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EX-32.2 - EXHIBIT 32.2 - ORMAT TECHNOLOGIES, INC.ex32-2.htm
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EX-31.2 - EXHIBIT 31.2 - ORMAT TECHNOLOGIES, INC.ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - ORMAT TECHNOLOGIES, INC.ex31-1.htm
EX-3.1 - EXHIBIT 3.1 - ORMAT TECHNOLOGIES, INC.ex3-1.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, 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 August 3, 2017, the number of outstanding shares of common stock, par value $0.001 per share, was 49,910,280.



 

 

 

 

ORMAT TECHNOLOGIES, INC.

 

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2017

 

PART I — FINANCIAL INFORMATION

 
     

ITEM 1.

FINANCIAL STATEMENTS

3

     

ITEM 2.

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

24

     

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

59

     

ITEM 4.

CONTROLS AND PROCEDURES

59

     

PART II — OTHER INFORMATION

 
     

ITEM 1.

LEGAL PROCEEDINGS

60

     

ITEM 1A.

RISK FACTORS

61

     

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

61

     

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

61

     

ITEM 4.

MINE SAFETY DISCLOSURES

61

     

ITEM 5.

OTHER INFORMATION

61

     

ITEM 6.

EXHIBITS

61

     

SIGNATURES

62

 

ii

 

 

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

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

ASSETS

Current assets:

               

Cash and cash equivalents

  $ 118,390     $ 230,214  

Restricted cash and cash equivalents (primarily related to VIEs)

    49,510       34,262  

Receivables:

               

Trade

    79,587       80,807  

Other

    20,128       17,482  

Inventories

    18,569       12,000  

Costs and estimated earnings in excess of billings on uncompleted contracts

    59,901       52,198  

Prepaid expenses and other

    41,151       45,867  

Total current assets

    387,236       472,830  

Investment in an unconsolidated company 

    13,957        

Deposits and other

    18,125       18,553  

Deferred charges

    43,598       43,773  

Property, plant and equipment, net ($1,449,920 and $1,483,224 related to VIEs, respectively)

    1,526,485       1,556,378  

Construction-in-process ($159,612 and $120,853 related to VIEs, respectively)

    408,939       306,709  

Deferred financing and lease costs, net

    5,186       3,923  

Intangible assets, net

    86,986       52,753  

Goodwill

    20,121       6,650  

Total assets

  $ 2,510,633     $ 2,461,569  
LIABILITIES AND EQUITY

Current liabilities:

               

Accounts payable and accrued expenses

  $ 101,827     $ 91,650  

Short term revolving credit lines with banks (full recourse)

    30,000        

Billings in excess of costs and estimated earnings on uncompleted contracts

    17,574       31,630  

Current portion of long-term debt:

               

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

               

Senior secured notes

    32,608       32,234  

Other loans

    21,495       21,495  

Full recourse

    10,673       12,242  

Total current liabilities

    214,177       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 $8,528 and $9,177, respectively)

    334,365       350,388  

Other loans (less deferred financing costs of $5,957 and $6,409, respectively)

    252,085       261,845  

Full recourse:

               

Senior unsecured bonds (less deferred financing costs of $654 and $755, respectively)

    203,678       203,577  

Other loans (less deferred financing costs of $1,206 and $1,346, respectively)

    52,742       57,063  

Investment in an unconsolidated company in excess of accumulated losses

          11,081  

Liability associated with sale of tax benefits

    48,810       54,662  

Deferred lease income

    53,036       54,561  

Deferred income taxes

    44,113       35,382  

Liability for unrecognized tax benefits

    6,015       5,738  

Liabilities for severance pay

    21,025       18,600  

Asset retirement obligation

    24,267       23,348  

Other long-term liabilities

    22,823       21,294  

Total liabilities

    1,277,136       1,286,790  

Commitments and contingencies (Note 10)

               
                 

Redeemable noncontrolling interest

    5,898       4,772  
                 

Equity:

               

The Company's stockholders' equity:

               

Common stock, par value $0.001 per share; 200,000,000 shares authorized; 49,910,280 and 49,667,340 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively

    50       50  

Additional paid-in capital

    875,591       869,463  

Retained earnings

    274,566       216,644  

Accumulated other comprehensive income (loss)

    (6,933 )     (7,732 )
Total stockholders' equity attributable to Company's stockholders     1,143,274       1,078,425  

Noncontrolling interest

    84,325       91,582  

Total equity

    1,227,599       1,170,007  

Total liabilities, redeemable noncontrolling interest and equity

  $ 2,510,633     $ 2,461,569  

 

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

 
3

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME

(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands,

except per share data)

   

(Dollars in thousands,

except per share data)

 

Revenues:

                               

Electricity

  $ 111,777     $ 104,001     $ 227,553     $ 211,869  

Product

    67,587       55,860       141,709       99,586  

Total revenues

    179,364       159,861       369,262       311,455  

Cost of revenues:

                               

