REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Ormat Technologies, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Ormat Technologies, Inc. and its subsidiaries (the "Company") as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive income (loss), of equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Realizability of Deferred Tax Assets
As described in Note 17 to the consolidated financial statements, the Company's deferred tax asset balance as of December 31, 2021 is $143 million. As disclosed by management, significant estimates are required to calculate the consolidated income tax provision and tax balances. Management calculates temporary differences resulting from differing treatments of items for tax and accounting purposes, which can result in the creation of deferred tax assets or liabilities. For those jurisdictions where the realization of net deferred tax assets is not more likely than not, a valuation allowance is recorded. In assessing the need for a valuation allowance, management estimates future taxable income by jurisdiction while also considering the feasibility of ongoing tax planning strategies and the realization of tax credits and net operating loss carryforwards. Significant estimates are required in estimating future taxable income by jurisdiction, leading to significant judgment from management.
The principal consideration for our determination that performing procedures relating to the realizability of deferred tax assets is a critical audit matter is that there was significant judgment by management in estimating future taxable income by jurisdiction. This in turn led to significant auditor judgment and effort in performing procedures to evaluate management's estimates of future taxable income.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the income tax process, including controls over estimating future taxable income by jurisdiction in order to assess the realizability of deferred tax assets. These procedures also included, among others, testing management’s process for assessing the realizability of deferred tax assets, testing the completeness and accuracy of underlying data used in management’s assessment and evaluating the reasonableness of management’s assumptions related to estimating future taxable income. Evaluating management’s assumptions related to estimating future taxable income involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the Company; (ii) the consistency with external market and industry data; and (iii) the consistency of the assumptions with evidence obtained in other areas of the audit.
/s/ Kesselman & Kesselman
Certified Public Accountants (Isr.)
A member firm of PricewaterhouseCoopers International Limited
Tel Aviv, Israel
February 25, 2022
We have served as the Company’s auditor since 2018.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
ASSETS | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 239,278 | | | $ | 448,252 | |
Marketable securities at fair value | | | 43,343 | | | | — | |
Restricted cash and cash equivalents (primarily related to VIEs) | | | 104,166 | | | | 88,526 | |
Receivables: | | | | | | | | |
Trade less allowance for credit losses of $90 and $597, respectively (primarily related to VIEs) | | | 122,944 | | | | 149,170 | |
Other | | | 18,144 | | | | 17,987 | |
Inventories | | | 28,445 | | | | 35,321 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | | | 9,692 | | | | 24,544 | |
Prepaid expenses and other | | | 35,920 | | | | 15,354 | |
Total current assets | | | 601,932 | | | | 779,154 | |
Investment in unconsolidated companies | | | 105,886 | | | | 98,217 | |
Deposits and other | | | 78,915 | | | | 66,989 | |
Deferred income taxes | | | 143,450 | | | | 119,299 | |
Property, plant and equipment, net ($2,159,696 and $1,978,220 related to VIEs, respectively) | | | 2,294,973 | | | | 2,099,046 | |
Construction-in-process ($366,924 and $198,812 related to VIEs, respectively) | | | 721,483 | | | | 479,315 | |
Operating leases right of use ($7,825 and $4,712 related to VIEs, respectively) | | | 19,357 | | | | 16,347 | |
Finance leases right of use ($192 and $7,001 related to VIEs, respectively) | | | 6,414 | | | | 11,633 | |
Intangible assets, net | | | 363,314 | | | | 194,421 | |
Goodwill | | | 89,954 | | | | 24,566 | |
Total assets | | $ | 4,425,678 | | | $ | 3,888,987 | |
LIABILITIES AND EQUITY | |
Current liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 143,186 | | | $ | 152,763 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | | | 9,248 | | | | 11,179 | |
Current portion of long-term debt: | | | | | | | | |
Limited and non-recourse (primarily related to VIEs): | | | 61,695 | | | | 60,846 | |
Full recourse | | | 313,846 | | | | 17,768 | |
Financing liability | | | 10,835 | | | | — | |
Operating lease liabilities | | | 2,564 | | | | 2,922 | |
Finance lease liabilities | | | 2,782 | | | | 3,169 | |
Total current liabilities | | | 544,156 | | | | 248,647 | |
Long-term debt, net of current portion: | | | | | | | | |
Limited and non-recourse (primarily related to VIEs and less deferred financing costs of $11,304 and $13,887, respectively) | | | 539,664 | | | | 600,123 | |
Full recourse (less deferred financing costs of $3,659 and $3,436, respectively) | | | 740,335 | | | | 777,090 | |
Financing liability | | | 242,029 | | | | — | |
Operating lease liabilities | | | 16,462 | | | | 12,897 | |
Finance lease liabilities | | | 4,361 | | | | 9,104 | |
Liability associated with sale of tax benefits | | | 134,953 | | | | 111,476 | |
Deferred income taxes | | | 84,662 | | | | 87,972 | |
Liability for unrecognized tax benefits | | | 5,730 | | | | 1,970 | |
Liabilities for severance pay | | | 15,694 | | | | 18,749 | |
Asset retirement obligation | | | 84,891 | | | | 63,457 | |
Other long-term liabilities | | | 4,951 | | | | 6,235 | |
Total liabilities | | $ | 2,417,888 | | | $ | 1,937,720 | |
| | | | | | | | |
Commitments and contingencies (Note 21) | | | | | | | | |
| | | | | | | | |
Redeemable noncontrolling interest | | | 9,329 | | | | 9,830 | |
| | | | | | | | |
Equity: | | | | | | | | |
The Company's stockholders' equity: | | | | | | | | |
Common stock, par value $0.001 per share; 200,000,000 shares authorized; 56,056,450 and 55,983,259 issued and outstanding as of December 31, 2020 and December 31, 2019, respectively | | | 56 | | | | 56 | |
Additional paid-in capital | | | 1,271,925 | | | | 1,262,446 | |
Retained earnings | | | 585,209 | | | | 550,103 | |
Accumulated other comprehensive loss | | | (2,191 | ) | | | (6,620 | ) |
Total stockholders' equity attributable to Company's stockholders | | | 1,854,999 | | | | 1,805,985 | |
Noncontrolling interest | | | 143,462 | | | | 135,452 | |
Total equity | | | 1,998,461 | | | | 1,941,437 | |
Total liabilities, redeemable noncontrolling interest and equity | | $ | 4,425,678 | | | $ | 3,888,987 | |
The accompanying notes are an integral part of the consolidated financial statements.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands, except earnings per share data) | |
Revenues: | | | | | | | | | | | | |
Electricity | | $ | 585,771 | | | $ | 541,393 | | | $ | 540,333 | |
Product | | | 46,920 | | | | 148,125 | | | | 191,009 | |
Energy storage | | | 30,393 | | | | 15,824 | | | | 14,702 | |
Total revenues | | | 663,084 | | | | 705,342 | | | | 746,044 | |
Cost of revenues: | | | | | | | | | | | | |
Electricity | | | 337,019 | | | | 300,059 | | | | 312,835 | |
Product | | | 41,374 | | | | 114,948 | | | | 145,974 | |
Energy storage | | | 20,353 | | | | 14,060 | | | | 17,912 | |
Total cost of revenues | | | 398,746 | | | | 429,067 | | | | 476,721 | |
Gross profit | | | 264,338 | | | | 276,275 | | | | 269,323 | |
Operating expenses: | | | | | | | | | | | | |
Research and development expenses | | | 4,129 | | | | 5,395 | | | | 4,647 | |
Selling and marketing expenses | | | 15,199 | | | | 17,384 | | | | 15,047 | |
General and administrative expenses | | | 75,901 | | | | 60,226 | | | | 55,833 | |
Business interruption insurance income | | | (248 | ) | | | (20,743 | ) | | | — | |
Operating income | | | 169,357 | | | | 214,013 | | | | 193,796 | |
Other income (expense): | | | | | | | | | | | | |
Interest income | | | 2,124 | | | | 1,717 | | | | 1,515 | |
Interest expense, net | | | (82,658 | ) | | | (77,953 | ) | | | (80,384 | ) |
Derivatives and foreign currency transaction gains (losses) | | | (14,720 | ) | | | 3,802 | | | | 624 | |
Income attributable to sale of tax benefits | | | 29,582 | | | | 25,720 | | | | 20,872 | |
Other non-operating income (expense), net | | | (134 | ) | | | 1,418 | | | | 880 | |
Income from operations before income tax and equity in earnings (losses) of investees | | | 103,551 | | | | 168,717 | | | | 137,303 | |
Income tax provision | | | (24,850 | ) | | | (67,003 | ) | | | (45,613 | ) |
Equity in earnings (losses) of investees, net | | | (2,624 | ) | | | 92 | | | | 1,853 | |
Net income | | | 76,077 | | | | 101,806 | | | | 93,543 | |
Net income attributable to noncontrolling interest | | | (13,985 | ) | | | (16,350 | ) | | | (5,448 | ) |
Net income attributable to the Company's stockholders | | $ | 62,092 | | | $ | 85,456 | | | $ | 88,095 | |
Comprehensive income: | | | | | | | | | | | | |
Net income | | | 76,077 | | | | 101,806 | | | | 93,543 | |
Other comprehensive income (loss), net of related taxes: | | | | | | | | | | | | |
Change in foreign currency translation adjustments | | | (3,236 | ) | | | 3,813 | | | | (1,810 | ) |
Change in unrealized gains or losses in respect of the Company's share in derivatives instruments of unconsolidated investment that qualifies as a cash flow hedge | | | 3,892 | | | | (3,975 | ) | | | (3,417 | ) |
Change in unrealized gains or losses in respect of a cross currency swap derivative instrument that qualifies as a cash flow hedge (net of related tax of $817 and $1,095, respectively) | | | 2,379 | | | | 3,366 | | | | — | |
Change in unrealized gains or losses on marketable securities available-for-sale (net of related tax of $0) | | | (40 | ) | | | — | | | | — | |
Other changes in comprehensive income | | | 228 | | | | 274 | | | | 44 | |
Comprehensive income | | | 79,300 | | | | 105,284 | | | | 88,360 | |
Comprehensive income attributable to noncontrolling interest | | | (12,779 | ) | | | (17,794 | ) | | | (5,120 | ) |
Comprehensive income attributable to the Company's stockholders | | $ | 66,521 | | | $ | 87,490 | | | $ | 83,240 | |
Earnings per share attributable to the Company's stockholders: | | | | | | | | | | | | |
Basic: | | $ | 1.11 | | | $ | 1.66 | | | $ | 1.73 | |
Diluted: | | $ | 1.10 | | | $ | 1.65 | | | $ | 1.72 | |
Weighted average number of shares used in computation of earnings per share attributable to the Company's stockholders: | | | | | | | | | | | | |
Basic | | | 56,004 | | | | 51,567 | | | | 50,867 | |
Diluted | | | 56,402 | | | | 51,937 | | | | 51,227 | |
The accompanying notes are an integral part of the consolidated financial statements. |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
| | The Company's Stockholders' Equity | | | | | |
| | | | | | | | | | | | | | Retained | | | Accumulated | | | | | | | | | | | | | |
| | | | | | | | | | Additional | | | Earnings | | | Other | | | | | | | | | | | | | |
| | Common Stock | | | Paid-in | | | (Accumulated | | | Comprehensive | | | | | | | Noncontrolling | | | Total | |
| | Shares | | | Amount | | | Capital | | | Deficit) | | | Income (Loss) | | | Total | | | Interest | | | Equity | |
| | (Dollars in thousands, except per share data) | |
Balance at January 1, 2019 | | | 50,700 | | | $ | 51 | | | $ | 901,363 | | | $ | 422,164 | | | $ | (3,799 | ) | | $ | 1,319,779 | | | $ | 125,259 | | | $ | 1,445,038 | |
Stock-based compensation | | | — | | | | — | | | | 9,358 | | | | — | | | | — | | | | 9,358 | | | | — | | | | 9,358 | |
Exercise of options by employees and directors (*) | | | 332 | | | | — | | | | 2,429 | | | | — | | | | — | | | | 2,429 | | | | — | | | | 2,429 | |
Cash paid to noncontrolling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (8,329 | ) | | | (8,329 | ) |
Cash dividend declared, $0.44 per share | | | — | | | | — | | | | — | | | | (22,386 | ) | | | — | | | | (22,386 | ) | | | — | | | | (22,386 | ) |
Increase in noncontrolling interest related to the Tungsten transaction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,072 | | | | 2,072 | |
Purchase of U.S. Geothermal | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Net income | | | — | | | | — | | | | — | | | | 88,095 | | | | — | | | | 88,095 | | | | 4,316 | | | | 92,411 | |
Other comprehensive income (loss), net of related taxes: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | (1,482 | ) | | | (1,482 | ) | | | (328 | ) | | | (1,810 | ) |
Change in respect of derivative instruments designated for cash flow hedge (net of related tax of $24) | | | — | | | | — | | | | — | | | | — | | | | 75 | | | | 75 | | | | — | | | | 75 | |
Change in unrealized gains or losses in respect of the Company's share in derivative instruments of unconsolidated investment (net of related tax of $0) | | | — | | | | — | | | | — | | | | — | | | | (3,417 | ) | | | (3,417 | ) | | | — | | | | (3,417 | ) |
Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge (net of related tax of $18) | | | — | | | | — | | | | — | | | | — | | | | (31 | ) | | | (31 | ) | | | — | | | | (31 | ) |
Balance at December 31, 2019 | | | 51,032 | | | | 51 | | | | 913,150 | | | | 487,873 | | | | (8,654 | ) | | | 1,392,420 | | | | 122,990 | | | | 1,515,410 | |
Cumulative effect of changes in accounting principles | | | — | | | | — | | | | — | | | | (755 | ) | | | — | | | | (755 | ) | | | — | | | | (755 | ) |
Adjusted balance as of the beginning of the year | | | 51,032 | | | | 51 | | | | 913,150 | | | | 487,118 | | | | (8,654 | ) | | | 1,391,665 | | | | 122,990 | | | | 1,514,655 | |
Stock-based compensation | | | — | | | | — | | | | 9,830 | | | | — | | | | — | | | | 9,830 | | | | — | | | | 9,830 | |
Exercise of options by employees and directors (*) | | | 178 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Common stock issuance | | | 4,773 | | | | 5 | | | | 339,466 | | | | — | | | | — | | | | 339,471 | | | | — | | | | 339,471 | |
Cash paid to noncontrolling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,756 | ) | | | (6,756 | ) |
Cash dividend declared, $0.44 per share | | | — | | | | — | | | | — | | | | (22,471 | ) | | | — | | | | (22,471 | ) | | | — | | | | (22,471 | ) |
Increase in noncontrolling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,754 | | | | 2,754 | |
Net income | | | — | | | | — | | | | — | | | | 85,456 | | | | — | | | | 85,456 | | | | 15,020 | | | | 100,476 | |
Other comprehensive income (loss), net of related taxes: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | 2,369 | | | | 2,369 | | | | 1,444 | | | | 3,813 | |
Change in unrealized gains or losses in respect of the Company's share in derivative instruments of unconsolidated investment | | | — | | | | — | | | | — | | | | — | | | | (3,975 | ) | | | (3,975 | ) | | | — | | | | (3,975 | ) |
Change in unrealized gains or losses in respect of a cross currency swap derivative instrument that qualifies as a cash flow hedge (net of related tax of $1,095) | | | — | | | | — | | | | — | | | | — | | | | 3,366 | | | | 3,366 | | | | — | | | | 3,366 | |
Other | | | — | | | | — | | | | — | | | | — | | | | 274 | | | | 274 | | | | — | | | | 274 | |
Balance at December 31, 2020 | | | 55,983 | | | | 56 | | | | 1,262,446 | | | | 550,103 | | | | (6,620 | ) | | | 1,805,985 | | | | 135,452 | | | | 1,941,437 | |
Stock-based compensation | | | — | | | | — | | | | 9,168 | | | | — | | | | — | | | | 9,168 | | | | — | | | | 9,168 | |
Exercise of stock-based awards by employees and directors (*) | | | 73 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Stock issuance costs reimbursement | | | — | | | | — | | | | 311 | | | | — | | | | — | | | | 311 | | | | — | | | | 311 | |
Cash paid to noncontrolling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5,507 | ) | | | (5,507 | ) |
Cash dividend declared, $0.48 per share | | | — | | | | — | | | | — | | | | (26,986 | ) | | | — | | | | (26,986 | ) | | | — | | | | (26,986 | ) |
Increase in noncontrolling interest in Steamboat Hills | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,357 | | | | 1,357 | |
Net income | | | — | | | | — | | | | — | | | | 62,092 | | | | — | | | | 62,092 | | | | 13,366 | | | | 75,458 | |
Other comprehensive income (loss), net of related taxes: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | (2,030 | ) | | | (2,030 | ) | | | (1,206 | ) | | | (3,236 | ) |
Change in unrealized gains or losses in respect of the Company's share in derivative instruments of unconsolidated investment that qualifies as a cash flow hedge (net of related tax of $0) | | | — | | | | — | | | | — | | | | — | | | | 3,892 | | | | 3,892 | | | | — | | | | 3,892 | |
Change in unrealized gains or losses in respect of a cross currency swap derivative instrument that qualifies as a cash flow hedge (net of related tax of $817) | | | — | | | | — | | | | — | | | | — | | | | 2,379 | | | | 2,379 | | | | — | | | | 2,379 | |
Change in unrealized gains or losses on marketable securities available-for-sale (net of related tax of $0) | | | — | | | | — | | | | — | | | | — | | | | (40 | ) | | | (40 | ) | | | — | | | | (40 | ) |
Other | | | — | | | | — | | | | — | | | | — | | | | 228 | | | | 228 | | | | — | | | | 228 | |
Balance at December 31, 2021 | | | 56,056 | | | | 56 | | | | 1,271,925 | | | | 585,209 | | | | (2,191 | ) | | | 1,854,999 | | | | 143,462 | | | | 1,998,461 | |
(*) Resulted in an amount lower than $1 thousand.
