ORMAT TECHNOLOGIES, INC. - Quarter Report: 2018 June (Form 10-Q)

 

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		June 30,				December 31,
		2018				2017
		(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	66,696			$	47,818
Restricted cash and cash equivalents (primarily related to VIEs)			76,041				48,825
Receivables:
Trade			109,061				110,410
Other			20,731				13,828
Inventories			36,696				19,551
Costs and estimated earnings in excess of billings on uncompleted contracts			46,573				40,945
Prepaid expenses and other			39,836				40,269
Total current assets			395,634				321,646
Investment in an unconsolidated company			66,551				34,084
Deposits and other			20,532				21,599
Deferred income taxes			102,162				57,337
Deferred charges			—				49,834
Property, plant and equipment, net ($1,759,608 and $1,631,900 related to VIEs, respectively)			1,840,558				1,734,691
Construction-in-process ($100,184 and $142,717 related to VIEs, respectively)			316,447				293,542
Deferred financing and lease costs, net			4,926				4,674
Intangible assets, net			207,206				85,420
Goodwill			40,133				21,037
Total assets		$	2,994,149			$	2,623,864
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	103,342			$	153,796
Short term revolving credit lines with banks (full recourse)			158,600				51,500
Billings in excess of costs and estimated earnings on uncompleted contracts			16,136				20,241
Current portion of long-term debt:
Limited and non-recourse (primarily related to VIEs):
Senior secured notes			36,458				33,226
Other loans			21,495				21,495
Full recourse			5,000				3,087
Total current liabilities			341,031				283,345
Long-term debt, net of current portion:
Limited and non-recourse (primarily related to VIEs):
Senior secured notes (less deferred financing costs of $7,987 and $8,113, respectively)			391,047				311,668
Other loans (less deferred financing costs of $5,025 and $5,258, respectively)			230,973				242,385
Full recourse:
Senior unsecured bonds (less deferred financing costs of $813 and $580, respectively)			303,527				203,752
Other loans (less deferred financing costs of $970 and $1,011, respectively)			44,030				46,489
Liability associated with sale of tax benefits			70,574				44,634
Deferred lease income			49,973				51,520
Deferred income taxes			47,128				61,961
Liability for unrecognized tax benefits			9,637				8,890
Liabilities for severance pay			20,159				21,141
Asset retirement obligation			37,188				27,110
Other long-term liabilities			21,817				18,853
Total liabilities			1,567,084				1,321,748
Commitments and contingencies (Note 10)
Redeemable noncontrolling interest			8,268				6,416
Equity:
The Company's stockholders' equity:
Common stock, par value $0.001 per share; 200,000,000 shares authorized; 50,630,138 and 50,609,051 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively			51				51
Additional paid-in capital			892,601				888,778
Retained earnings			405,353				327,255
Accumulated other comprehensive income (loss)			(2,297	)			(4,706	)
Total stockholders' equity attributable to Company's stockholders			1,295,708				1,211,378
Noncontrolling interest			123,089				84,322
Total equity			1,418,797				1,295,700
Total liabilities, redeemable nonconrolling interest and equity		$	2,994,149			$	2,623,864

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		Three Months Ended June 30,								Six Months Ended June 30,
		2018				2017				2018				2017
		(Dollars in thousands, except per share data)								(Dollars in thousands, except per share data)
Revenues:
Electricity		$	122,179			$	110,896			$	254,668			$	226,672
Product			54,915				67,587				103,587				141,709
Other			1,205				881				4,067				881
Total revenues			178,299				179,364				362,322				369,262
Cost of revenues:
Electricity			81,236				63,196				154,718				129,232
Product			37,573				43,432				71,299				92,884
Other			2,028				2,243				5,471				2,243
Total cost of revenues			120,837				108,871				231,488				224,359
Gross profit			57,462				70,493				130,834				144,903
Operating expenses:
Research and development expenses			1,251				1,050				2,359				1,652
Selling and marketing expenses			3,712				4,090				7,411				8,453
General and administrative expenses			15,866				12,201				29,719				22,150
Write-off of unsuccessful exploration activities			—				—				119				—
Operating income			36,633				53,152				91,226				112,648
Other income (expense):
Interest income			189				362				302				606
Interest expense, net			(15,846	)			(14,540	)			(30,190	)			(29,463	)
Derivatives and foreign currency transaction gains (losses)			(529	)			1,703				(2,128	)			3,041
Income attributable to sale of tax benefits			3,556				4,356				10,917				10,513
Other non-operating income (expense), net			7,373				6				7,353				(86	)
Income from continuing operations before income taxes and equity in losses of investees			31,376				45,039				77,480				97,259
Income tax (provision) benefit			(29,105	)			(32,765	)			(2,163	)			(43,769	)
Equity in earnings (losses) of investees, net			388				(428	)			1,598				(2,027	)
Income from continuing operations			2,659				11,846				76,915				51,463
Net income attributable to noncontrolling interest			(3,002	)			(3,206	)			(7,750	)			(7,629	)
Net income attributable to the Company's stockholders		$	(343	)		$	8,640			$	69,165			$	43,834
Comprehensive income:
Net income			2,659				11,846				76,915				51,463
Other comprehensive income (loss), net of related taxes:
Change in foreign currency translation adjustments			(2,496	)			1,461				(968	)			1,539
Change in unrealized gains or losses in respect of the Company's share in derivatives instruments of unconsolidated investment			529				(916	)			3,163				(347	)
Loss in respect of derivative instruments designated for cash flow hedge			20				45				40				93
Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge			(15	)			(15	)			(30	)			(39	)
Comprehensive income			697				12,421				79,120				52,709
Comprehensive income attributable to noncontrolling interest			(2,428	)			(3,613	)			(7,546	)			(8,025	)
Comprehensive income attributable to the Company's stockholders		$	(1,731	)		$	8,808			$	71,574			$	44,684
Earnings per share attributable to the Company's stockholders:
Basic:
Net income		$	(0.01	)		$	0.17			$	1.37			$	0.88
Diluted:
Net income		$	(0.01	)		$	0.17			$	1.36			$	0.87
Weighted average number of shares used in computation of earnings per share attributable to the Company's stockholders:
Basic			50,623				49,771				50,618				49,726
Diluted			50,958				50,624				51,001				50,559
Dividend per share declared		$	0.10			$	0.08			$	0.33			$	0.25