Electricity

    65,439       62,243       131,475       125,929  

Product

    43,432       31,822       92,884       55,857  

Total cost of revenues

    108,871       94,065       224,359       181,786  

Gross profit

    70,493       65,796       144,903       129,669  

Operating expenses:

                               

Research and development expenses

    1,050       595       1,652       944  

Selling and marketing expenses

    4,090       3,668       8,453       7,343  

General and administrative expenses

    12,201       8,783       22,150       17,532  

Write-off of unsuccessful exploration activities

          863             1,420  

Operating income

    53,152       51,887       112,648       102,430  

Other income (expense):

                               

Interest income

    362       245       606       565  

Interest expense, net

    (14,540 )     (18,401 )     (29,463 )     (34,424 )

Derivatives and foreign currency transaction gains (losses)

    1,703       (4,332 )     3,041       (2,370 )

Income attributable to sale of tax benefits

    4,356       4,519       10,513       8,917  

Other non-operating income (expense), net

    6       49       (86 )     240  

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

    45,039       33,967       97,259       75,358  

Income tax (provision) benefit

    (6,369 )     (7,890 )     (17,255 )     (17,399 )

Equity in losses of investees, net

    (428 )     (1,144 )     (2,027 )     (2,081 )

Income from continuing operations

    38,242       24,933       77,977       55,878  

Net income attributable to noncontrolling interest

    (3,206 )     (584 )     (7,629 )     (2,258 )

Net income attributable to the Company's stockholders

  $ 35,036     $ 24,349     $ 70,348     $ 53,620  

Comprehensive income:

                               

Net income

    38,242       24,933       77,977       55,878  

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

                               

Change in foreign currency translation adjustments

    1,461             1,539        

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

    (916 )     (1,987 )     (347 )     (5,166 )

Loss in respect of derivative instruments designated for cash flow hedge

    20       22       42       43  

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

    (15 )     (24 )     (39 )     (48 )

Comprehensive income

    38,792       22,944       79,172       50,707  

Comprehensive income attributable to noncontrolling interest

    (3,613 )     (584 )     (8,025 )     (2,258 )

Comprehensive income attributable to the Company's stockholders

  $ 35,179     $ 22,360     $ 71,147     $ 48,449  

Earnings per share attributable to the Company's stockholders:

                               

Basic:

                               

Net income

  $ 0.70     $ 0.49     $ 1.41     $ 1.09  

Diluted:

                               

Net income

  $ 0.69     $ 0.49     $ 1.39     $ 1.07  

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

                               

Basic

    49,771       49,456       49,726       49,314  

Diluted

    50,624       50,137       50,559       49,977  

Dividend per share declared

  $ 0.08     $ 0.07     $ 0.25     $ 0.38  

 

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

 

4

 

 

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

                1,659                   1,659             1,659  

Exercise of options by employees and directors

    460             5,945                   5,945             5,945  

Cash paid to non controlling interest

                                        (5,752 )     (5,752 )

Cash dividend declared, $0.38 per share

                      (18,998 )           (18,998 )           (18,998 )

Net income

                      53,620             53,620       2,258       55,878  

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

                                                               

cash flow hedge (net of related tax of $25)

                            43       43             43  

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)

                            (5,166 )     (5,166 )           (5,166 )

Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge (net of related tax of $30)

                            (48 )     (48 )           (48 )
                                                                 

Balance at June 30, 2016

    49,567     $ 49     $ 856,827     $ 183,018     $ (12,838 )   $ 1,027,056     $ 90,379     $ 1,117,435  
                                                                 

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

                5,343                   5,343             5,343  

Exercise of options by employees and directors

    243             785                   785             785  

Cash paid to noncontrolling interest

                                        (14,594 )     (14,594 )

Cash dividend declared, $0.25 per share

                      (12,426 )           (12,426 )           (12,426 )

Net income

                      70,348             70,348       6,941       77,289  

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

                                                               

Currency translation adjustment

                            1,143       1,143       396       1,539  

Loss in respect of derivative instruments designated for cash flow hedge (net of related tax of $26)

                            42       42             42  

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)

                            (347 )     (347 )           (347 )

Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge (net of related tax of $24)

                            (39 )     (39 )           (39 )
                                                                 

Balance at June 30, 2017

    49,910     $ 50     $ 875,591     $ 274,566     $ (6,933 )   $ 1,143,274     $ 84,325     $ 1,227,599  

 

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

 

5

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Six Months Ended June 30,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

Cash flows from operating activities:

               

Net income

  $ 77,977     $ 55,878  

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

               

Depreciation and amortization

    54,082       51,258  

Amortization of premium from senior unsecured bonds

          (154 )

Accretion of asset retirement obligation

    919       821  

Stock-based compensation

    5,343       1,659  

Amortization of deferred lease income

    (1,343 )     (1,343 )

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

    (6,844 )     (5,076 )

Equity in losses of investees

    2,027       2,081  

Mark-to-market of derivative instruments

    (2,462 )     (162 )

Write-off of unsuccessful exploration activities

          1,420  

Gain on severance pay fund asset

    (1,537 )     (253 )