The accompanying notes are an integral part of the consolidated financial statements. |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands) | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 76,077 | | | $ | 101,806 | | | $ | 93,543 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 182,972 | | | | 156,612 | | | | 148,761 | |
Accretion of asset retirement obligation | | | 3,977 | | | | 3,232 | | | | 2,709 | |
Stock-based compensation | | | 9,168 | | | | 9,830 | | | | 9,358 | |
Amortization of deferred lease income | | | — | | | | — | | | | (2,685 | ) |
Income attributable to sale of tax benefits, net of interest expense | | | (12,201 | ) | | | (12,090 | ) | | | (10,084 | ) |
Equity in losses (earnings) of investees, net | | | 2,624 | | | | (92 | ) | | | (1,853 | ) |
Mark-to-market of derivative instruments | | | 741 | | | | (1,192 | ) | | | (1,402 | ) |
Loss (gain) on severance pay fund asset | | | (1,335 | ) | | | (893 | ) | | | (1,016 | ) |
Deferred income tax provision | | | (3,115 | ) | | | 5,102 | | | | 27,896 | |
Liability for unrecognized tax benefits | | | 3,760 | | | | (12,673 | ) | | | 2,874 | |
Deferred lease revenues | | | — | | | | — | | | | (574 | ) |
Other | | | 526 | | | | 338 | | | | 914 | |
Changes in operating assets and liabilities, net of businesses acquired: | | | | | | | | | | | | |
Receivables | | | 26,738 | | | | 3,520 | | | | (15,133 | ) |
Costs and estimated earnings in excess of billings on uncompleted contracts | | | 14,852 | | | | 13,821 | | | | 3,765 | |
Inventories | | | 4,127 | | | | 178 | | | | 5,500 | |
Prepaid expenses and other | | | (19,105 | ) | | | (2,687 | ) | | | 3,452 | |
Change in operating lease right of use asset | | | 3,010 | | | | 3,825 | | | | 8,167 | |
Deposits and other | | | (4,154 | ) | | | (893 | ) | | | (22,525 | ) |
Accounts payable and accrued expenses | | | (21,936 | ) | | | (5,373 | ) | | | 8,738 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | | | (1,931 | ) | | | 8,424 | | | | (15,647 | ) |
Liabilities for severance pay | | | (3,055 | ) | | | (2 | ) | | | 757 | |
Change in operating lease liabilities | | | (2,816 | ) | | | (3,765 | ) | | | (8,405 | ) |
Other liabilities, net | | | (102 | ) | | | (2,023 | ) | | | (617 | ) |
Net cash provided by operating activities | | | 258,822 | | | | 265,005 | | | | 236,493 | |
Cash flows from investing activities: | | | | | | | | | | | | |
Purchase of marketable securities | | | (60,070 | ) | | | — | | | | — | |
Maturities of marketable securities | | | 16,272 | | | | — | | | | — | |
Capital expenditures | | | (419,272 | ) | | | (320,738 | ) | | | (279,986 | ) |
Cash received from insurance recoveries | | | — | | | | 4,700 | | | | 35,435 | |
Investment in unconsolidated companies | | | (6,401 | ) | | | (20,960 | ) | | | (10,674 | ) |
Cash paid for acquisition of a business, net of cash acquired | | | (171,000 | ) | | | (43,397 | ) | | | — | |
Decrease (increase) in severance pay fund asset, net of payments made to retired employees | | | 3,189 | | | | 845 | | | | 687 | |
Other investing activities | | | (911 | ) | | | (6,419 | ) | | | — | |
Net cash used in investing activities | | | (638,193 | ) | | | (385,969 | ) | | | (254,538 | ) |
Cash flows from financing activities: | | | | | | | | | | | | |
Proceeds from long-term loans, net of transaction costs | | | 275,000 | | | | 419,262 | | | | 132,847 | |
Proceeds from exercise of options by employees | | | — | | | | — | | | | 2,429 | |
Proceeds from issuance of common stock, net of stock issuance costs | | | 311 | | | | 339,471 | | | | — | |
Proceeds from the sale of limited liability company interest, net of transaction costs | | | 37,141 | | | | — | | | | 58,289 | |
Repayments of commercial paper and prepayments of long-term debt | | | — | | | | (50,000 | ) | | | (21,073 | ) |
Proceeds from issuance of commercial paper | | | — | | | | — | | | | 50,000 | |
Proceeds from revolving credit lines with banks | | | — | | | | 1,249,400 | | | | 1,450,850 | |
Repayment of revolving credit lines with banks | | | — | | | | (1,289,950 | ) | | | (1,569,300 | ) |
Cash received from noncontrolling interest | | | 5,390 | | | | 7,577 | | | | 3,346 | |
Repayments of long-term debt and financing liability | | | (93,046 | ) | | | (135,384 | ) | | | (72,708 | ) |
Cash paid to noncontrolling interest | | | (6,903 | ) | | | (9,739 | ) | | | (9,730 | ) |
Payments under finance lease obligations | | | (3,181 | ) | | | (2,890 | ) | | | (3,164 | ) |
Deferred debt issuance costs | | | (1,341 | ) | | | (1,798 | ) | | | (5,165 | ) |
Cash dividends paid | | | (26,986 | ) | | | (22,471 | ) | | | (22,386 | ) |
Net cash provided by (used in) financing activities | | | 186,385 | | | | 503,478 | | | | (5,765 | ) |
Effect of exchange rate changes | | | (348 | ) | | | 1,154 | | | | (575 | ) |
Net change in cash and cash equivalents and restricted cash and cash equivalents | | | (193,334 | ) | | | 383,668 | | | | (24,385 | ) |
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | | | 536,778 | | | | 153,110 | | | | 177,495 | |
Cash and cash equivalents and restricted cash and cash equivalents at end of period | | $ | 343,444 | | | $ | 536,778 | | | $ | 153,110 | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | | | | |
Interest, net of interest capitalized | | $ | 66,627 | | | $ | 60,830 | | | $ | 61,628 | |
Income taxes, net | | $ | 34,357 | | | $ | 64,795 | | | $ | 1,649 | |
Supplemental non-cash investing and financing activities: | | | | | | | | | | | | |
Increase (decrease) in accounts payable related to purchases of property, plant and equipment | | $ | 7,976 | | | $ | 3,148 | | | $ | 9,423 | |
Right of use assets obtained in exchange for new lease liabilities | | $ | 6,175 | | | $ | 3,642 | | | $ | 11,626 | |
Increase in asset retirement cost and asset retirement obligation | | $ | 12,153 | | | $ | 8,963 | | | $ | 8,334 | |
The accompanying notes are an integral part of the consolidated financial statements. |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
The Company is primarily engaged in the geothermal and recovered energy business and primarily designs, develops, builds, sells, owns and operates clean, environmentally friendly geothermal and recovered energy-based power plants, usually using equipment that it designs and manufactures. The Company owns and operates geothermal and recovered energy-based power plants in various countries, including the United States, Kenya, Guatemala, Guadeloupe and Honduras. The Company’s equipment manufacturing operations are primarily located in Israel. Additionally, the Company owns and operates independent storage facilities in the United States providing energy storage and related services.
Most of the Company’s domestic power plant facilities are Qualifying Facilities under the PURPA. The Power Purchase Agreements ("PPAs") for certain of such facilities are dependent upon their maintaining Qualifying Facility status.
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 or consolidated if they are a variable interest entity in which the Company has an interest and is the primary beneficiary. Under the equity method, original investments are recorded at cost and adjusted by the Company’s share of undistributed earnings or losses of such companies. The Company’s earnings or losses in investments accounted for under the equity method have been reflected as “equity in earnings (losses) of investees, net” on the Company’s consolidated statements of operations and comprehensive income (loss).
Use of estimates in preparation of financial statements
The preparation of financial statements in conformity with U.S. GAAP 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 Company’s consolidated financial statements relate to the useful lives of property, plant and equipment, impairment of goodwill and long-lived assets, including intangible assets, revenue recognition of product sales using the percentage of completion method, asset retirement obligations, and the provision for income taxes.
Cash and cash equivalents
The Company considers all highly liquid instruments, with an original maturity of three months or less, to be cash equivalents.
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, including principal and interest, cash collateral and operating fund accounts, including for future wells drilling, that have been classified as restricted cash and cash equivalents. Funds that will be used to satisfy obligations due during the next 12 months are classified as current restricted cash and cash equivalents, with the remainder classified as non-current restricted cash and cash equivalents. Such amounts are invested primarily in money market accounts and commercial paper with a minimum investment grade of “A”.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciliation of cash and cash equivalents and restricted cash and cash equivalents
The following table provides a reconciliation of cash and cash equivalents and restricted cash and cash equivalents reported on the balance sheets that sum to the total of the same amounts shown on the statement of cash flows:
| | December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands) | |
Cash and cash equivalents | | $ | 239,278 | | | $ | 448,252 | | | $ | 71,173 | |
Restricted cash and cash equivalents | | | 104,166 | | | | 88,526 | | | | 81,937 | |
Total cash and cash equivalents and restricted cash and cash equivalents | | $ | 343,444 | | | $ | 536,778 | | | $ | 153,110 | |
Marketable securities
The Company’s investments in marketable securities consist of debt securities with maturity of up to one year and a high credit rating. The investments in marketable securities are classified as available-for-sale ("AFS") and thus measured at fair value based on quoted market prices. Unrealized gains and losses from AFS debt securities are excluded from earnings and reported net of the related tax effect in "Accumulated other comprehensive income (loss)". Realized gains and losses from sale of marketable securities, as determined on a specific identification basis, as well as interest income earned, are included in earnings. The Company considers available evidence in evaluating potential impairments of its investments, including credit market conditions, credit ratings of the security as well as the extent to which fair value is less than amortized cost. The Company estimates the lifetime expected credit losses for all AFS debt securities in an unrealized loss position under its allowance for credit losses model. The Company assesses the security’s credit indicators, including credit ratings when estimating a security’s probability of default. If the assessment indicates that an expected credit loss exists, the Company determines the portion of the unrealized loss attributable to credit deterioration and records an allowance for the expected credit loss in earnings. Unrealized gains and losses attributable to non-credit factors are recorded in "Accumulated other comprehensive income (loss)", net of tax. Marketable debt securities with original maturities of three months or less that are readily convertible into a known amount of cash in the amount of approximately $3.7 million are presented under "Cash and cash equivalents" in the consolidated balance sheets.
