and on July 10, 2017, Ormat Nevada Inc. (“Ormat Nevada”) purchased all of the Class B membership units in ORTP from JPM for $2.4 million. As a result, Ormat Nevada is now the sole owner of all of the economic and voting interests in ORTP and continues to consolidate ORTP in its financial statements. The purchase of Class B membership units of ORTP was recorded in equity as a reduction to Noncontrolling Interest with the surplus charged to Additional Paid-in Capital.

 

SCPPA power purchase agreement

 

During the second quarter of 2017, ONGP LLC (“ONGP”), one of the Company’s wholly-owned subsidiaries, entered into a power purchase agreement (“PPA”) with Southern California Public Power Authority (“SCPPA”), pursuant to which ONGP will sell, and SCPPA will purchase, geothermal power generated by a portfolio of nine different geothermal power plants owned by the Company and located in the US. The parties’ obligations under the PPA are based on a geothermal power generation capacity of 150 MW, and, pursuant to the PPA, ONGP is required to deliver a minimum of 135 MW and is entitled to deliver a maximum of 185 MW to SCPPA over the next five years. The 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.

 

Assertion of permanent reinvestment of foreign unremitted earnings in a subsidiary

 

During the second quarter of 2017, in conjunction with (i) the final approval of the SCPPA PPA which will require the Company to make significant capital expenditures in the United Sates, (ii) the fact that the Company is currently exploring acquisition opportunities in the United States, and (iii) the acquisition of substantially all the assets of Viridity for $35.3 million with two additional earn-out payments that may have to be made in 2018 and 2021, the Company has re-evaluated its position with respect to a portion of the unrepatriated earnings of Ormat Systems Ltd. (“OSL”), its wholly owned Subsidiary in Israel, and after consideration of the aforementioned change in facts, determined that it can no longer maintain the permanent reinvestment position with respect to a portion of OSL’s unrepatriated earnings which will be repatriated to support the Company’s capital expenditures in the United Sates. Accordingly, and as further described in Note 11, the permanent reinvestment assertion of foreign unremitted earnings of OSL was reassessed and removed and the related deferred tax assets and liabilities as well as the estimated withholding taxes on expected remittance of OSL earnings to the United States were recorded by the Company in the second quarter of 2017.

 

Viridity transaction

 

On March 15, 2017, the Company completed the acquisition of substantially all of the business and assets of Viridity Energy, Inc., a privately held Philadelphia-based company formerly engaged in the provision of demand response, energy management and energy storage services. At closing, Viridity Energy Solutions Inc. (“Viridity”), a wholly owned subsidiary of the Company, paid initial consideration of $35.3 million. Additional contingent consideration with an estimated fair value of $ 12.8 million will be payable in two installments upon the achievement of certain performance milestones measured at the end of fiscal years 2017 and 2020. The acquired business and assets are operated by Viridity.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Using proprietary software and solutions, Viridity serves primarily retail energy providers, utilities, and large commercial and industrial customers. Viridity’s offerings enable its customers to optimize and monetize their energy management, demand response and storage facilities potential by interacting on their behalf with regional transmission organizations and independent system operators.

 

The Company accounted for the transaction in accordance with Accounting Standard Codification 805, Business Combinations, and consequently recorded intangible assets of $34.7 million primarily relating to Viridity’s storage and non-storage activities with a weighted-average amortization period of 17 years, approximately $0.4 million of working capital and fixed assets and $13.9 million of goodwill. Following the transaction, the Company consolidated Viridity in accordance with Accounting Standard Codification 810, Consolidation. The acquisition enabled the Company to enter the growing energy storage and demand response markets and expand its market presence. 

 

The revenues of Viridity for the period from March 15, 2017 to September 30, 2017 were included in the Company’s consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2017.

 

Accounting guidance provides that the allocation of the purchase price may be modified for up to one year from the date of the acquisition to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date.

 

Other comprehensive income

 

For the nine months ended September 30, 2017 and 2016, the Company classified $5,000 and $7,000, respectively, related to derivative instruments designated as cash flow hedges, from accumulated other comprehensive income, of which $9,000 and $11,000, respectively, were recorded to reduce interest expense and $4,000 and $4,000, respectively, were recorded against the income tax provision, in the condensed consolidated statements of operations and comprehensive income. For the three months ended September 30, 2017 and 2016, the Company classified $2,000 and $2,000, respectively, related to derivative instruments designated as cash flow hedges, from accumulated other comprehensive income, of which $6,000 and $3,000 respectively, was recorded to reduce interest expense and $4,000 and $1,000, respectively, were recorded against the income tax provision, in the condensed consolidated statements of operations and comprehensive income. The accumulated net loss included in Other comprehensive income as of September 30, 2017, is $0.6 million

 

Write-offs of unsuccessful exploration activities

 

There were no write-offs of unsuccessful exploration activities for the three and nine months ended September 30, 2017. Write-offs of unsuccessful exploration activities for the three and nine months ended 2016 were $1.3 million and $2.7 million, respectively. The write-offs of exploration costs in 2016 were related to the Company’s exploration activities in Nevada and Chile, after which the Company determined that the applicable sites would not support commercial operations.

 

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 and in foreign countries. At September 30, 2017 and December 31, 2016, the Company had deposits totaling $23.9 million and $72.5 million, respectively, in seven United States financial institutions that were federally insured up to $250,000 per account. At September 30, 2017 and December 31, 2016, the Company’s deposits in foreign countries amounted to approximately $56.0 million and $166.2 million, respectively.

 

At September 30, 2017 and December 31, 2016, accounts receivable related to operations in foreign countries amounted to approximately $67.5 million and $53.3 million, respectively. At September 30, 2017 and December 31, 2016, accounts receivable from the Company’s primary customers amounted to approximately 48% and 60% of the Company’s accounts receivable, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Sierra Pacific Power Company and Nevada Power Company (subsidiaries of NV Energy, Inc.) accounted for 16.3% and 14.4% of the Company’s total revenues for the three months ended September 30, 2017 and 2016, respectively, and 17.4% and 18.6% for the nine months ended September 30, 2017 and 2016, respectively.

