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EX-31 - EXHIBIT 31.1 - ORMAT TECHNOLOGIES, INC.ex31-1.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 June 30, 2014

   
 

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

 

Large accelerated filer ☐

Accelerated filer ☑   

Non-accelerated filer ☐  

Smaller reporting company ☐

  (Do not check if a smaller reporting company)

 

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 August 6, 2014, the number of outstanding shares of common stock, par value $0.001 per share, was 45,518,847.

 



 
 

 

 

ORMAT TECHNOLOGIES, INC.

 

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2014

 

PART I — FINANCIAL INFORMATION

 
     

ITEM 1.

FINANCIAL STATEMENTS

4

     

ITEM 2.

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

25

     

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

56

     

ITEM 4.

CONTROLS AND PROCEDURES

56

   

PART II — OTHER INFORMATION

 
     

ITEM 1.

LEGAL PROCEEDINGS

57

     

ITEM 1A.

RISK FACTORS

57

     

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

57

     

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

57

     

ITEM 4.

MINE SAFETY DISCLOSURES

58

     

ITEM 5.

OTHER INFORMATION

58

     

ITEM 6.

EXHIBITS

58

   

SIGNATURES

59

 

 
2

 

 

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.

 

 
3

 

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   

June 30,

2014

   

December 31,

2013

 
   

(In thousands)

 

ASSETS

Current assets:

               
                 

Cash and cash equivalents

  $ 80,120     $ 57,354  

Restricted cash, cash equivalents and marketable securities (all related to variable interest entities ("VIEs"))

    54,077       51,065  

Receivables:

               

Trade

    78,764       95,365  

Related entity

    442       442  

Other

    7,963       11,049  

Due from Parent

    607       382  

Inventories

    18,292       22,289  

Costs and estimated earnings in excess of billings on uncompleted contracts

    25,918       21,217  

Deferred income taxes

    2,484       523  

Prepaid expenses and other

    38,156       29,654  

Total current assets

    306,823       289,340  

Unconsolidated investments

    3,308       7,076  

Deposits and other

    23,480       22,114  

Deferred income taxes

          891  

Deferred charges

    35,674       36,738  

Property, plant and equipment, net ($1,399,678 and $1,381,083 related to VIEs, respectively)

    1,468,012       1,452,336  

Construction-in-process ($55,181 and $136,947 related to VIEs, respectively)

    247,901       288,827  

Deferred financing and lease costs, net

    29,429       30,178  

Intangible assets, net

    30,302       31,933  

Total assets

  $ 2,144,929     $ 2,159,433  

LIABILITIES AND EQUITY

Current liabilities:

               
                 

Accounts payable and accrued expenses

  $ 79,800     $ 98,047  

Short term revolving credit lines with banks (full recourse)

    42,600        

Billings in excess of costs and estimated earnings on uncompleted contracts

    28,185       7,903  

Current portion of long-term debt:

               

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

               

Senior secured notes

    30,208       31,137  

Other loans

    21,207       20,377  

Full recourse

    23,994       28,875  

Total current liabilities

    225,994       186,339  

Long-term debt, net of current portion:

               

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

               

Senior secured notes

    241,146       270,310  

Other loans

    300,429       311,078  

Full recourse:

               

Senior unsecured bonds (plus unamortized premium based upon 7% of $975)

    250,443       250,596  

Other loans

    43,940       53,467  

Revolving credit lines with banks

    82,000       112,017  

Liability associated with sale of tax benefits

    50,829       60,985  

Deferred lease income

    62,029       63,496  

Deferred income taxes

    63,884       55,035  

Liability for unrecognized tax benefits

    5,589       4,950  

Liabilities for severance pay

    23,794       23,841  

Asset retirement obligation

    19,422       18,679  

Other long-term liabilities

    4,830       3,529  

Total liabilities

    1,374,329       1,414,322  
                 

Commitments and contingencies (Note 10)

               
                 

Equity:

               

The Company's stockholders' equity:

               

Common stock, par value $0.001 per share; 200,000,000 shares authorized; 45,518,847 and 45,460,653 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

    46       46  

Additional paid-in capital

    738,842       735,295  

Retained earnings (accumulated deficit)