Deferred income tax provision

    8,375       13,254  

Liability for unrecognized tax benefits

    277       (411 )

Deferred lease revenues

    (182 )     169  

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

               

Receivables

    (625 )     (10,206 )

Costs and estimated earnings in excess of billings on uncompleted contracts

    (7,703 )     9,861  

Inventories

    (103 )     1,384  

Prepaid expenses and other

    1,820       (11,007 )

Deposits and other

    652       (153 )

Accounts payable and accrued expenses

    (4,636 )     1,808  

Billings in excess of costs and estimated earnings on uncompleted contracts

    (14,056 )     9,020  

Liabilities for severance pay

    2,425       (297 )

Other long-term liabilities

    (248 )     22  

Net cash provided by operating activities

    114,158       119,573  

Cash flows from investing activities:

               

Net change in restricted cash, cash equivalents and marketable securities

    (15,248 )     11,498  

Capital expenditures

    (116,015 )     (67,779 )

Investment in unconsolidated companies

    (27,412 )      

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

    (35,300 )      

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

    (130 )     992  

Net cash used in investing activities

    (194,105 )     (55,289 )

Cash flows from financing activities:

               

Proceeds from exercise of options by employees

    785       5,945  

Proceeds from revolving credit lines with banks

    437,500       134,500  

Repayment of revolving credit lines with banks

    (407,500 )     (134,500 )

Cash received from noncontrolling interest

    2,017       1,972  

Repayments of long-term debt

    (33,177 )     (31,386 )

Cash paid to noncontrolling interest

    (14,594 )     (12,249 )

Payments of capital leases

    (751 )      

Deferred debt issuance costs

    (3,731 )     (2,931 )

Cash dividends paid

    (12,426 )     (18,998 )

Net cash provided by (used in) financing activities

    (31,877 )     (57,647 )

Net change in cash and cash equivalents

    (111,824 )     6,637  

Cash and cash equivalents at beginning of period

    230,214       185,919  

Cash and cash equivalents at end of period

  $ 118,390     $ 192,556  

Supplemental non-cash investing and financing activities:

               

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

  $ 2,338     $ (6,956 )

Accrued liabilities related to financing activities

  $     $ 6,128  

 

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

 

6

 

 

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, 2017, the consolidated results of operations and comprehensive income (loss) for the three and six-month periods ended June 30, 2017 and 2016 and the consolidated cash flows for the six-month periods ended June 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 six-month period ended June 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.

 

Entry into a Material Definitive 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 the final approval of the SCPPA PPA which will require the Company to make significant capital expenditures in the U.S., the fact that the Company is currently looking for acquisitions in the U.S, and the acquisition of Viridity for a price of $35.3 million with two additional earn-out payments expected 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 (“OSL”), its fully 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 unrepatriated earnings which will be repatriated to support the Company’s capital expenditures in the U.S. 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 U.S. 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. (“VEI”), a privately held Philadelphia-based company engaged in the provision of demand response, energy management and energy storage services. Pursuant to the Asset Purchase Agreement dated as of December 29, 2016, Viridity Energy Solutions Inc. (“Viridity”), a wholly owned subsidiary of the Company paid initial consideration of $35.3 million at closing. 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.

 

7

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

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 will enable 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 June 30, 2017 were included in the Company’s consolidated statements of operations and comprehensive income for the three and six months ended June 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 six months ended June 30, 2017 and 2016, the Company classified $3,000 and $5,000, respectively, related to derivative instruments designated as cash flow hedges, from accumulated other comprehensive income, of which $5,000 and $10,000, respectively, were recorded to reduce interest expense and $2,000 and $5,000, 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, 2017 and 2016, the Company classified $1,000 and $2,000, respectively, related to derivative instruments designated as cash flow hedges, from accumulated other comprehensive income, of which $3,000 and $6,000 respectively, was recorded to reduce interest expense and $1,000 and $4,000, 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 June 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 six months ended June 30, 2017. Write-offs of unsuccessful exploration activities for the three and six months ended 2016 were $0.9 million and $1.4 million, respectively. The write-offs of exploration costs in 2016 were related to the Company’s exploration activities in Nevada and Chile, which the Company determined 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 (“U.S.”) and in foreign countries. At June 30, 2017 and December 31, 2016, the Company had deposits totaling $31.3 million and $72.5 million, respectively, in seven U.S. financial institutions that were federally insured up to $250,000 per account. At June 30, 2017 and December 31, 2016, the Company’s deposits in foreign countries amounted to approximately $99.9 million and $166.2 million, respectively.

 

At June 30, 2017 and December 31, 2016, accounts receivable related to operations in foreign countries amounted to approximately $53.5 million and $53.3 million, respectively. At June 30, 2017 and December 31, 2016, accounts receivable from the Company’s primary customers amounted to approximately 55% and 60% of the Company’s accounts receivable, respectively.