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash investments, marketable securities, accounts receivable and the cross-currency swap transaction.
The Company places its temporary cash investments with high credit quality financial institutions located in the U.S. and in foreign countries. At December 31, 2021 and 2020, the Company had deposits totaling $31.0 million and $18.9 million, respectively, in ten United States financial institutions that were federally insured up to $250,000 per account. At December 31, 2021 and 2020, the Company’s deposits in foreign countries of approximately $64.3 million and $72.4 million, respectively, were not insured.
At December 31, 2021 and 2020, accounts receivable related to operations in foreign countries amounted to approximately $77.5 million and $111.3 million, respectively. At December 31, 2021 and 2020, accounts receivable from the Company’s major customers (see Note 18) amounted to approximately 58% and 65%, respectively, of the Company’s accounts receivable.
The Company has historically been able to collect substantially all of its receivable balances. As of December 31, 2021, the amount overdue from KPLC in Kenya was $25.5 million of which $22.9 million was paid in January and February of 2022. These amounts represent an average of 63 days overdue. The Company believes it will be able to collect all past due amounts in Kenya. This belief is supported by the fact that in addition to KPLC's obligations under its power purchase agreement, the Company holds a support letter from the Government of Kenya that covers certain cases of KPLC non-payment (such as where caused by government actions/political events).
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In Honduras, as of December 31, 2021, the total amount overdue from ENEE was $20.7 million of which $2.9 million was collected in February 2022. In addition, due to continuing restrictive measures related to the COVID-19 pandemic in Honduras, the Company may experience additional delays in collection. The Company believes it will be able to collect all past due amounts in Honduras.
The Company may experience delays in collection in other locations due to the restrictive measures related to the COVID-19 pandemic which were imposed globally to different extents.
See Note 3 - Marketable Securities and under the caption "Marketable Securities" above for additional information regarding investment in marketable securities. The Company considers the counterparty credit risk related to the cross-currency swap, as further described in note 12 to the consolidated financial statements, when assessing the hedge effectiveness, noting such risk to be low as of December 31, 2021.
Inventories
Inventories consist primarily of raw material parts and sub-assemblies for power units and are stated at the lower of cost or net realizable value, using the weighted-average cost method. Inventories are reduced by a provision for slow-moving and obsolete inventories. This provision was not material at December 31, 2021 and 2020.
Deposits and other
Deposits and other consist primarily of performance bonds for construction and storage projects, long-term insurance contract funds and receivables, certain deferred costs and derivative instrument receivables.
Property, plant and equipment, net
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 15 to 30 years. The other assets are depreciated using the straight-line method over the following estimated useful lives of the assets:
| | | Years | | |
Buildings | | | | 25 | | |
Leasehold improvements | | | 15 | - | 30 | |
Machinery and equipment — manufacturing and drilling | | | | 10 | | |
Machinery and equipment — computers | | | 3 | - | 5 | |
Energy storage equipment | | | | 15 | | |
Office equipment — furniture and fixtures | | | 5 | - | 15 | |
Office equipment — other | | | 5 | - | 10 | |
Vehicles | | | 5 | - | 7 | |
The cost and accumulated depreciation of items sold or retired are removed from the accounts. Any resulting gain or loss is recognized currently and recorded in the accompanying statements of operations.
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 asset’s estimated useful life. Capitalized interest costs amounted to $14.6 million, $10.4 million, and $3.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.
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, 2021, 2020 and 2019. 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. However, in certain sites the process may take longer due to permitting delays, transmission constraints or any other commercial milestones that are required to be reached in order to pursue the development process.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 accounted under lease accounting as further described under the caption Leases below and reflected as expenses under “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 the lessor’s 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 be converted to a full-size commercial well, used either for extraction or re-injection of geothermal fluids, or be 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.
When deciding whether to continue holding lease rights and/or to pursue exploration activity, the Company diligently prioritizes prospective investments, taking into account resource and probability assessments in order to make informed decisions about whether a particular project will support commercial operation. There was no material write-off of unsuccessful activities for the years ended December 31, 2021, 2020 and 2019.
All exploration and development costs that are being capitalized 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 Company’s legal liabilities include plugging wells and post-closure costs of power producing and storage 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. The Company periodically reassesses the assumptions used to estimate the expected cash flows required to settle the asset retirement obligation, including changes in estimated probabilities, amounts, and timing of the settlement of the asset retirement obligation, as well as changes in the legal requirements of an obligation and revises the previously recorded asset retirement obligation accordingly. At retirement, the obligation is settled for its recorded amount at a gain or loss.
Deferred financing costs
Deferred financing costs are presented as a direct deduction from the carrying value of the associated debt liability or under "Deposits and other" if associated with lines of credit. Such deferred costs are amortized over the term of the related obligation using the effective interest method or ratably, as applicable. Amortization of deferred financing costs is presented as interest expense in the consolidated statements of operations and comprehensive income (loss). Amortization expense for the years ended December 31, 2021, 2020 and 2019 amounted to $3.2 million, $3.5 million, and $5.4 million, respectively. During the years ended December 31, 2021, 2020 and 2019, no amounts were written-off as a result of extinguishment of liabilities.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill represents the excess of the fair value of consideration transferred in the business combination transactions over the fair value of tangible and intangible assets acquired, net of the fair value of liabilities assumed and the fair value of any noncontrolling interest in the acquisitions. Goodwill is not amortized but rather subject to a periodic impairment testing on an annual basis, which the Company performs on December 31 of each year, or if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Additionally, an entity is permitted to first assess qualitative factors to determine whether a quantitative goodwill impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. An entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test. This would not preclude the entity from performing the qualitative assessment in any subsequent period. The quantitative assessment compares the fair value of the reporting unit to its carrying value, including goodwill. Under ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which was adopted by the Company in 2018, an entity should recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. For further information relating to goodwill see Note 10 - Intangible Assets and Goodwill to the consolidated financial statements.
Intangible assets
Intangible assets consist of allocated acquisition costs of PPAs, which are amortized using the straight-line method over the 6 to 19-year terms of the agreements (see Note 10) as well as acquisition costs allocation related to the Company's Energy Storage segment activities that are amortized over a period of between approximately 6 and 19 years. Intangible assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. In case there are no such events or change in circumstances, there is no need to perform the impairment testing. The recoverability is tested by comparing the net carrying value of the intangible assets to the undiscounted net cash flows to be generated from the use and eventual disposition of these assets. If the carrying amount of a long-lived asset (or asset group) is not recoverable, the fair value of the asset (asset group) is measured and if the carrying amount exceeds the fair value, an impairment loss is recognized.
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 Company’s 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.
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 of 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 PPAs and expected market rates thereafter 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 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 Company’s current estimates, a material impairment charge may be required in the future.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings. Changes in the fair value of derivatives designated as cash flow hedging instruments are initially recorded in "Other comprehensive income (loss)" and a corresponding amount is reclassified out of "Accumulated other comprehensive income (loss)" into earnings to offset the impact of the underlying hedge transaction when it affects earnings under the same line item in the consolidated statements of operations and comprehensive income.
The Company maintains a risk management strategy that may incorporate the use of swap contracts, put options, forward exchange contracts, interest rate swaps, and cross-currency swaps 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.
Foreign currency translation
The U.S. dollar is the functional currency for all of the Company’s consolidated operations and those of its equity affiliates except for the Guadeloupe power plant and the Company's operations in New Zealand. For those entities, all gains and losses from currency translations are included within the line item “Derivatives and foreign currency transaction gains (losses)” within the consolidated statements of operations and comprehensive income (loss). The Euro and New Zealand Dollar are the functional currencies of the Company's operations in Guadeloupe and New Zealand, respectively, and thus the impact from currency translation adjustments in those locations is included as currency translation adjustments in "Accumulated other comprehensive income" in the consolidated statements of equity and in comprehensive income. The accumulated currency translation adjustments amounted to a debit of $1.2 million and a credit of $0.9 million as of December 31, 2021 and 2020, respectively.
Comprehensive income (loss)
Comprehensive income (loss) includes net income or loss plus other comprehensive income (loss), which for the Company consists primarily of changes in unrealized gains or losses in respect of the Company’s share in derivatives instruments of an unconsolidated investment that qualifies as a cash flow hedge, changes in foreign currency translation adjustments, changes in respect of derivative instruments designated as a cash flow hedge and changes in unrealized gains or losses on marketable securities available-for-sale. The changes in foreign currency translation adjustments during the years ended December 31, 2021, 2020 and 2019 were immaterial. The changes in the Company’s share in derivative instruments of unconsolidated investment, gains or losses in respect of derivative instruments designated as a cash flow hedge and changes in unrealized gains or losses on marketable securities are disclosed under Note 6 – Investment in unconsolidated companies, Note 8 - Fair value of financial instruments and Note 3 - Marketable securities, respectively, to the consolidated financial statements.
Power purchase agreements
Substantially all of the Company’s Electricity revenues are recognized pursuant to PPAs in the United States and in various foreign countries, including Kenya, Guatemala, Guadeloupe and Honduras. These PPAs generally provide for the payment of energy payments or both energy and capacity payments through their respective terms which expire in varying periods from 2022 to 2047. Generally, capacity payments are calculated based on the amount of time that the power plants are available to generate electricity. The energy payments are calculated based on the amount of electrical energy delivered at a designated delivery point. The price terms are customary in the industry and include, among others, a fixed price, SRAC (the incremental cost that the power purchaser avoids by not having to generate such electrical energy itself or purchase it from others), and a fixed price with an escalation clause that includes the value for environmental attributes, known as renewable energy credits. Certain of the PPAs provide for bonus payments in the event that the Company is able to exceed certain target levels and potential payments by the Company if it fails to meet minimum target levels. The Company has PPAs that give the power purchaser or its designee a right of first refusal or a right of first offer to acquire the geothermal power plants at fair market value as negotiated between the parties. One of the Company’s subsidiaries in Guatemala sells power at an agreed upon price subject to terms of a “take or pay” PPA.
Pursuant to the terms of certain of the PPAs, the Company may be required to make payments to the relevant power purchaser under certain conditions, such as shortfall in delivery of renewable energy and energy credits, and not meeting certain performance threshold requirements, as defined in the relevant PPA. The amount of payment required is dependent upon the level of shortfall in delivery or performance requirements and is recorded in the period the shortfall occurs. In addition, if the Company does not meet certain minimum performance requirements, the capacity of the power plant may be permanently reduced.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues and cost of revenues
Upon adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) on January 1, 2018, revenues from contracts with customers are recognized in connection with the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Company is required to apply each of the following steps: (1) identify the contract(s) with the customer; (2) identify the performance obligations in the contracts; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
Revenues are primarily related to: (i) sale of electricity from geothermal and recovered energy-based power plants owned and operated by the Company; (ii) geothermal and recovered energy-based power plant equipment engineering, sale, construction and installation, and operating services and (iii) Energy storage services as well as services relating to the engineering, procurement, construction, operation and maintenance of energy storage units.
Electricity segment revenues: 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. The Company assesses whether PPAs entered into, modified, or acquired in business combinations contain a lease element requiring lease accounting. Revenue from such PPAs are accounted for in electricity revenues. In the Electricity segment, revenues for all but five power plants are accounted as operating leases, and therefore equipment related to geothermal and recovered energy generation power plants as described in Note 9 is considered held for leasing. For power plants in the scope of ASC 606, the Company identified electricity as a separate performance obligation. Performance obligations identified were evaluated and determined to be satisfied over time and qualified for the invoicing practical expedient since the invoiced amounts reasonably represents the value to customers of performance obligations fulfilled to date. The transaction price is determined based on the price per actual mega-watt output or available capacity as agreed to in the respective PPA. Customers are generally billed on a monthly basis and payment is typically due within 30 to 60 days after the issuance of the invoice.
Product segment revenues: 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 over time since control is transferred continuously to the Company's customers. The majority of the Company's contracts include a single performance obligation which is essentially the promise to transfer the individual goods or services that are not separately identifiable from other promises in the contracts and therefore deemed as not distinct. Performance obligations are satisfied over-time if the customer receives the benefits as we perform work, if the customer controls the asset as it is being constructed, or if the product being produced for the customer has no alternative use and the Company has a contractual right to payment. In the Company's Product segment, revenues are spread over a period of one to two years and are recognized over time based on the cost incurred to date in ratio to total estimated costs which represents the input method that best depicts the transfer of control over the performance obligation to the customer. Costs include direct material, labor, and indirect costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
In contracts for which the Company determines that control is not transferred continuously to the customer, the Company recognizes revenues at the point in time when the customer obtains control of the asset. Revenues for such contracts are recorded upon delivery and acceptance by the customer. This generally is the case for the sale of spare parts, generators or similar products.
Accounting for product contracts that are satisfied over time includes use of several estimates such as variable consideration related to bonuses and penalties and total estimated cost for completing the contract. The estimated amount of variable consideration will be included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. These estimates are based on historical experience, anticipated performance and the Company's best judgment at the time.
The nature of the Company's product contracts give rise to several modifications or change requests by its customers. Substantially all of the modifications are treated as cumulative catch-ups to revenues since the additional goods are not distinct from those already provided. The Company includes the additional revenues related to the modifications in its transaction price when both parties to the contract approved the modification. As a significant change in one or more of these estimates could affect the profitability of the Company's contracts, the Company reviews and updates its contract-related estimates regularly. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the total loss in the period in which it is identified.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Energy Storage segment revenues: Battery energy storage systems as a service, demand-response and energy management related services revenues are recorded based on energy management of load curtailment capacity delivered or service provided at rates specified under the relevant contract terms. The Company determined that such revenues are in the scope of ASC 606 and identified energy management services as a separate performance obligation. Performance obligations are satisfied once the Company provides verification to the electric power grid operator or utility of its ability to meet the committed capacity, the power curtailment requirements or the ancillary services and thus entitled to cash proceeds. Such verification may be provided by the Company bi-weekly, monthly or under any other frequency as set by the related program and are typically followed by a payment shortly after. Performance obligations identified were evaluated and determined to be satisfied over time and qualified for the invoicing practical expedient since the amounts included in the verification document reasonably represent the value of performance obligations fulfilled to date. The transaction price is determined based on mechanisms specified in the contract with the customer.
