NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
Ormat Technologies, Inc. (the Company), a subsidiary of Ormat Industries Ltd. (the Parent), is primarily engaged in the geothermal and recovered energy business, including the
supply of equipment that is manufactured by the Company and the design and construction of power plants for projects owned by the Company or for third parties. The Company owns and operates geothermal and recovered energy-based power plants in
various countries, including the United States of America (U.S.), Kenya, Guatemala, and Nicaragua. The Companys equipment manufacturing operations are located in Israel.
Most of the Companys domestic power plant facilities are Qualifying Facilities under the Public Utility Regulatory Policies Act of
1978 (PURPA). The power purchase agreements (PPAs) for certain of such facilities are dependent upon their maintaining Qualifying Facility status. Management believes that all of the facilities were in compliance with
Qualifying Facility status requirements as of December 31, 2012.
Cash dividends
During the years ended December 31, 2012, 2011, and 2010, the Companys Board of Directors declared, approved, and authorized
the payment of cash dividends in the aggregate amount of $3.6 million ($0.08 per share), $5.9 million ($0.13 per share), and $12.3 million ($0.27 per share), respectively. Such dividends were paid in the years declared.
Rounding
Dollar amounts, except per share data, in the notes to these financial statements are rounded to the closest $1,000, unless otherwise indicated.
Basis of presentation
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the accounts of the
Company and of all majority-owned subsidiaries in which the Company exercises control over operating and financial policies, and variable interest entities in which the Company has an interest and is the primary beneficiary. Intercompany accounts
and transactions have been eliminated in consolidation.
Investments in less-than-majority-owned entities or other entities in
which the Company exercises significant influence over operating and financial policies are accounted for using the equity method of accounting. Under the equity method, original investments are recorded at cost and adjusted by the Companys
share of undistributed earnings or losses of such companies. The Companys earnings or losses in investments accounted for under the equity method have been reflected as equity in income (losses) of investees, net on the
Companys consolidated statements of operations and comprehensive income (loss).
Cash and cash equivalents
The Company considers all highly liquid instruments, with an original maturity of three months or less, to be cash
equivalents.
140
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Marketable securities
Marketable securities consist of debt securities. The Company determines the appropriate classification of all marketable securities as
held-to-maturity, available-for-sale or trading at the time of the purchase and re-evaluates such classification at each balance sheet date. At December 31, 2012 and 2011, all of the Companys investments in marketable securities were
classified as available-for-sale securities and as a result, were reported at their fair value.
Restricted cash, cash
equivalents, and marketable securities
Under the terms of certain long-term debt agreements, the Company is required
to maintain certain debt service reserves, cash collateral and operating fund accounts that have been classified as restricted cash, cash equivalents, and marketable securities. Funds that will be used to satisfy obligations due during the next
twelve months are classified as current restricted cash, cash equivalents, and marketable securities, with the remainder classified as non-current restricted cash, cash equivalents and marketable securities (see Note 7). Such amounts were invested
primarily in money market accounts and commercial paper with a minimum investment grade of AA.
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash investments, marketable securities and accounts receivable.
The Company places its temporary cash investments and marketable securities with high credit quality financial institutions located in
the U.S. and in foreign countries. At December 31, 2012 and 2011, the Company had deposits totaling $41,231,000 and $39,569,000, respectively, in seven U.S. financial institutions that were federally insured up to $250,000 per account. At
December 31, 2012 and 2011, the Companys deposits in foreign countries of approximately $33,215,000 and $57,838,000, respectively, were not insured.
At December 31, 2012 and 2011, accounts receivable related to operations in foreign countries amounted to approximately $17,606,000 and $21,453,000, respectively. At December 31, 2012, and 2011,
accounts receivable from the Companys major customers that have generated 7.5% or more of its revenues (see Note 20) amounted to approximately 45% and 58%, respectively, of the Companys accounts receivable.
Southern California Edison Company (Southern California Edison) accounted for 17.5%, 27.7%, and 29.1% of the Companys
total revenues for the years ended December 31, 2012, 2011, and 2010, respectively. Southern California Edison is also the power purchaser and revenue source for the Mammoth complex, which was accounted for separately under the equity method
through August 1, 2010.
Sierra Pacific Power Company and Nevada Power Company (subsidiaries of NV Energy, Inc.)
accounted for 15.3%, 13.0%, and 15.0% of the Companys total revenues for the years ended December 31, 2012, 2011, and 2010, respectively.
Hawaii Electric Light Company accounted for 9.4%, 10.6%, and 8.6% of the Companys total revenues for the years ended December 31, 2012, 2011, and 2010, respectively.
Kenya Power and Lighting Co. Ltd. accounted for 7.9%, 8.0%, and 9.4% of the Companys total revenues for the years ended
December 31, 2012, 2011, and 2010, respectively.
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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company performs ongoing credit evaluations of its customers financial
condition. The Company has historically been able to collect on substantially all of its receivable balances, and accordingly, no provision for doubtful accounts has been made.
Inventories
Inventories consist primarily of raw material parts and sub-assemblies for power units, and are stated at the lower of cost or market value, using the weighted-average cost method. Inventories are reduced
by a provision for slow-moving and obsolete inventories. This provision was not significant at December 31, 2012 and 2011.
Deposits and other
Deposits and other consist primarily of performance bonds for construction projects, long-term insurance contract and receivables, and derivative instruments.
Deferred Charges
Deferred charges represent prepaid income taxes on intercompany sales. Such amounts are amortized using the straight-line method and included in income tax provision over the life of the related property,
plant and equipment.
Property, plant and equipment
Property, plant and equipment are stated at cost. All costs associated with the acquisition, development and construction of power plants
operated by the Company are capitalized. Major improvements are capitalized and repairs and maintenance (including major maintenance) costs are expensed. Power plants operated by the Company, which include geothermal wells and exploration and
resource development costs, are depreciated using the straight-line method over their estimated useful lives, which range from 25 to 30 years. The geothermal power plant in Zunil, Guatemala is to be fully depreciated over the term of the PPA, since
the Company does not own the geothermal resource used by the plant. The geothermal power plant in Nicaragua is to be fully depreciated over the period that the plant is operated by the Company (see Note 8). The other assets are depreciated using the
straight-line method over the following estimated useful lives of the assets:
|
|
|
|
|
Leasehold improvements
|
|
|
15-20 years
|
|
Machinery and equipment manufacturing and drilling
|
|
|
10 years
|
|
Machinery and equipment computers
|
|
|
3-5 years
|
|
Office equipment furniture and fixtures
|
|
|
5-15 years
|
|
Office equipment other
|
|
|
5-10 years
|
|
Automobiles
|
|
|
5-7 years
|
|
The cost and accumulated depreciation of items sold or retired are removed from the accounts. Any
resulting gain or loss is recognized currently and is recorded in operating income.
The Company capitalizes interest costs as
part of constructing power plant facilities. Such capitalized interest is recorded as part of the asset to which it relates and is amortized over the assets estimated useful life. Capitalized interest costs amounted to $11,964,000,
$11,709,000, and $9,493,000 for the years ended December 31, 2012, 2011, and 2010, respectively.
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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash Grants
From time to time, the Company is awarded cash grants from the U.S. Department of the Treasury (U.S. Treasury) for Specified
Energy Property in Lieu of Tax Credits under Section 1603 of the American Recovery and Reinvestment Act of 2009 (ARRA). The Company records the cash grant as a reduction in the carrying value of the related plant and amortizes the
grant as a reduction in depreciation expense over the plants estimated useful life.
For federal income tax purposes,
the tax basis of the plant is reduced only by 50% of the cash grant. To account for the tax effect of the difference between the tax and book basis of the plant, the Company records a deferred tax asset with a corresponding decrease in the carrying
value of the plant.
Exploration and development costs
The Company capitalizes costs incurred in connection with the exploration and development of geothermal resources once it acquires land
rights to the potential geothermal resource. Prior to acquiring land rights, the Company makes an initial assessment that an economically feasible geothermal reservoir is probable on that land. The Company determines the economic feasibility of
potential geothermal resources internally, with all available data and external assessments vetted through the exploration department and occasionally using outside service providers. Costs associated with the initial assessment are expensed and
included in cost of electricity revenues in the consolidated statements of operations and comprehensive income (loss). Such costs were immaterial during the years ended December 31, 2012, 2011, and 2010. It normally takes two to three years
from the time active exploration of a particular geothermal resource begins to the time a production well is in operation, assuming the resource is commercially viable.
In most cases, the Company obtains the right to conduct the geothermal development and operations on land owned by the Bureau of Land Management (BLM), various states or with private parties.
In consideration for certain of these leases, the Company may pay an up-front bonus payment which is a component of the competitive lease process. The up-front bonus payments and other related costs, such as legal fees, are capitalized and included
in construction-in-process. The annual land lease payments made during the exploration, development and construction phase are expensed as incurred and included in electricity cost of revenues in the consolidated statements of operations
and comprehensive income (loss). Upon commencement of power generation on the leased land, the Company begins to pay to the lessors long-term royalty payments based on the utilization of the geothermal resources as defined in the respective
agreements. Such payments are expensed when the related revenues are earned and included in electricity cost of revenues in the consolidated statements of operations and comprehensive income (loss).
Following the acquisition of land rights to the potential geothermal resource, the Company conducts further studies and surveys,
including water and soil analyses among others, and augments its database with the results of these studies. The Company then initiates a suite of geophysical surveys to assess the resource and determine drilling locations. If the results of these
activities support the initial assessment of the feasibility of the geothermal resource, the Company then proceeds to exploratory drilling and other related activities which may include drilling of temperature gradient holes, drilling of slim holes,
building access roads to drilling locations, drilling full size production and/or injection wells and flow tests. If the slim hole supports a conclusion that the geothermal resource will support a commercially viable power plant, it may either be
converted to a full-size commercial well, used either for extraction or re-injection or geothermal fluids, or used as an observation well to monitor and define the geothermal resource. Costs associated with these activities and other directly
attributable costs, including interest once physical exploration activities begin and permitting costs, are capitalized and included in construction-in-process. If the Company concludes that a geothermal resource will not support
commercial operations, capitalized costs are expensed in the period such determination is made.
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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Grants received from the U.S. Department of Energy (DOE) are offset against
the related exploration and development costs. Such grants amounted to $1,368,000, $6,194,000, and $1,116,000 for the years ended December 31, 2012, 2011, and 2010, respectively.
All exploration and development costs that are being capitalized, including the up-front bonus payments made to secure land leases, will
be depreciated over their estimated useful lives when the related geothermal power plant is substantially complete and ready for use. A geothermal power plant is substantially complete and ready for use when electricity generation commences.
Asset retirement obligation
The Company records the fair value of a legal liability for an asset retirement obligation in the period in which it is incurred. The Companys legal liabilities include plugging wells and
post-closure costs of power producing sites. When a new liability for asset retirement obligations is recorded, the Company capitalizes the costs of the liability by increasing the carrying amount of the related long-lived asset. The liability is
accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. At retirement, the obligation is settled for its recorded amount at a gain or loss.
Deferred financing and lease transaction costs
Deferred financing costs are amortized over the term of the related obligation using the effective interest method. Amortization of deferred financing costs is presented as interest expense in the
consolidated statements of operations and comprehensive income (loss). Accumulated amortization related to deferred financing costs amounted to $20,209,000 and $16,533,000 at December 31, 2012 and 2011, respectively. Amortization expense for
the years ended December 31, 2012, 2011, and 2010 amounted to $3,676,000, $3,567,000, and $3,042,000, respectively.
Deferred transaction costs relating to the Puna operating lease (see Note 12) in the amount of $4,172,000 are amortized using the
straight-line method over the 23-year term of the lease. Amortization of deferred transaction costs is presented in cost of revenues in the consolidated statements of operations and comprehensive income (loss). Accumulated amortization related to
deferred lease costs amounted to $1,405,000 and $1,221,000 at December 31, 2012 and 2011, respectively. Amortization expense for each of the years ended December 31, 2012, 2011, and 2010 amounted to $184,000.
Intangible assets
Intangible assets consist of allocated acquisition costs of PPAs, which are amortized using the straight-line method over the 13 to 25-year terms of the agreements.
Impairment of long-lived assets and long-lived assets to be disposed of
The Company evaluates long-lived assets, such as property, plant and equipment and construction-in-process for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors which could trigger an impairment include, among others, significant underperformance relative to historical or projected future operating
results, significant changes in the Companys use of assets or its overall business strategy, negative industry or economic trends, a determination that an exploration project will not support commercial operations, a determination that a
suspended project is not likely to be completed, a significant increase in costs necessary to complete a project, legal factors relating to its business or when it concludes that it is more likely than not that an asset will be disposed of or sold.
144
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company tests its operating plants that are operated together as a complex for
impairment at the complex level because the cash flows of such plants result from significant shared operating activities. For example, the operating power plants in a complex are managed under a combined operation management generally with one
central control room that controls all of the power plants in a complex and one maintenance group that services all of the power plants in a complex. As a result, the cash flows from individual plants within a complex are not largely independent of
the cash flows of other plants within the complex. The Company tests for impairment its operating plants which are not operated as a complex as well as its projects under exploration, development or construction that are not part of an existing
complex at the plant or project level. To the extent an operating plant becomes part of a complex, the Company will test for impairment at the complex level.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated future net undiscounted cash flows expected to be generated by the asset. The
significant assumptions that the Company uses in estimating its undiscounted future cash flows include: (i) projected generating capacity of the complex or power plant and rates to be received under the respective PPA(s) and (ii) projected
operating expenses of the relevant complex or power plant. Estimates of future cash flows used to test recoverability of a long-lived asset under development also include cash flows associated with all future expenditures necessary to develop the
asset.
If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds their fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Management believes that except for the North Brawley and OREG 4 power plants
described in Note 8, no impairment exists for long-lived assets; however, estimates as to the recoverability of such assets may change based on revised circumstances. If actual cash flows differ significantly from the Companys current
estimates, a material impairment charge may be required in the future.
Derivative instruments
Derivative instruments (including certain derivative instruments embedded in other contracts) are measured at their fair value and
recorded as either assets or liabilities unless exempted from derivative treatment as a normal purchase and sale. All changes in the fair value of derivatives are recognized currently in earnings unless specific hedge criteria are met, which
requires a company to formally document, designate and assess the effectiveness of transactions that receive hedge accounting.