 

Kenya Power and Lighting Co. Ltd. accounted for 17.6% and 15.1% of the Company’s total revenues for the three months ended September 30, 2017 and 2016, respectively, and 15.7% and 16.4% of the Company’s total revenues for the nine months ended September 30, 2017 and 2016, respectively.

 

Southern California Public Power Authority (“SCPPA”) accounted for 9.1% and 7.7% of the Company’s total revenues for the three months ended September 30, 2017 and 2016, respectively, and 8.9% and 9.9% of the Company’s total revenues for the nine months ended September 30, 2017 and 2016, respectively.

 

Hyundai (Sarulla geothermal project) accounted for 0.9% and 24% of the Company’s total revenues for the three months ended September 30, 2017 and 2016, respectively, and 4.7% and 14% for the nine months ended September 30, 2017 and 2016, respectively.

 

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 nine-month period ended September 30, 2017

 

Improvement to Employee Share-Based Payment Accounting

 

In March 2016, the Financial Accounting Standards Board “(FASB”) issued Accounting Standard Update (“ASU”) 2016-09, Improvement to Employee Share-Based Payment Accounting, an update to the guidance on stock-based compensation. Under the new guidance, all excess tax benefits and tax deficiencies will be recognized in the income statement as they occur. This will replace previous guidance, which required tax benefits that exceed compensation cost (windfalls) to be recognized in equity. It also eliminated the need to maintain a “windfall pool,” and removed the requirement to delay recognizing a windfall until it reduces current taxes payable. The new guidance also changed the cash flow presentation of excess tax benefits, classifying them as operating inflows, consistent with other cash flows related to income taxes. Previously, windfalls were classified as financing activities. This guidance affects the dilutive effects in earnings per share, as there will no longer be excess tax benefits recognized in additional paid in capital. Previously those excess tax benefits were included in assumed proceeds from applying the treasury stock method when computing diluted EPS. Under the amended guidance, companies are able to make an accounting policy election to either (1) continue to estimate forfeitures or (2) account for forfeitures as they occur. This updated guidance is effective for annual and interim periods beginning after December 15, 2016. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

 Interests Held through Related Parties that are under Common Control

 

 In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests held through Related Parties that are under Common Control. The amendments in this update require that if a decision maker is required to evaluate whether it is the primary beneficiary of a VIE, it will need to consider only its proportionate indirect interest in the VIE held through a common control party. The amendments in this update should be applied retrospectively for each period presented and are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

Simplifying the Measurement of Inventory

 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, Topic 330. The update contains no amendments to disclosure requirements, but replaces the concept of ‘lower of cost or market’ with that of ‘lower of cost and net realizable value’. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. The amendments should be applied prospectively with early adoption permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

New accounting pronouncements effective in future periods

 

Derivatives and Hedging

 

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The amendments in this Update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted in any interim period after issuance of the Update. The Company is currently evaluating the potential impact of the adoption of these amendments on its consolidated financial statements, if any.

 

Intangibles –Goodwill and Other

 

 In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). The amendments in this Update require the entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider the income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This Update, eliminated Step 2 from the goodwill impairment test under the current guidance. Step 2 measures a goodwill impairment loss by comparing the implied fair value of reporting unit’s goodwill with the carrying amount of that goodwill. The amendments in this Update should be applied on a prospective basis. An entity is also required to disclose the nature of and the reason for the change in accounting principal upon transition. That disclosure should be provided in the first annual period and the interim period within the first annual period when the entity initially adopts the amendments in this Update. The amendments in this Update are effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the potential impact of the adoption of these amendments on its consolidated financial statements.

 

Compensation - Stock Compensation

 

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718). The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this update require that an entity should account for the effects of a modification unless all of the following are met: (1) The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this Update. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the potential impact of the adoption of these amendments on its consolidated financial statements.

 

Business Combinations

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805). The update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update primarily provide a screen to determine when a set of assets and activities is not a business and by that reduces the number of transactions that need to be further evaluated. The amendments in this update should be applied prospectively and are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of the adoption of these amendments on its consolidated financial statements.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Statement of Cash Flow

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash. The amendments in this update require that a statement of cash flows explain the changes during the period in total cash, cash equivalents, and the amounts generally described as restricted cash or cash equivalents. Therefore, amounts of restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update should be applied retrospectively for each period presented and are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of the adoption of these amendments on its consolidated financial statements.

 

Intra-Entity Transfers of Assets Other than Inventory

 

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The amendments in this update require that the entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new guidance does not apply to intra-entity transfers on inventory. The amendments in this update should be applied for each period presented and are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The modified retrospective approach will be required for transition to the new guidance, with cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. Early adoption is permitted in the first quarter of 2017. The Company is currently evaluating the potential impact of the adoption of these amendments on its consolidated financial statements.

 

Revenues from Contracts with Customers

 

In May 2014, the FASB issued ASU 2014-09, Revenues from Contracts with Customers, Topic 606, which was a joint project of the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The update provides that an entity should recognize revenue in connection with the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, an entity is required to apply each of the following steps: (1) identify the contract(s) with the customer; (2) identify the performance obligations in the contracts; (3) determine the transaction price; (4) allocate the transaction price to the performance obligation in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 also prescribes additional financial presentations and disclosures. The amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early adoption is permitted no earlier than 2017 for calendar fiscal year entities. The Company expects the adoption of this standard to have an immaterial impact, if any, on its Electricity segment as it accounts for its PPA’s under ASC 840, Leases, however, the Company is still evaluating the related potential impact on its investment in an unconsolidated company. The Company is still evaluating the potential impact of the adoption of the standard on its Product segment, however, it believes that such impact, if any, will be immaterial.