    22,597       (3,088 )

Accumulated other comprehensive income (loss)

    (3,673 )     487  
      757,812       732,740  

Noncontrolling interest

    12,788       12,371  

Total equity

    770,600       745,111  
                 

Total liabilities and equity

  $ 2,144,929     $ 2,159,433  

 

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

 
4

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME 

(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 
   

(In thousands, except per share data)

   

(In thousands, except per share data)

 

Revenues:

                               
                                 

Electricity

  $ 91,692     $ 87,713     $ 186,509     $ 156,011  

Product

    35,911       64,966       83,530       115,574  

Total revenues

    127,603       152,679       270,039       271,585  

Cost of revenues:

                               

Electricity

    67,322       58,641       124,356       113,729  

Product

    20,324       43,657       52,267       80,698  

Total cost of revenues

    87,646       102,298       176,623       194,427  

Gross margin

    39,957       50,381       93,416       77,158  

Operating expenses:

                               

Research and development expenses

    232       1,608       145       2,608  

Selling and marketing expenses

    3,216       3,777       6,595       15,286  

General and administrative expenses

    6,072       7,134       13,668       13,718  

Write-off of unsuccessful exploration activities

    8,107             8,107        

Operating income

    22,330       37,862       64,901       45,546  

Other income (expense):

                               

Interest income

    90       87       201       128  

Interest expense, net

    (22,072 )     (17,504 )     (42,590 )     (33,367 )

Foreign currency translation and transaction gains (losses)

    (55 )     904       (693 )     2,586  

Income attributable to sale of tax benefits

    6,130       5,783       12,847       9,315  

Gain from sale of property, plant and equipment

    7,628             7,628        

Other non-operating income, net

    343       29       406       1,446  

Income before income taxes and equity in income (losses) of investees

    14,394       27,161       42,700       25,654  

Income tax provision

    (4,967 )     (5,780 )     (11,287 )     (9,827 )

Equity in income (losses) of investees

    (114 )     9       (311 )     9  

Income from continuing operations

    9,313       21,390       31,102       15,836  

Discontinued operations:

                               

Income from discontinued operations (including gain on disposal of $0, $3,646, $0 and $3,646, respectively)

          4,480             5,311  

Income tax provision

          (363 )           (614 )

Total income from discontinued operations

          4,117             4,697  
                                 

Net income

    9,313       25,507       31,102       20,533  

Net income attributable to noncontrolling interest

    (177 )     (322 )     (414 )     (407 )
                                 

Net income attributable to the Company's stockholders

  $ 9,136     $ 25,185     $ 30,688     $ 20,126  

Comprehensive income:

                               

Net income

    9,313       25,507       31,102       20,533  

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

                               

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

    (4,088 )           (4,088 )      

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

    (36 )     (42 )     (72 )     (84 )

Comprehensive income

    5,189       25,465       26,942       20,449  

Comprehensive income attributable to noncontrolling interest

    (177 )     (211 )     (414 )     (407 )

Comprehensive income attributable to the Company's stockholders

  $ 5,012     $ 25,254     $ 26,528     $ 20,042  
                                 

Earnings per share attributable to the Company's stockholders - basic and diluted:

                               
                                 

Income from continuing operations

  $ 0.20     $ 0.46     $ 0.67     $ 0.34  

Discontinued operations

          0.09             0.10  

Net income

    0.20       0.55       0.67       0.44  

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

                               

Basic

    45,606       45,431       45,545       45,431  

Diluted

    45,963       45,448       45,827       45,443  
                                 

Dividend per share declared

  $ 0.05     $ 0.04     $ 0.11     $ 0.04  

 

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

 
5

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

   

The Company's Stockholders' Equity

                 
   

Common Stock

   

Additional

Paid-in

   

Retained

Earnings(Accumulated

   

Accumulated Other Income Comprehensive

           

Noncontrolling

   

Total

 
   

Shares

   

Amount

   

Capital

   

Deficit)

   

(Loss)

   

Total

   

Interest

   

Equity

 
   

(In thousands, except per share data)

 
       

Balance at December 31, 2012, as revised

    45,431     $ 46     $ 732,140     $ (44,326 )   $ 651     $ 688,511     $ 7,096     $ 695,607  