The Company maintains a risk management strategy that incorporates the use of swap contracts and put options on oil and natural gas
prices, forward exchange contracts, interest rate swaps, and interest rate caps to minimize significant fluctuation in cash flows and/or earnings that are caused by oil and natural gas prices, exchange rate or interest rate volatility. Gains or
losses on contracts that initially qualify for cash flow hedge accounting, net of related taxes, are included as a component of other comprehensive income or loss and are subsequently reclassified into earnings when the hedged forecasted transaction
affects earnings. Gains or losses on contracts that are not designated to qualify as a cash flow hedge are included currently in earnings.
Foreign currency translation
The U.S. dollar is the functional
currency for substantially all of the Companys consolidated operations and those of its equity affiliates. For those entities, all gains and losses from currency translations are included in results of operations. For the subsidiary in New
Zealand that was sold in January 2010, and which was using a functional currency other than the U.S. dollar, the cumulative translation effects were included in accumulated other comprehensive income (loss) in the consolidated balance
sheets.
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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Comprehensive income (loss) reporting
Comprehensive income (loss) includes net income or loss plus other comprehensive income (loss), which for the Company consists of foreign
currency translation adjustments, the non-credit portion of unrealized gain or loss on available-for-sale marketable securities and the mark-to-market gains or losses on derivative instruments designated as a cash flow hedge.
Revenues and cost of revenues
Revenues are primarily related to: (i) sale of electricity from geothermal and recovered energy-based power plants owned and operated by the Company and (ii) geothermal and recovered
energy-based power plant equipment engineering, sale, construction and installation, and operating services.
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 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 are 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.
Revenues from engineering, operating services, and parts and product sales are recorded upon providing the service or delivery of the products and parts and when collectability is reasonably assured.
Revenues from the supply and/or construction of geothermal and recovered energy-based power plant equipment and other equipment to third parties are recognized using the percentage-of-completion method. Revenue is recognized based on the percentage
relationship that incurred costs bear to total estimated costs. Costs include direct material, labor, and indirect costs. Selling, marketing, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may
result in revisions to costs and revenues and are recognized in the period in which the revisions are determined.
In specific
instances where there is a lack of dependable estimates or inherent risks cause forecast to be doubtful, then the completed-contract method is followed. Revenue is recognized when the contract is substantially complete and when collectability is
reasonably assured. Costs that are closely associated with the project are deferred as contract costs and recognized similarly to the associated revenues.
Warranty on products sold
The Company generally provides a one-year
warranty against defects in workmanship and materials related to the sale of products for electricity generation. 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 years ended December 31, 2012, 2011, and 2010.
Research and development
Research and development costs incurred by the Company for the development of existing and new geothermal, recovered
energy and remote power technologies are expensed as incurred. Grants received from the DOE are offset against the related research and development expenses. Such grants amounted to $660,000, $1,143,000, and $704,000 for the years ended
December 31, 2012, 2011, and 2010, respectively.
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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-based compensation
The Company accounts for stock-based compensation using the fair value method whereby compensation cost is measured at the grant date,
based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). The Company uses the simplified method in developing an estimate of the expected
term of plain vanilla stock-based awards.
Income taxes
Income taxes are accounted for using the asset and liability approach, which requires the recognition of taxes payable or refundable for
the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Companys financial statements or tax returns. The measurement of current and deferred tax assets and
liabilities are based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not anticipated. The Company accounts for investment tax credits and production tax credits as a reduction to income taxes in the year
in which the credit arises. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not, more likely than not expected to be realized. A valuation allowance has been
established to reduce the Companys deferred tax assets to the amount that is expected to be realized in the future. Tax benefits from uncertain tax positions are recognized only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position.
Earnings (loss) per
share
Basic earnings (loss) per share attributable to the Companys stockholders (earnings (loss) per
share) is computed by dividing net income or loss attributable to the Companys 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 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:
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|
|
|
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|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Weighted average number of shares used in computation of basic earnings (loss) per share
|
|
|
45,431
|
|
|
|
45,431
|
|
|
|
45,431
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional shares from the assumed exercise of employee stock awards
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in computation of diluted earnings (loss) per share
|
|
|
45,431
|
|
|
|
45,431
|
|
|
|
45,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the years ended December 31, 2012 and 2011, the employee stock options were anti-dilutive because
of the Companys net loss, and therefore, they have been excluded from the diluted earnings (loss) per share calculation.
The number of stock-based awards that could potentially dilute future earnings per share and were not included in the computation of
diluted earnings per share because to do so would have been anti-dilutive was 5,479,852, 4,337,475, and 2,676,712, respectively, for the years ended December 31, 2012, 2011, and 2010.
147
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Use of estimates in preparation of financial statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of such financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ from those estimates. The most significant estimates with regard to the Companys consolidated financial statements relate to the useful lives of property, plant and
equipment, impairment of long-lived assets and assets to be disposed of, revenue recognition of product sales using the percentage of completion method, asset retirement obligations, and the provision for income taxes.
New Accounting Pronouncements
New accounting pronouncements effective in the year ended December 31, 2012
Fair Value Measurement
In May 2011, the Financial Accounting Standards
Board (FASB) issued authoritative guidance regarding fair value measurements and disclosures. Required disclosures were expanded under the new guidance, particularly for fair value measurements that are categorized within Level 3 of the
fair value hierarchy, for which quantitative information about the unobservable inputs, the valuation processes used by the entity, and the sensitivity of the measurement to the unobservable inputs are required. In addition, entities are required to
disclose the categorization by level of the fair value hierarchy for items that are not measured at fair value in the balance sheet but for which the fair value is required to be disclosed. The adoption of this guidance by the Company on
January 1, 2012 did not have a material impact on the Companys consolidated financial statements. See Note 7 for these and other fair value related disclosures.
Presentation of Comprehensive Income in the Financial Statements
In June
2011, the FASB issued authoritative guidance intended to increase the prominence of items reported in other comprehensive income. The guidance eliminates the option to present components of other comprehensive income as part of the statement of
changes in equity and requires that the total of comprehensive income, the components of net income, and the components of other comprehensive income be presented in a single continuous statement of comprehensive income or in two separate but
consecutive statements. The guidance also required presentation of adjustments for items that are reclassified from other comprehensive income in the statement where the components of net income and the components of other comprehensive income are
presented, which was indefinitely deferred by the FASB in December 2011. The guidance (other than the portion regarding the presentation of reclassification adjustments which, as noted above, has been deferred indefinitely) became effective on
January 1, 2012. The adoption of this guidance by the Company on January 1, 2012 did not have a material impact on the Companys consolidated financial statements.
New accounting pronouncement effective in future periods
Disclosures about Offsetting Assets and Liabilities
In December 2011, the FASB issued accounting guidance to amend the existing disclosure requirements for offsetting financial assets and liabilities to enhance current disclosures, as well as to improve
comparability of balance sheets prepared under GAAP and those prepared under IFRS. In January 2013, the FASB issued additional guidance on the scope of these disclosures. The revised disclosure guidance applies to derivative instruments and
securities borrowing and lending transactions that are subject to an enforceable master netting
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ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
arrangement or similar agreement. The revised disclosure guidance is effective on a retrospective basis for interim and annual periods beginning January 1, 2013. As this guidance provides
for additional disclosure requirements only, the adoption of this guidance is not expected to have an impact on the Companys results of operations, financial position or cash flows.
Amounts Reclassified Out of Accumulated Other Comprehensive Income
In February 2013, the FASB updated accounting guidance to add new disclosure requirements for items reclassified out of accumulated other
comprehensive income. The update does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified
out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other
comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified
in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The amendments are required to be applied prospectively for interim and annual reporting periods
beginning January 1, 2013. As this guidance provides for additional disclosure requirements only, the adoption of this guidance is not expected to have an impact on the Companys results of operations, financial position or cash flows.
NOTE 2 MAMMOTH COMPLEX ACQUISITION
On August 2, 2010, the Company acquired the remaining 50% interest in Mammoth-Pacific, L.P. (Mammoth
Pacific), which owns the Mammoth complex located near the city of Mammoth, California, for a purchase price of $72.5 million in cash. The Company acquired the remaining interest in Mammoth Pacific to increase its geothermal power plant
operations in the United States.
Prior to the acquisition, the Company had a 50% interest in Mammoth Pacific that was
accounted for under the equity method of accounting. Following the acquisition, the Company became the sole owner of the Mammoth complex, as well as the sole owner of rights to over 10,000 acres of undeveloped federal lands.
As a result of the acquisition of the remaining 50% interest in Mammoth Pacific, the financial statements of Mammoth Pacific have been
consolidated with the Companys financial statements effective August 2, 2010. The acquisition-date fair value of the previously held 50% equity interest was $64.9 million, which takes into account a control premium of $7.6
million. In the year ended December 31, 2010, the Company recognized a pre-tax gain of $36.9 million, which is equal to the difference between the acquisition-date fair value of the previously held 50% equity interest in Mammoth Pacific and the
acquisition-date carrying value of such investment. The gain is included in gain on acquisition of controlling interest in the consolidated statements of operations and comprehensive income (loss).
The values of the assets acquired and liabilities assumed at the acquisition date are based on managements estimates using the
methodology and assumptions described below.
Valuation methodology and assumptions
In estimating the fair value for the assets acquired, the Company primarily relied on the Income Approach. After reviewing
several geothermal transactions, the Company concluded that those transactions
149
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
were not sufficiently comparable to the assets acquired in this transaction. The Company also considered the Cost Approach as a reasonableness check to compare to the Income
Approach value, but did not rely on it as a final indicator of the value.
The Income Approach is based on
the premise that the value of an asset is equal to the present value of the cash flows that the assets are expected to generate. To estimate the fair value of the existing and replacement tangible and intangible assets as well as the development
project at the Mammoth Pacific site, a discounted cash flow (DCF) analysis was utilized whereby the cash flows expected to be generated by the acquired assets were discounted to their present value equivalent using the rate of return
that reflects the relative risk of each asset, as well as the time value of money. This return, known as the weighted average cost of capital (WACC), is an overall rate based upon the individual rates of return for invested capital
(equity and interest-bearing debt), and was calculated by weighting the acquired return on interest-bearing debt and common equity capital in proportion to their estimated percentage in the expected capital structure. The estimates for the WACC,
which ranged from 9.5% to 14.0%, developed in the valuation are for independent power producers and geothermal power producers.
The following table summarizes the fair value of the assets acquired and liabilities assumed at the acquisition date:
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,983
|
|
Trade receivables
|
|
|
3,239
|
|
Prepaid expenses and other
|
|
|
254
|
|
Deposits and other
|
|
|
622
|
|
Property, plant and equipment, net (including construction-in-process)
|
|
|
129,764
|
|
|
|
|
|
|
Total identifiable assets acquired
|
|
|
141,862
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Current liabilities accounts payable and accrued expenses
|
|
|
(1,072
|
)
|
Asset retirement obligation
|
|
|
(3,342
|
)
|
|
|
|
|
|
Total identifiable liabilities assumed
|
|
|
(4,414
|
)
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
137,448
|
|
|
|
|
|
|
The acquired property, plant and equipment will be depreciated over their estimated useful lives.
The revenues of the Mammoth complex and the net loss of the Mammoth complex were $7,567,000 and $645,000, respectively, for
the period from August 2, 2010 to December 31, 2010.
150
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following unaudited consolidated pro forma financial information for the year ended
December 31, 2010, assumes the Mammoth Pacific acquisition occurred as of January 1, 2010, after giving effect to certain adjustments, including the depreciation based on the adjustments to the fair market value of the property, plant and
equipment acquired, and related income tax effects. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations that may occur in the future or that would have occurred had
the acquisition of Mammoth Pacific been effected on the date indicated.
|
|
|
|
|
|
|
(Dollars in thousands,
except per share data)
|
|
Revenues
|
|
$
|
384,706
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
8,954
|
|
|
|
|
|
|
Net income
|
|
|
13,304
|
|
Net loss attributable to noncontrolling interest
|
|
|
90
|
|
|
|
|
|
|
Net income attributable to the Companys stockholders
|
|
$
|
13,394
|
|
|
|
|
|
|
Earnings per share attributable to the Companys stockholders basic and diluted:
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.20
|
|
Income from discontinued operations
|
|
|
0.10
|
|
|
|
|
|
|
Net income
|
|
$
|
0.30
|
|
|
|
|
|
|
NOTE 3 INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
Raw materials and purchased parts for assembly
|
|
$
|
9,775
|
|
|
$
|
6,058
|
|
Self-manufactured assembly parts and finished products
|
|
|
10,894
|
|
|
|
6,483
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,669
|
|
|
$
|
12,541
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Cost and estimated earnings on uncompleted contracts consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
Costs and estimated earnings incurred on uncompleted contracts
|
|
$
|
192,948
|
|
|
$
|
69,427
|
|
Less billings to date
|
|
|
(208,743
|
)
|
|
|
(98,565
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(15,795
|
)
|
|
$
|
(29,138
|
)
|
|
|
|
|
|
|
|
|
|
151
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
These amounts are included in the consolidated balance sheets under the following
captions:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
9,613
|
|
|
$
|
3,966
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(25,408
|
)
|
|
|
(33,104
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(15,795
|
)
|
|
$
|
(29,138
|
)
|
|
|
|
|
|
|
|
|
|
The completion costs of the Companys construction contracts are subject to estimation. Due to
uncertainties inherent in the estimation process, it is reasonably possible that estimated contract earnings will be further revised in the near term.
NOTE 5 UNCONSOLIDATED INVESTMENTS
Unconsolidated investments, mainly in power plants, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
Sarulla
|
|
$
|
2,591
|
|
|
$
|
2,215
|
|
Watts & More Ltd.
|
|
|
|
|
|
|
1,542
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,591
|
|
|
$
|
3,757
|
|
|
|
|
|
|
|
|
|
|
The Sarulla Project
The Company is a 12.75% member of a consortium which is in the process of developing a geothermal power project in Indonesia with expected
generating capacity of approximately 340 megawatts (MW). The project is located in Tapanuli Utara, North Sumatra, Indonesia and will be owned and operated by the consortium members under the framework of a Joint Operating Contract with
PT Pertamina Geothermal Energy. The project will be constructed in three phases over a period of five years, with each phase utilizing the Companys 110 MW to 120 MW combined cycle geothermal plants in which the steam first produces power in a
backpressure steam turbine and is subsequently condensed in a vaporizer of a binary plant, which produces additional power. The consortium is in the process of negotiating certain contractual amendments for facilitation of project financing and for
signing the resulting amended energy sales contract, and intends to proceed with the project after those amendments have become effective.