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		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, 2016			49,667			$	50			$	869,463			$	215,352			$	(8,175	)		$	1,076,690			$	91,582			$	1,168,272
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			—				—				—				43,834				—				43,834				6,941				50,775
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			—				—				—				—				93				93				—				93
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			$	246,760			$	(7,325	)		$	1,115,076			$	84,325			$	1,199,401
Balance at December 31, 2017			50,609			$	51			$	888,778			$	327,255			$	(4,706	)		$	1,211,378			$	84,322			$	1,295,700
Stock-based compensation			—				—				3,823				—				—				3,823				—				3,823
Exercise of options by employees and directors			21				—				—				—				—				—				—				—
Cumulative effect of changes in accounting principles			—				—				—				25,635				—				25,635				—				25,635
Cash paid to noncontrolling interest			—				—				—				—				—				—				(6,377	)			(6,377	)
Cash dividend declared, $0.33 per share			—				—				—				(16,702	)			—				(16,702	)			—				(16,702	)
Increase in noncontrolling interest in Guadeloupe			—				—				—				—				—				—				2,165				2,165
Increase in noncontrolling interest in Tungsten			—				—				—				—				—				—				996				996
Increase in noncontrolling interest in U.S. Geothermal			—				—				—				—				—				—				34,898				34,898
Net income			—				—				—				69,165				—				69,165				7,289				76,454
Other comprehensive income (loss), net of related taxes:
Currency translation adjustment			—				—				—				—				(764	)			(764	)			(204	)			(968	)
Loss in respect of derivative instruments designated for cash flow hedge (net of related tax of $24)			—				—				—				—				40				40				—				40
Change in unrealized gains or losses in respect of the Company's share in derivative instruments of unconsolidated investment (net of related tax of $0)			—				—				—				—				3,163				3,163				—				3,163
Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge (net of related tax of $18)			—				—				—				—				(30	)			(30	)			—				(30	)
Balance at June 30, 2018			50,630			$	51			$	892,601			$	405,353			$	(2,297	)		$	1,295,708			$	123,089			$	1,418,797

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		Six Months Ended June 30,
		2018				2017
		(Dollars in thousands)
Cash flows from operating activities:
Net income		$	76,915			$	51,463
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			63,580				54,082
Accretion of asset retirement obligation			1,068				919
Stock-based compensation			3,823				5,343
Amortization of deferred lease income			(1,342	)			(1,343	)
Income attributable to sale of tax benefits, net of interest expense			(8,303	)			(6,844	)
Equity in losses (earnings) of investees			(1,598	)			2,027
Mark-to-market of derivative instruments			1,499				(2,462	)
Loss on disposal of property, plant and equipment			4,942				—
Write-off of unsuccessful exploration activities			119				—
Gain on severance pay fund asset			721				(1,537	)
Deferred income tax provision and deferred charges			(5,060	)			34,771
Liability for unrecognized tax benefits			747				395
Deferred lease revenues			(205	)			(182	)
Proceeds from insurance recoveries			(7,150	)			—
Changes in operating assets and liabilities, net of amounts acquired:
Receivables			2,977				(625	)
Costs and estimated earnings in excess of billings on uncompleted contracts			(5,628	)			(7,703	)
Inventories			(981	)			(103	)
Prepaid expenses and other			433				1,820
Deposits and other			6				652
Accounts payable and accrued expenses			(54,183	)			(4,636	)
Billings in excess of costs and estimated earnings on uncompleted contracts			(4,105	)			(14,056	)
Liabilities for severance pay			(982	)			2,425
Other long-term liabilities			(243	)			(248	)
Net cash provided by operating activities			67,050				114,158
Cash flows from investing activities:
Capital expenditures			(139,125	)			(116,015	)
Investment in unconsolidated companies			(3,800	)			(27,412	)
Cash paid for acquisition of controlling interest in a subsidiary, net of cash acquired			(95,093	)			(35,300	)
Proceeds from insurance recoveries related to destroyed equipment			1,488				—
Decrease (increase) in severance pay fund asset, net of payments made to retired employees			340				(130	)
Net cash used in investing activities			(236,190	)			(178,857	)
Cash flows from financing activities:
Proceeds from long-term loans, net of transaction costs			100,000				—
Proceeds from exercise of options by employees			—				785
Proceeds from the sale of limited liability company interest in Tungsten, net of transaction costs			32,403				—
Proceeds from revolving credit lines with banks			1,791,400				437,500
Repayment of revolving credit lines with banks			(1,684,300	)			(407,500	)
Cash received from noncontrolling interest			4,134				2,017
Repayments of long-term debt			(28,264	)			(33,177	)
Cash paid to noncontrolling interest			(8,030	)			(14,594	)
Payments of capital leases			(972	)			(751	)
Deferred debt issuance costs			(1,428	)			(3,731	)
Cash dividends paid			(16,702	)			(12,426	)
Net cash provided by (used in) financing activities			188,241				(31,877	)
Net change in cash and cash equivalents and restricted cash and cash equivalents			19,101				(96,576	)
Restricted cash and cash equivalents acquired in a business combination			26,993				—
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period			96,643				264,476
Cash and cash equivalents and restricted cash and cash equivalents at end of period		$	142,737			$	167,900
Supplemental non-cash investing and financing activities:
Increase (decrease) in accounts payable related to purchases of property, plant and equipment		$	(6,202	)		$	2,338
Accrued liabilities related to financing activities		$	1,979			$	—