 

In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations. This update does not change the core principles of the guidance and is intended to clarify the implementation guidance on principal versus agent considerations. When another entity is involved in providing goods or services to a customer, an entity is required to determine if the nature of its promise is to provide the specific good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). The guidance includes indicators to assist an entity in determining whether it acts as a principal or agent in a specified transaction. The amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early adoption is permitted no earlier than 2017 for calendar fiscal year entities. The Company is currently evaluating the potential impact, if any, of the adoption of these amendments on its consolidated financial statements, however, it believes that any such impact, if any, will be immaterial.

 

Leases

 

 In February 2016, the FASB issued ASU 2016-02, Leases, Topic 842. This update introduces a number of changes and simplifies previous guidance, primarily the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. The Update retains the distinction between finance leases and operating leases and the classification criteria between the two types remains substantially similar. Also, lessor accounting remains largely unchanged from previous guidance. However, key aspects of the Update were aligned with the revenue recognition guidance in Topic 606. Additionally, the Update defines a lease as a contract, or part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of the identified asset means that the customer has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. The amendments in this update are effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods. Early adoption is permitted. The Company is currently evaluating the potential impact, if any, of the adoption of these amendments on its consolidated financial statements.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Recognition and Measurement of Financial Assets and Financial Liabilities

 

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The update primarily requires that an entity present separately, in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The application of this update should be by means of cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of the fiscal year of adoption. The Company is currently evaluating the potential impact, if any, of the adoption of this update on its consolidated financial statements.

 

NOTE 3 — INVENTORIES

 

Inventories consist of the following:

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

Raw materials and purchased parts for assembly

  $ 9,461     $ 5,429  

Self-manufactured assembly parts and finished products

    9,224       6,571  

Total

  $ 18,685     $ 12,000  

 

NOTE 4 — UNCONSOLIDATED INVESTMENTS

 

Unconsolidated investments consist of the following:

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

Sarulla

  $ 25,367     $ (11,081 )

 

 

The Sarulla Project

 

The Company holds a 12.75% equity interest in a consortium which is in the process of developing the Sarulla geothermal power project in Indonesia with an expected generating capacity of approximately 330 MW. The Sarulla project is located in Tapanuli Utara, North Sumatra, Indonesia and is owned and operated by the consortium members under the framework of a joint operating contract and energy sales contract that were both signed on April 4, 2013. Under the joint operating contract, 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 energy sales contract, PT PLN, the state electric utility, is the off-taker at Sarulla for a period of 30 years. In addition to its equity interest in the consortium, the Company designed the Sarulla power plant and supplies its Ormat energy converters to the power plant pursuant to a supply agreement that was signed in October 2013, as further described below. 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The project is being constructed in three phases of approximately 110 MW each, utilizing both steam and brine extracted from the geothermal field to increase the power plant’s efficiency. The first phase of the power plant commenced commercial operation on March 17, 2017 and is performing well, demonstrating its ability to produce geothermal power in excess of its design capacity. The second phase of the power plant commenced commercial operation on October 2, 2017. Construction work on the third phase of the power plant is progressing and on schedule although the gathering piping system may face some delays. The Company has achieved all of its contractual milestones under the Supply Agreement. Drilling for the third phase of the power plant is ongoing and the project has achieved to date, based on preliminary estimates, 100% of the required injection capacity and approximately 85% of the required production capacity.

 

On May 16, 2014, the consortium closed $1.17 billion in financing for the development of the Sarulla project with a consortium of lenders comprised of Japan Bank for International Cooperation (“JBIC”), the Asian Development Bank and six commercial banks and obtained construction and term loans on a limited recourse basis backed by a political risk guarantee from JBIC. Of the $1.17 billion, $0.1 billion (which was drawn down by the Sarulla project company on May 23, 2014) bears interest at a fixed rate and $1.07 billion bears interest at a rate linked to LIBOR. The project has missed several milestones under the financing documents, but, in each case, has either already received, or expects to receive in the near future, waivers from the lenders. The project experienced delays in field development and cost overruns resulting from delays and excess drilling costs. Due to the cost overruns in drilling, the lenders may request that the project sponsors contribute additional equity to the project.

 

The Sarulla consortium entered into interest rate swap agreements with various international banks, effective as of June 4, 2014, in order to fix the interest rate linked to LIBOR on up to $0.96 billion of the $1.07 billion portion of the financing arrangement subject to such interest rate at 3.4565%. The Sarulla project company accounted for the interest rate swap as a cash flow hedge upon which changes in the fair value of the hedging instrument, relative to the effective portion, are recorded in other comprehensive income. During the three and nine months ended September 30, 2017, the Sarulla project company recorded gains of $4.8 million and $2.1 million, respectively, net of deferred tax, of which the Company’s share was $0.6 million and $0.3 million, respectively. The Company’s share of such gains were recorded in other comprehensive income. During the three and nine months ended September 30, 2016, the Sarulla project company recorded a gain of $10.5 million and a loss of $30.0 million, respectively, net of deferred tax, of which the Company’s share was $1.3 million and $3.8 million, respectively. The Company’s share of such losses were recorded in other comprehensive income. The related accumulated loss recorded by the Company in other comprehensive income (loss) as of September 30, 2017 is $5.6 million.

 

The Company had added the $255.6 million supply agreement to its Product segment backlog in 2014. The Company started to recognize revenue from the project during the third quarter of 2014 and will complete revenue recognition over the course of the next year. The Company has eliminated the related intercompany profit of $14.1 million against equity in loss of investees.

 

During the three and nine months ended September 30, 2017, the Company made additional equity investments in the Sarulla project of approximately $10.5 million and $37.9 million, respectively, for a total of $49.8 million since inception.

 

 

NOTE 5— FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The fair value measurement guidance clarifies that fair value is an exit price, representing the amount that would be received upon selling an asset or paid upon transferring a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the fair value measurement guidance are described below:

 

Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

 

Level 2 — Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability

 

Level 3 — Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

15

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The following table sets forth certain fair value information at September 30, 2017 and December 31, 2016 for financial assets and liabilities measured at fair value by level within the fair value hierarchy, as well as cost or amortized cost. As required by the fair value measurement guidance, assets and liabilities are classified in their entirety based on the lowest level of inputs that is significant to the fair value measurement.