The Companys share in the results of operations of the Sarulla project was not significant for each of the years presented in these consolidated financial statements.
Watts & More Ltd.
In December 2012, the Company acquired additional shares in Watts & More Ltd. (W&M) and as a result holds 60% of W&Ms outstanding ordinary shares and W&M was
consolidated as of December 31, 2012.
The Companys investment in W&M prior to its consolidation was not
significant for each of the years presented in these consolidated financial statements.
152
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Mammoth Complex
Prior to August 2, 2010, the Company had a 50% interest in Mammoth Pacific, which owns the Mammoth complex. The Companys 50%
ownership interest in Mammoth Pacific was accounted for under the equity method of accounting as the Company had the ability to exercise significant influence, but not control, over Mammoth Pacific. On August 2, 2010, the Company acquired the
remaining 50% interest in Mammoth Pacific (see Note 2).
The unaudited condensed results of Mammoth Pacific for the period
from January 1, 2010 to August 1, 2010 are summarized below:
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
Condensed statements of operations:
|
|
|
|
|
Revenues
|
|
$
|
11,484
|
|
Gross margin
|
|
|
2,670
|
|
Net income
|
|
|
2,528
|
|
Companys equity in income of Mammoth:
|
|
|
|
|
50% of Mammoth net income
|
|
$
|
1,264
|
|
Plus amortization of basis difference
|
|
|
345
|
|
|
|
|
|
|
|
|
|
1,609
|
|
Less income taxes
|
|
|
(611
|
)
|
|
|
|
|
|
Total
|
|
$
|
998
|
|
|
|
|
|
|
NOTE 6 VARIABLE INTEREST ENTITIES
Effective January 1, 2010, the Company adopted accounting and disclosure guidance for variable interest entities
(VIEs). Among other accounting and disclosure requirements, the guidance requires the primary beneficiary of a VIE to be identified as the party that both (i) has the power to direct the activities of a VIE that most significantly
impact its economic performance; and (ii) has an obligation to absorb losses or a right to receive benefits that could potentially be significant to the VIE. The adoption of this accounting guidance did not result in the Company consolidating
any additional VIEs or deconsolidating any VIEs.
The Company evaluated all transactions and relationships with VIEs to
determine whether the Company is the primary beneficiary of the entities in accordance with the guidance. The Companys overall methodology for evaluating transactions and relationships under the VIE requirements includes the following two
steps: (i) determining whether the entity meets the criteria to qualify as a VIE; and (ii) determining whether the Company is the primary beneficiary of the VIE.
In performing the first step, the significant factors and judgments that the Company considers in making the determination as to whether an entity is a VIE include:
|
|
|
The design of the entity, including the nature of its risks and the purpose for which the entity was created, to determine the variability that the
entity was designed to create and distribute to its interest holders;
|
|
|
|
The nature of the Companys involvement with the entity;
|
|
|
|
Whether control of the entity may be achieved through arrangements that do not involve voting equity;
|
|
|
|
Whether there is sufficient equity investment at risk to finance the activities of the entity; and
|
153
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
Whether parties other than the equity holders have the obligation to absorb expected losses or the right to receive residual returns.
|
If the Company identifies a VIE based on the above considerations, it then performs the second step and
evaluates whether it is the primary beneficiary of the VIE by considering the following significant factors and judgments:
|
|
|
Whether the Company has the power to direct the activities of the VIE that most significantly impact the entitys economic performance; and
|
|
|
|
Whether the Company has the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits
from the entity that could potentially be significant to the VIE.
|
The Companys VIEs include certain
of its wholly owned subsidiaries that own one or more power plants with long-term PPAs. In most cases, the PPAs require the utility to purchase substantially all of the plants electrical output over a significant portion of its estimated
useful life. Most of the VIEs have associated project financing debt that is non-recourse to the general creditors of the Company, is collateralized by substantially all of the assets of the VIE and those of its wholly owned subsidiaries (also VIEs)
and is fully and unconditionally guaranteed by such subsidiaries. The Company has concluded that such entities are VIEs primarily because the entities do not have sufficient equity at risk and/or subordinated financial support is provided through
the long-term PPAs. The Company has evaluated each of its VIEs to determine the primary beneficiary by considering the party that has the power to direct the most significant activities of the entity. Such activities include, among others,
construction of the power plant, operations and maintenance, dispatch of electricity, financing and strategy. Except for power plants that it acquired, the Company is responsible for the construction of its power plants and generally provides
operation and maintenance services. Primarily due to its involvement in these and other activities, the Company has concluded that it directs the most significant activities at each of its VIEs and, therefore, is considered the primary beneficiary.
The Company performs an ongoing reassessment of the VIEs to determine the primary beneficiary and may be required to deconsolidate certain of its VIEs in the future. The Company has aggregated its consolidated VIEs into the following categories:
(i) wholly owned subsidiaries with project debt; (ii) wholly owned subsidiaries with PPAs; and (iii) less than majority-owned subsidiaries.
Agreement for joint development, construction, ownership and operation of one or more geothermal power plants in Oregon
On October 29, 2010, the Company entered into an agreement to jointly develop, construct, finance, own and operate one or more
geothermal power plants in the Crump Geothermal Area located in Lake County, Oregon (the Crump Project). Under the terms of the agreement, the other joint owner, Nevada Geothermal Power Inc., contributed all of its rights, titles and
interest in the Crump Project, consisting mainly of geothermal rights, to the newly formed entity. The Company paid $0.1 million and will pay an additional $2.4 million over a three-year period to the other joint owner for its ownership interest in
the Crump Project and related rights. The Company has a 50% voting interest and will have equal representation with the other joint owner on the governing board. During the development stage of the Crump Project, the Company has the obligation to
fund the first $15.0 million on behalf of the Crump Project. All other funding requirements will be required jointly by each owner. If the other joint owner is unable to obtain the necessary capital to fund its share of the Crump Project, the
Company will provide financing directly to the joint owner in an aggregate amount of up to $15.0 million. In addition, the Company will be responsible for leading the development of the Crump Project and once operational, will be considered the
operator of the facility. At any time during the development or construction of the Crump Project, the Company may terminate its involvement in the Crump Project, whereby the Company
154
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
would transfer its 50% ownership interest to the other joint owner, at no cost to the other joint owner. If this occurs, the Company will have no obligation to make any additional payments to the
other joint owner.
The Company concluded that the entity is a VIE primarily because the entity does not have sufficient
equity at risk. Through the Companys equity ownership and other variable interest, the Company determined that it is the primary beneficiary of the Crump Project and therefore will consolidate the assets, liabilities and operations. In making
the determination to consolidate, the Company considered the activities that most significantly impact the projects economic performance, which party has the power to direct those activities, and whether the obligation to absorb the losses or
the right to receive the benefits could potentially be significant to the Crump Project. The Company determined that the activities that most significantly impact the economic performance of the Crump Project currently include the development of the
project. As the Company is the managing member and is primarily responsible during the development phase and further, since the Companys obligations and benefits would be significant to the Crump Project, the Company determined that it is the
primary beneficiary.
The Company has incurred $11.1 million in development costs of the Crump Project, as of
December 31, 2012, which are presented in the Companys consolidated balance sheet in construction-in-process. No amounts related to this transaction have been included in the statement of operations and comprehensive income
(loss) during the years ended December 31, 2011 and 2010. In addition, the assets related to the Crump Project can only be used to settle the obligations related to the Crump Project.
The tables below detail the assets and liabilities (excluding intercompany balances which are eliminated in consolidation) for the
Companys VIEs, combined by VIE classifications, that were included in the consolidated balance sheets as of December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
Project Debt
|
|
|
PPAs
|
|
|
Less than Majority-
owned Subsidiary
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash, cash equivalents and marketable securities
|
|
$
|
76,537
|
|
|
$
|
|
|
|
$
|
|
|
Other current assets
|
|
|
73,135
|
|
|
|
8,766
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
966,433
|
|
|
|
196,173
|
|
|
|
|
|
Construction-in-process
|
|
|
248,890
|
|
|
|
4,885
|
|
|
|
11,121
|
|
Other long-term assets
|
|
|
57,337
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,422,332
|
|
|
$
|
210,097
|
|
|
$
|
11,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
25,477
|
|
|
$
|
5,393
|
|
|
$
|
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
1,718
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
595,425
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
81,070
|
|
|
|
8,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
703,690
|
|
|
$
|
13,779
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Project Debt
|
|
|
PPAs
|
|
|
Less Than Majority-
Owned Subsidiary
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash, cash equivalents and marketable securities
|
|
$
|
75,521
|
|
|
$
|
|
|
|
$
|
|
|
Other current assets
|
|
|
78,013
|
|
|
|
12,725
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
1,019,082
|
|
|
|
428,498
|
|
|
|
|
|
Construction-in-process
|
|
|
236,101
|
|
|
|
24,585
|
|
|
|
11,173
|
|
Other long-term assets
|
|
|
57,386
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,466,103
|
|
|
$
|
466,080
|
|
|
$
|
11,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
13,621
|
|
|
$
|
4,590
|
|
|
$
|
|
|
Long-term debt
|
|
|
476,753
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
84,619
|
|
|
|
7,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
574,993
|
|
|
$
|
12,588
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 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).
156
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth certain fair value information at December 31, 2012
and 2011 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or Amortized
Cost at December 31,
2012
|
|
|
Fair Value at December 31, 2012
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (including restricted cash accounts)
|
|
$
|
54,298
|
|
|
$
|
54,298
|
|
|
$
|
54,298
|
|
|
$
|
|
|
|
$
|
|
|
Marketable Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Put options on oil price
(1)
|
|
|
|
|
|
|
1,842
|
|
|
|
|
|
|
|
1,842
|
|
|
|
|
|
Swap transaction on oil price
(2)
|
|
|
|
|
|
|
336
|
|
|
|
|
|
|
|
336
|
|
|
|
|
|
Swap transaction on natural gas price
(3)
|
|
|
|
|
|
|
2,804
|
|
|
|
|
|
|
|
2,804
|
|
|
|
|
|
Currency forward contracts
(4)
|
|
|
|
|
|
|
1,675
|
|
|
|
|
|
|
|
1,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,298
|
|
|
$
|
60,955
|
|
|
$
|
54,298
|
|
|
$
|
6,657
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or Amortized
Cost at December 31,
2011
|
|
|
Fair Value at December 31, 2011
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (including restricted cash accounts)
|
|
$
|
61,649
|
|
|
$
|
61,649
|
|
|
$
|
61,649
|
|
|
$
|
|
|
|
$
|
|
|
Marketable Securities
|
|
|
18,284
|
|
|
|
18,521
|
|
|
|
18,521
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency forward contracts
(5)
|
|
|
|
|
|
|
(890
|
)
|
|
|
|
|
|
|
(890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,933
|
|
|
$
|
79,820
|
|
|
$
|
80,170
|
|
|
$
|
(890
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
This amount relates to derivatives which represent swap contract on oil prices, valued primarily based on observable inputs, including forward and spot
prices for related commodity indices, and are included within prepaid expenses and other in the consolidated balance sheet with the corresponding gain or loss being recognized within electricity revenues in the consolidated
statement of operations and comprehensive income (loss).
|
(
2
)
|
This amount relates to derivatives which represent swap contract on oil prices, valued primarily based on observable inputs, including forward and spot
prices for related commodity indices, and are included within prepaid expenses and other in the consolidated balance sheet with the corresponding gain or loss being recognized within electricity revenues in the consolidated
statement of operations and comprehensive income (loss).
|
(
3
)
|
This amount relates to derivatives which represent swap contract on natural gas prices, valued primarily based on observable inputs, including forward
and spot prices for related commodity indices, and are included within prepaid expenses and other in the consolidated balance sheet with the corresponding gain or loss being recognized within electricity revenues in the
consolidated statement of operations and comprehensive income (loss).
|
157
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(
4
)
|
These amounts relate to derivatives which represent currency forward contracts valued primarily based on observable inputs, including forward and spot
prices for currencies, netted against contracted rates and then multiplied against notional amounts, and are included within prepaid expenses and other in the consolidated balance sheet with the corresponding gain or loss being
recognized within foreign currency translation and transaction gains (losses) in the consolidated statement of operations and comprehensive income (loss).
|
(
5
)
|
These amounts relate to derivatives which represent currency forward contracts valued primarily based on observable inputs, including forward and spot
prices for currencies, netted against contracted rates and then multiplied against notional amounts, and are included within accounts payable and accrued expenses in the consolidated balance sheet with the corresponding gain or loss
being recognized within foreign currency translation and transaction gains (losses) in the consolidated statement of operations and comprehensive income (loss).
|
The Companys financial assets measured at fair value (including restricted cash accounts) at December 31, 2012 and 2011
include investments in debt instruments (which are included in marketable securities), money market funds (which are included in cash equivalents) and short-term bank deposits. 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.
As of December 31, 2010, all of
the Companys auction rate securities were associated with failed auctions. Such securities had par values totaling $4.5 million, all of which had been in a loss position since the fourth quarter of 2007. The Companys auction rate
securities at December 31, 2010, were valued using Level 3 inputs. Historically, the carrying value of auction rate securities approximated fair value due to the frequent resetting of the interest rates. While the Company continued to earn
interest on these investments at the contractual rates, the estimated market value of these auction rate securities no longer approximated par value. Due to the lack of observable market quotes on the Companys illiquid auction rate securities,
the Company utilized valuation models that relied exclusively on Level 3 inputs including, among other things: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at
rates considered to reflect the uncertainty of current market conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; (iv) assessments of counterparty credit quality;
(v) estimates of the recovery rates in the event of default for each security; and (vi) overall capital market liquidity. These estimated fair values were subject to uncertainties that were difficult to predict. Therefore, such auction
rate securities were classified as Level 3 in the fair value hierarchy.
In the year ended December 31, 2011, the Company
identified a buyer outside of the auction process, and sold the balance of the auction rate securities for consideration of $2,822,000.