 

Sierra Pacific Power Company and Nevada Power Company (subsidiaries of NV Energy, Inc.) accounted for 16.7% and 19.1% of the Company’s total revenues for the three months ended June 30, 2017 and 2016, respectively, and 17.8% and 21.1% for the six months ended June 30, 2017 and 2016, respectively.

 

Kenya Power and Lighting Co. Ltd. accounted for 15.4% and 17.1% of the Company’s total revenues for the three months ended June 30, 2017 and 2016, respectively, and 14.8% and 17.2% of the Company’s total revenues for the six months ended June 30, 2017 and 2016, respectively.

 

8

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Southern California Public Power Authority (“SCPPA”) accounted for 8.7% and 10.4% of the Company’s total revenues for the three months ended June 30, 2017 and 2016, respectively, and 8.9% and 11.2% of the Company’s total revenues for the six months ended June 30, 2017 and 2016, respectively.

 

Hyundai (Sarulla geothermal power project) accounted for 4.9% and 8.6% of the Company’s total revenues for the three months ended June 30, 2017 and 2016, respectively, and 6.3% and 9.0% for the six months ended June 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 six-month period ended June 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 replaced 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.

 

9

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

New accounting pronouncements effective in future periods

 

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.

 

Statement of Cash Flows

 

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. 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.

  

10

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

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.

 

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.

 

11

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 3 — INVENTORIES

 

Inventories consist of the following:

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

Raw materials and purchased parts for assembly

  $ 11,486     $ 5,429  

Self-manufactured assembly parts and finished products

    7,083       6,571  

Total

  $ 18,569     $ 12,000  

 

NOTE 4 — UNCONSOLIDATED INVESTMENTS

 

Unconsolidated investments consist of the following:

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

Sarulla

  $ 13,957     $ (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 (“JOC”) and Energy Sales Contract (“ESC”) that were both signed on April 4, 2013. Under the JOC, PT Pertamina Geothermal Energy (“PGE”), 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, 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 (“OECs”) to the power plant pursuant to a supply agreement (the “Supply Agreement”) that was signed in October 2013, as further described below. 

 

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. Construction of the second phase of the power plant is nearing completion and site pre-commissioning activities have commenced. The Company expects that the second phase of the power plant will commence geothermal power production within three months. Formal testing and commercial operation under the PPA is expected to occur in the fourth quarter of 2017. Engineering, procurement and construction work for the third phase of the power plant is in progress and most of the equipment manufactured by the Company for the third phase of the power plant has already been delivered. The Company has achieved all of its contractual milestones under the Supply Agreement. Drilling for the second and third phases 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 90% 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 six months ended June 30, 2017, the Sarulla project company recorded losses of $7.2 million and $2.7 million, respectively, net of deferred tax, of which the Company’s share was $0.9 million and $0.3 million, respectively. The Company’s share of such losses were recorded in other comprehensive income. During the three and six months ended June 30, 2016, the Sarulla project company recorded losses of $15.6 million and $40.5 million, respectively, net of deferred tax, of which the Company’s share was $2.0 million and $5.2 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 June 30, 2017 is $6.3 million.

 

12

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

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 the recognition revenue over the course of the year. The Company has eliminated the related intercompany profit of $14.1 million against equity in loss of investees.

 

During the three and six months ended June 30, 2017, the Company made additional equity investments in the Sarulla project of approximately $12.5 million and $27.4 million, respectively, and $39.3 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).

 

The following table sets forth certain fair value information at June 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.

 

           

June 30, 2017

 
           

Fair Value

 
   

Carrying

Value at

June 30,

2017

   

Total

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

Assets:

                                       

Current assets:

                                       

Cash equivalents (including restricted cash accounts)

  $ 17,378     $ 17,378     $ 17,378     $     $  

Derivatives:

                                       

Put options on gas price (3)

    251       251             251        

Contingent receivable (1)

    1,088       1,088                   1,088  

Currency forward contracts (2)

    2,007       2,007             2,007        

Liabilities:

                                       

Current liabilities:

                                       

Derivatives:

                                       

Contingent payables (1)

    (25,486 )     (25,486 )                 (25,486 )

Warrants (1)

    (3,753 )     (3,753 )                 (3,753 )
Total, net   $ (8,515 )   $ (8,515 )   $ 17,378     $ 2,258     $ (28,151 )

 

13

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

           

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

 

(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 June 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 June 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 June 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.

 

14

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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 as

 

Location of recognized gain

 

Three Months Ended June 30,

   

Six Months Ended June 30,

 

hedging instruments

  (loss)  

2017

   

2016

   

2017

   

2016

 
                                     

Put options on natural gas price

 

Derivatives and foreign currency transaction gains (losses)

    (48 )           (241 )      

Call options on natural gas price

 

Derivatives and foreign currency transaction gains (losses)

          (1,664 )           (1,146 )

Call and put options on oil price

 

Derivatives and foreign currency transaction gains (losses)

          (899 )           (1,542 )

Contingent considerations

 

Derivative and foreign currency transaction gains (losses)

    (45 )           (95 )      

Currency forward contracts

 

Derivative and foreign currency and transaction gains (losses)

    1,457       (1,349 )     3,719       465  
        $ 1,364     $ (3,912 )   $ 3,383     $ (2,223 )

 

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 has 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 have monthly expiration dates on which the options can be called and the Company would have to settle its liability on a cash basis.