Stock-based compensation

                2,857                   2,857             2,857  

Cash paid to noncontrolling interest

                                        (349 )     (349 )

Cash dividend declared, $0.04 per share

                                        5,151       5,151  

Net income

                      20,126             20,126       407       20,533  

Other comprehensive loss, net of related taxes:

                                                               

Amortization of gains in respect of derivative instruments designated for cash flow hedge (net of related tax of $52)

                            (84 )     (84 )           (84 )
                                                                 

Balance at June 30, 2013

    45,431     $ 46     $ 734,997     $ (24,200 )   $ 567     $ 711,410     $ 12,305     $ 723,715  
                                                                 

Balance at December 31, 2013

    45,461     $ 46     $ 735,295     $ (3,088 )   $ 487     $ 732,740     $ 12,371     $ 745,111  

Stock-based compensation

                2,806                   2,806             2,806  

Exercise of options by employees and directors

    58             741                   741             741  

Cash paid to noncontrolling interest

                                        (254 )     (254 )

Cash dividend declared, $0.11 per share

                      (5,003 )           (5,003 )           (5,003 )

Increase in noncontrolling interest

                                        257       257  

Net income

                      30,688             30,688       414       31,102  

Other comprehensive income, net of related taxes:

                                                               

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)

                            (4,088 )     (4,088 )           (4,088 )

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

                            (72 )     (72 )           (72 )
                                                                 

Balance at June 30, 2014

    45,519     $ 46     $ 738,842     $ 22,597     $ (3,673 )   $ 757,812     $ 12,788     $ 770,600  

 

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

 
6

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

 

   

Six Months Ended June 30,

 
   

2014

   

2013

 
   

(In thousands)

 

Cash flows from operating activities:

               
                 

Net income

  $ 31,102     20,533  

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

               

Depreciation and amortization

    48,819       45,884  

Amortization of premium from senior unsecured bonds

    (153 )     (153 )

Accretion of asset retirement obligation

    743       758  

Stock-based compensation

    2,806       2,857  

Amortization of deferred lease income

    (1,343 )     (1,343 )

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

    (7,540 )     (4,578 )

Equity in (income) losses of investees

    311       (9 )

Mark-to-market of derivative instruments

    (302 )     2,370  

Write-off of unsuccessful exploration activities

    8,107        

Loss on severance pay fund asset

    (396 )     (403 )

Gain on sale of a subsidiary and property, plant and equipment

    (7,628 )     (3,646 )

Deferred income tax provision

    8,887       9,634  

Liability for unrecognized tax benefits

    639       1,074  

Deferred lease revenues

    (124 )     (117 )

Other

    (181 )     (819 )

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

               

Receivables

    19,959       (17,748 )

Costs and estimated earnings in excess of billings on uncompleted contracts

    (4,701 )     (6,710 )

Inventories

    3,997       2,763  

Prepaid expenses and other

    (8,738 )     (4,173 )

Deposits and other

    86       (2,840 )

Accounts payable and accrued expenses

    (11,094 )     (8,827 )

Due from/to related entities, net

          (46 )

Billings in excess of costs and estimated earnings on uncompleted contracts

    20,282       (14,438 )

Liabilities for severance pay

    (47 )     309  

Other long-term liabilities

    313       (225 )

Due from/to Parent

    (225 )     (157 )

Net cash provided by operating activities

    103,579       19,950  

Cash flows from investing activities:

               

Short-term deposit

          (11 )

Net change in restricted cash and cash equivalents

    (3,012 )     (8,975 )

Cash received from sale of a subsidiary and property, plant and equipment

    35,250       7,699  

Capital expenditures

    (89,125 )     (102,019 )

Cash grant received from the U.S. Treasury under Section 1603 of the ARRA

    27,427        

Investment in unconsolidated companies

    (631 )     (924 )

Increase in severance pay fund asset, net of payments made to retired employees

    1,079       1,061  

Net cash used in investing activities

    (29,012 )     (103,169 )

Cash flows from financing activities:

               

Proceeds from long-term loans

          45,000  
Proceeds from exercise of options by employees     392        

Proceeds from the sale of limited liability company interest in ORTP, LLC, net of transaction costs