 

           

September 30, 2017

 
           

Fair Value

 
   

Carrying

Value at

September

30, 2017

   

Total

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

Assets:

                                       

Current assets:

                                       

Cash equivalents (including restricted cash accounts)

  $ 13,497     $ 13,497     $ 13,497     $     $  

Derivatives:

                                       

Put options on gas price (3)

    61       61             61        

Contingent receivable (1)

    1,125       1,125                   1,125  

Currency forward contracts (2)

    486       486             486        

Liabilities:

                                       

Current and long-term liabilities:

                                       

Derivatives:

                                       

Contingent payables (1)

  $ (25,913 )   $ (25,913 )   $     $     $ (25,913 )

Warrants (1)

    (3,889 )     (3,889 )                     (3,889 )

Currency forward contracts (2)

    (203 )     (203 )           (203 )      
    $ (14,836 )   $ (14,836 )   $ 13,497     $ 344     $ (28,677 )

 

 

           

December 31, 2016

 
           

Fair Value

 
   

Carrying Value at December 31, 2016

   

Total

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

Assets

                                       

Current assets:

                                       

Cash equivalents (including restricted cash accounts)

  $ 14,922     $ 14,922     $ 14,922     $     $  

Derivatives:

                                       

Contingent receivable (1)

    1,443       1,443                   1,443  

Liabilities:

                                       

Current and long-term liabilities:

                                       

Derivatives:

                                       

Contingent payables (1)

  $ (11,581 )   $ (11,581 )   $     $     $ (11,581 )

Warrants (1)

    (3,429 )     (3,429 )                 (3,429 )

Currency forward contracts (2)

    (481 )     (481 )           (481 )      
    $ 874     $ 874     $ 14,922     $ (481 )   $ (13,567 )

 

16

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

 

(1)

These amounts relate to contingent receivables and payables relating to the Viridity acquisition and Guadeloupe power plant purchase transaction, valued primarily based on unobservable inputs and are included within Prepaid expenses and other, Accounts payable and accrued expenses and Other long-term liabilities on September 30, 2017 and within Prepaid expenses and other and Other long-term liabilities on December 31, 2016 in the consolidated balance sheets with the corresponding gain or loss being recognized within Derivatives and foreign currency transaction gains (losses) in the consolidated statement of operations and comprehensive income.

 

 

(2)

These amounts relate to currency forward contracts valued primarily based on observable inputs, including forward and spot prices for currencies, net of contracted rates and then multiplied by notional amounts, and are included within Prepaid expenses and other and Accounts payable and accrued expenses on September 30, 2017 and December 31, 2016, in the consolidated balance sheet with the corresponding gain or loss being recognized within Derivatives and foreign currency transaction gains (losses) in the consolidated statement of operations and comprehensive income.

 

 

(3)

These amounts relate to natural gas put options, valued primarily based on observable inputs, including spot prices on related commodity indices, and are included within Prepaid expenses and other on September 30, 2017 in the consolidated balance sheets with the corresponding gain or loss being recognized within Derivatives and foreign currency transaction gains (losses) in the consolidated statement of operations and comprehensive income.

 

The amounts set forth in the tables above include investments in debt instruments and money market funds (which are included in cash equivalents). Those securities and deposits are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in an active market.

 

The following table presents the amounts of gain (loss) recognized in the consolidated statements of operations and comprehensive income on derivative instruments not designated as hedges:

 

       

Amount of recognized gain (loss)

 

Derivatives not designated

 

Location of recognized

 

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
 as hedging instruments    gain (loss)  

2017

   

2016

   

2017

   

2016

 
                                     

Put options on natural gas price

 

Derivatives and foreign currency transaction gains (losses)

  $ (121 )   $     $ (362 )   $  

Call options on natural gas price

 

Derivatives and foreign currency transaction gains (losses)

          32             (1,114 )

Call and put options on oil price

 

Derivatives and foreign currency transaction gains (losses)

          230             (1,312 )

Contingent considerations

 

Derivative and foreign currency transaction gains (losses)

    (19 )           (114 )      

Currency forward contracts

 

Derivative and foreign currency and transaction gains (losses)

    (887 )     689       2,832       1,154  
        $ (1,027 )   $ 951     $ 2,356     $ (1,272 )

 

17

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

In January 2017, the Company entered into Henry Hub Natural Gas Future contracts under which it has bought a number of put options covering a notional quantity of approximately 4.1 million British Thermal Units (“MMBtu”) with exercise prices of $3 and expiration dates ranging from January 26, 2017 until November 27, 2017 in order to reduce its exposure to fluctuations in natural gas prices under its PPAs with Southern California Edison. The Company paid an aggregate amount of approximately $0.7 million for these put options. The put option contracts have monthly expiration dates at which the options can be called and the transaction would be settled on a net cash basis.

 

On February 2, 2016, the Company entered into Henry Hub Natural Gas Future contracts under which it had written a number of call options covering a notional quantity of approximately 4.1 MMBtu with exercise prices of $2 and expiration dates ranging from February 24, 2016 until December 27, 2016 in order to reduce its exposure to fluctuations in natural gas prices under its PPAs with Southern California Edison. The Company received an aggregate premium of approximately $1.9 million from these call options. The call option contracts had monthly expiration dates on which the options could have been called and the Company would have had to settle its liability on a cash basis.

 

On February 24, 2016, the Company entered into Brent Oil Future contracts under which it had written a number of call options covering a notional quantity of approximately 185,000 barrels (“BBL”) of Brent with exercise prices of $32.80 to $35.50 and expiration dates ranging from March 24, 2016 until December 22, 2016 in order to reduce its exposure to fluctuations in Brent prices under its PPA with HELCO. The Company received an aggregate premium of approximately $1.1 million from these call options. The call option contracts had monthly expiration dates on which the options could have been be called and the Company would have had to settle its liability on a cash basis. Moreover, during March 2016, the Company rolled 2 existing call options covering a total notional quantity of 31,800 BBL of Brent in order to limit its exposure to $41 to $42.50 instead of $32.80 to $33.50. In addition, the Company entered into short risk reversal transactions (sell call and buy put options) by rolling existing call options covering notional quantities of 16,500 BBL and 17,000 BBL in order to limit its exposure from the outstanding call options originally entered into in February 2016 to between $28.50 and $37.50 and $28 and $38.50, respectively.