 

On February 24, 2016, the Company entered into Brent Oil Future contracts under which it has 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 have monthly expiration dates on which the options can be called and the Company would have 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.

 

15

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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 six months ended June 30, 2017.

 

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

 

   

Fair Value

   

Carrying Amount

 
   

June 30,

2017

   

December 31,

2016

   

June 30,

2017

   

December 31,

2016

 
   

(Dollars in millions)

   

(Dollars in millions)

 

Olkaria III Loan - DEG

  $ 12.5     $ 16.3     $ 11.8     $ 15.8  

Olkaria III Loan - OPIC

    247.8       253.4       237.6       246.6  

Olkaria IV Loan - DEG 2

    51.7       50.9       50.0       50.0  

Amatitlan Loan

    35.1       37.3       35.0       36.8  

Senior Secured Notes:

                               

Ormat Funding Corp. ("OFC")

    14.3       17.0       14.3       17.0  

OrCal Geothermal Inc. ("OrCal")

    33.8       37.4       32.1       35.2  

OFC 2 LLC ("OFC 2")

    245.1       249.0       238.9       247.2  

Don A. Campbell 1 ("DAC1")

    88.7       88.9       90.2       92.4  

Senior Unsecured Bonds

    203.3       200.1       204.3       204.3  

Other long-term debt

    8.9       10.4       9.7       11.2  

 

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 June 30, 2017:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(Dollars in millions)

 

Olkaria III - DEG

  $     $     $ 12.5     $ 12.5  

Olkaria III - OPIC

                247.8       247.8  

Olkaria IV - DEG 2

                51.7       51.7  

Amatitlan Loan

          35.1             35.1  

Senior Secured Notes:

                               

OFC

          14.3             14.3  

OrCal

                33.8       33.8  

OFC 2

                245.1       245.1  

Don A. Campbell 1 ("DAC1")

                88.7       88.7  

Senior Unsecured Bonds

                203.3       203.3  

Other long-term debt

          1.7       7.2       8.9  

Revolving lines of credit

          30.0             30.0  

Deposits

    15.9                   15.9  

 

16

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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 ("DAC1")

                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  

 

 

NOTE 6 — STOCK-BASED COMPENSATION

 

The 2004 Incentive Compensation Plan

 

In 2004, the Company’s Board of Directors (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.

 

17

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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 June 30,

   

Six Months Ended June 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Interest related to sale of tax benefits

  $ 1,849     $ 2,846     $ 3,861     $ 3,704  

Interest expense

    14,146       15,863       28,321       31,488  

Less — amount capitalized

    (1,455 )     (308 )     (2,719 )     (768 )
    $ 14,540     $ 18,401     $ 29,463     $ 34,424  

 

 

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 June 30,

   

Six Months Ended June 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

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

    49,771       49,456       49,726       49,314  

Add:

                               

Additional shares from the assumed exercise of employee stock options

    853       681       833       663  
                                 

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

    50,624       50,137       50,559       49,977  

 

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 2,363 and 135,875 for the three months ended June 30, 2017 and 2016, respectively, and 2,430 and 224,116 for the six months ended June 30, 2017 and 2016, respectively.

 

18

 

 

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 June 30, 2017:

                       

Net revenue from external customers

  $ 111,777     $ 67,587     $ 179,364  

Intersegment revenue

          16,565       16,565  

Operating income

    36,117       17,035       53,152  

Segment assets at period end (1)

    2,323,618       187,015       2,510,633  
                         

Three Months Ended June 30, 2016:

                       

Net revenue from external customers

  $ 104,001     $ 55,860     $ 159,861  

Intersegment revenue

          19,266       19,266  

Operating income

    32,814       19,073       51,887  

Segment assets at period end

    2,031,650       241,363       2,273,013  
                         

Six Months Ended June 30, 2017:

                       

Net revenues from external customers

  $ 227,553     $ 141,709     $ 369,262  

Intersegment revenues

          32,778       32,778  

Operating income

    77,015       35,633       112,648  

Segment assets at period end (1)

    2,323,618       187,015       2,510,633  
                         

Six Months Ended June 30, 2016:

                       

Net revenues from external customers

  $ 211,869     $ 99,586     $ 311,455  

Intersegment revenues

          21,206       21,206  

Operating income

    67,599       34,831       102,430  

Segment assets at period end

    2,031,650       241,363       2,273,013  

 

 

 

(1)  

Electricity segment assets include goodwill in the amount of $20.1 million

 

19

 

 

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 June 30,

   

Six Months Ended June 30,

 
   

 

2017

   

2016

   

2017

   

2016

 
                                 
                                 

Revenue:

                               