Contract assets related to the Company's Product segment reflect revenues recognized and performance obligations satisfied in advance of customer billing. Contract liabilities related to the Company's Product segment reflect customer billing in advance of the satisfaction of performance under the contract. The Company receives payments from customers based on the terms established in the contracts. Total contract assets and contract liabilities as of December 31, 2021 and 2020 are as follows:
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Contract assets (*) | | $ | 9,692 | | | $ | 24,544 | |
Contract liabilities (*) | | $ | (9,248 | ) | | $ | (11,179 | ) |
(*) Contract assets and contract liabilities are presented as "Costs and estimated earnings in excess of billings on uncompleted contracts" and "Billings in excess of costs and estimated earnings on uncompleted contracts", respectively, on the consolidated balance sheets. The contract liabilities balance at the beginning of the year was partially recognized as product revenues during the year ended December 31, 2021 as a result of performance obligations that were partially satisfied.
The following table presents the significant changes in the contract assets and contract liabilities for the years ended December 31, 2021 and 2020:
| | Years Ended December 31, | |
| | 2021 | | | 2020 | |
| | Contract assets | | | Contract liabilities | | | Contract assets | | | Contract liabilities | |
| | (Dollars in thousands) | |
Recognition of contract liabilities as revenue as a result of performance obligations satisfied | | $ | — | | | $ | 3,566 | | | $ | — | | | $ | 5,336 | |
Cash received in advance for which revenues have not yet recognized, net of expenditures made | | | — | | | | (2,146 | ) | | | — | | | | (11,177 | ) |
Reduction of contract assets as a result of rights to consideration becoming unconditional | | | (43,518 | ) | | | — | | | | (145,548 | ) | | | — | |
Contract assets recognized, net of recognized receivables | | | 29,177 | | | | — | | | | 129,144 | | | | — | |
Net change in contract assets and contract liabilities | | $ | (14,341 | ) | | $ | 1,420 | | | $ | (16,404 | ) | | $ | (5,841 | ) |
The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets and contract liabilities on the consolidated balance sheet. In the Company's Products segment, amounts are billed as work progresses in accordance with agreed-upon contractual terms, or upon achievement of contractual milestones. Generally, billing occurs subsequent to the recognition of revenue, resulting in contract assets. However, the Company sometimes receives advances or deposits from its customers before revenue can be recognized, resulting in contract liabilities. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. The timing of billing its customers and receiving advance payments vary from contract to contract. The majority of payments are received no later than the completion of the project and satisfaction of the Company's performance obligation.
On December 31, 2021, the Company had approximately $53.0 million of remaining performance obligations not yet satisfied or partly satisfied related to its Product segment. The Company expects to recognize approximately 100% of this amount as Product revenues during the next 24 months.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following schedule reconciles revenues accounted under lease accounting, and ASC 606, Revenues from Contracts with Customers, to total consolidated revenues for the three years ended December 31, 2021, 2020 and 2019:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands) | |
Electricity revenues accounted under lease accounting | | $ | 502,355 | | | $ | 473,260 | | | $ | 479,059 | |
Electricity, Product and Energy Storage revenues accounted under ASC 606 | | | 160,729 | | | | 232,082 | | | | 266,985 | |
Total consolidated revenues | | $ | 663,084 | | | $ | 705,342 | | | $ | 746,044 | |
Disaggregated revenues from contracts with customers for the years ended December 31, 2021, 2020 and 2019 are disclosed under Note 18 - Business Segments, to the consolidated financial statements.
Allowance for credit losses
The Company performs an analysis of potential credit losses related to its financial instruments that are within the scope of ASU 2018-19, Codification Improvements to Topic 325, Financial Instruments – Credit Losses, primarily cash and cash equivalents, restricted cash and cash equivalents, investment in marketable securities, receivables (excluding those accounted under lease accounting) and costs and estimated earnings in excess of billings on uncompleted contracts, based on class of financing receivables which share the same or similar risk characteristics such as customer type and geographic location, among others. The Company estimates the expected credit losses for each class of financing receivables by applying the related corporate default rate which corresponds to the credit rating of the specific customer or class of financing receivables. For trade receivables, the Company applied this methodology using aging schedules reflecting how long the receivables have been outstanding. The Company has also considered the existence of credit enhancement arrangements that may mitigate the credit risk of its financial receivables in estimating the applicable corporate default rate. While significant uncertainty still exists concerning the magnitude of the impact and duration of the COVID-19 pandemic on the global economy, the Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of credit losses was not significantly impacted.
The following table describes the changes in the allowance for expected credit losses for the years ended December 31, 2021 and 2020 (all related to trade receivables):
| | Years Ended December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Beginning balance of the allowance for expected credit losses | | $ | 597 | | | $ | 755 | |
Change in the provision for expected credit losses for the period | | | (507 | ) | | | (158 | ) |
Ending balance of the allowance for expected credit losses | | $ | 90 | | | $ | 597 | |
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard introduced a number of changes and simplified previous guidance, primarily the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. The standard retained the distinction between finance leases and operating leases and the classification criteria between the two types remains substantially similar. Also, lessor accounting remained largely unchanged from previous guidance. Additionally, the standard defined a lease as a contract, or part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of the identified asset means that the customer has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. The Company adopted this new standard as of January 1, 2019 using the modified retrospective approach and accordingly recognized a cumulative-effect adjustment to the opening balance of retained earnings, which was an immaterial amount, with no restatement of comparative information.
The Company is a lessee in operating lease transactions primarily consisting of land leases for its exploration and development activities. Additionally, the Company is a lessee in finance lease transactions primarily consisting of fleet vehicles and office rentals. As further described under Note 2 - Business Acquisitions to the consolidated financial statements, one of the Company's power plant asset is subject to a sale and leaseback transaction that is accounted as a "failed" sale and leaseback under accounting guidance. Additionally, as further described above under Revenues and cost of revenues, the Company acts as a lessor in PPAs that are accounted under ASC 842, Leases.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the lease standard, for agreements in which the Company is the lessee, the Company applies a unified accounting model by which it recognizes a right-of-use asset ("ROU") and a lease liability at the commencement date of the lease contract for all the leases in which the Company has a right to control identified assets for a specified period of time. The classification of the lease as a finance lease or an operating lease determines the subsequent accounting for the lease arrangement.
Upon the adoption of the new standard the Company, both as a lessee and as a lessor, chose to apply the following permitted practical expedients:
| 1. | Not reassess whether any existing contracts are or contain a lease; |
| 2. | Not reassess the classification of leases that commenced before the effective date (for example, all existing leases that were classified as operating leases in accordance with Topic 840 continued to be classified as operating leases, and all existing leases that were classified as capital leases in accordance with Topic 840 continued to be classified as finance leases); |
| 3. | Exclude initial direct costs from measurement of the ROU asset at the date of initial application; |
| 4. | Applying the practical expedient (for a lessor) to not separate non-lease components accounted for under Topic 606 from lease components and, instead, to account for each separate lease component and the non-lease components associated with that lease as a single component. If the non-lease components are the predominant components, the Company will account for the combined component as a single performance obligation entirely in accordance with Topic 606. Otherwise, the combined component will be accounted as an operating lease entirely in accordance with the new standard. |
| 5. | Applying the practical expedient (for a lessee) regarding the recognition and measurement of short-term leases, for leases for a period of up to 12 months from the commencement date. Instead, the Company continued to recognize the lease payments for those leases in profit or loss on a straight-line basis over the lease term. |
| 6. | Applying the practical expedient (for a lessee) to not assess whether existing or expired land easements that were not previously accounted for as leases under Topic 840 are or contain a lease under Topic 842. |
Since the Company elected to apply the practical expedients above, it applied the lease standard to all contracts entered into before January 1, 2019 and identified as leases in accordance with Topic 840.
The significant accounting policies regarding leases that were applied as from January 1, 2019 following the application of the new standard are as follows:
| 1. | Determining whether an arrangement contains a lease |
On the inception date of the lease, the Company determines whether the arrangement is a lease or contains a lease, while examining if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
| 2. | The Company as a lessee |
At the commencement date, a lease is a finance lease if it meets any one of the criteria below; otherwise the lease is an operating lease:
| • | The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. |
| • | The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. |
| • | The lease term is for the major part of the remaining economic life of the underlying asset. |
| • | The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset. |
| • | The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of lease term. |
| b. | Leased assets and lease liabilities - initial recognition |
Upon initial recognition, the Company recognizes a liability at the present value of the lease payments to be made over the lease term, and concurrently recognizes a ROU asset at the same amount of the liability, adjusted for any prepaid or accrued lease payments, plus initial direct costs incurred in respect of the lease. Since the interest rate implicit in the lease is not readily determinable, the incremental borrowing rate of the Company is used. The subsequent measurement depends on whether the lease is classified as a finance lease or an operating lease.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
c. The lease term
The lease term is the non-cancellable period of the lease plus periods covered by an extension or termination option if it is reasonably certain that the Company will exercise the option.
| d. | Subsequent measurement of operating leases |
After lease commencement, the Company measures the lease liability at the present value of the remaining lease payments using the discount rate determined at lease commencement (as long as the discount rate has not been updated as a result of a reassessment event). The Company subsequently measures the ROU asset at the present value of the remaining lease payments, adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term and any unamortized initial direct costs. Further, the Company recognizes lease expense on a straight-line basis over the lease term.
| e. | Subsequent measurement of finance leases |
After lease commencement, the Company measures the lease liability by increasing the carrying amount to reflect interest on the lease liability and reducing the carrying amount to reflect lease payments made during the period. The Company determines the interest on the lease liability in each period during the lease term as the amount that produces a constant periodic discount rate on the remaining balance of the liability, taking into consideration the reassessment requirements.
After lease commencement, the Company measures the ROU assets at cost less any accumulated amortization and any accumulated impairment losses, taking into consideration the reassessment requirements. The Company amortizes the ROU asset on a straight-line basis, unless another systematic basis better represents the pattern in which the Company expects to consume the ROU asset’s future economic benefits. The ROU asset is amortized over the shorter of the lease term or the useful life of the ROU asset as follows:
| | (in years) | |
Vehicles | | | 4 | - | 5 | |
Building | | | | 15 | | |
The total periodic expense (the sum of interest and amortization expense) of a finance lease is typically higher in the early periods and lower in the later periods.
| f. | Variable lease payments: |
Variable lease payments that depend on an index or a rate
On the commencement date, the lease payments may include variability and depend on an index or a rate (such as the Consumer Price Index or a market interest rate). The Company does not remeasure the lease liability for changes in future lease payments arising from changes in an index or rate unless the lease liability is remeasured for another reason. Therefore, after initial recognition, such variable lease payments are recognized in profit or loss as they are incurred.
Other variable lease payments:
Variable payments that depend on performance or use of the underlying asset are not included in the lease payments. Such variable payments are recognized in profit or loss in the period in which the event or condition that triggers the payment occurs.
| 7. | The Company as a lessor |
At lease commencement, the Company as a lessor classifies leases as either finance or operating leases. Finance leases are further classified as a sales-type lease or as a direct financing lease, however, the Company has no such leases as a lessor.
Under an operating lease, the Company recognizes the lease payment as income over the lease term, generally as earned or on a straight-line basis.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Termination fee
Fees to terminate PPAs are recognized in the period incurred as selling and marketing expenses. No termination fees were incurred during 2021, 2020 and 2019.
Warranty on products sold
The Company generally provides a one to two year warranty against defects in workmanship and materials related to the sale of products for electricity generation. The Company considers the warranty to be an assurance type warranty since the warranty provides the customer the assurance that the product complies with agreed-upon specifications. Estimated future warranty obligations are included in operating expenses in the period in which the related revenue is recognized. Such charges are immaterial for the years ended December 31, 2021, 2020 and 2019.
Research and development
Research and development costs incurred by the Company for the development of technologies related to its existing and new geothermal and recovered energy power plants as well as storage facilities are expensed as incurred.
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 Complex Lattice, Three-based Option Pricing model to calculate the fair value of the stock-based compensation awards.
Tax monetization Transactions
The Company has four tax monetization transactions, Opal Geo, Tungsten, McGinness Hills 3 and Steamboat Hills, which was entered into during the fourth quarter of 2021, as further described under Note 13 – Tax monetization transactions to the consolidated financial statements. The purpose of these transactions is to form tax partnerships, whereby investors provide cash in exchange for equity interests that provide the holder a right to the majority of tax benefits associated with a renewable energy project. The Company accounts for a portion of the proceeds from the transaction as debt under ASC 470. Given that a portion of these transactions is structured as a purchase of an equity interest the Company also classifies a portion as noncontrolling interest consistent with guidance in ASC 810. The portion recorded to noncontrolling interest is initially measured at the fair value of the discounted tax attributes and cash distributions which represents the partner's residual economic interest. The residual proceeds are recognized as the initial carrying value of the debt which is classified as a "Liability associated with the sale of tax benefits". The Company applies the effective interest rate method to the liability associated with the tax monetization transaction component as described by ASC 835 and CON 7. The tax benefits and cash distributions realized by the partner each period are treated as the debt servicing amounts, with the tax benefit amounts giving rise to income attributable to the sale of tax benefits. The deferred transaction costs are capitalized and amortized using the effective interest method.
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 Company’s 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 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 more likely than not expected to be realized. A partial valuation allowance has been established to offset the Company’s U.S. deferred tax assets. 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. Interest and penalties assessed by taxing authorities on an underpayment of income taxes are included as a component of income tax provision in the consolidated statements of operations and comprehensive income.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per share
Basic earnings per share attributable to the Company’s stockholders (“earnings per share”) is computed by dividing net income or loss attributable to the Company’s stockholders by the weighted average number of shares of common stock outstanding for the period. The Company does not have any equity instruments that are dilutive, except for 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:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (In thousands) | |
Weighted average number of shares used in computation of basic earnings per share | | | 56,004 | | | | 51,567 | | | | 50,867 | |
Add: | | | | | | | | | | | | |
Additional shares from the assumed exercise of employee stock options | | | 398 | | | | 370 | | | | 360 | |
Weighted average number of shares used in computation of diluted earnings per share | | | 56,402 | | | | 51,937 | | | | 51,227 | |
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 142.4 thousand, 369.7 thousand, and 360.5 thousand, respectively, for the years ended December 31, 2021, 2020 and 2019.