The table below sets forth a summary of the changes in the fair value of the Companys financial assets classified as Level 3 (i.e., illiquid auction rate securities) for each of the years ended
December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
3,027
|
|
|
$
|
3,164
|
|
Sale of auction rate securities
|
|
|
(2,822
|
)
|
|
|
|
|
Total unrealized gains (losses):
|
|
|
|
|
|
|
|
|
Included in net income
|
|
|
(205
|
)
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
|
|
|
$
|
3,027
|
|
|
|
|
|
|
|
|
|
|
158
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effective July 1, 2010, the Company adopted an accounting standards update that
amends and clarifies the guidance on how entities should evaluate credit derivatives embedded in beneficial interests in securitized financial assets. The updated guidance eliminates the scope exception for bifurcation of embedded credit derivatives
in interests in securitized financial assets unless they are created solely by subordination of one beneficial interest to another. The auction rate securities held by the Company are considered securitized financial assets and therefore fall under
the guideline in the abovementioned accounting standards update. The Company elected the fair value option for its auction rate securities as permitted by the update. Upon adoption of this accounting standards update, the Company reclassified
$693,000 (net of income taxes of $377,000) to retained earnings with an offset to other comprehensive income. Effective with the adoption of this new guidance, all changes in the fair value of auction rate securities are recognized in earnings.
In April 2012, the Company entered into a NYMEX Heating Oil swap contract (85%) and an ICE Brent swap contract
(15%) for notional volume of 241,250 BBL with a bank effective from May 1, 2012 until March 31, 2013 to reduce the Companys exposure to fluctuations in the energy rate caused by fluctuations in oil prices under the 25 MW PPA for
the Puna complex. The Company entered into these contracts because both swaps had a high correlation with the avoided costs (which are the incremental costs that the power purchaser avoids by not having to generate such electrical energy itself or
purchase it from others) that HELCO uses to calculate the energy rate. The contracts did not have up-front costs. Under the terms of these contracts, the Company will make floating rate payments to the bank and receive fixed rate payments from the
bank on each settlement date ($130.50 per BBL in respect of NYMEX Heating Oil and $115.50 per BBL in respect of ICE Brent). The swap contracts have monthly settlements whereby the difference between the fixed price and the monthly average market
price will be settled on a cash basis.
In May 2012, the Company entered into a European put transaction with a bank effective
from July 1, 2012, pursuant to which the Company purchased a natural gas put option for 4.4 million MMbtus that settled against Natural Gas California SoCal NGI (NGI) on December 31, 2012. The Company entered
into this transaction in order to reduce its exposure to NGI below $3.08 per MMbtu under its PPAs with Southern California Edison. The transaction was settled on December 31, 2012 for $1.2 million.
In July 2012, the Company entered into another European put transaction with the same bank for settlement effective from August 1,
2012, pursuant to which the Company purchased a natural gas put option for 0.7 million MMbtus that settled against NGI on December 31, 2012. The Company entered into this transaction in order to reduce its exposure to NGI below $3.19 per
MMbtu under its PPAs with Southern California Edison. The transaction was settled on December 31, 2012 for $0.1 million.
On September 27, 2012, the Company entered into European put transactions with two banks effective from January 1, 2013 until
December 31, 2013, pursuant to which the Company purchased NYMEX Heating Oil put options for notional volume of 191,250 BBL, and ICE Brent put options for notional volume of 33,750 BBL. The Company entered into these transactions to reduce its
exposure to fluctuations in the energy rate caused by fluctuations in oil prices under the 25 MW PPA for the Puna complex. The Company entered into these transactions because both transactions had a high correlation with the avoided costs that HELCO
uses to calculate the energy rate. The Company paid up-front premiums in the total amount of approximately $2.6 million that were recorded on September 27, 2012 as current assets and are marked to market on each balance sheet date. Under these
transactions, the Company will receive from the banks on each settlement date the difference between the strike price of $126.63 per BBL in respect of NYMEX Heating Oil and $106.80 in respect of ICE Brent and the respective monthly average market
price of the relevant commodity. If the strike price is lower than the monthly average market price, no payment will be made.
159
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 11, 2012, the Company entered into NGI swap contracts for notional
volume of approximately 8.9 million MMbtus with a bank for settlement effective from January 1, 2013 until December 31, 2013, in order to reduce its exposure to NGI below $4.00 per MMbtu under its PPAs with Southern California Edison.
The contracts did not have up-front costs. Under the terms of these contracts, the Company will make floating rate payments to the bank and receive fixed rate payments from the bank on each settlement date. The swap contracts have monthly
settlements whereby the difference between the fixed price of $4.00 per MMbtu and the market price on the first commodity business day on which the relevant commodity reference price is published in the relevant calculation period (January 1, 2013
to December 1, 2013) will be settled on a cash basis.
These transactions have not been designated as hedge transactions
and are marked to market with the corresponding gains or losses recognized within electricity revenues in the consolidated statements of operations and comprehensive income (loss). The Company recognized a net gain from these
transactions of $2.3 million in the year ended December 31, 2012.
There were no transfers of assets or liabilities
between Level 1 and Level 2 during the year ended December 31, 2012.
The fair value of the Companys
long-term debt approximates its carrying amount, except for the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Carrying Amount
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in millions)
|
|
|
(Dollars in millions)
|
|
Olkaria III Loan DEG
|
|
$
|
48.8
|
|
|
$
|
79.2
|
|
|
$
|
47.4
|
|
|
$
|
77.4
|
|
Amatitlan Loan
|
|
|
38.9
|
|
|
|
37.2
|
|
|
|
34.3
|
|
|
|
36.8
|
|
Senior Secured Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ormat Funding Corp. (OFC)
|
|
|
105.0
|
|
|
|
114.8
|
|
|
|
114.1
|
|
|
|
125.0
|
|
OrCal Geothermal Inc. (OrCal)
|
|
|
77.3
|
|
|
|
84.4
|
|
|
|
76.5
|
|
|
|
85.9
|
|
OFC 2 LLC (OFC 2)
|
|
|
131.2
|
|
|
|
131.0
|
|
|
|
150.5
|
|
|
|
151.7
|
|
Senior Unsecured Bonds
|
|
|
273.2
|
|
|
|
252.8
|
|
|
|
250.9
|
|
|
|
248.3
|
|
Loan from institutional investors
|
|
|
27.7
|
|
|
|
34.2
|
|
|
|
27.0
|
|
|
|
34.2
|
|
The fair value of OFC Senior Secured Notes is determined using observable market prices as these
securities are traded. The fair value of 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.
160
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the fair value of financial instruments as of
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
Amatitlan loan
|
|
$
|
|
|
|
$
|
|
|
|
$
|
38.9
|
|
|
$
|
38.9
|
|
Senior Secured Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFC
|
|
|
|
|
|
|
105.0
|
|
|
|
|
|
|
|
105.0
|
|
OrCal
|
|
|
|
|
|
|
|
|
|
|
77.3
|
|
|
|
77.3
|
|
OFC 2
|
|
|
|
|
|
|
|
|
|
|
131.2
|
|
|
|
131.2
|
|
Senior unsecured bonds
|
|
|
|
|
|
|
|
|
|
|
273.2
|
|
|
|
273.2
|
|
Loan from institutional investors
|
|
|
|
|
|
|
|
|
|
|
27.7
|
|
|
|
27.7
|
|
Olkaria III LoanDEG
|
|
|
|
|
|
|
|
|
|
|
48.8
|
|
|
|
48.8
|
|
Other long-term debt
|
|
|
|
|
|
|
36.7
|
|
|
|
|
|
|
|
36.7
|
|
Revolving credit lines with banks
|
|
|
|
|
|
|
73.6
|
|
|
|
|
|
|
|
73.6
|
|
Deposits
|
|
|
21.7
|
|
|
|
|
|
|
|
|
|
|
|
21.7
|
|
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The North Brawley geothermal power plant was tested for impairment as of December 31, 2012 due to the low output and higher than
expected operating costs. The plant was placed in service under its PPA with Southern California Edison in 2010. However, management found that the North Brawley geothermal field was significantly more difficult to operate than other fields of the
Company and the power plant was unable to reach its design capacity of 50 MW and instead, operated at capacities between 20 MW and 33 MW. This generation level was achieved only after significant additional capital expenditures and higher than
anticipated operating costs.
In order to improve the economics of the plant, the Company approached Southern California
Edison to discuss various contractual alternatives to the PPA and, in early 2012, it reached a written understanding to engage in discussions with third parties about purchasing the power at better rates. However, in a letter dated January 14,
2013, Southern California Edison informed the Company that it is no longer interested in pursuing alternatives to the current PPA, thus retracting its permission to the Company to explore a replacement PPA with higher electricity prices.
As a result of Southern California Edisons notification and the rates under the existing PPA, coupled with a further understanding
of the cost and probability of success of additional well field work which has been accumulated in recent months, the Company has concluded that it will not be economical to continue to invest the substantial capital required to increase the
generating capacity of the power plant. Accordingly, the Company decided to operate the plant at the current capacity level of approximately 27 MW and refrain from additional capital investment to expand the capacity.
Based on these indicators, the power plant was tested for recoverability by estimating its future cash flows taking into consideration
rates to be received under the PPA with Southern California Edison through the end of its term and expected market rates thereafter, possible penalties for underperformance during periods when the plant is expected to operate below the stated
capacity in the PPA, projected capital expenditures and projected operating expenses over the life of the plant.
As a result,
the North Brawley power plant was written down to its fair value of $32.0 million. The impairment loss of $229.1 million is presented in the consolidated statement of operations and comprehensive income (loss) under Impairment Charges.
161
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In estimating the fair value for the power plant, the Company primarily relied on the
Income Approach, using assumptions that the Company believes market participants would utilize in making such valuation. The Income Approach is based on the principle that the value of an asset is equal to the present value
of the cash flows that the asset is expected to generate. To estimate the fair value of the power plant, a discounted cash flow (DCF) analysis was utilized whereby the cash flows expected to be generated by the power plant were
discounted to their present value equivalent using the rate of return that reflects the relative risk of each asset, as well as the time value of money. This return, known as the weighted average cost of capital (WACC), an overall rate
based upon the individual rates of return for invested capital (equity and interest-bearing debt), was calculated by weighting the acquired return on interest-bearing debt and common equity capital in proportion to their estimated percentage in the
expected capital structure. The estimate for the WACC of 8% developed in the valuation is for independent power producers and geothermal power producers.
In addition to the WACC rate of 8%, other significant inputs of the future net cash flow estimates included in the valuation are generation output, average realized price, and operating costs. These
future net cash flow estimates are classified as Level 3 within the fair value hierarchy. Below are the significant unobservable inputs for each year included in the valuation as of the year ended December 31, 2012.
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except realized price)
|
|
|
|
|
|
|
|
|
|
Valuation Technique
|
|
|
Amount or Range
|
|
Weighted Average
|
Generation output (MWh)
|
|
|
DCF
|
|
|
224,836
|
|
224,836
|
Average realized price ($/MWh)
|
|
|
DCF
|
|
|
$84.50 $111.25
|
|
$92.31
|
Operating costs
|
|
|
DCF
|
|
|
$12,687 $20,430
|
|
$16,163
|
OREG 4, a recovered energy generation power plant, was also tested for impairment in the third quarter of
2012 due to continued low run time of the compressor station that serves as it heat source, which resulted in low power generation and revenues. Based on these indicators, the power plant was tested for recoverability by estimating its future cash
flows over the life of the plant.
As a result, the OREG 4 power plant was written down to its fair value of $3.6 million. The
impairment loss of $7.3 million is presented in the consolidated statement of operations and comprehensive income (loss) under Impairment Charges.
In estimating the fair value for the power plant, the Company primarily relied on the Income Approach, using assumptions that the Company believes market participants would utilize in making
such valuation. The Income Approach is based on the principle that the value of an asset is equal to the present value of the cash flows that the asset is expected to generate. To estimate the fair value of the power plant, a DCF
analysis was utilized and the estimate for the WACC of 8% developed in the valuation is for independent power producers and geothermal power producers.
162
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition to the WACC rate of 8%, other significant inputs of the future net cash flow
estimates included in the valuation are generation output, average realized price, and operating costs. These future net cash flow estimates are classified as Level 3 within the fair value hierarchy. Below are the significant unobservable inputs for
each year included in the valuation as of the quarter ended September 30, 2012.
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except realized price)
|
|
|
|
|
|
|
|
|
|
Valuation Technique
|
|
|
Amount or Range
|
|
Weighted Average
|
Generation output (MWh)
|
|
|
DCF
|
|
|
11,916 15,456
|
|
15,097
|
Average realized price ($/MWh)
|
|
|
DCF
|
|
|
$49.00 $71.50
|
|
$60.36
|
Operating costs
|
|
|
DCF
|
|
|
$86 $595
|
|
$400
|
The Jersey Valley geothermal power plant, which is under development, was tested for impairment in the
current year due to the low output due to injection constraints. Based on these indicators the power plant was tested for recoverability by estimating its future cash flows taking into consideration the various outcomes from different generating
capacities, rates to be received under the PPA through the end of its term and expected market rates thereafter, possible penalties for underperformance during periods when the plant is expected to operate below the stated capacity in the PPA,
projected capital expenditures to complete development of the plant and projected operating expenses over the life of the plant. The Company applied a probability-weighted approach and considered alternative courses of action.
Using a probability-weighted approach, the estimated undiscounted cash flows exceed the carrying value of the plant ($65.5 million as of
December 31, 2012) by approximately $31.2 million and therefore, no impairment was recognized. Estimated undiscounted cash flows are subject to significant uncertainties. If actual cash flows differ from our current estimates due to factors
that include, among others, if the plants future generating capacity is less than approximately 10 MW, or if the capital expenditures required to complete development of the plant and/or future operating costs exceed the level of the
Companys current projections, a material impairment write-down may be required in the future.
163
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 PROPERTY, PLANT AND EQUIPMENT AND CONSTRUCTION-IN-PROCESS
Property, plant and equipment
Property, plant and equipment, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
Land owned by the Company where the geothermal resource is located
|
|
$
|
32,396
|
|
|
$
|
32,411
|
|
Leasehold improvements
|
|
|
1,339
|
|
|
|
1,325
|
|
Machinery and equipment
|
|
|
100,499
|
|
|
|
92,227
|
|
Office equipment
|
|
|
15,218
|
|
|
|
16,444
|
|
Automobiles
|
|
|
5,816
|
|
|
|
5,581
|
|
Geothermal and recovered energy generation power plants, including geothermal wells and exploration and resource development
costs:
United States of America, net of cash grants and impairment charges
|
|
|
1,296,534
|
|
|
|
1,534,001
|
|
Foreign countries
|
|
|
312,412
|
|
|
|
281,896
|
|
Asset retirement cost
|
|
|
7,214
|
|
|
|
9,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,771,428
|
|
|
|
1,973,326
|
|
Less accumulated depreciation
|
|
|
(544,670
|
)
|
|
|
(454,794
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
1,226,758
|
|
|
$
|
1,518,532
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2012, 2011, and 2010 amounted to $89,876,000,
$89,600,000, and $80,669,000, respectively. Depreciation expense for the years ended December 31, 2012 and 2011 is net of the impact of the cash grant in the amount of $5,553,000 and $3,681,000, respectively.