Total segment revenue

  $ 179,364     $ 159,861     $ 369,262     $ 311,455  

Intersegment revenue

    16,565       19,266       32,778       21,206  

Elimination of intersegment revenue

    (16,565 )     (19,266 )     (32,778 )     (21,206 )

Total consolidated revenue

  $ 179,364     $ 159,861     $ 369,262     $ 311,455  
                                 

Operating income:

                               

Operating income

  $ 53,152     $ 51,887     $ 112,648     $ 102,430  

Interest income

    362       245       606       565  

Interest expense, net

    (14,540 )     (18,401 )     (29,463 )     (34,424 )

Derivatives and foreign currency transaction gains (losses)

    1,703       (4,332 )     3,041       (2,370 )

Income attributable to sale of tax benefits

    4,356       4,519       10,513       8,917  

Other non-operating income (expense), net

    6       49       (86 )     240  

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

  $ 45,039     $ 33,967     $ 97,259     $ 75,358  

 

 

20

 

 

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 PGV 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 Satiago, 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. In response to various motions submitted by the defendants, including a motion describing preliminary procedural defenses, on August 16, 2016, and October 11, 2016, the 27th Civil Court issued a number of decisions, which were followed by a decision of May 26, 2017 by the Court of Appeals of Santiago. The outcome of these decisions is that the 11th Civil Court of Santiago was found to be the competent court and various of the preliminary procedural defenses are still pending. 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 alleges 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 discuss the complaint against itself which it had filed On March 25, 2017. 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.

 

21

 

 

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.

 

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 $110.5 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 $109.6 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., $62.0 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 $40.8 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 $7 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 million as of June 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 June 30, 2017 and 2016 was 14.2% and 23.2%, respectively, and 17.7% and 23.1% for the six months ended June 30, 2017 and 2016, respectively. The effective rate differs from the federal statutory rate of 35% for the six months ended June 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 June 30, 2017 and 2016 was $0.8 million and $1.1 million, respectively, and for the six months ended June 30, 2017 and 2016 was 1.7 million and 2.3 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.

 

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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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’s 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.

 

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 June 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 August 3, 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 August 15, 2017, payable on August 29, 2017.

 

 

ORIX transaction 

 

On May 4, 2017, the Company announced that ORIX Corporation (“ORIX”) had entered into a definitive agreement with certain stockholders of the Company providing for the acquisition of approximately 11 million shares of the Company’s common stock, representing an approximately 22% ownership stake in the Company, from FIMI ENRG Limited Partnership, FIMI ENRG, L.P. (collectively, “FIMI”), Bronicki Investments, Ltd. (“Bronicki”), and certain senior members of the Company’s management team. Also on May 4, 2017, the Company announced that the Company and ORIX entered into certain related agreements, including a Governance Agreement, a Commercial Cooperation Agreement and a Registration Rights Agreement, following the unanimous recommendation of a Special Committee of the Board that was formed to evaluate and negotiate the stockholder arrangements proposed by ORIX, and following unanimous approval by the Board. The closing of the stock purchase transaction and the transactions contemplated by the related agreements between the Company and ORIX occurred on July 26, 2017.

 

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 our 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 ORTP Flip Date occurred and on July 10, 2017, Ormat Nevada purchased all of the Class B membership units from JP Morgan for $2.35 million. As a result, Ormat Nevada is now the sole owner of all controlling voting interests in ORTP and continues to consolidate ORTP 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;

 

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

 

 

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;

 

 

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, if any, 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.

 

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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.

 

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

 

Our geothermal power plants include both power plants that we have built and power plants that we have acquired, while we have built all of our recovered energy-based plants. We currently conduct our business activities in two business segments:

 

 

The Electricity segment — in this segment, we develop, build, own and operate geothermal and recovered energy-based power plants in the U.S. and geothermal power plants in other countries around the world, and sell the electricity they generate; in this segment, we also provide related services and derive revenues from activity in the demand response and storage markets as described below; and 

 

 

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

 

We recently expanded our operations to include the provision of services in the demand response, energy management and energy storage markets. On March 15, 2017, we completed the acquisition of substantially all of the business and assets of Viridity Energy, Inc. (“VEI”), a Philadelphia-based company with nearly a decade of expertise and leadership in demand response, energy management and storage. The acquired business and assets are owned and operated by our wholly owned subsidiary Viridity Energy Solutions Inc. (“Viridity”). The acquisition enabled us to enter the growing energy storage and demand response markets. We intend to use Viridity to accelerate long-term growth, expand our market presence, and further develop our demand response VPower™ software platform and energy storage services. We plan to continue to provide services and products to existing customers of the acquired business, while expanding into new geographies and targeting a broader potential customer base.

 

Both our Electricity segment and Product segment operations are conducted in the U.S. and the rest of the world. Our current generating portfolio includes geothermal power plants in the U.S., Guatemala, Kenya, Guadeloupe and Indonesia, as well as recovered energy generation power plants in the U.S.

 

For the six months ended June 30, 2017, our total revenues increased by 18.6% (from $311.5 million to $369.3 million) over the corresponding period in 2016.