          31,508  

Purchase of OFC Senior Secured Notes

    (12,860 )     (11,888 )

Proceeds from revolving credit lines with banks

    1,742,383       1,354,761  

Repayment of revolving credit lines with banks

    (1,729,800 )     (1,348,120 )

Repayments of long-term debt

    (41,078 )     (18,787 )

Cash paid to non-controlling interest

    (5,398 )     (6,990 )

Cash received from non-controlling interest

    2,234        

Deferred debt issuance costs

    (2,671 )      

Cash dividends paid

    (5,003 )      

Net cash provided by (used in) financing activities

    (51,801 )     45,484  

Net change in cash and cash equivalents

    22,766       (37,735 )

Cash and cash equivalents at beginning of period

    57,354       66,628  
                 

Cash and cash equivalents at end of period

  $ 80,120      $ 28,893  

Supplemental non-cash investing and financing activities:

               
                 

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

  $ (7,289 )    $ 4,063  
                 

Accrued liabilities related to financing activities

  $      $ (1,347 )

 

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

 
7

 

 

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 June 30, 2014, the consolidated results of operations and comprehensive income for the three and six-month periods ended June 30, 2014 and 2013 and the consolidated cash flows for the six-month periods ended June 30, 2014 and 2013.

 

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 six-month periods ended June 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014.

 

These condensed 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, 2013. The condensed consolidated balance sheet data as of December 31, 2013 was derived from the audited consolidated financial statements for the year ended December 31, 2013, 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.

 

Other comprehensive income

 

For the six months ended June 30, 2014 and 2013, the Company reclassified $72,000 and $84,000, respectively, from other comprehensive income, of which $116,000 and $136,000, respectively, were recorded to reduce interest expense and $44,000 and $52,000, respectively, were recorded against the income tax provision, in the condensed consolidated statements of operations and comprehensive income. For the three months ended June 30, 2014 and 2013, the Company reclassified $36,000 and $42,000, respectively, from other comprehensive income, of which $58,000 and $68,000, respectively, were recorded to reduce interest expense and $22,000 and $26,000, respectively, were recorded against the income tax provision, in the condensed consolidated statements of operations and comprehensive income.

 

Termination fee

 

On March 15, 2013, the Company finalized the agreement with Southern California Edison Company (“Southern California Edison”), by which the G1 and G3 Standard Offer #4 power purchase agreements (“PPAs”) were terminated and a termination fee of $9.0 million was recorded in the first quarter of 2013 in selling and marketing expenses. Under the agreement, the Company will continue to sell power from G2, the third plant of the Mammoth complex, under its existing PPA with Southern California Edison, with the term of the contract extended by an additional six years until early 2027.

 

Solar project sale

 

On March 26, 2014, the Company signed an agreement with RET Holdings, LLC to sell the Heber Solar project in Imperial County, California for $35.25 million. The Company received the first payment of $15.0 million during the first quarter of 2014 and the second payment for the remaining $20.25 million was paid in the second quarter of 2014. Due to certain contingencies in the sale agreement, the Company deferred the pre-tax gain of approximately $7.6 million until the contingencies were resolved in the second quarter of 2014.

 

 
8

 

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Write-off of unsuccessful exploration activities

 

Write-off of unsuccessful activities for the three and six months ended June 30, 2014, was $8.1 million. This represents the write-off of exploration costs related to the Company’s exploration activities in the Wister site in California, which the Company determined in the second quarter of 2014 would not support commercial operations.

 

OFC 2 loan prepayment

 

On June 20, 2014, Phase I of Tuscarora Facility achieved Project Completion under the OFC 2 Note Purchase Agreement. In accordance with the terms of the Note Purchase Agreement and following recalibration of the financing assumptions, the loan amount was adjusted through a principal prepayment of $4,275,000.

   

Concentration of credit risk

 

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

 

The Company places its temporary cash investments with high credit quality financial institutions located in the United States (“U.S.”) and in foreign countries. At June 30, 2014 and December 31, 2013, the Company had deposits totaling $21,790,000 and $13,805,000, respectively, in seven U.S. financial institutions that were federally insured up to $250,000 per account. At June 30, 2014 and December 31, 2013, the Company’s deposits in foreign countries amounted to approximately $69,129,000 and $56,133,000, respectively.