U.S. Operations
The net book value of the property, plant and equipment, including construction-in-process, located in the United States was approximately $1,261,520,000 and $1,625,961,000 as of December 31, 2012
and 2011, respectively. These amounts as of December 31, 2012 and 2011 are net of cash grants in the amount of $117,320,000 and $103,222,000, respectively (net of accumulated depreciation of $1,872,000 and $5,063,000 as of December 31,
2012 and 2011, respectively). The cash grant amounts include the write-off of the North Brawley power plant. The write-off associated with this grant was $99,542,000 (net of accumulated depreciation of $8,744,000).
Impairment tests of the North Brawley, OREG 4 and Jersey Valley power plants were performed during the year ended December 31, 2012
resulting in impairment charges for the North Brawley and OREG 4 power plants (see Note 7).
Foreign Operations
The net book value of property, plant and equipment, including construction-in-process, located outside of the United
States was approximately $361,379,000 and $263,121,000 as of December 31, 2012 and 2011, respectively.
The Company,
through its wholly owned subsidiary, OrPower 4, Inc. (OrPower 4) owns and operates geothermal power plants in Kenya. The net book value of assets associated with the power plants was $272,050,000 and $169,701,000 as of December 31,
2012 and 2011, respectively. The Company sells the
164
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
electricity produced by the power plants to Kenya Power and Lighting Co. Ltd. (KPLC) under a 20-year PPA. The Company has incurred approximately $167,344,000 and $67,551,000 (included
in construction-in-process) at December 31, 2012 and 2011, respectively, in connection with the construction of Phase III of the complex.
Pursuant to an agreement with Empresa Nicaraguense de Electricitdad (ENEL), a Nicaraguan power utility, the Company rehabilitated existing wells, drilled new wells, and is operating the
geothermal facilities. The Company owns the plants for a fifteen-year period ending in 2014, at which time they will be transferred to ENEL at no cost. The net book value of the assets related to the plant and wells was $3,931,000 and $7,987,000 at
December 31, 2012 and 2011, respectively.
The Company, through its wholly owned subsidiary, Orzunil I de Electricidad,
Limitada (Orzunil), owns a power plant in Guatemala. The geothermal resources used by the power plant are owned by Instituto Nacional de Elecrification (INDE), a Guatemalan power utility, who granted the use of these
resources to Orzunil for the period of the PPA. The net book value of the assets related to the power plant was $21,628,000 and $24,732,000 at December 31, 2012 and 2011, respectively.
The Company, through its wholly owned subsidiary, Ortitlan, Limitada (Ortitlan), owns a power plant in Guatemala. The net
book value of the assets related to the power plant was $43,360,000 and $45,189,000 at December 31, 2012 and 2011, respectively.
Construction-in-process
Construction-in-process consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
Projects under exploration and development:
|
|
|
|
|
|
|
|
|
Up-front bonus lease costs
|
|
$
|
33,985
|
|
|
$
|
36,832
|
|
Exploration and development costs
|
|
|
32,302
|
|
|
|
40,223
|
|
Interest capitalized
|
|
|
1,278
|
|
|
|
1,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,565
|
|
|
|
78,653
|
|
|
|
|
|
|
|
|
|
|
Projects under construction:
|
|
|
|
|
|
|
|
|
Up-front bonus lease costs
|
|
|
29,160
|
|
|
|
31,179
|
|
Drilling and construction costs
|
|
|
283,873
|
|
|
|
246,878
|
|
Interest capitalized
|
|
|
15,543
|
|
|
|
13,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328,576
|
|
|
|
291,898
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
396,141
|
|
|
$
|
370,551
|
|
|
|
|
|
|
|
|
|
|
165
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projects under Exploration and Development
|
|
|
|
Up-front Bonus
Lease Costs
|
|
|
Exploration and
Development
Costs
|
|
|
Capitalized
Interest
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance at December 31, 2009
|
|
$
|
15,867
|
|
|
$
|
17,698
|
|
|
$
|
52
|
|
|
$
|
33,617
|
|
Cost incurred during the year
|
|
|
17,733
|
|
|
|
21,483
|
|
|
|
158
|
|
|
|
39,374
|
|
Write off of unsuccessful exploration costs
|
|
|
|
|
|
|
(2,940
|
)
|
|
|
(110
|
)
|
|
|
(3,050
|
)
|
Reclassification of exploration and development projects to drilling and construction
|
|
|
|
|
|
|
(15,244
|
)
|
|
|
|
|
|
|
(15,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
33,600
|
|
|
|
20,997
|
|
|
|
100
|
|
|
|
54,697
|
|
Cost incurred during the year
|
|
|
3,232
|
|
|
|
19,226
|
|
|
|
1,498
|
|
|
|
23,956
|
|
Write off of unsuccessful exploration costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of exploration and development projects to drilling and
construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
36,832
|
|
|
|
40,223
|
|
|
|
1,598
|
|
|
|
78,653
|
|
Cost incurred during the year
|
|
|
|
|
|
|
3,782
|
|
|
|
420
|
|
|
|
4,202
|
|
Write off of unsuccessful exploration costs
|
|
|
(1,160
|
)
|
|
|
(1,479
|
)
|
|
|
|
|
|
|
(2,639
|
)
|
Reclassification of exploration and development projects to drilling and
construction
|
|
|
(1,687
|
)
|
|
|
(10,224
|
)
|
|
|
(740
|
)
|
|
|
(12,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
33,985
|
|
|
$
|
32,302
|
|
|
$
|
1,278
|
|
|
$
|
67,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projects under Construction
|
|
|
|
Up-front Bonus
Lease Costs
|
|
|
Drilling and
Construction Costs
|
|
|
Capitalized
Interest
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance at December 31, 2009
|
|
$
|
3,179
|
|
|
$
|
442,218
|
|
|
$
|
39,581
|
|
|
$
|
484,978
|
|
Cost incurred during the year
|
|
|
28,000
|
|
|
|
249,072
|
|
|
|
9,335
|
|
|
|
286,407
|
|
Write off of unsuccessful exploration costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of exploration and development projects to drilling and
construction
|
|
|
|
|
|
|
15,244
|
|
|
|
|
|
|
|
15,244
|
|
Reclassification of completed projects to property, plant and equipment
|
|
|
|
|
|
|
(529,566
|
)
|
|
|
(41,126
|
)
|
|
|
(570,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
31,179
|
|
|
|
176,968
|
|
|
|
7,790
|
|
|
|
215,937
|
|
Cost incurred during the year
|
|
|
|
|
|
|
242,066
|
|
|
|
10,207
|
|
|
|
252,273
|
|
Write off of unsuccessful exploration costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of exploration and development projects to drilling and
construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of completed projects to property, plant and equipment
|
|
|
|
|
|
|
(172,156
|
)
|
|
|
(4,156
|
)
|
|
|
(176,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
31,179
|
|
|
|
246,878
|
|
|
|
13,841
|
|
|
|
291,898
|
|
Cost incurred during the year
|
|
|
|
|
|
|
216,894
|
|
|
|
11,541
|
|
|
|
228,435
|
|
Write off of unsuccessful exploration costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of exploration and development projects to drilling and
construction
|
|
|
1,687
|
|
|
|
10,224
|
|
|
|
740
|
|
|
|
12,651
|
|
Reclassification of completed projects to property, plant and equipment
|
|
|
(3,706
|
)
|
|
|
(190,123
|
)
|
|
|
(10,579
|
)
|
|
|
(204,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
29,160
|
|
|
$
|
283,873
|
|
|
$
|
15,543
|
|
|
$
|
328,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9 INTANGIBLE ASSETS
Intangible assets consist mainly of the Companys PPAs acquired in business combinations and amounted to
$35,492,000 and $38,781,000, net of accumulated amortization of $28,654,000 and $25,365,000, as of December 31, 2012 and 2011, respectively. Amortization expense for the years ended December 31, 2012, 2011, and 2010 amounted to $3,289,000,
$3,279,000, and $3,179,000, respectively.
Estimated future amortization expense for the intangible assets as of
December 31, 2012 is as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Year ending December 31:
|
|
|
|
|
2013
|
|
$
|
3,289
|
|
2014
|
|
|
3,289
|
|
2015
|
|
|
3,289
|
|
2016
|
|
|
3,289
|
|
2017
|
|
|
3,289
|
|
Thereafter
|
|
|
19,047
|
|
|
|
|
|
|
Total
|
|
$
|
35,492
|
|
|
|
|
|
|
NOTE 10 ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
Trade payables
|
|
$
|
51,303
|
|
|
$
|
69,894
|
|
Salaries and other payroll costs
|
|
|
10,423
|
|
|
|
10,174
|
|
Customer advances
|
|
|
9,592
|
|
|
|
4,900
|
|
Accrued interest
|
|
|
9,110
|
|
|
|
9,273
|
|
Income tax payable
|
|
|
1,467
|
|
|
|
1,464
|
|
Property tax
|
|
|
4,399
|
|
|
|
3,323
|
|
Scheduling and transmission
|
|
|
594
|
|
|
|
1,059
|
|
Royalty
|
|
|
1,646
|
|
|
|
1,065
|
|
Other
|
|
|
9,467
|
|
|
|
3,960
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
98,001
|
|
|
$
|
105,112
|
|
|
|
|
|
|
|
|
|
|
167
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11 LONG-TERM DEBT AND CREDIT AGREEMENTS
Long-term debt consists of notes payable under the following agreements:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
Limited and non-recourse agreements:
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
Non-recourse:
|
|
|
|
|
|
|
|
|
Loan agreement with DEG (the Olkaria III power plant)
|
|
$
|
|
|
|
$
|
77,368
|
|
Loan agreement with TCW (the Amatitlan power plant)
|
|
|
34,268
|
|
|
|
36,764
|
|
Limited recourse:
|
|
|
|
|
|
|
|
|
Loan agreement with OPIC (the Olkaria III power plant)
|
|
|
220,000
|
|
|
|
|
|
Senior Secured Notes:
|
|
|
|
|
|
|
|
|
Non-recourse:
|
|
|
|
|
|
|
|
|
Ormat Funding Corp. (OFC)
|
|
|
114,136
|
|
|
|
125,022
|
|
OrCal Geothermal Inc. (OrCal)
|
|
|
76,548
|
|
|
|
85,860
|
|
Limited recourse:
|
|
|
|
|
|
|
|
|
OFC 2 LLC (OFC 2)
|
|
|
150,473
|
|
|
|
151,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595,426
|
|
|
|
476,753
|
|
Less current portion
|
|
|
(39,684
|
)
|
|
|
(35,011
|
)
|
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
555,741
|
|
|
$
|
441,742
|
|
|
|
|
|
|
|
|
|
|
Full recourse agreements:
|
|
|
|
|
|
|
|
|
Senior unsecured bonds
|
|
$
|
250,904
|
|
|
$
|
250,042
|
|
Loans from institutional investors:
|
|
|
43,624
|
|
|
|
54,166
|
|
Loan agreement with DEG (the Olkaria III power plant)
|
|
|
47,369
|
|
|
|
|
|
Loan from a commercial bank
|
|
|
20,000
|
|
|
|
30,000
|
|
Revolving credit lines with banks
|
|
|
73,606
|
|
|
|
214,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
435,503
|
|
|
|
548,257
|
|
Less current portion
|
|
|
(28,649
|
)
|
|
|
(20,543
|
)
|
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
406,854
|
|
|
$
|
527,714
|
|
|
|
|
|
|
|
|
|
|
Loan Agreement with TCW (the Amatitlan Power Plant)
In May 2009, the Companys wholly owned subsidiary, Ortitlan, entered into a note purchase agreement, in an aggregate principal
amount of $42.0 million which refinanced its investment in the 20 MW Amatitlan geothermal power plant located in Amatitlan, Guatemala (the Amatitlan Loan). The Amatitlan Loan was provided by TCW Global Project Fund II, Ltd.
(TCW). The Amatitlan Loan will mature on June 15, 2016, and is payable in 28 quarterly installments. The Amatitlan Loan bears interest at a rate of 9.83%.
There are various restrictive covenants under the Amatitlan Loan, which include: (i) a projected 12-month debt service coverage ratio (DSCR) of not less than 1.2; and (ii) a
long-term debt to equity ratio not to exceed 4 (both of which are measured quarterly). If Ortitlan fails to comply with these financial ratios it will be prohibited from making distributions to its shareholders. In addition, subject to certain
cure rights, such failure will constitute an event of default by Ortitlan. As of December 31, 2012, the projected 12-month DSCR was 1.58, and the debt to equity ratio was 2.51.
168
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Debt service reserve
As required under the terms of the Amatitlan Loan, Ortitlan maintains an account which may be funded by cash or backed by letters of
credit in an amount sufficient to pay scheduled debt service amounts, including principal and interest, due under the terms of the Amatitlan Loan in the following three months, and a well field reserve account. This restricted cash account is
classified as current in the consolidated balance sheets. As of December 31, 2012 and 2011, the balance of such account was and $3.8 million
.
In addition, as of December 31, 2012 and 2011, part of the required debt service reserve
was backed by a letter of credit in the amount of $5.9 million for both years (see Note 23).
Finance Agreement with
OPIC (the Olkaria III Complex)
On August 23, 2012, the Companys wholly owned subsidiary, OrPower 4 entered
into a Finance Agreement with Overseas Private Investment Corporation (OPIC), an agency of the United States government, to provide limited-recourse senior secured debt financing in an aggregate principal amount of up to $310.0 million
(the OPIC Loan) for the refinancing and financing of the Olkaria III geothermal power complex in Kenya. The Finance Agreement was amended on November 9, 2012.