 

For the six months ended June 30, 2017, Electricity segment revenues were $227.6 million, compared to $211.9 million for the six months ended June 30, 2016, an increase of 7.4% from the prior year period. Product segment revenues for the six months ended June 30, 2017 were $141.7 million, compared to $99.6 million during the six months ended June 30, 2016, an increase of 42.3% from the prior year period.

 

During the six months ended June 30, 2017 and 2016, our consolidated power plants generated 2,759,218 megawatt hours (“MWh”) and 2,698,265 MWh, respectively, an increase of 2.3%.

 

For the six months ended June 30, 2017, our Electricity segment generated approximately 61.6% of our total revenues, while our Product segment generated approximately 38.4% of our total revenues. For the six months ended June 30, 2016, our Electricity segment generated approximately 68.0% of our total revenues, while our Product segment generated approximately 32.0% of our total revenues.

 

For the six months ended June 30, 2017, approximately 85.7% of our Electricity segment revenues were derived from PPAs with fixed energy rates which are not affected by fluctuations in energy commodity prices. We have variable price PPAs in California and Hawaii, which provide for payments based on the local utilities’ avoided cost, which is the incremental cost that the power purchaser avoids by not having to generate such electrical energy itself or purchase it from others, as follows:

 

 

the energy rates under the PPAs in California for each of the Ormesa complex, Heber 2 power plant in the Heber complex and the G2 power plant in the Mammoth complex, a total of approximately 90 MW, change primarily based on fluctuations in natural gas prices; and

 

 

the prices paid for electricity pursuant to the 25 MW PPA for the Puna complex in Hawaii change primarily attributable to variations in the price of oil as well as other commodities.

 

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We recently reduced our economic exposure to fluctuations in the price of oil and natural gas from February 2017 until December 2017, and before that we reduced our economic exposure to fluctuations in the price of natural gas from March 31, 2015 and from June 1, 2015 until December 31, 2015 and from February 3, 2016 until December 29, 2016 by entering into derivatives transactions. For the six months ended June 30, 2017, we recorded a net loss of $0.2 million under Derivatives and foreign currency transaction gains.

 

To comply with obligations under their respective PPAs, certain of our project subsidiaries are structured as special purpose, bankruptcy remote entities and their assets and liabilities are ring-fenced. Such assets are not generally available to pay our debt, other than debt at the respective project subsidiary level. However, these project subsidiaries are allowed to pay dividends and make distributions of cash flows generated by their assets to us, subject in some cases to restrictions in debt instruments, as described below.

 

Electricity segment revenues are also subject to seasonal variations and can be affected by higher-than-average ambient temperatures, as described below under “Seasonality”.

 

Revenues attributable to our Product segment are based on the sale of equipment, engineering, procurement and construction (“EPC”) contracts and the provision of various services to our customers. Product segment revenues may vary from period to period because of the timing of our receipt of purchase orders and the progress of our equipment manufacturing and execution of the relevant project.

 

Our management assesses the performance of our two operating segments differently. In the case of our Electricity segment, when making decisions about potential acquisitions or the development of new projects, management typically focuses on the internal rate of return of the relevant investment, technical and geological matters and other business considerations. Management evaluates our operating power plants based on revenues, expenses, and EBITDA, and our projects that are under development based on costs attributable to each such project. Management evaluates the performance of our Product segment based on the timely delivery of our products, performance quality of our products, revenues and costs actually incurred to complete customer orders compared to the costs originally budgeted for such orders.

 

Recent Developments

 

The most significant developments in our company and business since January 1, 2017 are described below:

 

 

On June 1, 2017, we announced that Southern California Public Power Authority (“SCPPA”) received the final necessary approval from the City of Los Angeles, enabling SCPPA to execute the power purchase agreement, dated as of October 20, 2016 (the “Portfolio PPA”), between ONGP LLC, our wholly owned subsidiary, and SCPPA. Under the Portfolio PPA, SCPPA will purchase 150 MW of power generated by a portfolio of our new and existing geothermal power plants. SCPPA will resell all power purchased under the Portfolio PPA to the Los Angeles Department of Water and Power. Energy deliveries under the Portfolio PPA are expected to start in the fourth quarter of 2017 and the entire portfolio of geothermal power plants is expected to be on line by the end of 2022. The Portfolio PPA contract capacity is 150 MW, with a minimum delivery requirement of 135 MW and a permitted maximum delivery of 185 MW. 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.

 

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

 

 

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 that was formed to evaluate and negotiate the stockholder arrangements proposed by ORIX, and following unanimous 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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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 our 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.

 

 

On March 15, 2017, we announced that we completed the acquisition of substantially all of the business and assets of VEI, a Philadelphia-based company with nearly a decade of expertise and leadership in demand response, energy management and storage. Pursuant to the Asset Purchase Agreement dated as of December 29, 2016, Viridity paid initial consideration of $35.3 million at closing. Additional contingent consideration 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 owned and operated by Viridity. This transaction marks our entry into the growing energy storage and demand response markets, with an established North American presence.