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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, 2018, the consolidated results of operations and comprehensive income (loss) for the three and six-month periods ended June 30, 2018 and 2017 and the consolidated cash flows for the six-month periods ended June 30, 2018 and 2017.

 

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, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018.

 

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/A for the year ended December 31, 2017. The condensed consolidated balance sheet data as of December 31, 2017 was derived from the Company’s audited consolidated financial statements for the year ended December 31, 2017, 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.

 

 Tungsten Mountain partnership transaction   

 

On May 17, 2018, one of the Company’s wholly-owned subsidiaries that indirectly owns the 26 MW Tungsten Mountain Geothermal power plant entered into a partnership agreement with a private investor. Under the transaction documents, the private investor acquired membership interests in the Tungsten Mountain Geothermal power plant project for an initial purchase price of approximately $33.4 million and for which it will pay additional installments that are expected to amount to approximately $13 million. The Company will continue to operate and maintain the power plant and will receive substantially all the distributable cash flow generated by the power plant.

 

Under the agreements, prior to the December 31, 2026 (“Target Flip Date”), the Company’s fully owned subsidiary, Ormat Nevada Inc.("Ormat Nevada"), receives substantially all of the distributable cash flow generated by the project, while the private investor receives substantially all of the tax attributes of the project. Following the later of the Target Flip Date and the date in which the private investor reaches its target return, Ormat Nevada will receive 97.5% of the distributable cash and 95.0% of the taxable income, on a going forward basis.

 

On the Target Flip Date, Ormat Nevada has the option to purchase the private investor’s interests at the then-current fair market value, plus an amount that may be needed to cause the private investor to reach its target return, if needed. If Ormat Nevada exercises this purchase option, it will become the sole owner of the project again.

 

Puna

 

On May 3, 2018, the Kilauea volcano located in close proximity to the Company’s 38 MW Puna geothermal power plant in the Puna district of Hawaii's Big Island erupted following a significant increase in seismic activity in the area. While the Company has taken steps to secure and protect the Puna facilities, including, among others, taking electricity generation offline and placing physical barriers around, and protective coverings over, the geothermal wells, and has evacuated non-essential personnel at the power plant and removed all pentane from the site, it is still assessing the impact of the volcanic eruption and seismic activity on the Puna facilities. The approaching lava covered the wellheads of three geothermal wells and the substation of the Puna complex and an adjacent warehouse that stored a drilling rig were burned due to the approaching lava, all of which had a carrying value of approximately $4.9 million that was written-off during the second quarter of 2018. These property damages are expected to be covered by the Company’s insurance policies and therefore the Company recorded a provision for such recoveries out of which approximately $7.2 million was included in “Other income” as excess recoveries over the carrying value of the rig which was destroyed by the lava. The write-off and related insurance recoveries, excluding the excess portion, were recorded under “Electricity cost of revenues” in the condensed consolidated statements of operations and comprehensive income. The Company is in discussions with the insurance companies on the reimbursement for profit and loss and property damages. The total net book value of the Puna property, plant and equipment is approximately $102.2 million. The Company cannot currently estimate when the lava flow will stop nor when it will be able to assess all of the damages. Any significant physical damage to, or extended shut-down of, the Puna facilities could have an adverse impact on the power plant's electricity generation and availability, which in turn could have a material adverse impact on the Company’s business and results of operations. The Company continues to monitor the condition of the Puna facilities, coordinate with Hawaii Electric Light Company (“HELCO”) and local authorities, and is taking steps to both further secure the power plant and restore its operations as soon as it is safe to do so. In addition, the Company will continue to assess the accounting implications of this event on the assets and liabilities on its balance sheet and whether an impairment will be required.