Redeemable noncontrolling interest
Redeemable noncontrolling interest is currently redeemable and relates to a certain noncontrolling shareholder in a subsidiary having an option to sell its equity interest to the Company. The carrying value of the redeemable noncontrolling interest balance as of December 31, 2021 and 2020 approximates the redemption price of such interests. Changes in the carrying amount of the Company's Redeemable noncontrolling interest were as follows:
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Redeemable noncontrolling interest as of January 1, | | $ | 9,830 | | | $ | 9,250 | |
Redeemable noncontrolling interest in results of operation of a consolidated subsidiary | | | 619 | | | | 1,330 | |
Cash paid to noncontrolling interest | | | (268 | ) | | | (1,779 | ) |
Currency translation adjustments | | | (852 | ) | | | 1,029 | |
Redeemable noncontrolling interest as of December 31, | | $ | 9,329 | | | $ | 9,830 | |
Cash dividends
During the years ended December 31, 2021, 2020 and 2019, the Company’s Board of Directors (the “Board”) declared, approved, and authorized the payment of cash dividends in the aggregate amount of $27.0 million ($0.48 per share), $22.5 million ($0.44 per share), and $22.4 million ($0.44 per share), respectively. Such dividends were paid in the years declared.
Stockholders' equity offering
On November 18, 2020, the Company entered into an underwriting agreement with J.P. Morgan Securities LLC and BofA Securities, Inc., as representatives of the several underwriters listed therein (the “Underwriters”), in connection with a public offering, pursuant to which the Company agreed to issue and sell 4,150,000 shares of common stock, par value $0.001 per share at a public offering price of $74.00 per share. In addition, the Company granted the Underwriters a 30-day option to purchase an additional 622,500 shares of common stock at the public offering price of $74.00 per share which was fully exercised by the Underwriters on November 30, 2020. The total net proceeds from the offering were approximately $339.5 million, after deducting underwriting discounts, commissions and offering expenses.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COVID-19 consideration
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic. Since that time and through the date of this report, the Company has implemented significant measures in order to meet government requirements and preserve the health and safety of its employees, including by working remotely when needed and adopting separate shifts from time to time in its power plants, manufacturing facilities and other locations while at the same time trying to continue operations at close to full capacity in all locations. Since the end of the second quarter of 2021, the Company has experienced an easing of government restrictions in a number of countries, including in Israel, but uncertainty around the impact of COVID-19 continues. With respect to its employees, the Company has not laid-off or furloughed any employees due to COVID-19 and has continued to pay full salaries. In addition, the Company focused efforts on adjusting its operations to mitigate the impact of COVID-19 including managing its global supply chain risks and enhancing its liquidity profile. As most of the Company's electricity revenues are generated under long term contracts, the majority of which are under a fixed energy rate, the impact of COVID-19 on electricity revenues was limited. Nevertheless, the Company experienced a higher rate of curtailments during 2020 from KPLC for its Olkaria complex and continued to experience curtailments during 2021.
In the Product segment, the Company experienced a significant decline in product backlog, which it believes resulted mainly due to the impact of COVID-19 and the unwillingness of potential customers to enter into new commitments at this time. Since the second quarter of 2021, the Company has started to see a limited recovery that has resulted in an increase in backlog.
In the Energy Storage segment, revenues are generated primarily from participating in the energy and ancillary services markets and therefore are directly impacted by the prevailing energy prices in those markets.
While the extent and duration of the economic downturn from the COVID-19 pandemic remains unclear, the Company has considered, among other things, whether the global operational disruptions indicate a change in circumstances that may trigger asset impairments and whether it needs to revisit accounting estimates and projections or its expectations about collectability of receivables. Additionally, the Company has considered the potential impacts on its fair value disclosures and on its internal control over financial reporting and while significant uncertainty still exists concerning the magnitude of the impact and duration of the COVID-19 pandemic on the global economy, the Company has determined that there was no triggering event for an impairment with respect to any of its assets nor has there been an adverse change in the probability related to the collectability of its receivables. The Company continues to assess the potential impact of the global economic situation on its consolidated financial statements.
Puna Power Plant
On May 3, 2018, the Kilauea volcano located in close proximity to the Company's 38 MW Puna geothermal power plant in the Puna district of Hawaii's Big Island erupted following a significant increase in seismic activity in the area. Before it stopped flowing, the lava covered the wellheads of three geothermal wells, monitoring wells and the substation of the Puna complex and an adjacent warehouse that stored a drilling rig that was also consumed by the lava. The insurance policy coverage for property and business interruption is provided by a consortium of insurers some of which denied the full amount of the Company's claim asserting that our insurance policy has coverage limitations. During 2021 and 2020, the Company recognized approximately $15.8 million and $28.6 million, respectively, of business interruption insurance income in the consolidated statements of operations and comprehensive income for those years which was included under Electricity "Cost of revenues" up to the amount covering the related costs and the remainder under "Operating expenses". The Company is still in discussions with insurers related to additional Business Interruption and property damage payments.
The Puna power plant resumed operations in November 2020 and during 2021 operated at a stable level of 25 MW. The Company continues reservoir study and improvement of existing wells to maximize long term performance of the power plant. In 2019, we reached an agreement with HELCO and signed a new PPA that is currently subject to PUC approval. The new PPA extends the current term until 2052 and increases the current contract capacity by 8 MW to 46MW. In addition, the new PPA has a fixed price with no escalation, regardless of changes to fossil fuel pricing, which impacts the majority of our current pricing under the existing PPA. The existing PPA remains in effect with its current terms until the earlier of a) PPA's expiration date at the end of 2027 and b) the new PPA will be in effect.
The Company continues to assess the accounting implications of these events on its assets and liabilities and whether any related assets may be impaired. As of December 31, 2021, the Company assessed that no impairment was required.
February power crisis in Texas
In February 2021, extreme weather conditions in Texas resulted in a significant increase in demand for electricity on the one hand and a decrease in electricity supply in the region on the other hand. On February 15, 2021, the Electricity Reliability Council of Texas (“ERCOT”) issued an Energy Emergency Alert Level 3 ("EEA 3") prompting rotating outages in Texas. This ultimately led to a significant increase in the Responsive Reserve Service (“RRS”) market prices, where the Company operates its Rabbit Hill battery energy storage facility which provides ancillary services and energy optimization to the wholesale markets managed by ERCOT. Due to the electricity supply shortage, ERCOT restricted battery charging in the Rabbit Hill facility from February 16, 2021 to February 19, 2021, resulting in a limited ability of the Rabbit Hill storage facility to provide RRS. As a result, the Company incurred losses of approximately $9.1 million, net of associated revenues, from a hedge transaction in relation to its inability to provide RRS during that period. Starting February 19, 2021, the Rabbit Hill energy storage facility resumed operation at full capacity.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company recorded a provision for approximately $3.0 million for receivables related to imbalance charges from the grid operator in respect of its demand response operation as it estimated it is probable it may be unable to collect such receivables. The provision for uncollectible receivables is included in "General and administrative expenses" in the consolidated statements of operations and comprehensive income for the year ended December 31, 2021.
The Company has filed billing disputes with ERCOT related to some of the imbalance charges and revenue allocated to its Demand Response services and customers, the outcome of which may impact the final amount.
New Accounting Pronouncements
New accounting pronouncements effective in the year ended December 31, 2021
Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The standard is effective for annual periods beginning after December 15, 2020 and interim periods within those fiscal years. The Company adopted ASU 2019-12 on January 1, 2021. The adoption of this update did not have a material impact on the Company's consolidated financial statements.
New accounting pronouncements effective in future periods
Revenue Contracts Acquired in a Business Combination
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"). ASU 2021-08 is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing the following topics: (1) recognition of an acquired contract liability and (2) payment terms and their effect on subsequent revenue recognized by the acquirer. The amendments in ASU 2021-08 require that an entity that is the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 at the acquisition date as if it had originated the contracts. The amendments in ASU 2021-08 are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The amendments in this update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption is permitted. The Company does not anticipate the adoption of ASU 2021-08 to have a material impact on its consolidated financial statements.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 —BUSINESS ACQUISITIONS
Business combination - geothermal assets purchase transaction
On July 13, 2021, the Company closed a transaction with TG Geothermal Portfolio, LLC (a subsidiary of Terra-Gen, LLC) (the "Seller") to acquire two contracted geothermal assets in Nevada with a total net generating capacity of 67.5 MW, a greenfield development asset adjacent to one of the plants, and an underutilized transmission line (the "Terra-Gen Transaction"). The Company paid approximately $171.0 million in cash (excluding working capital adjustment of approximately $10.8 million) for 100% of the equity interests in the entities holding those assets and assumed a financing obligation with a fair value at acquisition date of approximately $258.4 million. The two contracted geothermal assets include the Dixie Valley and Beowawe geothermal power plants which sell power under existing power purchase agreements with Southern California Edison under a long term Power Purchase Agreement ("PPA") expiring in 2038 and with NV Power, Inc. under a PPA expiring in December 2025, respectively.
As a result of the acquisition, the Company expanded its overall generation capacity and expects to improve the profitability of the purchased assets through cost reduction and synergies. The Company accounted for the transaction in accordance with Accounting Standard Codification ("ASC") 805, Business Combinations. Following the transaction, the Company consolidates the Dixie Valley and Beowawe power plants as well as the other geothermal assets included in the transaction in accordance with ASC 810, Consolidation. In 2021, the Company incurred approximately $4.7 million of acquisition-related costs included under "General and administrative expenses" in the consolidated statements of operations and comprehensive income for the year ended December 31, 2021. Accounting guidance provides that the allocation of the purchase price may be modified for up to one year from the date of the acquisition to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date. The primary area of the purchase price allocation that is not yet finalized is related to certain tax matters and the related impact on goodwill.
The following table summarizes the purchase price allocation to the fair value of the assets acquired and liabilities assumed (in millions):
Cash and cash equivalents and restricted cash | | $ | 10.9 | |
Trade receivables and others (1) | | | 8.6 | |
Deferred income taxes | | | 23.6 | |
Property, plant and equipment and construction-in-process | | | 152.0 | |
Intangible assets (2) | | | 191.6 | |
Goodwill (3) | | | 65.4 | |
Total assets acquired | | $ | 452.1 | |
| | | | |
Accounts payable, accrued expenses and others | | $ | 6.6 | |
Financing liability (4) | | | 258.4 | |
Asset retirement obligation | | | 5.3 | |
Total liabilities assumed | | $ | 270.3 | |
| | | | |
Total assets acquired, and liabilities assumed, net | | $ | 181.8 | |
(1) The gross amount of receivables due under the Dixie Valley and Beowawe PPAs is $7.8 million. These receivables were fully collected during the third quarter of 2021.
(2) Intangible assets are related to the long-term electricity PPAs described above and are amortized over the term of those PPAs.
(3) Goodwill is primarily related to the expected synergies and potential cost savings in operations as a result of the purchase transaction. The goodwill is allocated to the Electricity segment and is deductible for tax purposes pending the exercise of the financial lease buy-out option as described below.
(4) Financing liability is related to a sale and leaseback transaction entered into by the Seller in September 2015 under which it sold and leased back the undivided interests in the Dixie Valley power plant asset through June 2038. The lease transaction was accounted for by the Seller as a finance lease due to the Seller's continued involvement and management of the power plant and the existence of an early buy-out option in September 2024, which continues to be applicable to the Company. As per the accounting guidance, the Company retained the Seller's accounting of a "failed" sale and leaseback transaction and accordingly accounted for the liability as a financing liability. This financing liability, as well as the related power plant asset, were measured at their acquisition-date fair value.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period starting from the acquisition date, July 13, 2021, to December 31, 2021, the acquired geothermal power plants contributed Electricity revenues of $26.2 million and earnings of $5.5 million, net of related tax and finance liability interest expense costs of $4.9 million, which were included in the Company’s consolidated statements of operations and comprehensive income for the year ended December 31, 2021.
The following unaudited pro forma summary presents condensed consolidated information of the Company as if the business combination had occurred on January 1, 2020. The pro forma results below include the impact of certain adjustments related to the depreciation of property, plant and equipment, amortization of intangible assets, transaction-related costs incurred as of the acquisition date, and interest expense on related borrowings, and in each case, the related income tax effects, as well as certain other post-acquisition adjustments. This pro forma presentation does not include any impact from transaction synergies.
| | Pro forma for the Year Ended December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in millions) | |
Electricity revenues | | $ | 613.3 | | | $ | 596.6 | |
Total revenues | | $ | 690.6 | | | $ | 760.6 | |
Net income attributable to the Company's stockholders | | $ | 69.6 | | | $ | 84.3 | |
Energy storage assets portfolio purchase transaction
On July 20, 2020, the Company completed the acquisition of 100% of the 20MW/80MWh Pomona Energy Storage ("Pomona") facility in California from Alta Gas Power Holdings (U.S.) Inc. for a total consideration of $43.4 million. The Pomona facility has been in commercial operation since December 2016 under a 10-year energy storage resource agreement with Southern California Edison Company. The Pomona facility is the Company's first battery storage asset in California. The purchase increased the Company's operating portfolio and added to its other battery storage assets located in New Jersey, New England and Texas. The Company accounted for the transaction in accordance with ASC 805, Business Combinations and following the transaction close date, consolidated the results of Pomona in accordance with ASC 810, Consolidation in its consolidated financial statements.
The following table summarizes the purchase price allocation to the fair value of the assets acquired and liabilities assumed (in millions):
Trade and other receivables | | $ | 1.0 | |
Property, plant and equipment, net | | 20.1 | |
Intangible assets (1) | | 20.4 | |
Goodwill (2) | | | 4.1 | |
Total assets acquired | | $ | 45.6 | |
| | | | |
Liabilities assumed | | $ | (2.2 | ) |
| | | | |
Total assets acquired and liabilities assumed, net | | $ | 43.4 | |
(1) Intangible assets of $18.0 million are related to a long-term energy storage resource adequacy agreement with Southern California Edison and are depreciated over a period of approximately 6.5 years. The remaining $2.4 million is related to certain other contract rights.