 

At June 30, 2014 and December 31, 2013, accounts receivable related to operations in foreign countries amounted to approximately $48,814,000 and $32,231,000, respectively. At June 30, 2014 and December 31, 2013, accounts receivable from the Company’s primary customers (as described immediately below) amounted to approximately 51.8% and 35.0% of the Company’s accounts receivable, respectively.

 

Sierra Pacific Power Company and Nevada Power Company (subsidiaries of NV Energy, Inc.) accounted for 17.4% and 14.9% of the Company’s total revenues for the three months ended June 30, 2014 and 2013, respectively, and 17.6% and 17.8% for the six months ended June 30, 2014 and 2013, respectively.

 

Southern California Edison accounted for 13.5% and 12.4% of the Company’s total revenues for the three months ended June 30, 2014 and 2013, respectively, and 12.7% and 12.1% for the six months ended June 30, 2014 and 2013, respectively.

 

Hawaii Electric Light Company accounted for 10.1% and 8.6% of the Company’s total revenues for the three months ended June 30, 2014 and 2013, respectively, and 9.6% and 8.9% for the six months ended June 30, 2014 and 2013, respectively.

 

Kenya Power and Lighting Co. Ltd. accounted for 16.9% and 10.3% of the Company’s total revenues for the three months ended June 30, 2014 and 2013, respectively, and 15.6% and 9.5% for the six months ended June 30, 2014 and 2013, respectively.

 

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

 

NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS

 

New accounting pronouncements effective in the six-month period ended June 30, 2014

 

Presentation of Unrecognized Tax Benefits

In July 2013, the Financial Accounting Standards Board (“FASB”) clarified the accounting guidance on presentation of the unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance states that an unrecognized tax benefit (or a portion thereof) should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except for certain exceptions specified in the guidance. The exceptions include when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to reduce any income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and is to be made assuming the disallowance of the tax position at the reporting date. This accounting update is effective for fiscal periods after December 15, 2013. The provision was applied prospectively to all unrecognized tax benefits that exist on January 1, 2014. The adoption of this guidance did not have a material impact on the condensed consolidated financial statements. 

 

 
9

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

New accounting pronouncements effective in future periods

 

Reporting Discontinued Operations and Disclosures

In April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendment, required to be applied prospectively for reporting periods beginning after December 15, 2014, limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on operations and financial results. The amendment requires expanded disclosures for discontinued operations and also requires additional disclosures regarding disposals of individually significant components that do not qualify as discontinued operations. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. This amendment has no impact on our current disclosures, but will in the future if we dispose of any individually significant components of the Company.

 

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. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the potential impact, if any, of the adoption of these amendments on its consolidated financial statements.

 

NOTE 3 — INVENTORIES

 

Inventories consist of the following:

 

   

June 30,

2014

   

December 31,

2013

 
   

(Dollars in thousands)

 

Raw materials and purchased parts for assembly

  $ 4,174     $ 6,326  

Self-manufactured assembly parts and finished products

    14,118       15,963  

Total

  $ 18,292     $ 22,289  

 

 

 
10

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

 

NOTE 4 — UNCONSOLIDATED INVESTMENTS

 

Unconsolidated investments consist of the following:

 

   

June 30,

2014

   

December 31,

2013

 
   

(Dollars in thousands)

 
                 

Sarulla

  $ 3,308     $ 7,076  

  

The Sarulla Project 

 

The Company (through a subsidiary) is a 12.75% equity stake member of a consortium (the “Sarulla Consortium”) which is in the process of developing the Sarulla geothermal power project in Indonesia with expected generating capacity of approximately 330 megawatts (“MW”). The Sarulla project is located in Tapanuli Utara, North Sumatra, Indonesia and will be owned and operated by the consortium members under the framework of a Joint Operating Contract (“JOC”) and Energy Sales Contract (“ESC”) that were signed on April 4, 2013. Under the JOC, PT Pertamina Geothermal Energy, the concession holder for the project, has provided the consortium with the right to use the geothermal field, and under the ESC, PT PLN, the state electric utility, will be the off-taker at Sarulla for a period of 30 years. In addition to its equity holdings in the consortium, the Company designed the Sarulla plant and is expected to supply its Ormat Energy Converters (“OECs”) to the power plant. The supply contract was signed on October 2013.