 

 

On March 21, 2017, we announced that the first phase of the Sarulla geothermal power plant, one of the world’s largest geothermal power plants, located in Indonesia’s North Sumatra, commenced commercial operation. The approximately 110 MW power plant, which combines flash and binary technologies to provide a high efficiency power plant and 100% reinjection of the exploited geothermal fluid, is operated by Sarulla Operations Ltd. We provided the conceptual design of the geothermal combined cycle unit power plant and supplied our Ormat Energy Converters (“OECs”), while Toshiba supplied the geothermal steam turbines and generators for the flash systems.

 

 

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

 

 

Trends and Uncertainties

 

Different trends, factors and uncertainties may impact our operations and financial condition, including many that we do not or cannot foresee. However, we believe that our results of operations and financial condition for the foreseeable future will be primarily affected by the following trends, factors and uncertainties that are from time to time also subject to market cycles:

 

 

There has been increased demand for energy generated from geothermal and other renewable resources in the U.S. as costs for electricity generated from renewable resources have become more competitive. Much of this is attributable to legislative and regulatory requirements and incentives, such as state renewable portfolio standard (“RPS”) and federal tax credits such as production tax credits (“PTCs”) or investment tax credits (“ITCs”) (which are discussed in more detail in the section entitled “Government Grants and Tax Benefits” below). We believe that future demand for energy generated from geothermal and other renewable resources in the U.S. will be driven primarily by further commitment and implementation of state RPS and greenhouse gas initiatives.

 

 

We accelerated our efforts to expand business development activities in developing countries where geothermal is considered a local resource that can provide a stable and cost effective solution to increase access to power. We expect that a variety of local governmental initiatives will create new opportunities for the development of new projects, as well as create additional markets for our products. These initiatives include the award of long-term contracts to independent power generators, the creation of competitive wholesale markets for selling and trading energy, capacity and related energy products and the adoption of programs designed to encourage “clean” renewable and sustainable energy sources.

 

 

We expect to continue to generate the majority of our revenues from our Electricity segment through the sale of electricity from our power plants. All of our current revenues from the sale of electricity are derived from payments under long-term PPAs related to fully-contracted power plants. We also intend to continue to pursue opportunities, as they arise in our recovered energy business, in the Solar PV sector, in the energy storage market and in other forms of clean energy. In addition, pursuant to our strategic plan, we acquired a business that operates in the demand response and energy storage markets and that generates revenues primarily from software license fees and the provisions of services. We are also pursuing PPAs with enterprises that will increase our potential customer base.

 

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We have adopted a new strategic plan for the growth of our company, in terms of geographic scope, customer base, and technology platforms covered by our product and service offerings, with a focus on increasing net income from operations.  Under this plan, we will continue to focus on organic growth and increasing operational efficiency of our existing business lines.  In addition, we are actively pursuing acquisition opportunities, both in our existing business lines and the solar power generation and energy storage businesses targeted as part of the plan. Recent acquisitions include our acquisition of the Bouillante geothermal power plant on Guadeloupe Island and our recent acquisition of substantially all of the business and assets of VEI, which we have begun to operate in the demand response and storage markets. We will face a number of challenges and uncertainties in implementing this plan, including integration of recently acquired assets, and we may revise elements of the plan in response to market conditions or other factors as we move forward with the plan.

 

 

In the Electricity segment, we expect intense domestic competition from the solar and wind power generation industries to continue and increase. While we believe the expected demand for renewable energy will be large enough to accommodate increased competition, any such increase in competition, including increasing amounts of renewable energy under contract as well as any further decline in natural gas prices attributable to increased production which can affect the market price for electricity may contribute to a reduction in electricity prices. However, despite increased competition from the solar and wind power generation industries, we believe that base load electricity, such as geothermal-based energy, will continue to be an important source of renewable energy in areas with commercially viable geothermal resources. Also, we believe that geothermal power plants can positively impact electrical grid stability and provide valuable ancillary services because of their base load nature. In the geothermal industry, attributable to reduced competition for geothermal leases, we have experienced a decrease in the upfront fee required to secure geothermal leases.

 

 

In the Product segment, we have experienced increased competition from binary power plant equipment suppliers including the major steam turbine manufacturers. While we believe that we have a distinct competitive advantage based on our accumulated experience and current worldwide share of installed binary generation capacity, an increase in competition may impact our ability to secure new purchase orders from potential customers. The increased competition may also lead to further reduction in the prices that we are able to charge for our binary equipment, which in turn may reduce our profitability.

 

 

The 38 MW Puna complex has three PPAs, one of which (the 25 MW PPA) has a monthly variable energy rate based on the local utility’s avoided costs. A decrease in the price of oil as well as in other commodities will result in a decrease in the incremental cost that the power purchaser avoids by not generating its electrical energy needs from oil, which will result in a reduction of the energy rate that we may charge under this PPA. In order to reduce our exposure to oil we signed fixed rate PPAs for the remaining 13 MW.