(2) Goodwill is primarily related to certain potential future economic benefits arising from assets acquired. Goodwill is allocated to the Energy Storage segment and is deductible for tax purposes.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts of revenues and earnings related to Pomona that are included in the Company's consolidated statements of operations and comprehensive income for the year ended December 31, 2021 are $9.4 million and $2.9 million respectively. The amounts of revenues and earnings related to Pomona that are included in the Company's consolidated statements of operations and comprehensive income for the year ended December 31, 2020 since the acquisition date are $4.8 million and $1.2 million respectively. Unaudited pro forma information is not included as the Company deemed the transaction to not qualify as a significant business combination.
NOTE 3 — MARKETABLE SECURITIES
Marketable securities are presented at fair value and include investments in debt securities classified as available for sale. All marketable securities have maturities of less than a year. Investment in marketable securities is comprised of the following:
|
|
December 31, 2021 |
|
|
|
Amortized cost |
|
|
Gross unrealized gains |
|
|
Gross unrealized losses |
|
|
Fair value |
|
|
|
(Dollars in thousands) |
|
Debt security type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
32,302 |
|
|
$ |
— |
|
|
$ |
(36 |
) |
|
$ |
32,529 |
|
Commercial paper |
|
|
8,891 |
|
|
|
— |
|
|
|
— |
|
|
|
8,891 |
|
Money market funds |
|
|
3,686 |
|
|
|
— |
|
|
|
— |
|
|
|
3,686 |
|
Foreign issuers |
|
|
1,920 |
|
|
|
— |
|
|
|
(4 |
) |
|
|
1,923 |
|
Total debt securities available for sale |
|
$ |
46,799 |
|
|
$ |
— |
|
|
$ |
(40 |
) |
|
$ |
47,029 |
|
As of December 31, 2021, approximately $3.7 million of debt securities were classified under "Cash and cash equivalents" in the consolidated balance sheets as such securities met all applicable classification criteria.
The following table summarizes the fair value and gross unrealized losses of debt securities with unrealized losses aggregated by security type and length of time that the fair value had been below amortized cost, on an individual security basis:
|
|
December 31, 2021 |
|
|
|
Less than 12 months |
|
|
Greater than 12 months |
|
|
|
Fair value |
|
|
Gross unrealized loss |
|
|
Fair value |
|
|
Gross unrealized loss |
|
|
|
(Dollars in thousands) |
|
Debt security type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
32,529 |
|
|
$ |
(36 |
) |
|
$ |
— |
|
|
$ |
— |
|
Commercial paper |
|
|
8,891 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Money market funds |
|
|
3,686 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Foreign issuers |
|
|
1,923 |
|
|
|
(4 |
) |
|
|
— |
|
|
|
— |
|
Total debt securities available for sale |
|
$ |
47,029 |
|
|
$ |
(40 |
) |
|
$ |
— |
|
|
$ |
— |
|
There were no sales of investments in debt securities during the year ended December 31, 2021 and 2020.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 — INVENTORIES
Inventories consist of the following:
| | December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Raw materials and purchased parts for assembly | | $ | 11,539 | | | $ | 14,835 | |
Self-manufactured assembly parts and finished products | | | 16,906 | | | | 20,486 | |
Total | | $ | 28,445 | | | $ | 35,321 | |
NOTE 5 — COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Cost and estimated earnings on uncompleted contracts consist of the following:
| | December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Costs and estimated earnings incurred on uncompleted contracts | | $ | 103,486 | | | $ | 227,591 | |
Less billings to date | | | (103,042 | ) | | | (214,226 | ) |
Total | | $ | 444 | | | $ | 13,365 | |
These amounts are included in the consolidated balance sheets under the following captions:
| | December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Costs and estimated earnings in excess of billings on uncompleted contracts | | $ | 9,692 | | | $ | 24,544 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | | | (9,248 | ) | | | (11,179 | ) |
Total | | $ | 444 | | | $ | 13,365 | |
The completion costs of the Company’s 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 6 — INVESTMENT IN UNCONSOLIDATED COMPANIES
Investment in unconsolidated companies consists of the following:
| | December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Investment in Sarulla | | $ | 68,968 | | | $ | 67,451 | |
Investment in Ijen | | | 36,918 | | | | 30,766 | |
Total investment in unconsolidated companies | | $ | 105,886 | | | $ | 98,217 | |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Sarulla Complex
The Company holds a 12.75% equity interest in a consortium that developed the 330 MW Sarulla geothermal power plant project in Tapanuli Utara, North Sumatra, Indonesia. The Sarulla project is comprised of three separately constructed 110 MW units, the most recent of which, NIL 2, was completed in April 2018. The Sarulla project is owned and operated by the consortium members under the framework of a joint operating contract and energy sales contract that were both executed on April 4, 2013. Under the joint operating contract, PT Pertamina Geothermal Energy, the concession holder for the project, provided the consortium with the right to use the geothermal field, and under the energy sales contract, PT PLN, the state electric utility, is the off-taker at the Sarulla complex for a period of 30 years. The Company has a significant influence over the Sarulla project through representation on Sarulla's board of directors and thus accounts for its investment in the Sarulla geothermal project under the equity method prescribed by ASC 323 - Investments - Equity Method and Joint Ventures.
During the years ended December 31, 2021, 2020 and 2019, the Company made no additional cash equity investment in the Sarulla complex. As of December 31, 2021, the total cash investment in the Sarulla complex since its inception is $62.0 million.
The Sarulla consortium entered into interest rate swap agreements with various international banks, effective as of June 4, 2014, and accounted for the interest rate swap as a cash flow hedge upon which changes in the fair value of the hedging instrument, relative to the effective portion, are recorded in other comprehensive income. The Company’s share of such gains (losses) recorded in other comprehensive income (loss) are as follows:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Change, net of deferred tax, in unrealized gains (losses) in respect of the Company’s share in derivative instruments of unconsolidated investment | | $ | 3,892 | | | $ | (3,975 | ) |
The related accumulated loss recorded by the Company under accumulated other comprehensive income (loss) as of December 31, 2021 and 2020 was $6.4 million and $10.3 million, respectively.
The Sarulla power plant complex has been experiencing a reduction in generation primarily due to wellfield issues at one of its power plants, as well as equipment failures which resulted in a decrease in profitability. To address these issues, the project management developed a Long-Term Recovery Plan ("LTRP") that includes drilling of additional wells and various equipment modifications. The LTRP is expected to be implemented starting in 2022, pending approval by the lenders. Additional initiatives are also undergoing in an effort to strengthen the Sarulla project's financial position, including potential tariff changes. Additionally, in March and September 2021, Sarulla failed to meet its debt service coverage ratio under the credit facility agreement due to lower performance of the power plants. The Company determined that as of December 31, 2021, the aforementioned events and circumstances are still temporary and expected to be remediated by the LTRP and additional initiatives once finalized and executed. As the Company determined that the current situation and circumstances related to its equity method investment in Sarulla are temporary, no impairment testing was required. However, failure to execute the LTRP and/or the other remedial initiatives, altogether or separately, may result in a triggering event that would potentially require an impairment testing.
The Ijen Project
On July 2, 2019, the Company agreed to acquire 49% in the Ijen geothermal project company from a subsidiary of Medco Power (“Medco”), which is a party to a Power Purchase Agreement and holds a geothermal license to develop the Ijen project in East Java in Indonesia for a total consideration of approximately $2.7 million. As part of the transaction, the Company committed to make additional funding for the exploration and development of the project, subject to specific conditions and during 2021 and 2020, the Company made additional cash investments of such of approximately $6.4 million and $21.0 million, respectively, for a total of $38.1 million . Medco retains 51% ownership in the project company and the Company and Medco are developing the project jointly. The Company accounted for its investment in the Ijen geothermal project company under the equity method prescribed by ASC 323 - Investments - Equity Method and Joint Ventures.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 — VARIABLE INTEREST ENTITIES
The Company’s overall methodology for evaluating transactions and relationships under the variable interest entity (“VIE”) accounting and disclosure 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 Company’s 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 |
| • | 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 entity’s 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 Company’s 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 plant’s electrical output over a significant portion of its estimated useful life. Some 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 for each. The Company has aggregated its consolidated VIEs into the following categories: (i) wholly owned subsidiaries with project debt; and (ii) wholly owned subsidiaries with PPAs.
The tables below detail the assets and liabilities (excluding intercompany balances which are eliminated in consolidation) for the Company’s VIEs, combined by VIE classifications, that were included in the consolidated balance sheets as of December 31, 2021 and 2020:
| | December 31, 2021 | |
| | Project Debt | | | PPAs | |
| | (Dollars in thousands) | |
Assets: | | | | | | | | |
Restricted cash and cash equivalents | | $ | 101,364 | | | $ | — | |
Other current assets | | | 122,944 | | | | 31,781 | |
Property, plant and equipment, net | | | 1,300,941 | | | | 858,755 | |
Construction-in-process | | | 96,764 | | | | 270,160 | |
Other long-term assets | | | 326,686 | | | | 55,441 | |
Total assets | | $ | 1,948,699 | | | $ | 1,216,137 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 34,155 | | | $ | 10,004 | |
Long-term debt | | | 672,804 | | | | 2,444 | |
Other long-term liabilities | | | 419,085 | | | | 49,919 | |
Total liabilities | | $ | 1,126,044 | | | $ | 62,367 | |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | December 31, 2020 | |
| | Project Debt | | | PPAs | |
| | (Dollars in thousands) | |
Assets: | | | | | | | | |
Restricted cash and cash equivalents | | $ | 86,581 | | | $ | — | |
Other current assets | | | 133,017 | | | | 30,917 | |
Property, plant and equipment, net | | | 1,208,165 | | | | 770,055 | |
Construction-in-process | | | 27,440 | | | | 171,372 | |
Other long-term assets | | | 156,000 | | | | 60,143 | |
Total assets | | $ | 1,611,203 | | | $ | 1,032,487 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 21,958 | | | $ | 15,362 | |
Long-term debt | | | 730,177 | | | | — | |
Other long-term liabilities | | | 143,985 | | | | 39,486 | |
Total liabilities | | $ | 896,120 | | | $ | 54,848 | |
NOTE 8— FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value measurement guidance clarifies that fair value represents the amount that would be received upon selling an asset or paid upon transferring a liability in an orderly transaction between market participants at the measurement date. 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 observable inputs that reflect quoted prices for identical assets or liabilities in active markets;
Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly;
Level 3 — unobservable inputs.
The following table sets forth certain fair value information at December 31, 2021 and 2020 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.
| | | | | | December 31, 2021 | |
| | | | | | Fair Value | |
| | Carrying Value at December 31, 2021 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | (Dollars in thousands) | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | | | | | |
Cash equivalents (including restricted cash accounts) | | $ | 31,675 | | | $ | 31,675 | | | $ | 31,675 | | | $ | — | | | $ | — | |
Marketable securities (including cash equivalents) | | | 47,029 | | | | 47,029 | | | | 47,029 | | | | — | | | | — | |
Derivatives: | | | | | | | | | | | | | | | | | | | | |
Cross currency swap (3) | | | 1,461 | | | | 1,461 | | | | — | | | | 1,461 | | | | — | |
Currency forward contracts (2) | | | 813 | | | | 813 | | | | — | | | | 813 | | | | — | |
Long-term assets: | | | | | | | | | | | | | | | | | | | | |
Cross currency swap (3) | | | 37,883 | | | | 37,883 | | | | — | | | | 37,883 | | | | — | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Long-term liabilities: | | | | | | | | | | | | | | | | | | | | |
Contingent payables (1) | | | (2,425 | ) | | | (2,425 | ) | | | — | | | | — | | | | (2,425 | ) |
| | $ | 116,436 | | | $ | 116,436 | | | $ | 78,704 | | | $ | 40,157 | | | $ | (2,425 | ) |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | December 31, 2020 | |
| | | | | | Fair Value | |
| | Carrying Value at December 31, 2020 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | (Dollars in thousands) | |
Assets | | | | | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | | | | | |
Cash equivalents (including restricted cash accounts) | | $ | 28,653 | | | $ | 28,653 | | | $ | 28,653 | | | $ | — | | | $ | — | |
Derivatives: | | | | | | | | | | | | | | | | | | | | |
Contingent receivable (1) | | | 111 | | | | 111 | | | | — | | | | — | | | | 111 | |
Currency forward contracts (2) | | | 1,554 | | | | 1,554 | | | | — | | | | 1,554 | | | | — | |
Long-term assets: | | | | | | | | | | | | | | | | | | | | |
Cross currency swap (3) | | | 27,829 | | | | 27,829 | | | | — | | | | 27,829 | | | | — | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | |
Derivatives: | | | | | | | | | | | | | | | | | | | | |
Contingent payables (1) | | | (549 | ) | | | (549 | ) | | | — | | | | — | | | | (549 | ) |
Cross currency swap (3) | | | (2,283 | ) | | | (2,283 | ) | | | — | | | | (2,283 | ) | | | — | |
Long-term liabilities: | | | | | | | | | | | | | | | | | | | | |
Contingent payables (1) | | | (2,630 | ) | | | (2,630 | ) | | | — | | | | — | | | | (2,630 | ) |
| | $ | 52,685 | | | $ | 52,685 | | | $ | 28,653 | | | $ | 27,100 | | | $ | (3,068 | ) |
(1) These amounts relate to contingent receivables and payables and warrants pertaining to the Guadeloupe power plant purchase transaction, valued primarily based on unobservable inputs and are included within "Prepaid expenses and other", "Accounts payable and accrued expenses" and "Other long-term liabilities" on December 31, 2021 and 2020 in the consolidated balance sheets with the corresponding gain or loss being recognized within "Derivatives and foreign currency transaction gains (losses)" in the consolidated statement of operations and comprehensive income.