 

The foregoing future and forward transactions were not designated as hedge transactions and are marked to market with the corresponding gains or losses recognized within “Derivatives and foreign currency transaction gains (losses)”.

 

There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 during the nine months ended September 30, 2017.

 

The fair value of the Company’s long-term debt approximates its carrying amount, except for the following:

 

   

Fair Value

   

Carrying Amount

 
   

September 30,

2017

   

December 31,

2016

   

September 30,

2017

   

December 31,

2016

 
   

(Dollars in millions)

   

(Dollars in millions)

 

Olkaria III Loan - DEG

  $     $ 16.3     $     $ 15.8  

Olkaria III Loan - OPIC

    242.9       253.4       233.1       246.6  

Olkaria IV Loan - DEG 2

    52.4       50.9       50.0       50.0  

Amatitlan Loan

    34.2       37.3       34.1       36.8  

Senior Secured Notes:

                               

Ormat Funding Corp. ("OFC")

          17.0             17.0  

OrCal Geothermal Inc. ("OrCal")

    34.1       37.4       32.1       35.2  

OFC 2 LLC ("OFC 2")

    242.5       249.0       236.6       247.2  

Don A. Campbell 1 ("DAC1")

    88.2       88.9       89.6       92.4  

Senior Unsecured Bonds

    201.4       200.1       204.3       204.3  

Other long-term debt

    7.3       10.4       8.0       11.2  

 

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The fair value of the OFC Senior Secured Notes is determined using observable market prices as these securities are traded. The fair value of all the other long-term debt is determined by a valuation model, which is based on a conventional discounted cash flow methodology and utilizes assumptions of current borrowing rates. The fair value of revolving lines of credit is determined using a comparison of market-based price sources that are reflective of similar credit ratings to those of the Company.

 

The carrying value of other financial instruments, such as revolving lines of credit, deposits, and other long-term debt approximates fair value.

 

The following table presents the fair value of financial instruments as of September 30, 2017:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(Dollars in millions)

 

Olkaria III - OPIC

  $     $     $ 242.9     $ 242.9  

Olkaria IV - DEG 2

                52.4       52.4  

Amatitlan Loan

          34.2             34.2  

Senior Secured Notes:

                               

OrCal

                34.1       34.1  

OFC 2

                242.5       242.5  

Don A. Campbell 1

                88.2       88.2  

Senior Unsecured Bonds

                201.4       201.4  

Other long-term debt

                7.3       7.3  

Revolving lines of credit

          33.9             33.9  

Deposits

    15.2                   15.2  

 

 

The following table presents the fair value of financial instruments as of December 31, 2016:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(Dollars in millions)

 

Olkaria III Loan - DEG

  $     $     $ 16.3     $ 16.3  

Olkaria III Loan - OPIC

                253.4       253.4  

Olkaria IV - DEG 2

                50.9       50.9  

Amatitlan Loan

          37.3             37.3  

Senior Secured Notes:

                               

OFC

          17.0             17.0  

OrCal

                37.4       37.4  

OFC 2

                249.0       249.0  

Don A. Campbell 1

                88.9       88.9  

Senior Unsecured Bonds

                200.1       200.1  

Other long-term debt

          3.3       7.1       10.4  

Deposits

    14.4                   14.4  

 

19

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

NOTE 6 — STOCK-BASED COMPENSATION

 

The 2004 Incentive Compensation Plan

 

In 2004, the Board adopted the 2004 Incentive Compensation Plan (“2004 Incentive Plan”), which provided for the grant of the following types of awards: incentive stock options, non-qualified stock options, restricted stock, stock appreciation rights (“SARs”), stock units, performance awards, phantom stock, incentive bonuses, and other possible related dividend equivalents to employees of the Company, directors and independent contractors. Under the 2004 Incentive Plan, a total of 3,750,000 shares of the Company’s common stock were reserved for issuance, all of which could be issued as options or as other forms of awards. Options and SARs granted to employees under the 2004 Incentive Plan 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. Options granted to non-employee directors under the 2004 Incentive Plan cliff vest and are exercisable one year after the grant date. Vested stock-based awards may be exercised for up to ten years from the grant date. The shares of common stock issued in respect of awards under the 2004 Incentive Plan are issued from the Company’s authorized share capital upon exercise of options or SARs. The 2004 Incentive Plan expired in May 2012 upon adoption of the 2012 Incentive Compensation Plan (“2012 Incentive Plan”), except as to stock-based awards outstanding under the 2004 Incentive Plan on that date.

 

The 2012 Incentive Compensation Plan

 

In May 2012, the Company’s shareholders adopted the 2012 Incentive Plan, which provides for the grant of the following types of awards: incentive stock options, non-qualified stock options, restricted stock, SARs, stock units, performance awards, phantom stock, incentive bonuses, and other possible related dividend equivalents to employees of the Company, directors and independent contractors. Under the 2012 Incentive Plan, a total of 4,000,000 shares of the Company’s common stock have been reserved for issuance, all of which could be issued as options or as other forms of awards. Options and SARs granted to employees under the 2012 Incentive Plan typically vest and become exercisable as follows: 25% vest 24 months after the grant date, an additional 25% vest 36 months after the grant date, and the remaining 50% vest 48 months after the grant date. Options granted to non-employee directors under the 2012 Incentive Plan will vest and become exercisable one year after the grant date. The term of stock-based awards typically ranges from six to ten years from the grant date. The shares of common stock issued in respect of awards under the 2012 Incentive Plan are issued from the Company’s authorized share capital upon exercise of options or SARs.