 

The consortium has started preliminary testing and development activities at the site and signed an engineering procurement and construction agreement (“EPC”) with an unrelated third party. The project will be constructed in three phases of 110 MW each, utilizing both steam and brine extracted from the geothermal field to optimize the resource utilization.

 

On May 16, 2014, the consortium reached financial closing of $1.17 billion financing agreements to finance 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 loan under limited recourse financing package backed by political risk guarantee from JBIC.

 

Of the $1.17 billion, $0.1 billion (which was drawn-down by the Company on May 23, 2014) bears a fixed interest rate and $1.07 billion bears a Libor-based interest rate.

 

The Sarulla consortium entered into interest rate swap agreements with various international banks in order to fix the Libor interest rate on up to $0.96 billion of the $1.07 billion credit facility at a rate of 3.4565%. The interest rate swap became effective as of June 4, 2014 along with the second draw-down by the Company of $50.0 million.

         The Sarulla project has 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, will be recorded in other comprehensive income. As such, during the period, the project recorded a loss equal to $32.0 million, of which the Company's share was $4.1 million which was recorded in other comprehensive income

 

The first phase of operations is expected to commence in 2016 and the remaining two phases of operations are scheduled to commence within 18 months thereafter. The Company will supply its Ormat Energy Converters to the power plant and has added the $254.0 million supply contract to its product segment backlog. According to the current project plan, we expect to recognize revenue from the project over the course of the next three to four years starting in the third quarter of 2014.

 

During the first six months of 2014, the Company made additional investment contributions of $0.6 million to the Sarulla project, consistent with its pro rata share in the consortium.

 

 
11

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company’s share in the results of operations of the Sarulla project was not significant for each of the periods presented in these condensed consolidated financial statements.

 

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).

  

The following table sets forth certain fair value information at June 30, 2014 and December 31, 2013 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.

 

     Carrying
value at
June 30,
   

Fair Value at June 30, 2014

 
    2014    

Total

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

Assets

                                       

Current assets:

                                       

Cash equivalents (including restricted cash accounts)

  $ 40,991     $ 40,991     $ 40,991     $     $  

Derivatives:

                                       

Currency forward contracts(3)

    354       354             354        

Liabilities:

                                       

Current liabilities:

                                       

Swap transaction on natural gas price(2)

    (2,423 )     (2,423 )           (2,423 )      

Swap transaction on oil price(1)

    (106 )     (106 )           (106 )      
    $ 38,816     $ 38,816     $ 40,991     $ (2,175 )   $  

   

 

 
12

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     Carrying
value at
December
   

Fair Value at December 31, 2013

 
    31, 2013    

Total

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

Assets

                                       

Current assets:

                                       

Cash equivalents (including restricted cash accounts)

  $ 40,015     $ 40,015     $ 40,015     $     $  

Derivatives:

                                       

Currency forward contracts(3)

    2,290       2,290             2,290        

Liabilities

                                       

Current liabilities:

                                       

Derivatives:

                                       

Swap transaction on oil price(1)

    (2,490 )     (2,490 )           (2,490 )      

Swap transaction on natural gas price(2)

    (341 )     (341 )           (341 )      
    $ 39,474     $ 39,474     $ 40,015     $ (541 )   $  

 



(1)

This amount relates to derivatives which represent swap contracts on oil prices, valued primarily based on observable inputs, including forward and spot prices for related commodity indices, and are included within "prepaid expenses and other" and "accounts payable and accrued expenses" in the condensed consolidated balance sheet with the corresponding gain or loss being recognized within "electricity revenues" in the condensed consolidated statement of operations and comprehensive income (loss).

 

(2)

This amount relates to derivatives which represent swap contracts on natural gas prices, valued primarily based on observable inputs, including forward and spot prices for related commodity indices, and are included within "prepaid expenses and other" and "accounts payable and accrued expenses" in the condensed consolidated balance sheet with the corresponding gain or loss being recognized within "electricity revenues" in the condensed consolidated statement of operations and comprehensive income (loss).