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

U.S. Geothermal (“USG”) transaction

 

On April 24, 2018, the Company completed its previously announced acquisition of USG. The total cash consideration (exclusive of transaction expenses) was approximately $110 million, comprised of approximately $106 million funded from available cash of Ormat Nevada Inc. (to acquire the outstanding shares of common stock of USG) and approximately $4 million funded from available cash of USG (to cash-settle outstanding in-the-money options for common stock of USG). As a result of the acquisition, USG became an indirect wholly owned subsidiary of Ormat, and Ormat indirectly acquired, among other things, interests held by USG and its subsidiaries in:

 

•     three operating power plants at Neal Hot Springs, Oregon, San Emidio, Nevada and Raft River, Idaho with a total net generating capacity of approximately 38 MW; and

•     development assets which include a project at the Geysers, California; a second phase project at San Emidio, Nevada; a greenfield project in Crescent Valley, Nevada; and the El Ceibillo project located near Guatemala City, Guatemala.

 

As a result of the acquisition, the Company expanded its overall generation capacity and expects to improve the profitability of the purchased assets through cost reduction and synergies. The Company accounted for the transaction in accordance with Accounting Standard Codification ASC 805, Business Combinations and following the transaction, the Company consolidates USG, in accordance with Accounting Standard Codification ASC 810, Consolidation. 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. The Company deemed that the adoption of ASU 2017-01, Business Combinations, as further described under Note 2 to the condensed consolidated financial statements, did not have an effect on the USG transaction.

 

The Company deemed the transaction to not meet the significant subsidiary threshold and as a result did not provide additional pro-forma and other related information, that otherwise would have been required. 

 

The following table summarizes the fair value amounts of identified assets and liabilities assumed as of the transaction date (in millions):

 

(1)

Intangible assets are primarily related to long-term electricity power purchase agreements and depreciated over an average of 19 years.

(2)

Goodwill is primarily related to the expected synergies in operation as a result of the purchase transaction and is allocated to the Electricity segment.

 

The fair value of the noncontrolling interest of $34.9 million reflects the 40% minority interests in the Neal Hot Springs project that was evaluated using the income approach. The fair value of the noncontrolling interest is based on the following significant inputs: (i) forecasted cash flows assumed to be generated in correspondence with the remaining life of the related power purchase agreement which is approximately 20 years; (ii) revenues were estimated in accordance with the price and generation capacity of the related power purchase agreement; (iii) assumed terminal value based on the realizable value of the project at the end of the power purchase agreement term; and (iv) assumed discount rate range of 9%.     

 

Total Electricity segment revenues and operating losses related to the three USG power plants of approximately $3.4 million and $4.2 million, respectively, were included in the Company’s consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2018. The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2017:

 

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Migdal Senior Unsecured Loan

 

On March 22, 2018 the Company entered into a definitive loan agreement (the "Migdal Loan Agreement") with Migdal Insurance Company Ltd., Migdal Makefet Pension and Provident Funds Ltd. and Yozma Pension Fund of Self Employed Ltd., all entities within the Migdal Group, a leading insurance company and institutional investor in Israel. The Migdal Loan Agreement provides for a loan by the lenders to the Company in an aggregate principal amount of $100 million (the “Migdal Loan”). The Migdal Loan will be repaid in 15 semi-annual payments of $4.2 million each, commencing on September 15, 2021, with a final payment of $37 million on March 15, 2029. The Migdal Loan bears interest at a fixed rate of 4.8% per annum, payable semi-annually, subject to adjustment in certain circumstances as described below.

 

The Migdal Loan is subject to early redemption by the Company prior to maturity from time to time (but not more frequently than once per quarter) and at any time in whole or in part, at a redemption price set forth in the Migdal Loan Agreement. If the rating of the Company is downgraded to "ilA-", by Standard and Poor’s Global Ratings Maalot Ltd. (“Maalot”), the interest rate applicable to the Migdal Loan will be increased by 0.50%. If the rating of the Company is further downgraded to a lower level, the interest rate applicable to the Migdal Loan will be increased by 0.25% for each additional downgrade. In no event will the cumulative increase in the interest rate applicable to the Migdal Loan exceed 1% regardless of the cumulative rating downgrade. A subsequent upgrade or reinstatement of a rating by Maalot will reduce the interest rate applicable to the Migdal Loan by 0.25% for each upgrade (but in no event will the interest rate applicable the Migdal Loan fall below the base interest rate of 4.8%). Additionally, if the ratio between short-term and long-term debt to financial institutions and bondholders, deducting cash and cash equivalents to EBITDA is equal to or higher than 4.5, the interest rate on all amounts then outstanding under the Migdal Loan shall be increased by 0.5% per annum over the interest rate then-applicable to the Migdal Loan.

 

The Migdal Loan constitutes senior unsecured indebtedness of the Company and will rank equally in right of payment with any existing and future senior unsecured indebtedness of the Company, and effectively junior to any existing and future secured indebtedness, to the extent of the security therefore.

 

The Migdal Loan Agreement includes various affirmative and negative covenants, including a covenant that the Company maintain (i) a debt to adjusted EBITDA ratio below 6, (ii) a minimum equity amount (as shown on its consolidated financial statements, excluding noncontrolling interests) of not less than $650 million, and (iii) an equity attributable to Company's stockholders to total assets ratio of not less than 25%. In addition, the Migdal Loan Agreement restricts the Company from making dividend payments if its equity falls below $800 million and otherwise restricts dividend payments in any one year to not more than 50% of the net income of the Company of such year as shown on the Company’s consolidated annual financial statements as long as any of the Company's bonds issued in Israel prior to March 27, 2018 remain outstanding. The Migdal Loan Agreement includes other customary affirmative and negative covenants and events of default. As of June 30, 2018 the Company was in compliance with all such covenants.