 

The 2012 Incentive Plan empowers the Board, in its discretion, to amend the 2012 Incentive Plan in certain respects. Consistent with this authority, in February 2014 the Board adopted and approved certain amendments to the 2012 Incentive Plan. The key amendments are as follows:

 

●     Increase of per grant limit: Section 15(a) of the 2012 Incentive Plan was amended to allow the grant of up to 400,000 shares of the Company’s common stock with respect to the initial grant of an equity award to newly hired executive officers in any calendar year; and

 

●     Acceleration of vesting: Section 15(l) of the 2012 Incentive Plan was amended to clarify the Company’s ability to provide in the applicable award agreement that part and/or all of the award will be accelerated upon the occurrence of certain predetermined events and/or conditions, such as a change in control (as defined in the 2012 Incentive Plan, as amended).

 

NOTE 7 — INTEREST EXPENSE, NET

 

The components of interest expense are as follows:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Interest related to sale of tax benefits

  $ 1,607     $ 2,565     $ 5,468     $ 6,269  

Interest expense

    13,299       15,726       41,620       47,214  

Less — amount capitalized

    (3,214 )     (1,154 )     (5,933 )     (1,922 )
    $ 11,692     $ 17,137     $ 41,155     $ 51,561  

 

20

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

NOTE 8 — EARNINGS PER SHARE

 

Basic earnings per share attributable to the Company’s stockholders is computed by dividing net income or loss attributable to the Company’s 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-based awards.

 

The table below shows the reconciliation of the number of shares used in the computation of basic and diluted earnings per share:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Weighted average number of shares used in computation of basic earnings per share

    50,367       49,599       49,942       49,410  

Add:

                               

Additional shares from the assumed exercise of employee stock options

    500       690       727       687  
                                 

Weighted average number of shares used in computation of diluted earnings per share

    50,867       50,289       50,669       50,097  

 

The number of stock-based awards that could potentially dilute future earnings per share and that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive was 8,851 and 225,191 for the three months ended September 30, 2017 and 2016, respectively, and 6,494 and 116,641 for the nine months ended September 30, 2017 and 2016, respectively.

 

21

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

NOTE 9 — BUSINESS SEGMENTS

 

The Company has two reporting segments: the Electricity segment and the Product segment. These 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 from the Company’s power plants pursuant to PPAs. The Product 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

   

Product

   

Consolidated

 
   

(Dollars in thousands)

 

Three Months Ended September 30, 2017:

                       

Net revenue from external customers

  $ 112,273     $ 44,912     $ 157,185  

Intersegment revenue

          28,248       28,248  

Operating income

    36,205       7,765       43,970  

Segment assets at period end (1)

    2,371,855       131,883       2,503,738  
                         

Three Months Ended September 30, 2016:

                       

Net revenue from external customers

  $ 109,795     $ 74,822       184,617  

Intersegment revenue

          14,835       14,835  

Operating income

    23,903       24,320       48,223  

Segment assets at period end

    2,137,845       141,426       2,279,271  
                         

Nine Months Ended September 30, 2017:

                       

Net revenues from external customers

  $ 339,826     $ 186,621       526,447  

Intersegment revenues

          61,026       61,026  

Operating income

    113,220       43,398       156,618  

Segment assets at period end (1)

    2,371,855       131,883       2,503,738  
                         

Nine Months Ended September 30, 2016:

                       

Net revenues from external customers

  $ 321,664     $ 174,408       496,072  

Intersegment revenues

          36,042       36,042  

Operating income

    91,502       59,151       150,653  

Segment assets at period end

    2,137,845       141,426       2,279,271  

 

 

 

(1)

Electricity segment assets include goodwill in the amount of $20.7 million.

 

22

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Revenue:

                               

Total segment revenue

  $ 157,185     $ 184,617     $ 526,447     $ 496,072  

Intersegment revenue

    28,248       14,835       61,026       36,042  

Elimination of intersegment revenue

    (28,248 )     (14,835 )     (61,026 )     (36,042 )

Total consolidated revenue

  $ 157,185     $ 184,617     $ 526,447     $ 496,072  
                                 

Operating income:

                               

Operating income

  $ 43,970     $ 48,223     $ 156,618     $ 150,653  

Interest income

    255       266       861       831  

Interest expense, net

    (11,692 )     (17,137 )     (41,155 )     (51,561 )

Derivatives and foreign currency transaction gains (losses)

    (1,001 )     (222 )     2,040       (2,592 )

Income attributable to sale of tax benefits

    3,506       3,463       14,019       12,380  

Other non-operating expense, net

    (1,592 )     (5,546 )     (1,678 )     (5,306 )

Total consolidated income before income taxes and equity in losses of investees

  $ 33,446     $ 29,047     $ 130,705     $ 104,405  

 

23

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

NOTE 10 — COMMITMENTS AND CONTINGENCIES

 

 

Jon Olson and Hilary Wilt, together with Puna Pono Alliance filed a complaint on February 17, 2015 in the Third Circuit Court for the State of Hawaii, requesting declaratory and injunctive relief requiring that Puna Geothermal Venture comply with an ordinance that the plaintiffs allege will prohibit PGV from engaging in night drilling operations at its KS-16 well site. On May 17, 2015, the original complaint was amended to add the County of Hawaii and the State of Hawaii Department of Land and Natural Resources as defendants to the case. On October 10, 2016, the court issued its decision in response to each of the plaintiffs’ and defendants’ motions for summary judgment, denying plaintiffs’ motion and granting defendant PGV's and the County of Hawaii’s cross motions for summary judgment, effectively rendering the plaintiffs’ action moot. On January 23, 2017, the plaintiffs filed a motion requesting that the Intermediate Court of Appeals address appellate jurisdiction, which was denied by the court on April 20, 2017 as premature. The Company believes that it has valid defenses under law, and intends to defend itself vigorously.