 

(3)

This amount relates to derivatives which represent currency forward contracts, valued primarily based on observable inputs, including forward and spot prices for currencies, netted against contracted rates and then multiplied against notational amounts, and are included within "prepaid expenses and other" in the condensed consolidated balance sheet with the corresponding gain or loss being recognized within "foreign currency translation and transaction gains (losses)" in the condensed consolidated statement of operations and comprehensive income (loss).

  

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.

 

 
13

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

 

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

 

        Amount of recognized gain (loss)  

 Derivatives not designated
as hedging instruments

   Location of recognized gain (loss)  

Three Months Ended June 30,

   

Six Months Ended June 30,

 
       

2014

   

2013

   

2014

   

2013

 
                                     
       

(Dollars in thousands)

   

(Dollars in thousands)

 
                                     

Put options on oil price

 

Electricity revenues

  $     $ 496     $     $ (432 )

Swap transaction on oil price

 

Electricity revenues

    (679 )           228       (294 )

Swap transaction on natural gas price

 

Electricity revenues

    372       2,994       (2,904 )     (396 )
Currency forward contracts  

Foreign currency translation and transaction gains (losses)

    223       890       (8 )     2,925  
                                     
        $ (84 )   $ 4,380     $ (2,684 )   $ 1,803  

 

On September 3, 2013, the Company entered into an NGI swap contract with a bank for notional quantity of approximately 4.4 million MMbtu for settlement effective January 1, 2014 until December 31, 2014, in order to reduce its exposure to NGI below $4.035 per MMbtu under its PPAs with Southern California Edison. The contract did not have up-front costs. Under the terms of this contract, the Company makes floating rate payments to the bank and receives fixed rate payments from the bank on each settlement date. The swap contract has monthly settlement whereby the difference between the fixed price of $4.035 per MMbtu and the market price on the first commodity business day on which the relevant commodity reference price is published in the relevant calculation period (January 1, 2014 to December 1, 2014) is being settled on a cash basis.

 

On October 16, 2013, the Company entered into an NGI swap contract with a bank for notional quantity of approximately 4.2 million MMbtu for settlement effective January 1, 2014 until December 31, 2014, in order to reduce its exposure to NGI below $4.103 per MMbtu under its PPAs with Southern California Edison. The contract did not have any up-front costs. Under the terms of this contract, the Company makes floating rate payments to the bank and receives fixed rate payments from the bank on each settlement date. The swap contract has monthly settlements whereby the difference between the fixed price of $4.103 per MMbtu and the market price on the first commodity business day on which the relevant commodity reference price is published in the relevant calculation period (January 1, 2014 to December 1, 2014) is being settled on a cash basis.

 

On October 16, 2013, the Company entered into a New York Harbor ULSD swap contract with a bank for notional quantity of 275,000 BBL effective from January 1, 2014 until December 31, 2014 to reduce the Company’s exposure to fluctuations in the energy rate caused by fluctuations in oil prices under the 25 MW PPA for the Puna complex. The Company entered into this contract because the swap had a high correlation with the avoided cost (which is the incremental cost that the power purchaser avoids by not having to generate such energy itself) that HELCO uses to calculate the energy rate. The contract did not have any up-front costs. Under the term of this contract, the Company will make floating rate payments to the bank and receive fixed rate payments from the bank on each settlement date ($125.15 per BBL). The swap contract has monthly settlements whereby the difference between the fixed price and the monthly average market price will be settled on a cash basis.

 

On March 6, 2014, the Company entered into an NGI swap contract with a bank for notional quantity of approximately 2.2 million MMbtu for settlement effective January 1, 2015 until March 31, 2015, in order to reduce its exposure to NGI below $4.95 per MMbtu under its PPAs with Southern California Edison. The contract did not have any up-front costs. Under the terms of this contract, the Company will make floating rate payments to the bank and receive fixed rate payments from the bank on each settlement date. The swap contract has monthly settlements whereby the difference between the fixed price of $4.95 per MMbtu and the market price on the first commodity business day on which the relevant commodity reference price is published in the relevant calculation period (January 1, 2015 to March 1, 2015) will be settled on a cash basis.