 

Other comprehensive income

 

For the six months ended June 30, 2018 and 2017, the Company classified $10,000 and $54,000, respectively, related to derivative instruments designated as cash flow hedges, from accumulated other comprehensive income, of which $15,000 and $30,000, respectively, were recorded to reduce interest expense and $5,000 and $(24,000), 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, 2018 and 2017, the Company classified $5,000 and $30,000, respectively, related to derivative instruments designated as cash flow hedges, from accumulated other comprehensive income, of which $6,000 and $20,000, respectively, were recorded to reduce interest expense and $1,000 and $(10,000), 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, 2018 is $1.0 million

 

Write-offs of unsuccessful exploration activities

 

Write-offs of unsuccessful exploration activities for the three and six months ended June 30, 2018 were $0 and $0.1 million. There were no write-offs of unsuccessful exploration activities for the three and six months ended June 30, 2017.

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Reconciliation of Cash and cash equivalents and Restricted cash and cash equivalents

 

The following table provides a reconciliation of Cash and cash equivalents and Restricted cash and cash equivalents reported on the balance sheet that sum to the total of the same amounts shown on the statement of cash flows:

 

 

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, 2018 and December 31, 2017, the Company had deposits totaling $21.6 million and $21.2 million, respectively, in eight U.S. financial institutions that were federally insured up to $250,000 per account. At June 30, 2018 and December 31, 2017, the Company’s deposits in foreign countries amounted to approximately $59.8 million and $32.8 million, respectively.

 

At June 30, 2018 and December 31, 2017, accounts receivable related to operations in foreign countries amounted to approximately $83.2 million and $78.1 million, respectively. At June 30, 2018 and December 31, 2017, accounts receivable from the Company’s primary customers amounted to approximately 55% and 57% of the Company’s accounts receivable, respectively.

 

Sierra Pacific Power Company and Nevada Power Company (subsidiaries of NV Energy, Inc.) accounted for 17.0% and 16.7% of the Company’s total revenues for the three months ended June 30, 2018 and 2017, respectively, and 16.7% and 17.8% of the Company’s total revenues for the six months ended June 30, 2018 and 2017, respectively.

 

Southern California Public Power Authority (“SCPPA”) accounted for 14.9% and 8.7% of the Company’s total revenues for the three months ended June 30, 2018 and 2017, respectively, and 15.6% and 8.9% of the Company’s total revenues for the six months ended June 30, 2018 and 2017.

 

Kenya Power and Lighting Co. Ltd. accounted for 16.6% and 15.4% of the Company’s total revenues for the three months ended June 30, 2018 and 2017, respectively, and 15.8% and 14.8% of the Company’s total revenues for the six months ended June 30, 2018 and 2017, respectively.

 

The Company has historically been able to collect on substantially all of its receivable balances, and believes it will continue to be able to collect all amounts due. 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, 2018

 

Income Taxes

 

In March 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-05, Income Taxes (Topic 740). The amendments in this update add several SEC paragraphs pursuant to the issuance of the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) in December 2017. The amendments in this update are effective immediately. For additional information, see Note 11 to the consolidated financial statements.

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations. This update did not change the core principles of the guidance and was 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 included indicators to assist an entity in determining whether it acts as a principal or agent in a specified transaction.

 

The Company adopted this update effectively as of January 1, 2018 using the modified retrospective approach with one-time cumulative adjustment to the opening balance of retained earnings as further described below and applied the five-step model described above on identified outstanding contracts at the date of adoption, under which revenues are generated. Under ASC 606, an entity must identify the performance obligations in a contract, determine the transaction price and allocate the price to specific performance obligations and recognize the revenue when the obligation is completed. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The standard also requires disclosure of sufficient information to allow users to understand the nature, amount, timing and uncertainty of revenue and cash flow arising from contracts.

 

The adoption of ASC 606, Revenues from Contracts with Customers, as described above, did not have an impact on our Electricity, Product and Other segment revenues in 2018, however, the adoption did have an impact on our accounting for investment in an unconsolidated company as further described in the following table and in the disclosure under the heading "Investment in an unconsolidated company" within this note below. Additionally, the following table below summarizes the impact of the adoption of ASC 606 on the Company’s consolidated financial statements as of January 1, 2018, followed by further information for each of the line items in the table:

 

 