(2) These amounts relate to currency forward contracts valued primarily based on observable inputs, including forward and spot prices for currencies, net of contracted rates and then multiplied by notional amounts, and are included within "Receivables, other" on December 31, 2021 and December 31, 2020, in the consolidated balance sheet with the corresponding gain or loss being recognized within "Derivatives and foreign currency transaction gains (losses)" in the consolidated statement of operations and comprehensive income.
(3) These amounts relate to cross currency swap contracts valued primarily based on the present value of the Cross Currency Swap future settlement prices for USD and NIS zero yield curves and the applicable exchange rate as of December 31, 2021. These amounts are included within “Prepaid expenses and other” and “Deposits and other” on December 31, 2021 and within "Accounts payable and accrued expenses" and “Deposits and other” on December 31, 2020 in the consolidated balance sheets. There are no cash collateral deposits on December 31, 2021.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amounts of gain (loss) recognized in the consolidated statements of operations and comprehensive income (loss):
Derivatives not designated as hedging instruments | | Location of recognized gain (loss) | | Amount of recognized gain (loss) | |
| | | | 2021 | | | 2020 | | | 2019 | |
| | | | (Dollars in thousands) | |
Swap transaction on RRS prices (1) | | Derivative and foreign currency transaction gains (losses) | | $ | (14,540 | ) | | $ | — | | | $ | — | |
Currency forward contracts (1) | | Derivative and foreign currency transaction gains (losses) | | | 1,368 | | | | 5,175 | | | | 2,556 | |
| | | | $ | (13,172 | ) | | $ | 5,175 | | | $ | 2,556 | |
| | | | | | | | | | | | | | |
Derivatives designated as cash flow hedging instruments | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Cross currency swap (2) | | Derivative and foreign currency transaction gains (losses) | | $ | 10,501 | | | $ | 21,187 | | | $ | — | |
(1) The foregoing currency forward and price swap transactions were not designated as hedge transactions and were marked to market with the corresponding gains or losses recognized within “Derivatives and foreign currency transaction gains (losses)” in the consolidated statements of operations and comprehensive income. The price swap transaction was related to a hedging agreement with a third party that was effective January 1, 2021 under which the Company fixed the price per MWh on a portion of RRS provided by its Rabbit Hill storage facility, as described under Note 1 to the consolidated financial statements. The price swap transaction was terminated effective April 1, 2021.
(2) The foregoing cross currency swap transactions were designated as a cash flow hedge as further described under Note 1 to the consolidated financial statements. The changes in the cross currency swap fair value are initially recorded in "Other comprehensive income (loss)" and a corresponding amount is reclassified out of "Accumulated other comprehensive income (loss)" to "Derivatives and foreign currency transaction gains (losses)" to offset the remeasurement of the underlying hedged transaction which also impacts the same line item in the consolidated statements of operations and comprehensive income.
There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 during the year ended December 31, 2021.
The following table presents the effect of derivative instruments designated as cash flow hedges on the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2021 and 2020 :
| | Year Ended December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Cross currency swap cash flow hedge: | | | | | | | | |
Balance in Other comprehensive income (loss) beginning of period | | $ | 3,366 | | | $ | — | |
Gain or (loss) recognized in Other comprehensive income (loss) (1) | | | 12,880 | | | | 24,533 | |
Amount reclassified from Other comprehensive income (loss) into earnings | | | (10,501 | ) | | | (21,187 | ) |
Balance in Other comprehensive income (loss) end of period | | $ | 5,745 | | | $ | 3,366 | |
(1) The amount of gain or (loss) recognized in Other comprehensive income (loss) for the years ended December 31, 2021 and 2020 is net of tax of $0.8 million and $1.1 million, respectively.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated net amount of existing gain (loss) that is reported in "Accumulated other comprehensive income (loss)" as of December 31, 2021 that is expected to be reclassified into earnings within the next 12 months is immaterial. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flow is from the transaction commencement date through June 2031.
The fair value of the Company’s long-term debt approximates its fair value, except for the following:
| | Fair Value | | | Carrying Amount | |
| | 2021 | | | 2020 | | | 2021 | | | 2020 | |
| | (Dollars in millions) | | | (Dollars in millions) | |
HSBC Loan | | $ | 50.4 | | | $ | — | | | $ | 50.0 | | | $ | — | |
Hapoalim Loan | | | 117.8 | | | | — | | | | 116.1 | | | | — | |
Discount Loan | | | 100.2 | | | | — | | | | 100.0 | | | | — | |
Financing Liability - Dixie Valley | | | 248.4 | | | | — | | | | 252.9 | | | | — | |
Olkaria III Loan - DFC | | | 166.5 | | | | 192.5 | | | | 156.7 | | | | 174.7 | |
Olkaria III plant 4 Loan - DEG 2 | | | 34.1 | | | | 40.4 | | | | 32.5 | | | | 37.5 | |
Olkaria III plant 1 Loan - DEG 3 | | | 30.1 | | | | 35.8 | | | | 28.4 | | | | 32.8 | |
Platanares Loan - DFC | | | 98.2 | | | | 112.1 | | | | 88.1 | | | | 96.3 | |
Amatitlan Loan | | 19.8 | | | | 23.5 | | | | 19.3 | | | | 22.8 | |
OFC 2 LLC Senior Secured Notes ("OFC 2") | | | 183.3 | | | | 207.9 | | | | 173.3 | | | | 188.2 | |
Don A. Campbell 1 Senior Secured Notes ("DAC 1") | | | 69.8 | | | | 78.5 | | | | 67.9 | | | | 73.1 | |
USG Prudential - NV | | | 28.9 | | | | 31.8 | | | | 26.3 | | | | 27.6 | |
USG Prudential - ID | | | 17.3 | | | | 18.3 | | | | 17.3 | | | | 18.4 | |
USG DOE | | | 39.9 | | | | 45.1 | | | | 35.5 | | | | 38.2 | |
Senior Unsecured Bonds | | | 578.9 | | | | 585.1 | | | | 539.6 | | | | 529.1 | |
Senior Unsecured Loan | | | 204.3 | | | | 222.2 | | | | 191.6 | | | | 200.0 | |
Plumstriker | | | 14.8 | | | | 18.1 | | | | 14.7 | | | | 18.1 | |
Other long-term debt | | | 13.3 | | | | 17.4 | | | | 13.6 | | | | 17.6 | |
The fair value of the long-term debt is determined by a valuation model, which is based on a conventional discounted cash flow methodology and utilizes assumptions of current borrowing rates.
As disclosed above under Note 1 to the consolidated financial statements, the outbreak of the COVID-19 pandemic has resulted in a global economic downturn and market volatility that may have an impact on the estimated fair value of the Company's long-term debt and financing liability. Additionally, other components of the Company's borrowing rates may increase as the global economic situation evolves which may have a direct impact on the fair value of the Company's long-term debt.
The carrying value of revolving lines of credit and deposits approximates fair value.
The following table presents the fair value of financial instruments as of December 31, 2021:
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | (Dollars in millions) | |
HSBC Loan | | $ | — | | | $ | — | | | $ | 50.4 | | | $ | 50.4 | |
Hapoalim Loan | | | — | | | | — | | | | 117.8 | | | | 117.8 | |
Discount Loan | | | — | | | | — | | | | 100.2 | | | | 100.2 | |
Financing Liability - Dixie Valley | | | — | | | | — | | | | 248.4 | | | | 248.4 | |
Olkaria III - DFC | | | — | | | | — | | | | 166.5 | | | | 166.5 | |
Olkaria III plant 4 - DEG 2 | | | — | | | | — | | | | 34.1 | | | | 34.1 | |
Olkaria III plant 1 - DEG 3 | | | — | | | | — | | | | 30.1 | | | | 30.1 | |
Platanares Loan - DFC | | | — | | | | — | | | | 98.2 | | | | 98.2 | |
Amatitlan Loan | | | — | | | | 19.8 | | | | — | | | | 19.8 | |
OFC 2 Senior Secured Notes | | | — | | | | — | | | | 183.3 | | | | 183.3 | |
DAC 1 Senior Secured Notes | | | — | | | | — | | | | 69.8 | | | | 69.8 | |
USG Prudential - NV | | | — | | | | — | | | | 28.9 | | | | 28.9 | |
USG Prudential - ID | | | — | | | | — | | | | 17.3 | | | | 17.3 | |
USG DOE | | | — | | | | — | | | | 39.9 | | | | 39.9 | |
Senior Unsecured Bonds | | | — | | | | — | | | | 578.9 | | | | 578.9 | |
Senior Unsecured Loan | | | — | | | | — | | | | 204.3 | | | | 204.3 | |
Plumstriker | | | — | | | | 14.8 | | | | — | | | | 14.8 | |
Other long-term debt | | | — | | | | — | | | | 13.3 | | | | 13.3 | |
Deposits | | | 17.1 | | | | — | | | | — | | | | 17.1 | |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair value of financial instruments as of December 31, 2020:
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | (Dollars in millions) | |
Olkaria III Loan - DFC | | $ | — | | | $ | — | | | $ | 192.5 | | | $ | 192.5 | |
Olkaria III plant 4 - DEG 2 | | | — | | | | — | | | | 40.4 | | | | 40.4 | |
Olkaria III plant 1 - DEG 3 | | | — | | | | — | | | | 35.8 | | | | 35.8 | |
Platanares Loan - DFC | | | — | | | | — | | | | 112.1 | | | | 112.1 | |
Amatitlan Loan | | | — | | | | 23.5 | | | | — | | | | 23.5 | |
Senior Secured Notes: | | | | | | | | | | | | | | | | |
OFC 2 Senior Secured Notes | | | — | | | | — | | | | 207.9 | | | | 207.9 | |
DAC 1 Senior Secured Notes | | | — | | | | — | | | | 78.5 | | | | 78.5 | |
USG Prudential - NV | | | — | | | | — | | | | 31.8 | | | | 31.8 | |
USG Prudential - ID | | | — | | | | — | | | | 18.3 | | | | 18.3 | |
USG DOE | | | — | | | | — | | | | 45.1 | | | | 45.1 | |
Senior Unsecured Bonds | | | — | | | | — | | | | 585.1 | | | | 585.1 | |
Senior Unsecured Loan | | | — | | | | — | | | | 222.2 | | | | 222.2 | |
Plumstriker | | | — | | | | 18.1 | | | | — | | | | 18.1 | |
Other long-term debt | | | — | | | | — | | | | 17.4 | | | | 17.4 | |
Deposits | | | 14.8 | | | | — | | | | — | | | | 14.8 | |
NOTE 9 — PROPERTY, PLANT AND EQUIPMENT AND CONSTRUCTION-IN-PROCESS
Property, plant and equipment
Property, plant and equipment, net, consist of the following:
| | December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Land owned by the Company where the geothermal resource is located | | $ | 40,545 | | | $ | 40,157 | |
Leasehold improvements | | | 9,105 | | | | 8,477 | |
Machinery and equipment | | | 302,367 | | | | 271,981 | |
Land, buildings and office equipment | | | 48,275 | | | | 43,555 | |
Vehicles | | | 10,724 | | | | 8,960 | |
Energy storage equipment | | | 79,805 | | | | 63,562 | |
Geothermal and recovered energy generation power plants, including geothermal wells and exploration and resource development costs: | | | | | | | | |
United States of America, net of cash grants | | | 2,511,027 | | | | 2,296,414 | |
Foreign countries | | | 800,000 | | | | 732,537 | |
Asset retirement cost | | | 41,157 | | | | 28,946 | |
| | | 3,843,005 | | | | 3,494,589 | |
Less accumulated depreciation | | | (1,548,032 | ) | | | (1,395,543 | ) |
| | | | | | | | |
Property, plant and equipment, net | | $ | 2,294,973 | | | $ | 2,099,046 | |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense for the years ended December 31, 2021, 2020 and 2019 amounted to $153.0 million, $133.5 million and $126.7 million, respectively. Depreciation expense for the years ended December 31, 2021, 2020, and 2019 is net of the impact of the cash grant in the amount of $7.4 million, $7.3 million and $7.3 million, 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 $2,502.2 million and $2,081.6 million as of December 31, 2021 and 2020, respectively. These amounts as of December 31, 2021 and 2020 are net of cash grants in the amount of $151.9 million and $155.0 million, respectively.
Foreign Operations
The net book value of property, plant and equipment, including construction-in-process, located outside of the United States was approximately $514.3 million and $496.8 million as of December 31, 2021 and 2020, 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 $297.4 million and $289.3 million as of December 31, 2021 and 2020, respectively. The Company sells the electricity produced by the power plants to Kenya Power and Lighting Co. Ltd. (“KPLC”) under a 20-year PPA ending between 2033 and 2036.
The Company, through its wholly owned subsidiary, Orzunil I de Electricidad, Limitada (Orzunil), owns a 97% interest in a geothermal power plant in Guatemala. The net book value of the assets related to the power plant was $17.2 million and $10.1 million at December 31, 2021 and 2020, respectively. The Company sells the electricity produced by the power plants to INDE, a Guatemalan power company under a PPA ending in 2034.
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 $39.8 million and $42.0 million at December 31, 2021 and 2020, respectively.
The Company, through its wholly owned subsidiary, GeoPlatanares, signed a BOT contract for the Platanares geothermal project in Honduras with ELCOSA, a privately owned Honduran energy company, for 15 years from the commercial operation date. Platanares sells the electricity produced by the power plants to ENEE, the national utility of Honduras under a 30-year PPA which expires in 2047. The net book value of the assets related to the power plant was $75.4 million and $97.2 million at December 31, 2021 and 2020, respectively.