 

 
14

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The foregoing swap transactions have not been designated as hedge transactions and are marked to market with the corresponding gains or losses recognized within “electricity revenues” in the condensed consolidated statements of operations and comprehensive income. For the six months ended June 30, 2014 and 2013, the Company recognized a net loss from these transactions of $2.7 million and $1.1 million, respectively. For the three months ended June 30, 2014 and 2013, the Company recognized a net loss and a net gain from these transactions of $0.3 million and $3.5 million, respectively.

 

There were no transfers of assets or liabilities between Level 1 and Level 2 during the six months ended June 30, 2014.

 

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

 

   

Fair Value

   

Carrying Amount

 
   

June 30,

2014

   

December 31,

2013

   

June 30,

2014

   

December 31,

2013

 
   

(Dollars in millions)

   

(Dollars in millions)

 

Olkaria III loan - DEG

  $ 36.2     $ 40.3     $ 35.5     $ 39.5  

Olkaria III loan - OPIC

    279.4       279.6       291.6       299.9  

Amatitlan loan

    32.6       34.8       30.0       31.5  

Senior secured notes:

                               

Ormat Funding LLC ("OFC")

    70.0       83.5       72.5       90.8  

OrCal Geothermal LLC ("OrCal")

    63.3       65.8       63.2       66.2  

OFC 2 LLC ("OFC 2")

    115.5       119.0       135.7       144.4  

Senior unsecured bonds

    270.5       270.6       250.4       250.6  

Loans from institutional investors

    16.1       20.1       15.7       19.5  

 

The fair value of OFC senior secured notes is determined using observable market prices as these securities are traded. The fair value of other long-term debt is determined by a valuation model, which is based on a conventional discounted cash flow methodology and utilizes assumptions of estimated 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 June 30, 2014:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(Dollars in millions)

 
                                 
             $                

Olkaria III loan - DEG

  $             36.2       36.2  

Olkaria III loan - OPIC

                279.4       279.4  

Amatitlan loan

                32.6       32.6  

Senior secured notes:

                               

OFC

          70.0             70.0  

OrCal

                63.3       63.3  

OFC 2

                115.5       115.5  

Senior unsecured bonds

                270.5       270.5  

Loan from institutional investors

                16.1       16.1  

Other long-term debt

          16.7             16.7  

Revolving lines of credit

          124.6             124.6  

Deposits

 

20.6

                  20.6  

 

 

 
15

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the fair value of financial instruments as of December 31, 2013:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(Dollars in millions)

 
                                 
             $                

Olkaria III loan - DEG

  $             40.3       40.3  

Olkaria III loan - OPIC

                279.6       279.6  

Amatitlan loan

                34.8       34.8  

Senior secured notes:

                               

OFC

          83.5             83.5  

OrCal

                65.8       65.8  

OFC 2

                119.0       119.0  

Senior unsecured bonds

                270.6       270.6  

Loan from institutional investors

                20.1       20.1  

Other long-term debt

          23.3             23.3  

Revolving lines of credit

          112.0             112.0  

Deposits

    21.3                   21.3  

 

NOTE 6 — STOCK-BASED COMPENSATION

 

The 2004 Incentive Compensation Plan

 

In 2004, the Company’s Board of Directors adopted the 2004 Incentive Compensation Plan (“2004 Incentive Plan”), which provides 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 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 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 become fully exercisable one year after the grant date. Vested stock-based awards may be exercised for up to ten years from the date of grant. The shares of common stock will be issued upon exercise of options or SARs from the Company’s authorized share capital. The 2004 Incentive Plan expired in May 2012 upon adoption of the 2012 Incentive Plan, except as to share based awards outstanding on that date.

 

The 2012 Incentive Compensation Plan

 

In May 2012, the Company’s shareholders adopted the 2012 Incentive Compensation Plan (as amended 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 will 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 date of grant. The shares of common stock will be issued upon exercise of options or SARs from the Company’s authorized share capital.

 

The 2012 Incentive Plan was amended during the first half of 2014. The key amendments are as follows:

 

 
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