Electricity segment revenues: Electricity revenues are primarily related to sale of electricity from geothermal and recovered energy-based power plants owned and operated by the Company. Revenues related to the sale of electricity from geothermal and recovered energy-based power plants and capacity payments are recorded based upon output delivered and capacity provided at rates specified under relevant contract terms. For power purchase agreements (“PPAs”) agreed to, modified, or acquired in business combinations on or after July 1, 2003, the Company determines whether such PPAs contain a lease element requiring lease accounting. Revenue from such PPAs is accounted for in electricity revenues. The lease element of the PPAs is also assessed in accordance with the revenue arrangements with multiple deliverables guidance, which requires that revenues be allocated to the separate earnings processes based on their relative fair value. PPAs with minimum lease rentals which vary over time are generally recognized on the straight-line basis over the term of the PPAs. PPAs with contingent rentals are recognized when earned. In the Electricity segment, revenues for all but three power plants are accounted for under ASC 840 (Leases) as operating leases, and therefore equipment related to geothermal and recovered energy generation power plants is considered held for leasing. For power plants in the scope of ASC 606, the Company identified electricity as a separate performance obligation. Performance obligations identified were evaluated and determined to be satisfied over time and qualified for the invoicing practical expedient since the invoiced amounts reasonably represented the value to customers of performance obligations fulfilled to date. The transaction price is determined based on the price per actual mega-watt output or available capacity as agreed to in the respective PPA. Customers are generally billed on a monthly basis and payment is typically due within 30 to 60 days after the issuance of the invoice.

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Product segment revenues: Product segment revenues are primarily related to sale of geothermal and recovered energy-based power plants, including equipment, engineering, construction and installation and operating services. Revenues from the supply and/or construction of geothermal and recovered energy-based power plant equipment and other equipment to third parties are recognized over time since control is transferred continuously to our customers. The majority of our contracts include a single performance obligation which is essentially the promise to transfer the individual goods or services that are not separately identifiable from other promises in the contracts and therefore deemed as not distinct. Performance obligations are satisfied over-time if the customer receives the benefits as we perform work, if the customer controls the asset as it is being constructed, or if the product being produced for the customer has no alternative use and we have a contractual right to payment. In our Product segment, revenues are spread over a period of one to two years and are recognized over time based on the cost incurred to date in ratio to total estimated costs which represents the input method that best depicts the transfer of control over the performance obligation to the customer. Costs include direct material, labor, and indirect costs. Selling, marketing, general, and administrative costs are expensed as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

 

In contracts for which we determine that control is not transferred continuously to the customer, we recognized revenues at the point in time when the customer obtains control of the asset. Revenues for such contracts are recorded upon delivery and acceptance by the customer. This generally is the case for the sale of spare parts, generators or similar products.

 

Accounting for product contracts that are satisfied over time includes use of several estimates such as variable consideration related to bonuses and penalties and total estimated cost for completing the contract. The estimated amount of variable consideration will be included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. These estimates are based on historical experience, anticipated performance and our best judgment at the time.

 

The nature of our product contracts give rise to several modifications or change requests by our customers. Substantially all of the modifications are treated as cumulative catch-ups to revenues since the additional goods are not distinct from those already provided. We include the additional revenues related to the modifications in our transaction price when both parties to the contract approved the modification. As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in Product revenues on contracts under the cumulative catch-up method. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the period in which it is identified.

 

The Company generally provides a one-year warranty against defects in workmanship and materials related to the sale of products for electricity generation. The Company considered the warranty as an assurance type warranty since the warranty provides the customer the assurance that the product complies with agreed-upon specifications. Estimated future warranty obligations are included in operating expenses in the period in which the related revenue is recognized. Such charges are immaterial for the three and six months ended June 30, 2018 and 2017.

 

Contract Assets and Liabilities related to our Product segment: Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. We receive payments from customers based on the terms established in our contracts. Total contract assets and contract liabilities as of June 30, 2018 and December 31, 2017 are as follows:

 

 

(*) Contract assets and contract liabilities are presented as "Costs and estimated earnings in excess of billings on uncompleted contracts" and "Billings in excess of costs and estimated earnings on uncompleted contracts", respectively, on the consolidated balance sheet.

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The following table presents the significant changes in the contract assets and contract liabilities for the six months ended June 30, 2018:

 

 

The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets and contract liabilities on the condensed consolidated balance sheet. In our Products segment, amounts are billed as work progresses in accordance with agreed-upon contractual terms, or upon achievement of contractual milestones. Generally, billing occurs subsequent to the recognition of revenue, resulting in contract assets. However, we sometimes receive advances or deposits from our customers before revenue can be recognized, resulting in contract liabilities. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. The timing of billing our customers and receiving advance payments vary from contract to contract. We typically receive a down payment of between 10% and 20% of total contract consideration upon signing, followed by additional milestone payments for which timing varies from contract to contract. The majority of payments are received no later than the completion of the project and satisfaction of our performance obligation.

 

On June 30, 2018, we had approximately $229.0 million of remaining performance obligations not yet satisfied or partly satisfied related to our Product segment. We expect to recognize approximately 96% of this amount as Product revenues during the next 24 months and the rest will be recognized thereafter.

 

The following schedule reconciles revenues accounted for under ASC 840, Leases, and ASC 606, Revenues from Contracts with Customers, to total consolidated revenues for the three and six months ended June 30, 2018:

 

 

Disaggregated revenues from contracts with customers for the three and six months ended June 30, 2018 are shown under Note 9 – Business Segments, to the condensed consolidated financial statements. 

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Investment in an unconsolidated company: The Company also reviewed the impact of the adoption of ASC 606 on its investment in an unconsolidated company. As a result of the adoption, the Company recorded one-time cumulative credit adjustment to the opening balance of retained earnings of approximately $24.0 million as of January 1, 2018. This impact is a result of the unconsolidated company’s variable consideration related to the construction of its power plant for which, under the new guidance, is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. As such, the comparative information will not be restated and shall continue to be reported under the accounting standards in effect for those periods.