The OPIC Loan is comprised of up to three tranches:
|
|
|
Tranche I in an aggregate principal amount of $85.0 million, which was drawn on November 9, 2012, was used to prepay approximately $20.5 million
(plus associated prepayment penalty and breakage costs of $1.5 million) of the DEG Loan, as described below. The remainder of Tranche I proceeds was used for reimbursement of prior capital costs and other corporate purposes.
|
|
|
|
Tranche II in an aggregate principal amount of up to $180.0 million will be used to fund the construction and well field drilling for the expansion of
the Olkaria III geothermal power complex to up to 84 MW (Plant 2). On November 9, 2012, an amount of $135.0 million was disbursed under this Tranche II, and in February 2013, the remaining $45.0 million was distributed under this
Tranche II.
|
|
|
|
Tranche III is a stand-by tranche in an aggregate principal amount of up to $45.0 million, and will be made available to OrPower 4 in the event it
elects, in its discretion, to construct a further expansion of the Olkaria III complex of up to an additional 16 MW (Plant 3). Terms and conditions for Tranche III of the OPIC Loan will be agreed upon by OPIC and OrPower 4 in subsequent
documentation.
|
The interest rate on both Tranche I and Tranche II is variable from the date of disbursement
until a conversion date selected by OrPower 4, whereupon interest on each Tranche will convert to a fixed rate. The interest rate as of December 31, 2012 was 2.92%. Interest, whether floating or fixed, will be payable quarterly in arrears
on each March 15, June 15, September 15 and December 15, commencing with the first such date following the respective disbursement of a Tranche. OrPower 4 is required to select a conversion date that will be within
180 days of the commercial operation date of Plant 2.
The applicable Tranche interest rate will be determined at the time of
the actual disbursement of loan proceeds based upon, and in connection with, the issuance of certificates of participation in the OPIC Loan. The payment of principal and interest on the certificates of participation is fully guaranteed by OPIC, and
is backed by the full faith and credit of the U.S. government.
The final maturity of Tranche I and Tranche II is
approximately 18 years.
OrPower 4 has the right to make voluntary prepayments of all or a portion of the OPIC Loan subject to
prior notice, minimum prepayment amounts, and a prepayment premium of 2% in the first two years after the Plant 2 commercial operation date, declining to 1% in the third year after the Plant 2 commercial operation date, and
169
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
without premium thereafter, plus a redemption premium. In addition, the OPIC Loan is subject to customary mandatory prepayment in the event of certain reductions in generation capacity of the
power plants, unless such reductions will not cause the projected ratio of cash flow to debt service to fall below 1.7.
The
OPIC Loan is secured by substantially all of OrPower 4s assets and by a pledge of all of the equity interests in OrPower 4.
The Finance Agreement includes customary events of default, including failure to pay any principal, interest or other amounts when due, failure to comply with covenants, breach of representations and
warranties, non-payment or acceleration of other debt of OrPower 4, bankruptcy of OrPower 4 or certain of its affiliates, judgments rendered against OrPower 4, expropriation, change of control, and revocation or early termination of security
documents or certain project-related agreements, subject to various exceptions and notice, cure and grace periods.
The
repayment of the remaining outstanding DEG Loan (see below) in the amount of approximately $51.3 million as of November 9, 2012, has been subordinated to the OPIC Loan.
There are various restrictive covenants under the OPIC Loan, which include a required historical and projected 12-month DSCR of not less than 1.4 (measured as of
March 15, June 15, September 15 and December 15 of each year). If OrPower 4 fails to comply with these financial ratios it will be prohibited from making distributions to its shareholders. In addition, if the
DSCR falls below 1.1, subject to certain cure rights, such failure will constitute an event of default by OrPower 4. This covenant in respect of Tranche I will become effective on December 15, 2014.
Debt service reserve
As required under the terms of the OPIC Loan, OrPower 4 maintains an account which may be funded by cash or backed by letters of credit in an amount sufficient to pay scheduled debt service amounts,
including principal and interest, due under the terms of the OPIC Loan in the following six months. This restricted cash account is classified as current in the consolidated balance sheets. As of December 31, 2012, the balance of the account
was $18.9 million. In addition, as of December 31, 2012, part of the required debt service reserve was backed by a letter of credit in the amount of $8.0 million (see Note 23).
Well drilling reserve
As required under the terms of the OPIC Loan, OrPower 4 may be required to maintain an account which may be funded by cash or backed by letters of credit to reserve funds for future well drilling, based
on determination upon the completion of the expansion work.
OFC Senior Secured Notes
On February 13, 2004, OFC, a wholly owned subsidiary, issued $190.0 million, 8.25% Senior Secured Notes (OFC Senior Secured
Notes) and received net cash proceeds of approximately $179.7 million, after deduction of issuance costs of approximately $10.3 million, which have been included in deferred financing costs in the consolidated balance sheet. The OFC Senior
Secured Notes have a final maturity of December 30, 2020. Principal and interest on the OFC Senior Secured Notes are payable in semi-annual payments. The OFC Senior Secured Notes are collateralized by substantially all of the assets of OFC and
those of its wholly owned subsidiaries and are fully and unconditionally guaranteed by all of the wholly owned subsidiaries of OFC. There are various restrictive covenants under the OFC Senior Secured Notes, which include limitations on additional
170
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
indebtedness of OFC and its wholly owned subsidiaries. Failure to comply with these and other covenants will, subject to customary cure rights, constitute an event of default by OFC. In
addition, there are restrictions on the ability of OFC to make distributions to its shareholders, which include a required historical and projected 12-month DSCR of not less than 1.25 (measured semi-annually as of June 30 and December 31
of each year). If OFC fails to comply with the DSCR ratio it will be prohibited from making distributions to its shareholders. The Company believes that the transition to variable energy prices under the Ormesa and Mammoth PPAs and the impact of the
currently low natural gas prices on the revenues under these PPAs may cause OFC to not meet the DSCR ratio requirements for making distributions, but it does not believe that there will be an event of default by OFC. As of December 31, 2012
(the last measurement date of the covenants), the actual historical 12-month DSCR was 1.28.
In February 2013, the Company
acquired from OFC noteholders OFC Senior Secured Notes with an outstanding aggregate principal amount of $12.8 million and will recognize a gain of $1.1 million in the first quarter of 2013.
OFC may redeem the OFC Senior Secured Notes, in whole or in part, at any time, at a redemption price equal to the principal amount of the
OFC Senior Secured Notes to be redeemed plus accrued interest, premium and liquidated damages, if any, plus a make-whole premium. Upon certain events, as defined in the indenture governing the OFC Senior Secured Notes, OFC may be
required to redeem a portion of the OFC Senior Secured Notes at a redemption price ranging from 100% to 101% of the principal amount of the OFC Senior Secured Notes being redeemed plus accrued interest, premium and liquidated damages, if any.
Debt service reserve
As required under the terms of the OFC Senior Secured Notes, OFC maintains an account which may be funded by cash or backed by letters of credit (see below) in an amount sufficient to pay scheduled debt
service amounts, including principal and interest, due under the terms of the OFC Senior Secured Notes in the following six months. This restricted cash account is classified as current in the consolidated balance sheets. As of December 31,
2012 and 2011, the balance of such account was $2.9 million and $1.8 million, respectively. In addition, as of each of December 31, 2012 and 2011, part of the required debt service reserve was backed by a letter of credit in the amount of
$10.6 million (see Note 23).
OrCal Senior Secured Notes
On December 8, 2005, OrCal, a wholly owned subsidiary, issued $165.0 million, 6.21% Senior Secured Notes (OrCal Senior Secured
Notes) and received net cash proceeds of approximately $161.1 million, after deduction of issuance costs of approximately $3.9 million, which have been included in deferred financing costs in the consolidated balance sheet. The OrCal Senior
Secured Notes have been rated BBB- and BB as of December 31, 2012 and March 8, 2013, respectively, by Fitch Ratings. The OrCal Senior Secured Notes have a final maturity of December 30, 2020. Principal and interest on the OrCal Senior
Secured Notes are payable in semi-annual payments. The OrCal Senior Secured Notes are collateralized by substantially all of the assets of OrCal, and those of its subsidiaries and are fully and unconditionally guaranteed by all of the wholly owned
subsidiaries of OrCal. There are various restrictive covenants under the OrCal Senior Secured Notes, which include limitations on additional indebtedness of OrCal and its wholly owned subsidiaries. Failure to comply with these and other
covenants will, subject to customary cure rights, constitute an event of default by OrCal. In addition, there are restrictions on the ability of OrCal to make distributions to its shareholders, which include a required historical and projected
12-month DSCR of not less than 1.25 (measured semi-annually as of June 30 and December 31 of each year). If OrCal fails to comply with the DSCR ratio it will be prohibited from making distributions to its shareholders. As of
December 31, 2012 (the last measurement date of the covenants), the actual historical 12-month DSCR was 1.36.
171
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OrCal may redeem the OrCal Senior Secured Notes, in whole or in part, at any time at a
redemption price equal to the principal amount of the OrCal Senior Secured Notes to be redeemed plus accrued interest, and a make-whole premium. Upon certain events, as defined in the indenture governing the OrCal Senior Secured Notes,
OrCal may be required to redeem a portion of the OrCal Senior Secured Notes at a redemption price of 100% of the principal amount of the OrCal Senior Secured Notes being redeemed plus accrued interest.
Debt service reserve
As required under the terms of the OrCal Senior Secured Notes, OrCal maintains an account which may be funded by cash or backed by letters of credit (see below) in an amount sufficient to pay scheduled
debt service amounts, including principal and interest, due under the terms of the OrCal Senior Secured Notes in the following six months. This restricted cash account is classified as current in the consolidated balance sheets. As of
December 31, 2012 and 2011, the balance of such account was $2.6 million and $0, respectively. In addition, as of December 31, 2012 and 2011, part of the required debt service reserve was backed by a letter of credit in the amount of $4.9
million and $4.8 million, respectively (see Note 23).
OFC 2 Senior Secured Notes
On September 23, 2011, the Companys subsidiary OFC 2 and its wholly owned project subsidiaries (collectively, the OFC 2
Issuers) entered into a note purchase agreement (the Note Purchase Agreement) with OFC 2 Noteholder Trust, as purchaser, John Hancock Life Insurance Company (U.S.A.), as administrative agent, and the DOE, as guarantor, in
connection with the offer and sale of up to $350.0 million aggregate principal amount of OFC 2s Senior Secured Notes (OFC 2 Senior Secured Notes) due December 31, 2034.
Subject to the fulfillment of customary and other specified conditions precedent, the OFC 2 Senior Secured Notes may be issued in up to
six distinct series associated with the phased construction (Phase I and Phase II) of the Jersey Valley, McGinness Hills and Tuscarora geothermal power plants which are owned by the OFC 2 Issuers. The OFC 2 Senior Secured Notes will mature
and the principal amount of the OFC 2 Senior Secured Notes will be payable in equal quarterly installments and in any event not later than December 31, 2034. Each series of notes will bear interest at a rate calculated based on a spread over
the Treasury yield curve that will be set at least ten business days prior to the issuance of such series of notes. Interest will be payable quarterly in arrears. The DOE will guarantee payment of 80% of principal and interest on the OFC 2 Senior
Secured Notes pursuant to Section 1705 of Title XVII of the Energy Policy Act of 2005, as amended. The conditions precedent to the issuance of the OFC 2 Senior Secured Notes include certain specified conditions required by the DOE in connection
with its guarantee of the OFC 2 Senior Secured Notes.
On October 31, 2011, the Issuers completed the sale of $151.7
million in aggregate principal amount of 4.687% Series A Notes due 2032 (the Series A Notes). The net proceeds from the sale of the Series A Notes, after deducting transaction fees and expenses, were approximately $141.1 million, and
were used to finance a portion of the construction costs of Phase I of the McGinness Hills and Tuscarora power plants and to fund certain reserves. Principal and interest on the Series A Notes are payable quarterly in arrears on the last day of
March, June, September and December of each year.
Issuance of the Series B Notes is dependent on the Jersey Valley power
plant reaching certain operational targets in addition to the other conditions precedent noted above. If issued, the aggregate principal of the Series B Notes will not exceed $28.0 million, and such proceeds would be used to finance a portion of the
construction costs of Phase I of the Jersey Valley power plant.
172
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The OFC 2 Issuers have sole discretion regarding whether to commence construction of
Phase II of any of the Jersey Valley, McGinness Hills and Tuscarora power plants. If a facility Phase II is undertaken for any of the power plants, the OFC 2 Issuers may issue Phase II tranches of Notes, comprised of one or more of Series C Notes,
Series D Notes, Series E Notes and Series F Notes, to finance a portion of the construction costs of such Phase II of any facility. The aggregate principal amount of all Phase II Notes may not exceed $170.0 million. The aggregate principal amount of
each series of Notes comprising a Phase II tranche will be determined by the OFC 2 Issuers in their sole discretion provided that certain financial ratios are satisfied pursuant to the terms of the Note Purchase Agreement and subject to the
aggregate limit noted above.
The OFC 2 Senior Secured Notes are collateralized by substantially all of the assets of OFC 2
and those of its wholly owned subsidiaries and are fully and unconditionally guaranteed by all of the wholly owned subsidiaries of OFC 2. There are various restrictive covenants under the OFC 2 Senior Secured Notes, which include limitations on
additional indebtedness of OFC 2 and its wholly owned subsidiaries. Failure to comply with these and other covenants will, subject to customary cure rights, constitute an event of default by OFC 2. In addition, there are restrictions on
the ability of OFC 2 to make distributions to its shareholders. Among other things, the distribution restrictions include a quarterly DSCR requirement of at least 1.2 (on a blended basis for all of the OFC 2 power plants) and 1.5 on a pro forma
basis (giving effect to the distributions). As of December 31, 2012 (the last measurement date of the covenants), the actual DSCR for the fourth quarter of 2012 was 2.69 and the pro-forma 12-month DSCR was 2.13.
The Company provided a guarantee in connection with the issuance of the Series A Notes, and will provide a guarantee in connection with
the issuance of each other Series of OFC 2 Senior Secured Notes, which will be available to be drawn upon if certain trigger events occur. One trigger event is the failure of any facility financed by the relevant Series of OFC 2 Senior Secured Notes
to reach completion and meet certain operational performance levels (the non-performance trigger) which gives rise to a prepayment obligation on the OFC 2 Senior Secured Notes. The other trigger event is a payment default on the OFC 2 Senior Secured
Notes or the occurrence of certain fundamental defaults that result in the acceleration of the OFC 2 Senior Secured Notes, in each case that occurs prior to the date that the relevant facility(ies) financed by such OFC 2 Senior Secured Notes reaches
completion and meets certain operational performance levels. A demand on the Companys guarantee based on the non-performance trigger is limited to an amount equal to the prepayment amount on the OFC 2 Senior Secured Notes necessary to bring
the OFC 2 Issuers into compliance with certain coverage ratios. A demand on the Companys guarantee based on the other trigger event is not so limited.