 

 

On July 8, 2014, Global Community Monitor, LiUNA, and two residents of Bishop, California filed a complaint in the U.S. District Court for the Eastern District of California, alleging that Mammoth Pacific, L.P., the Company and Ormat Nevada are operating three geothermal generating plants in Mammoth Lakes, California (MP-1, MP-II and PLES-I) in violation of the federal Clean Air Act and Great Basin Unified Air Pollution Control District rules. On June 26, 2015, in response to a motion by the defendants, the court dismissed all but one of the plaintiffs’ causes of action. On January 6, 2017, the court issued its order regarding several pending motions, including plaintiffs’ motion for partial summary judgment, defendants' motion for summary judgment, defendants' motion to exclude and defendants' motion for leave to file a sur-reply. The impact of the court’s January 6, 2017 order is to deny the plaintiffs’ sole remaining cause of action. No appeal by the plaintiffs is expected and the company considers this case to be effectively closed.

 

 

On March 29, 2016, a former local sales representative in Chile, Aquavant, S.A., filed a claim against Ormat’s subsidiaries in the 27th Civil Court of Santiago, Chile on the basis of unjust enrichment. The claim requests that the court order Ormat to pay Aquavant $4.8 million in connection with its activities in Chile, including the EPC contract for the Cerro Pabellon project and various geothermal concessions, plus 3.75% of Ormat geothermal products sales in Chile over the next 10 years. Pursuant to various motions submitted by the defendants and the plaintiffs to various courts, including the Court of Appeals, the 11th Civil Court of Santiago, rather than the 27th Civil Court, was found to be the competent court. Plaintiffs appealed to the 11th Civil Court to accept the case as it stood for continued review although not submitted to that court originally, but the court denied the plaintiffs’ request. The Company believes that it has valid defenses under law, and intends to defend itself vigorously.

 

 

On August 5, 2016, George Douvris, Stephanie Douvris, Michael Hale, Cheryl Cacocci, Hillary E. Wilt and Christina Bryan, acting for themselves and on behalf of all other similarly situated residents of the lower Puna District, filed a complaint in the Third Circuit Court for the State of Hawaii seeking certification of a class action for preliminary and permanent injunctive relief, consequential and punitive damages, attorney’s fees and statutory interest against PGV and other presently unknown defendants. On December 12, 2016, the federal district court granted plaintiffs’ motion for joinder of HELCO as a co-defendant, and the case, which had previously been removed to the U.S. District Court for the District of Hawaii, was remanded back to the Third Circuit Court. The amended complaint alleged that injuries and other damages in an undisclosed amount were caused to the plaintiffs as a result of an alleged toxic release by PGV in the wake of Hurricane Iselle in August 2014. On June 14, 2017, the Third Circuit Court denied HELCO’s motion to dismiss the complaint against HELCO. Discovery is underway. The Company believes that it has valid defenses under law, and intends to defend itself vigorously.

 

 

On June 20, 2016, Nadia Garcia, individually and as successor in interest to Thomas Garcia Valenzuela, and as guardian ad litem to Emerie Garcia, Khamilla Garcia and Reyene Adam, filed a complaint against Ormat Technologies, Ormat Nevada and Ormesa LLC in the Superior Court of Imperial County seeking unspecified monetary damages. The complaint alleges that the Ormat defendants caused the wrongful death, personal injury and other harm to Thomas Garcia when he was employed by Martin Hydroblasting Services, Inc. and suffered injuries leading to his death while performing work at the Ormesa plant site on or around March 31, 2016. The plaintiffs and the deceased's employer’s insurer reached an out of court settlement that was approved by the US District Court, Southern District of California, and executed May 25, 2017. The case has been dismissed, without liability to the Company.

 

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

In addition, from time to time, the Company is named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of our business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings, the Company accrues reserves when a loss is probable and the amount of such loss can be reasonably estimated. It is the opinion of the Company’s management that the outcome of these proceedings, individually and collectively, will not be material to the Company’s consolidated financial statements as a whole.

 

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

NOTE 11 — INCOME TAXES

 

As further described in Note 1 and in connection with the closing of the SCPPA PPA portfolio agreement, during the second quarter of 2017 the Company changed its assertion related to permanent reinvestment of foreign unremitted earnings in Ormat Systems, its Israeli fully owned subsidiary. Accordingly, a deferred tax liability in the amount of $111.0 million was recorded which represents the estimated tax impact of future repatriation of the unremitted foreign earning in Ormat Systems at the statutory U.S. tax rate of 35%. Additionally, the Company accrued $53.9 million for the estimated Israeli withholding taxes expected when Ormat Systems remits its earnings to the U.S. The Company also recorded a deferred tax asset in the amount of $111.1 million for foreign tax credits related to taxes already paid by Ormat Systems on such earnings in Israel.

 

Realization of the deferred tax assets and tax credits is dependent on generating sufficient taxable income in appropriate jurisdictions prior to expiration of the NOL carryforwards and tax credits. In prior periods and through March 31, 2017 the Company had maintained a valuation allowance against its net deferred tax asset balance in the US. As of March 31, 2017 such valuation allowance was $109.6 million. Based upon new available evidence of the Company’s ability to generate additional taxable income in the U.S. due to the closing of the SCPPA PPA portfolio and the Company’s permanent reinvestment of unremitted earnings assertion change with respect to Ormat Systems Ltd., $61.5 million of valuation allowance was released against the U.S. deferred tax assets, as it is more likely than not that the deferred tax assets will be utilized. However, the Company is maintaining a valuation allowance of $47.0 million against a portion of the U.S. foreign tax credits that are expected to expire before they can be utilized in future periods. Additionally, the Company recorded a specific valuation allowance of $1.1 million attributable to current year projected activity as this will need to be held back and recognized throughout the year as current year income is earned for a total valuation allowance of $48.1 million as of September 30, 2017. This valuation allowance is based upon management’s estimates of future taxable income. Although the degree of variability inherent in the estimates of future taxable income is significant and subject to change in the near term, management believes that the estimate is adequate. However, the amount of deferred tax asset considered realizable could change in the near term if estimates which require significant judgment of future taxable income during the carryforward period are increased or decreased.  Accordingly, the estimated valuation allowance is continually reviewed and as adjustments to the valuation allowance become necessary, such adjustments will be reflected in current earnings.