 

The following schedule quantifies the impact of adopting ASC 606 on the statement of operations for the three and six months ended June 30, 2018:

 

 

 

 

Other segment revenues: Other segment revenues are primarily related to energy storage, demand-response and energy management related services. Revenues are recorded based on energy management of load curtailment capacity delivered or service provided at rates specified under the relevant contract terms. The Company determined that the Other segment revenues are in the scope of ASC 606 and identified energy management as a separate performance obligation. Performance obligations are satisfied once the Company provides verification to the electric power grid operator or utility of its ability to meet the committed capacity or power curtailment requirements and thus entitled to cash proceeds. Such verification may be provided by the Company bi-weekly, monthly or under any other frequency as set by the related program and are typically followed by a payment shortly after. Performance obligations identified were evaluated and determined to be satisfied over time and qualified for the invoicing practical expedient since the amounts included in the verification document reasonably represent the value of performance obligations fulfilled to date. The transaction price is determined based on mechanisms specified in the contract with the customer.

 

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 under 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. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The adoption of this guidance did not have a material impact on the Company’s 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. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Statement of Cash Flow

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash. The amendments in this update require that a statement of cash flows explain the changes during the period in total cash, cash equivalents, and the amounts generally described as restricted cash or cash equivalents. Therefore, amounts of restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update should be applied retrospectively for each period presented and are effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted this guidance retrospectively in its consolidated financial statements for the three month period ending March 31, 2018 and adjusted its disclosure accordingly.

 

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 is required for transition to the new guidance, with cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. The Company adopted this guidance in its consolidated financial statements for the three months ending March 31, 2018 using the modified retrospective approach and recorded a net cumulative-effect adjustment to retained earnings of approximately $1.8 million with a corresponding adjustment to deferred charges and deferred income taxes on the condensed consolidated balance sheet of approximately $49.8 million and $51.6 million, respectively.

 

Statement of Cash Flows: Classification of Certain Cash Receipts and Cash payments (Topic 230)

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash-Flows (Topic 230). This update addresses eight specific cash flow classification issues with the objective of reducing diversity in practice. One of the issues addressed in this update is debt prepayment or debt extinguishment costs which under the new guidance should be classified as cash outflows for financing activities. Additionally, the update addressed contingent consideration payments made after a business combination. Such cash payments made soon after the acquisition date to settle a contingent consideration liability should be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities. The amendments in this update are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The amendments in this update should be applied using a retrospective transition method to each period presented. The Company adopted this guidance and expects that the impact from the adoption of the update will result in a reclassification of approximately $8.0 million of cash paid for achievement of production threshold in Guadeloupe during the fourth quarter of 2017 from cash outflows from investing activities to cash outflows from financing activities as required by this update.

  

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. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

New accounting pronouncements effective in future periods

 

Derivatives and Hedging

 

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

 

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 principle 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, if any, of the adoption of these amendments on its consolidated financial statements.

 

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. This update requires the modified retrospective transition approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. The modified retrospective approach includes a number of optional practical expedients related to identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with the previous generally accepted accounting principles in the United States unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining  minimum rental payments that were tracked and disclosed under previous generally accepted accounting principles in the United States.  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.

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive income

 

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220). The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting for the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The guidance is effective for the fiscal years beginning after December 15, 2018, 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, however, such impact, if any, is not expected to be material.

 

 

NOTE 3 — INVENTORIES

 

Inventories consist of the following:

 

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

 

NOTE 4 — INVESTMENT IN AN UNCONSOLIDATED COMPANY

 

Unconsolidated investments consist of the following:

 

 

The Sarulla Project

 

The Company holds a 12.75% equity interest in a consortium that developed the 330 MW Sarulla geothermal power plant project in Tapanuli Utara, North Sumatra, Indonesia. The Sarulla project is comprised of three separately constructed 110 MW units, the most recent of which, NIL 2, was completed in April 2018. The Sarulla project is owned and operated by the consortium members under the framework of a joint operating contract and energy sales contract that were both executed on April 4, 2013. Under the joint operating contract, PT Pertamina Geothermal Energy, the concession holder for the project, provided the consortium with the right to use the geothermal field, and under the energy sales contract, PT PLN, the state electric utility, is the off-taker at Sarulla for a period of 30 years.

 

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 bears interest at a fixed rate and $1.07 billion bears interest at a rate linked to LIBOR. The total interest expenses, net incurred by the consortium for the six months ended June 30, 2018, totaled approximately $23.1 million.

 

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, 2018 the Sarulla project company recorded a gain of $4.2 million and $24.8 million, respectively, net of deferred tax, of which the Company’s share was $0.5 million and $3.2 million, respectively. The Company’s share of such gains was 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 was recorded in other comprehensive income. The related accumulated loss recorded by the Company in other comprehensive income (loss) as of June 30, 2018 is $1.9 million.

 

During the three and six months ended June 30, 2018, the Company made additional cash equity investments in the Sarulla project of approximately $2.5 and $3.8 million, respectively, for a total of $62.0 million since inception.