Debt service reserve; other restricted funds
Under the terms of the OFC 2
Senior Secured Notes, OFC 2 is required to maintain a debt service reserve and certain other reserves, as follows:
|
(i)
|
A debt service reserve account which may be funded by cash or backed by letters of credit (see below) in an amount sufficient to pay scheduled debt service amounts,
including principal and interest, due under the terms of the OFC 2 Senior Secured Notes in the following six months. This restricted cash account is classified as current in the consolidated balance sheet. As of December 31, 2012, part of the
required debt service reserve was backed by a letter of credit in the amount of $10.4 million (see Note 23).
|
|
(ii)
|
A performance level reserve account, intended to provide additional security for the OFC 2 Senior Secured Notes, which may be funded by cash or backed by letters of
credit. This reserve builds up over time and reduces gradually each time the project achieves certain milestones. Upon issuance of the Series A Notes, this reserve was funded in the amount of $28.0 million. As of December 31, 2012, the balance
of such account was $44.0 million, and in addition OFC 2 funded $10.0 million in a letter of credit issued that is required to be maintained at all times until this reserve reduces to zero.
|
173
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
(iii)
|
Under the terms of the OFC 2 Senior Secured Notes, OFC 2 is also required to maintain a well field drilling and maintenance reserve that builds up over time and is
dedicated to costs and expenses associated with drilling and maintenance of the projects well field, which may be funded by cash or backed by letters of credit. Certain other reserves are required in the event OFC 2 elects to commence
construction of Phase II of any facility and fund such construction with any Series of Notes (other than Series A and Series B Notes).
|
Senior Unsecured Bonds
On August 3, 2010, the Company entered
into a trust instrument governing the issuance of, and accepted subscriptions for, an aggregate principal amount of approximately $142.0 million of senior unsecured bonds (the Bonds). Subject to early redemption, the principal of the
Bonds is repayable in a single bullet payment upon the final maturity of the Bonds on August 1, 2017. The Bonds bear interest at a fixed rate of 7%, payable semi-annually. In February 2011, the Company accepted subscription for an aggregate
principal amount of approximately $108.0 million of additional senior unsecured bonds (the Additional Bonds) under two addendums to the trust instrument. The terms and conditions of the Additional Bonds are identical to the original
Bonds. The Additional Bonds were issued at a premium which reflects an effective fixed interest of 6.75%.
Loans from
institutional investors
In July 2009, the Company entered into a 6-year loan agreement of $20.0 million with a group
of institutional investors (the First Loan). The First Loan matures on July 16, 2015, is payable in 12 semi-annual installments, which commenced on January 16, 2010, and bears interest of 6.5%.
In July 2009, the Company entered into an 8-year loan agreement of $20.0 million with another group of institutional investors (the
Second Loan). The Second Loan matures on August 1, 2017, is payable in 12 semi-annual installments, which commenced on February 1, 2012, and bears interest at 6-month LIBOR plus 5.0%.
In November 2010, the Company entered into a 6-year loan agreement of $20.0 million with a group of institutional investors (the
Third Loan). The Third Loan matures on November 16, 2016, is payable in ten semi-annual installments, which commenced on May 16, 2012, and bears interest of 5.75%.
Loan Agreement with DEG (the Olkaria III Complex)
In March 2009, the Companys wholly owned subsidiary, OrPower 4, entered into a project financing loan of $105.0 million to refinance its investment in Phase I of the Olkaria III complex located in
Kenya (the DEG Loan). The DEG Loan was provided by a group of European Development Finance Institutions (DFIs) arranged by DEG Deutsche Investitions und Entwicklungsgesellschaft mbH (DEG). The first
disbursement of $90.0 million occurred on March 23, 2009 and the second disbursement of $15.0 million occurred on July 10, 2009. The DEG Loan will mature on December 15, 2018, and is payable in 19 equal semi-annual installments,
commencing December 15, 2009. Interest on the DEG Loan is variable based on 6-month LIBOR plus 4.0% and OrPower 4 had the option to fix the interest rate upon each disbursement. Upon the first disbursement, the Company fixed the interest rate
on $77.0 million of the DEG Loan at 6.90%.
On October 31, 2012, OrPower 4, DEG and the parties thereto amended and
restated the DEG Loan agreement (the DEG Amendment). The DEG Amendment became effective on November 9, 2012 upon the execution by OrPower 4 of the Tranche I and Tranche II Notes and the related disbursements of the proceeds thereof
under the OPIC Finance Agreement (as described above). The amended and restated DEG Loan Agreement provides for: (i) the prepayment in full of two loans thereunder in the total principal amount of
174
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
approximately $20.5 million; (ii) the release and discharge of all collateral security previously provided by OrPower 4 to the secured parties under the DEG Loan agreement and the
substitution of the Companys guarantee of OrPower 4s payment and certain other performance obligations in lieu thereof; and (iii) the establishment of a LIBOR floor of 1.25% in respect of one of the loans under the DEG Loan
agreement, and (iv) the elimination of most of the affirmative and negative covenants under the DEG Loan agreement and certain other conforming provisions to take into account OrPower 4s execution of the OPIC Finance Agreement and its
obligations thereunder.
Loan from a commercial bank
On November 4, 2009, the Company entered into a 5-year loan agreement of $50.0 million with a commercial bank. The bank loan matures
on November 10, 2014 and is payable in 10 semi-annual installments, which commenced on May 10, 2010, and bears interest at 6-month LIBOR plus 3.25%.
Revolving credit lines with commercial banks
As of
December 31, 2012, the Company has credit agreements with six commercial banks for an aggregate amount of $445.8 million (including $50.0 million from Union Bank, N.A. (Union Bank)), see below. Under the terms of these credit
agreements, the Company, or its Israeli subsidiary, Ormat Systems, can request: (i) extensions of credit in the form of loans and/or the issuance of one or more letters of credit in the amount of up to $265.0 million; and (ii) the issuance
of one or more letters of credit in the amount of up to $180.8 million. The credit agreements mature between June 2013 and December 2014. Loans and draws under the credit agreements or under any letters of credit will bear interest at the respective
banks cost of funds plus a margin.
As of December 31, 2012, loans in the total amount of $73.6 million were
outstanding, and letters of credit with an aggregate stated amount of $183.8 million were issued and outstanding under such credit agreements. The $73.6 million in loans are for terms of three months or less and bear interest at an annual weighted
average rate of 2.71%.
Restrictive covenants
The Companys obligations under the credit agreements, the loan agreements, and the trust instrument governing the bonds, described
above, are unsecured, but are subject to a negative pledge in favor of the banks and the other lenders and certain other restrictive covenants. These include, among other things, a prohibition on: (i) creating any floating charge or any
permanent pledge, charge or lien over our assets without obtaining the prior written approval of the lender; (ii) guaranteeing the liabilities of any third party without obtaining the prior written approval of the lender; and
(iii) selling, assigning, transferring, conveying or disposing of all or substantially all of our assets, or a change of control in our ownership structure. Some of the credit agreements, the term loan agreements, as well as the trust
instrument contain cross-default provisions with respect to other material indebtedness owed by us to any third party. In some cases, the Company has agreed to maintain certain financial ratios, which are measured quarterly, such as: (i) equity
of at least $600 million and in no event less than 30% of total assets; (ii) 12-month debt, net of cash, cash equivalents, marketable securities and short-term bank deposits to Adjusted EBITDA ratio not to exceed 7; and (iii) dividend
distribution not to exceed 35% of net income for that year. As of December 31, 2012: (i) total equity was $702.2 million and the actual equity to total assets ratio was 34.2%, and (ii) the 12-month debt, net of cash, cash equivalents,
marketable securities and short-term bank deposits to Adjusted EBITDA ratio was 4.73. During the year ended December 31, 2012, the Company distributed interim dividends in an aggregate amount of $3.6 million. Although the Company reported a net
loss for the year, under the credit agreements, the loan agreements, and the trust instrument governing the
175
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
bonds the Company can distribute interim dividends on the basis of its estimate of its net income for the year. Since the Company incurred a loss for the year ended December 31, 2012, an
adjustment of $3.6 million will be made in the next fiscal year in which the Company distributes a dividend. The failure to perform or observe any of the covenants set forth in such agreements, subject to various cure periods, would result in the
occurrence of an event of default and would enable the lenders to accelerate all amounts due under each such agreement.
Credit agreement with Union Bank
On February 7, 2012, the Companys wholly owned subsidiary, Ormat Nevada Inc. (Ormat Nevada) entered into an amended and restated credit agreement with Union Bank. Under the
amended and restated agreement, the credit termination date was extended to February 7, 2014 and the aggregate amount available under the credit agreement was increased from $39.0 million to $50.0 million. The facility is limited to the
issuance, extension, modification or amendment of letters of credit. Union Bank is currently the sole lender and issuing bank under the credit agreement, but is also designated as an administrative agent on behalf of banks that may, from time to
time in the future, join the credit agreement as parties thereto. In connection with this transaction, the Company entered into a guarantee in favor of the administrative agent for the benefit of the banks, pursuant to which the Company agreed to
guarantee Ormat Nevadas obligations under the credit agreement. Ormat Nevadas obligations under the credit agreement are otherwise unsecured. There are various restrictive covenants under the credit agreement, which include a requirement
to comply with the following financial ratios, which are measured quarterly: (i) a 12-month debt to EBITDA ratio not to exceed 4.5; (ii) 12-month DSCR of not less than 1.35; and (iii) distribution leverage ratio not to exceed 2.0. As
of December 31, 2012: (i) the actual 12-month debt to EBITDA ratio was 2.38; (ii) the 12-month DSCR was 3.26; and (iii) the distribution leverage ratio was 1.19. In addition, there are restrictions on dividend distributions in
the event of a payment default or noncompliance with such ratios, and subject to specified carve-outs and exceptions, a negative pledge on the assets of Ormat Nevada in favor of Union Bank. As of December 31, 2012, letters of credit in the
aggregate amount of $42.5 million remain issued and outstanding under this credit agreement with Union Bank.
Future minimum payments
Future minimum payments under long-term obligations, excluding revolving credit lines with commercial banks, as of December 31, 2012 are as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Year ending December 31:
|
|
|
|
|
2013
|
|
$
|
68,333
|
|
2014
|
|
|
77,266
|
|
2015
|
|
|
70,850
|
|
2016
|
|
|
86,188
|
|
2017
|
|
|
308,938
|
|
Thereafter
|
|
|
345,748
|
|
|
|
|
|
|
Total
|
|
$
|
957,323
|
|
|
|
|
|
|
NOTE 12 PUNA POWER PLANT LEASE TRANSACTIONS
In 2005, the Companys wholly owned subsidiary in Hawaii, Puna Geothermal Ventures (PGV), entered into
transactions involving the original geothermal power plant of the Puna complex located on the Big Island (the Puna Power Plant).
176
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pursuant to a 31-year head lease (the Head Lease), PGV leased Puna Power
Plant to an unrelated company in return for prepaid lease payments in the total amount of $83.0 million (the Deferred Lease Income). The carrying value of the leased assets as of December 31, 2012 and 2011 amounted to $39.6 million
and $42.4 million, net of accumulated depreciation of $22.8 million and $20.0 million, respectively. The unrelated company (the Lessor) simultaneously leased back the Puna Power Plant to PGV under a 23-year lease (the Project
Lease). PGVs rent obligations under the Project Lease will be paid solely from revenues generated by the Puna Power Plant under a PPA that PGV has with Hawaii Electric Light Company (HELCO). The Head Lease and the Project
Lease are non-recourse lease obligations to the Company. PGVs rights in the geothermal resource and the related PPA have not been leased to the Lessor as part of the Head Lease but are part of the Lessors security package.
The Head Lease and the Project Lease are being accounted for separately. Each was classified as an operating lease in accordance with the
accounting standards for leases. The Deferred Lease Income is amortized into revenue, using the straight-line method, over the 31-year term of the Head Lease. Deferred transaction costs amounting to $4.2 million are being amortized, using the
straight-line method, over the 23-year term of the Project Lease.
Future minimum lease payments under the Project Lease, as
of December 31, 2012, are as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Year ending December 31:
|
|
|
|
|
2013
|
|
$
|
8,062
|
|
2014
|
|
|
8,647
|
|
2015
|
|
|
8,222
|
|
2016
|
|
|
8,374
|
|
2017
|
|
|
8,747
|
|
Thereafter
|
|
|
21,876
|
|
|
|
|
|
|
Total
|
|
$
|
63,928
|
|
|
|
|
|
|
Depository accounts
As required under the terms of the lease agreements, there are certain reserve funds that need to be managed by the indenture trustee in
accordance with certain balance requirements. Such reserve funds amounted to $4.4 million and $3.9 million as of December 31, 2012 and 2011, respectively, and were included in restricted cash accounts in the consolidated balance sheets and were
classified as current as they were used for current payments.
Distribution account
PGV maintains an account to deposit its remaining cash, after making all of the necessary payments and transfers as provided for in the
lease agreements, in order to make distributions to the Companys wholly owned subsidiary, Ormat Nevada. The distributions are allowed only if PGV maintains various restrictive covenants under the lease agreements, which include limitations on
additional indebtedness. As of December 31, 2012 and 2011, the balance of such account was $0.
NOTE 13 OPC TRANSACTION
In June 2007, the Companys wholly owned subsidiary Ormat Nevada entered into agreements with affiliates of Morgan
Stanley & Co. Incorporated and Lehman Brothers Inc. (Morgan Stanley Geothermal LLC
177
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and Lehman-OPC LLC), under which those investors purchased, for cash, interests in a newly formed subsidiary of Ormat Nevada, OPC LLC (OPC), entitling the investors to certain tax
benefits (such as production tax credits (PTCs) and accelerated depreciation) and distributable cash associated with four geothermal power plants.
The first closing under the agreements occurred in 2007 and covered the Companys Desert Peak 2, Steamboat Hills, and Galena 2 power plants. The investors paid $71.8 million at the first closing. The
second closing under the agreements occurred in 2008 and covered the Galena 3 power plant. The investors paid $63.0 million at the second closing.