 

The Company’s effective tax rate for the three months ended September 30, 2017 and 2016 was 32.9% and 41.3%, respectively, and 21.6% and 28.1% for the nine months ended September 30, 2017 and 2016, respectively. The effective rate differs from the federal statutory rate of 35% for the nine months ended September 30, 2017 due to: (i) a partial valuation allowance release against the Company’s U.S. deferred tax assets as described above in respect of net operating loss (“NOL”) carryforwards (see below) offset by withholding taxes related to the assertion change on the Company’s permanent reinvestment of foreign unremitted earnings in Ormat Systems also as described above, (ii) lower tax rate in Israel of 16%, partially offset by a tax rate in Kenya of 37.5%; and (iii) a tax credit and tax exemption related to the Company’s subsidiaries in Guatemala and Honduras. The effect of the tax credit and tax exemption for the three months ended September 30, 2017 and 2016 was $0.6 million in both periods and for the nine months ended September 30, 2017 and 2016 was $2.3 million and $2.4 million, respectively.

 

As described above, the Company is currently in a net deferred tax asset position with a partial valuation allowance against the Company’s foreign tax credits that are expected to expire before they can be utilized in future periods. As of December 31, 2016, the Company had U.S. Federal NOL carryforwards of approximately $299.6 million, which expire between 2029 and 2036, and state NOL carryforwards of approximately $244.7 million, which expire between 2018 and 2036 which are available to reduce future taxable income. The Company's investment tax credits (“ITCs”) in the amount of $0.7 million at December 31, 2016 are available for a 20-year period and expire between 2022 and 2024. The Company's production tax credits (“PTCs”) in the amount of $82.5 million at December 31, 2016 are available for a 20-year period and expire between 2026 and 2036. The Company also has offsetting deferred tax liabilities in the U.S.

 

The total amount of undistributed earnings of foreign subsidiaries related to Ormat Systems for income tax purposes was approximately $367 million at December 31, 2016. Although the Company plans to repatriate undistributed earnings related to Ormat Systems to support expected capital expenditure requirements in the U.S., based upon its plans to increase its operations outside of the U.S., it is the Company’s intention to reinvest undistributed earnings of its other foreign subsidiaries and thereby indefinitely postpone their remittance, given that the Company requires existing and future cash to fund the anticipated investment and development activities as well as debt service requirements in those jurisdictions. In addition, the Company believes that existing and anticipated cash flows as well as borrowing capacity in the U.S. and cash to be remitted to the U.S. from Ormat Systems will be sufficient to meet its needs in the U.S. Accordingly, no provision has been made for foreign withholding taxes or U.S. income taxes with respect to its foreign subsidiaries, other than Ormat Systems, which may become payable if undistributed earnings of foreign subsidiaries were paid as dividends to the Company. The additional taxes on that portion of undistributed earnings in those other jurisdictions which is available for dividends are not practicably determinable. If plans change the Company may be required to accrue and pay U.S. taxes to repatriate these funds.

 

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The Company is subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating tax positions and determining the position for income taxes. Reserves are established to tax-related uncertainties based on estimates of whether, and the extent to which additional taxes will be due. As of September 30, 2017, the Company is unaware of any potentially significant uncertain tax positions for which a reserve has not been established.

 

As previously reported by the Company, the Kenya Revenue Authority (“KRA”) conducted an audit related to the Company’s operations in Kenya for fiscal years 2012 and 2013. On June 20, 2017, the Company has signed a Settlement Agreement with the KRA under which it paid approximately $2.6 million in principal for full settlement of all claims raised by the KRA during the audit. The principal amount that was paid in June 2017 was recorded as an addition to the cost of the power plants and is qualified for investment deduction at 150% under the terms of the settlement agreement. Additionally, as per the Settlement Agreement, the Company submitted a request for waiver on the applied interest in the amount of approximately $1.2 million, for which the Company recorded a provision to cover such a potential exposure.

 

 

NOTE 12 — SUBSEQUENT EVENTS

 

Cash dividend

 

On November 7, 2017, the Board declared, approved and authorized payment of a quarterly dividend of $4.0 million ($0.08 per share) to all holders of the Company’s issued and outstanding shares of common stock on November 21, 2017, payable on December 5, 2017.

 

OPC buyout

 

On May 31, 2017, the Company’s partners JPM and Morgan Stanley achieved their target after-tax yield on its investment in OPC, LLC (“OPC”) and on October 31, 2017, Ormat Nevada purchased all of the Class B membership units in OPC from JPM and Morgan Stanley for $1.9 million. As a result, Ormat Nevada is now the sole owner of all of the economic and voting interests in OPC and continues to consolidate OPC in its financial statements.

 

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

 

Cautionary Note Regarding Forward-Looking Statements

 

This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this quarterly report that address activities, events or developments that we expect or anticipate will or may occur in the future, including such matters as our projections of annual revenues, expenses and debt service coverage with respect to our debt securities, future capital expenditures, business strategy, competitive strengths, goals, development or operation of generation assets, market and industry developments and the growth of our business and operations, are forward-looking statements. When used in this quarterly report on Form 10-Q, the words “may”, “will”, “could”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “projects”, “potential”, or “contemplate” or the negative of these terms or other comparable terminology are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this quarterly report are primarily located in the material set forth under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, and “Notes to Condensed Consolidated Financial Statements”, but are found in other locations as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management’s current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this quarterly report on Form 10-Q completely and with the understanding that actual future results and developments may be materially different from what we expect attributable to a number of risks and uncertainties, many of which are beyond our control.

 

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;

 

 

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 renewable power market penetration on the energy price component under certain of our power purchase agreements (“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;

 

 

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 U.S. 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 cooperation agreement with Orix 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 photovoltaic (“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;

 

 

the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 and any update contained herein and other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (“SEC”); 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.

 

 

Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Other than as required by law, we undertake no obligation to update forward-looking statements even though our situation may change in the future. Given these risks and uncertainties, readers are cautioned not to place un-attributable 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, 2016 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 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.