 

As further described above under the heading “New accounting pronouncement effective in the six-month period ended June 30, 2018” in Note 2 to the condensed consolidated financial statements, the Company adopted ASC 606, Revenue from Contracts with Customers, on January 1, 2018. The impact of the adoption of this standard on its investment in an unconsolidated company amounted to $24.0 million at January 1, 2018. This impact was a result of the unconsolidated company’s variable consideration related to the construction of its power plant for which, under the new guidance, is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. The Company adopted the new standard using the modified retrospective approach with a one-time cumulative adjustment to the opening balance of retained earnings of approximately $24.0 million at January 1, 2018, the date of initial application.

 

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

 

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, 2018 and December 31, 2017 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.

 

 

 

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(1)

These amounts relate to contingent receivables and payables and warrants relating to acquisition of substantially all of the assets of Viridity Energy, Inc. and to the 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, 2018 and December 31, 2017 in the consolidated balance sheets with the corresponding gain or loss being recognized within Derivatives and foreign currency transaction gains (losses) in the consolidated statement of operations and comprehensive income. The warrants were executed during the second quarter of 2018 in accordance with the purchase agreements.

 

(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”, as applicable, on June 30, 2018 and December 31, 2017, 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.

 

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.

 

 

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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:

 

 

In January 2017, the Company entered into Henry Hub Natural Gas Future contracts under which it bought a number of put options covering a notional quantity of approximately 4.1 million British Thermal Units 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 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, 2018.

 

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

 

 

 

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The fair value of the 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 financial instruments such as revolving lines of credit and deposits approximates fair value.

 

The following table presents the fair value of financial instruments as of June 30, 2018:

 

 

 

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The following table presents the fair value of financial instruments as of December 31, 2017:

 

 

 

NOTE 6 — STOCK-BASED COMPENSATION

 

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, 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 2012 Incentive Plan, a total of 4,000,000 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 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. Restricted stock units granted to directors and members of senior management vest according to a vesting schedule as follows: for the directors, 100% on the first anniversary of the grant date and for members of senior management, 25% on each of the first, second, third and fourth anniversaries of the grant date.  The term of stock-based awards typically ranges from six to ten years from the grant date. The shares of common stock issued in respect of awards under the 2012 Incentive Plan are issued from the Company’s authorized share capital upon exercise of options or SARs. The 2012 Incentive Plan expired in May 2018 upon adoption of the 2018 Incentive Compensation Plan (“2018 Incentive Plan”), except as to stock-based awards outstanding under the 2012 Incentive Plan on that date.

 

The 2018 Incentive Compensation Plan

 

On May 7, 2018, the Company held its 2018 Annual Meeting of Stockholders at which the Company's stockholders approved the 2018 Incentive Plan. The 2018 Incentive Plan provides for the grant of the following types of awards: incentive stock options, restricted stock units (“RSUs”), 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 2018 Incentive Plan, a total of 5,000,000 shares of the Company’s common stock were authorized and reserved for issuance, all of which could be issued as options or as other forms of awards. SARs and RSUs granted to employees under the 2018 Incentive Plan typically vest and become exercisable as follows: 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date.  SARs and Restricted stock units granted to directors under the 2018 Incentive Plan typically vest and become exercisable (100%) on the first anniversary of 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 2018 Incentive Plan are issued from the Company’s authorized share capital upon exercise of options or SARs.

 

On May 8, 2018, the Company granted an aggregate of 295,671 SARs and 40,489 RSUs to the CEO and one of the directors under the Company’s 2018 Incentive Plan. The exercise price of each SAR is $55.16, which represented the fair market value of the Company’s common stock on the grant date. The SARs and RSUs will expire in five and a half years from the date of grant and will vest according to a vesting schedule as follows: for the directors, 100% after a half year from the grant date and for the CEO, 22% on each of the first and second anniversaries of the grant date and 28% on the third and fourth anniversaries of the grant date.

 

 

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The fair value of each SAR for the director and the CEO on the grant date was $14.56 and $14.57, respectively. The fair value of each RSU for the director and the CEO on the grant date was $54.92 and $54.23, respectively. The Company calculated the fair value of each SAR and RSU on the grant date using the Exercise Multiple-Based Lattice Pricing model based on the following assumptions:

 

 

On June 25, 2018, the Company granted its employees and members of its senior management an aggregate of 838,117 SARs and 19,848 RSUs under the Company’s 2018 Incentive Plan. The exercise price of each SAR is $53.44, which represented the fair market value of the Company’s common stock on the grant date. The SARs and RSUs will expire in six years from the date of grant and will vest according to a vesting schedule as follows: 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date.

 

The fair value of each SAR for the employees and members of senior management on the grant date was $13.82 and $14.64, respectively. The fair value of each RSU for the employees and members of senior management on the grant date was $52.03 and $52.09, respectively. The Company calculated the fair value of each SAR and RSU on the grant date using the Exercise Multiple-Based Lattice Pricing model based on the following assumptions:

 

 

 

NOTE 7 — INTEREST EXPENSE, NET

 

The components of interest expense are as follows:

 

 

 

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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:

 

 

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 232,925 and 2,363 for the three months ended June 30, 2018 and 2017, respectively, and 223,708 and 2,430 for the six months ended June 30, 2018 and 2017, respectively.

 

 

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