Ormat Nevada continues to operate and maintain the power plants. Under the agreements, Ormat Nevada initially received all of the distributable cash flow generated by the power plants, while the investors
received substantially all of the production tax credits and taxable income or loss (together, the Economic Benefits). Once Ormat Nevada recovered the capital that it has invested in the power plants, which occurred in the fourth quarter
of 2010, the investors receive both the distributable cash flow and the Economic Benefits. The investors return is limited by the term of the transaction. Once the investors reach a target after-tax yield on their investment in OPC (the
OPC Flip Date), Ormat Nevada will receive 95% of both distributable cash and taxable income, on a going forward basis. Following the OPC Flip Date, Ormat Nevada also has the option to buy out the investors remaining interest in OPC
at the then-current fair market value or, if greater, the investors capital account balances in OPC. Should Ormat Nevada exercise this purchase option, it would thereupon revert to being sole owner of the power plants.
The Class B membership units are provided with a 5% residual economic interest in OPC. The 5% residual interest commences on achievement
by the investors of a contractually stipulated return that triggers the OPC Flip Date. The actual OPC Flip Date is not known with certainty and is determined by the operating results of OPC. This residual 5% interest represents a noncontrolling
interest and is not subject to mandatory redemption or guaranteed payments. Cash is distributed each period in accordance with the cash allocation percentages stipulated in the agreements. Until the fourth quarter of 2010, Ormat Nevada was allocated
the cash earnings in OPC and therefore, the amount allocated to the 5% residual interest represented the noncash loss of OPC which principally represented depreciation on the property, plant and equipment. As from the fourth quarter of 2010, the
distributable cash is allocated to the Class B membership units. As a result of the acquisition by Ormat Nevada, on October 30, 2009, of all of the Class B membership units of OPC held by Lehman-OPC LLC (see below), the residual interest
decreased to 3.5%. Such residual interest increased to 5% on February 3, 2011 when Ormat Nevada sold its Class B membership units to JPM Capital Corporation (JPM) (see below).
The Companys voting rights in OPC are based on a capital structure that is comprised of Class A and Class B membership units.
Through Ormat Nevada, the Company owns all of the Class A membership units, which represent 75% of the voting rights in OPC. The investors own all of the Class B membership units, which represent 25% of the voting rights in OPC. In the period
from October 30, 2009 to February 3, 2011, the Company owned, through Ormat Nevada, all of the Class A membership units, which represented 75% of the voting rights in OPC, and 30% of the Class B membership units, which represented
7.5% of the voting rights of OPC. In total the Company had 82.5% of the voting rights in OPC as of December 31, 2010. In that period, the investors owned 70% of the Class B membership units, which represented 17.5% of the voting rights of OPC.
Other than in respect of customary protective rights, all operational decisions in OPC are decided by the vote of a majority of the membership units. Following the OPC Flip Date, Ormat Nevadas voting rights will increase to 95% and the
investors voting rights will decrease to 5%. Ormat Nevada retains the controlling voting interest in OPC both before and after the OPC Flip Date and therefore consolidates OPC.
178
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 30, 2009, Ormat Nevada acquired from Lehman-OPC LLC all of the Class B
membership units of OPC held by Lehman-OPC pursuant to a right of first offer for a price of $18.5 million. A substantial portion of the initial sale of the Class B membership units by Ormat Nevada was accounted for as a financing transaction. As a
result, the repurchase of these interests at a discount resulted in a pre-tax gain of $13.3 million in the year ended December 31, 2009. In addition, an amount of approximately $1.1 million has been reclassified from noncontrolling interest to
additional paid-in capital representing the 1.5% residual interest of Lehman-OPCs Class B membership units.
On
February 3, 2011, Ormat Nevada sold to JPM all of the Class B membership units of OPC that it had acquired on October 30, 2010 for a sale price of $24.9 million in cash. The Company did not record any gain from the sale of its Class B
membership interests in OPC to JPM. A substantial portion of the Class B membership units are accounted for as a financing transaction. As a result, the majority of these proceeds were recorded as a liability. In addition, $2.3 million has been
reclassified from additional paid-in capital to noncontrolling interest representing the 1.5% residual interest of JPMs Class B membership units.
NOTE 14 ASSET RETIREMENT OBLIGATION
The following table presents a reconciliation of the beginning and ending aggregate carrying amount of asset retirement
obligation for the years presented below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of year
|
|
$
|
21,284
|
|
|
$
|
19,903
|
|
Changes in price estimates
|
|
|
(3,696
|
)
|
|
|
(1,071
|
)
|
Liabilities incurred
|
|
|
|
|
|
|
859
|
|
Accretion expense
|
|
|
1,701
|
|
|
|
1,593
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
19,289
|
|
|
$
|
21,284
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2012, the Company decreased the aggregate carrying amount of its
asset retirement obligation by $3,696,000 due to decreased costs associated with demolition and abandonment of property, plant and equipment.
During the year ended December 31, 2011, the Company decreased the aggregate carrying amount of its asset retirement obligation by $1,071,000 due to changes in useful life and price estimates.
NOTE 15 STOCK-BASED COMPENSATION
The Company makes an estimate of expected forfeitures and recognizes compensation costs only for those stock-based
awards expected to vest. As of December 31, 2012, the total future compensation cost related to unvested stock-based awards that are expected to vest is $8,016,000, which amount will be recognized over a weighted average period of 1.3 years.
179
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the years ended December 31, 2012, 2011 and 2010, the Company recorded
compensation related to stock-based awards as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands, except
per share data)
|
|
Cost of revenues
|
|
$
|
4,225
|
|
|
$
|
4,325
|
|
|
$
|
4,403
|
|
Selling and marketing expenses
|
|
|
542
|
|
|
|
600
|
|
|
|
780
|
|
General and administrative expenses
|
|
|
1,611
|
|
|
|
1,747
|
|
|
|
2,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
|
6,378
|
|
|
|
6,672
|
|
|
|
7,378
|
|
Tax effect on stock-based compensation expense
|
|
|
797
|
|
|
|
834
|
|
|
|
924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect of stock-based compensation expense
|
|
$
|
5,581
|
|
|
$
|
5,838
|
|
|
$
|
6,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of stock-based compensation expense on earnings (loss) per share
|
|
$
|
0.12
|
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2012, the Company evaluated the trends in the stock-based award forfeiture
rate and determined that the actual rate is 6.4%. This represents a decrease of 1.1% from the estimate made a year earlier in the third quarter of 2011. As a result of the reduction of the estimated forfeiture rate, the stock based compensation
expense increased by an immaterial amount.
Valuation assumptions
The fair value of each grant of stock-based awards is estimated using the Black-Scholes valuation model and the assumptions noted in the
following table. The Companys expected term represents the period that the Companys stock-based awards are expected to be outstanding. In the absence of enough historical information, the expected term was determined using the simplified
method giving consideration to the contractual term and vesting schedule. Since the Company does not have any traded stock-based award and was listed for trading on the New York Stock Exchange beginning in November 2004, the Companys expected
volatility was calculated based on the Companys historical volatility and for the period of time prior to the Companys listing, the historical volatility of the Parent. There is a high correlation between the stock behavior of the
Company and its Parent. The dividend yield forecast is expected to be 20% of the Companys yearly net profit, which is equivalent to a 0.0% yearly weighted average dividend rate in the year ended December 31, 2012. The risk-free interest
rate was based on the yield from U.S. constant treasury maturities bonds with an equivalent term. The forfeiture rate is based on trends in actual stock-based awards forfeitures.
The Company calculated the fair value of each stock-based award on the date of grant based on the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
For stock options issued by the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rates
|
|
|
1.0
|
%
|
|
|
2.2
|
%
|
|
|
2.5
|
%
|
Expected lives (in years)
|
|
|
5.0
|
|
|
|
5.1
|
|
|
|
5.1
|
|
Dividend yield
|
|
|
0.81
|
%
|
|
|
0.80
|
%
|
|
|
0.72
|
%
|
Expected volatility
|
|
|
47.2
|
%
|
|
|
46.4
|
%
|
|
|
47.6
|
%
|
Forfeiture rate
|
|
|
6.4
|
%
|
|
|
7.5
|
%
|
|
|
13.0
|
%
|
180
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-based awards
The 2004 Incentive Compensation Plan
In 2004, the Companys Board of Directors adopted the 2004 Incentive Compensation Plan (2004 Incentive Plan), which provides for the grant of the following types of awards: incentive
stock options, non-qualified stock options, restricted stock, stock appreciation rights (SARs), stock units, performance awards, phantom stock, incentive bonuses, and other possible related dividend equivalents to employees of the
Company, directors and independent contractors. Under the 2004 Incentive Plan, a total of 3,750,000 shares of the Companys common stock have been reserved for issuance, all of which could be issued as options or as other forms of awards.
Options and SARs granted to employees under the 2004 Incentive Plan cliff vest and are exercisable from the grant date as follows: 25% after 24 months, 25% after 36 months, and the remaining 50% after 48 months. Options granted to non-employee
directors under the 2004 Incentive Plan cliff vest and are exercisable one year after the grant date. Vested shares may be exercised for up to ten years from the date of grant. The shares of common stock will be issued upon exercise of options or
SARs from the Companys authorized share capital. The 2004 Incentive Plan expired in May 2012 upon adoption of the 2012 Incentive Plan, except as to share based awards outstanding on that date.
The 2012 Incentive Compensation Plan
In May 2012, the Companys shareholders adopted the 2012 Incentive Compensation Plan (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 Companys common stock have been reserved for issuance, all of which could be issued as options or as other forms of awards. Options and SARs granted to employees under the 2012
Incentive Plan will vest and become exercisable as follows: 25% vest 24 months after the grant date, an additional 25% vest 36 months after the grant date, and the remaining 50% vest 48 months after the grant date. Options granted to non-employee
directors under the 2012 Incentive Plan will vest and become exercisable one year after the grant date. Vested stock-based awards may be exercised for up to ten years from the date of grant. The shares of common stock will be issued upon exercise of
options or SARs from the Companys authorized share capital.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at beginning of year
|
|
|
2,934
|
|
|
$
|
32.40
|
|
|
|
2,335
|
|
|
$
|
34.35
|
|
|
|
1,745
|
|
|
$
|
36.08
|
|
Granted, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
75
|
|
|
|
19.01
|
|
|
|
30
|
|
|
|
19.10
|
|
|
|
37
|
|
|
|
28.39
|
|
SARs*
|
|
|
602
|
|
|
|
20.13
|
|
|
|
622
|
|
|
|
25.65
|
|
|
|
592
|
|
|
|
29.95
|
|
Forfeited
|
|
|
(48
|
)
|
|
|
28.92
|
|
|
|
(53
|
)
|
|
|
31.69
|
|
|
|
(39
|
)
|
|
|
38.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
3,563
|
|
|
|
30.09
|
|
|
|
2,934
|
|
|
|
32.40
|
|
|
|
2,335
|
|
|
|
34.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and SARs exercisable at end of year
|
|
|
1,592
|
|
|
|
36.61
|
|
|
|
1,086
|
|
|
|
37.46
|
|
|
|
621
|
|
|
|
37.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options and SARs granted during the year
|
|
|
|
|
|
$
|
7.25
|
|
|
|
|
|
|
$
|
9.69
|
|
|
|
|
|
|
$
|
12.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
*
|
Upon exercise, SARs entitle the recipient to receive shares of common stock equal to the increase in value of the award between the grant date and the exercise date.
|
As of December 31, 2012, 3,925,000 shares of the Companys common stock are available for future
grants under the 2012 Incentive Plan.
No shares of the Companys common stock are available for future grants under the
2004 Incentive Plan as of such date.
The following table summarizes information about stock-based awards outstanding at
December 31, 2012 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise
Price
|
|
Number of
Shares
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Number of
Shares
Exercisable
|
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
$15.00
|
|
|
32
|
|
|
|
1.8
|
|
|
|
$136
|
|
|
|
32
|
|
|
|
1.8
|
|
|
|
$136
|
|
18.56
|
|
|
45
|
|
|
|
6.8
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.10
|
|
|
30
|
|
|
|
5.8
|
|
|
|
5
|
|
|
|
30
|
|
|
|
5.8
|
|
|
|
5
|
|
19.69
|
|
|
30
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.10
|
|
|
8
|
|
|
|
1.8
|
|
|
|
|
|
|
|
8
|
|
|
|
1.8
|
|
|
|
|
|
20.13
|
|
|
594
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.65
|
|
|
598
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.74
|
|
|
23
|
|
|
|
2.8
|
|
|
|
|
|
|
|
23
|
|
|
|
2.8
|
|
|
|
|
|
26.84
|
|
|
552
|
|
|
|
3.2
|
|
|
|
|
|
|
|
276
|
|
|
|
3.2
|
|
|
|
|
|
28.19
|
|
|
30
|
|
|
|
4.8
|
|
|
|
|
|
|
|
30
|
|
|
|
4.8
|
|
|
|
|
|
29.21
|
|
|
8
|
|
|
|
4.3
|
|
|
|
|
|
|
|
8
|
|
|
|
4.3
|
|
|
|
|
|
29.95
|
|
|
567
|
|
|
|
4.3
|
|
|
|
|
|
|
|
139
|
|
|
|
4.3
|
|
|
|
|
|
34.13
|
|
|
225
|
|
|
|
3.3
|
|
|
|
|
|
|
|
225
|
|
|
|
3.3
|
|
|
|
|
|
37.90
|
|
|
15
|
|
|
|
.8
|
|
|
|
|
|
|
|
15
|
|
|
|
.8
|
|
|
|
|
|
38.50
|
|
|
23
|
|
|
|
3.8
|
|
|
|
|
|
|
|
23
|
|
|
|
3.8
|
|
|
|
|
|
38.85
|
|
|
8
|
|
|
|
1.2
|
|
|
|
|
|
|
|
8
|
|
|
|
1.2
|
|
|
|
|
|
42.08
|
|
|
340
|
|
|
|
1.3
|
|
|
|
|
|
|
|
340
|
|
|
|
1.3
|
|
|
|
|
|
45.78
|
|
|
412
|
|
|
|
2.3
|
|
|
|
|
|
|
|
412
|
|
|
|
2.3
|
|
|
|
|
|
52.98
|
|
|
23
|
|
|
|
1.8
|
|
|
|
|
|
|
|
23
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,563
|
|
|
|
4.0
|
|
|
|
$173
|
|
|
|
1,592
|
|
|
|
2.6
|
|
|
|
$141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182