The Company, through its subsidiary, Guadeloupe Bouillante ("GB"), owns a power plant in Guadeloupe. The net book value of the assets related to the power plant was $39.4 million and $32.0 million at December 31, 2021 and 2020, respectively. GB sells the electricity produced by the power plants to EDF, the French electric utility, under a 15-year PPA.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Construction-in-process
Construction-in-process consists of the following:
| | December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Projects under exploration and development: | | | | | | | | |
Up-front bonus costs | | $ | 5,335 | | | $ | 5,347 | |
Exploration and development costs | | | 44,664 | | | | 45,478 | |
Interest capitalized | | | 703 | | | | 703 | |
| | | 50,702 | | | | 51,528 | |
Projects under construction: | | | | | | | | |
Up-front bonus costs | | | 39,156 | | | | 39,144 | |
Drilling and construction costs | | | 611,553 | | | | 379,117 | |
Interest capitalized | | | 20,072 | | | | 9,526 | |
| | | 670,781 | | | | 427,787 | |
Total | | $ | 721,483 | | | $ | 479,315 | |
| | Projects under exploration and development | |
| | Up-front Bonus Costs | | | Exploration and Development Costs | | | Interest Capitalized | | | Total | |
| | (Dollars in thousands) | |
Balance at December 31, 2018 | | $ | 17,018 | | | $ | 53,237 | | | $ | 703 | | | $ | 70,958 | |
Cost incurred during the year | | | — | | | | 17,215 | | | | — | | | | 17,215 | |
Transfer of projects under exploration and development to projects under construction | | | — | | | | (3,536 | ) | | | — | | | | (3,536 | ) |
Balance at December 31, 2019 | | | 17,018 | | | | 66,916 | | | | 703 | | | | 84,637 | |
Cost incurred during the year | | | — | | | | 5,832 | | | | — | | | | 5,832 | |
Transfer of projects under exploration and development to projects under construction | | | (11,671 | ) | | | (27,270 | ) | | | — | | | | (38,941 | ) |
Balance at December 31, 2020 | | | 5,347 | | | | 45,478 | | | | 703 | | | | 51,528 | |
Cost incurred during the year | | | — | | | | 2,680 | | | | — | | | | 2,680 | |
Transfer of projects under exploration and development to projects under construction | | | (12 | ) | | | (3,494 | ) | | | — | | | | (3,506 | ) |
Balance at December 31, 2021 | | $ | 5,335 | | | $ | 44,664 | | | $ | 703 | | | $ | 50,702 | |
| | Projects under construction | |
| | Up-front Bonus Costs | | | Drilling and Construction Costs | | | Interest Capitalized | | | Total | |
| | (Dollars in thousands) | |
Balance at December 31, 2018 | | $ | 27,473 | | | $ | 160,398 | | | $ | 2,861 | | | $ | 190,732 | |
Cost incurred during the year | | | — | | | | 264,137 | | | | 3,100 | | | | 267,237 | |
Transfer of projects under exploration and development to projects under construction | | | — | | | | 3,536 | | | | — | | | | 3,536 | |
Insurance recoveries | | | — | | | | (35,435 | ) | | | — | | | | (35,435 | ) |
Transfer of completed projects to property, plant and equipment | | | — | | | | (134,152 | ) | | | — | | | | (134,152 | ) |
Balance at December 31, 2019 | | | 27,473 | | | | 258,484 | | | | 5,961 | | | | 291,918 | |
Cost incurred during the year | | | — | | | | 298,215 | | | | 3,565 | | | | 301,780 | |
Transfer of projects under exploration and development to projects under construction | | | 11,671 | | | | 27,270 | | | | — | | | | 38,941 | |
Transfer of completed projects to property, plant and equipment | | | — | | | | (204,852 | ) | | | — | | | | (204,852 | ) |
Balance at December 31, 2020 | | | 39,144 | | | | 379,117 | | | | 9,526 | | | | 427,787 | |
Cost incurred during the year | | | — | | | | 403,296 | | | | 10,546 | | | | 413,842 | |
Transfer of projects under exploration and development to projects under construction | | | 12 | | | | 3,494 | | | | — | | | | 3,506 | |
Transfer of completed projects to property, plant and equipment | | | — | | | | (174,354 | ) | | | — | | | | (174,354 | ) |
Balance at December 31, 2021 | | $ | 39,156 | | | $ | 611,553 | | | $ | 20,072 | | | $ | 670,781 | |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — INTANGIBLE ASSETS AND GOODWILL
Intangible assets amounting to $363.3 million and $194.4 million consist mainly of the Company’s PPAs acquired in business combinations and its energy storage activities, net of accumulated amortization of $110.1 million and $89.4 million as of December 31, 2021 and 2020, respectively.
The following table summarizes the information related to the Company's intangible assets as of December 31, 2021 and 2020:
| | December 31, 2021 | | | December 31, 2020 | |
| | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | |
| | (Dollars in thousands) | | | (Dollars in thousands) | |
Amortized intangible assets | | | | | | | | | | | | | | | | |
Electricity segment | | $ | 417,479 | | | $ | (96,250 | ) | | $ | 227,811 | | | $ | (80,622 | ) |
Storage segment | | | 55,973 | | | | (13,888 | ) | | | 55,973 | | | | (8,741 | ) |
Total | | $ | 473,452 | | | $ | (110,138 | ) | | $ | 283,784 | | | $ | (89,363 | ) |
Amortization expense for the years ended December 31, 2021, 2020 and 2019 amounted to $21.7 million, $14.4 million and $13.3 million, respectively.
Additions to intangible assets for the years ended December 31, 2021, 2020 and 2019, amounted to $192.5 million, $20.4 million and $0.0 million, respectively. The additions to intangible assets in 2021 and 2020 relate to the geothermal assets purchase transaction from TG Geothermal Portfolio, LLC and the Pomona acquisition, respectively, as further described under Note 2 to the consolidated financial statements. The Company tested the intangible assets for recoverability in December 2021, 2020 and 2019 and assessed whether there were events or change in circumstances which may indicate that the intangible assets are not recoverable. The Company's assessment resulted in that there were no write-offs of intangible assets in 2021, 2020 and 2019.
Estimated future amortization expense for the intangible assets as of December 31, 2021 is as follows:
| | (Dollars in thousands) | |
Year ending December 31: | | | | |
2022 | | $ | 27,429 | |
2023 | | | 27,359 | |
2024 | | | 26,398 | |
2025 | | | 26,079 | |
2026 | | | 25,368 | |
Thereafter | | | 230,681 | |
Total | | $ | 363,314 | |
Goodwill
Goodwill amounting to $90.0 million and $24.6 million as of December 31, 2021 and 2020, respectively, represents the excess of the fair value of consideration transferred in business combination transactions over the fair value of tangible and intangible assets acquired, net of the fair value of liabilities assumed and non-controlling interest (as applicable) in the acquisitions. For the years 2021, 2020 and 2019, the Company's impairment assessment of goodwill related to its reporting units resulted in no impairment.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the carrying amount of the Company’s goodwill for the years ended December 31, 2021 and 2020 were as follows:
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Goodwill as of January 1, | | $ | 24,566 | | | $ | 20,140 | |
Goodwill acquired (1) | | | 65,441 | | | | 4,107 | |
Translation differences | | | (53 | ) | | | 319 | |
Goodwill as of December 31, | | $ | 89,954 | | | $ | 24,566 | |
(1) Goodwill acquired in 2021 and 2020 is related to the purchase of geothermal assets from TG Geothermal Portfolio, LLC and the Pomona storage facility purchase transaction, respectively, as further described in Note 2 to the consolidated financial statements.
NOTE 11 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
| | December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Trade payable | | $ | 75,164 | | | $ | 75,779 | |
Salaries and other payroll costs | | | 25,513 | | | | 29,271 | |
Customer advances | | | 1,218 | | | | 1,197 | |
Accrued interest | | | 11,283 | | | | 7,843 | |
Income tax payable | | | 8,138 | | | | 19,913 | |
Property tax payable | | | 2,906 | | | | 1,378 | |
Scheduling and transmission | | | 3,632 | | | | 2,632 | |
Royalty accrual | | | 6,023 | | | | 3,581 | |
Warranty accrual | | | 1,579 | | | | 2,087 | |
Other | | | 7,730 | | | | 9,082 | |
Total | | $ | 143,186 | | | $ | 152,763 | |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 — LONG-TERM DEBT, CREDIT AGREEMENTS AND FINANCE LIABILITY
Long-term debt consists of the following loan agreements:
| | December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Limited and non-recourse agreements: | | | | | | | | |
Limited recourse: | | | | | | | | |
Loan agreement with DFC (the Olkaria III power plant) | | $ | 156,657 | | | $ | 174,652 | |
Loan agreement with DFC (the Platanares power plant) | | | 88,073 | | | | 96,266 | |
Loan agreement with Banco Industrial S.A. and Westrust Bank (International) Limited | | | 19,250 | | | | 22,750 | |
Loan agreement with a global industrial company (the Plumstriker battery energy storage projects) | | | 14,726 | | | | 18,081 | |
Other loans (assumed in the purchase of USG) | | | 79,064 | | | | 84,118 | |
Other loans | | | 5,930 | | | | 7,807 | |
OFC 2 Senior Secured Notes | | | 173,321 | | | | 188,223 | |
Non-recourse: | | | | | | | | |
DAC 1 Senior Secured Notes | | | 67,939 | | | | 73,121 | |
Other loans | | | 7,697 | | | | 9,838 | |
Total limited and non-recourse agreements | | | 612,657 | | | | 674,856 | |
Less current portion | | | (61,695 | ) | | | (60,846 | ) |
Noncurrent portion | | $ | 550,962 | | | $ | 614,010 | |
Full recourse agreements: | | | | | | | | |
Senior Unsecured Bonds (Series 3 and Series 4) | | $ | 539,567 | | | $ | 529,066 | |
Senior Unsecured Loan (Migdal) | | | 191,600 | | | | 200,000 | |
Hapoalim, HSBC and Discount loans | | | 266,071 | | | | — | |
Loan agreements with DEG (the Olkaria III and power plants 4 and 1 upgrade) | | | 60,896 | | | | 70,264 | |
Revolving credit lines with banks | | | — | | | | — | |
Total full recourse agreements | | | 1,058,134 | | | | 799,330 | |
Less current portion | | | (313,846 | ) | | | (17,768 | ) |
Noncurrent portion | | $ | 744,288 | | | $ | 781,562 | |
Full-Recourse Third-Party Debt
Bank Hapoalim Loan
On July 12, 2021, the Company entered into a definitive loan agreement (the "Hapoalim Loan Agreement") with Bank Hapoalim B.M. (“Bank Hapoalim”). The Hapoalim Loan Agreement provides for a loan by Bank Hapoalim to the Company in an aggregate principal amount of $125 million (the “Hapoalim Loan”). The outstanding principal amount of the Hapoalim Loan will be repaid in 14 semi-annual payments of $8.9 million each, commencing on December 12, 2021. The duration of the Hapoalim Loan is 7 years. The Hapoalim Loan bears interest at a fixed rate of 3.45% per annum, payable semi-annually.
The Hapoalim Loan Agreement includes various affirmative and negative covenants, including a requirement that the Company maintain (i) a financial debt to adjusted EBITDA ratio not to exceed 6, (ii) a minimum equity capital amount (as shown on its consolidated financial statements) of not less than $750 million, and (iii) an equity capital to total assets ratio of not less than 25%. The Hapoalim Loan Agreement includes other customary affirmative and negative covenants, including payment and covenant events of default. As of December 31, 2021, the covenants have been met.
| | Amount | | | Amount Outstanding as of | | | Annual | | Maturity |
Loan | | Issued | | | December 31, 2021 | | | Interest Rate (1) | | Date |
| | (Dollars in millions) | | | | | | |
Hapoalim Loan | | | $125.0 | | | | $116.1 | | | | 3.45% | | June 2028 |
(1) payable semi-annually |
HSBC Bank Loan
On July 15, 2021, the Company entered into a definitive loan agreement (the "HSBC Loan Agreement") with HSBC Bank PLC (“HSBC Bank”). The HSBC Loan Agreement provides for a loan by HSBC Bank to the Company in an aggregate principal amount of $50 million (the “HSBC Loan”). The outstanding principal amount of the HSBC Loan will be repaid in 14 semi-annual payments of $3.6 million each, commencing on January 19, 2022. The duration of the HSBC Loan is 7 years. The HSBC Loan bears interest at a fixed rate of 3.45% per annum, payable semi-annually.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The HSBC Loan Agreement includes various affirmative and negative covenants, including a requirement that the Company maintain (i) a financial debt to adjusted EBITDA ratio not to exceed 6, (ii) a minimum equity capital amount (as shown on its consolidated financial statements) of not less than $750 million, and (iii) an equity capital to total assets ratio of not less than 25%. The HSBC Loan Agreement includes other customary affirmative and negative covenants, including payment and covenant events of default. As of December 31, 2021, the covenants have been met.
| | Amount | | | Amount Outstanding as of | | | Annual | | Maturity |
Loan | | Issued | | | December 31, 2021 | | | Interest Rate (1) | | Date |
| | (Dollars in millions) | | | | | | |
HSBC Loan | | $ | 50.0 | | | $ | 50.0 | | | | 3.45 | % | July 2028 |
(1) payable semi-annually |
The proceeds from Hapoalim Loan and HSBC Loan were used to pay for the purchase of the geothermal assets portfolio from TG Geothermal Portfolio, LLC as described above in Note 2 - Business Acquisitions to the consolidated financial statements.
Discount Bank Loan
On September 2, 2021, the Company entered into a definitive loan agreement (the "Discount Loan Agreement") with Israel Discount Bank Ltd. (“Discount Bank”). The Discount Loan Agreement provides for a loan by Discount Bank to the Company in an aggregate principal amount of $100 million (the “Discount Loan”). The outstanding principal amount of the Discount Loan will be repaid in 16 semi-annual payments of $6.25 million each, commencing on March 2, 2022. The duration of the Discount Loan is 8 years. The Discount Loan bears interest at a fixed rate of 2.9% per annum, payable semi-annually.
The Discount Loan Agreement includes various affirmative and negative covenants, including a requirement that the Company maintain (i) a financial debt to adjusted EBITDA ratio not to exceed 6, (ii) a minimum equity capital amount (as shown on its consolidated financial statements) of not less than $750 million, and (iii) an equity capital to total assets ratio of not less than 25%. The Discount Loan Agreement includes other customary affirmative and negative covenants, including payment and covenant events of default. As of December 31, 2021, the covenants have been met.
| | Amount | | | Amount Outstanding as of | | | Annual | | Maturity |
Loan | | Issued | | | December 31, 2021 | | | Interest Rate (1) | | Date |
| | (Dollars in millions) | | | | | | |
Discount Loan | | $ | 100.0 | | | $ | 100.0 | | | | 2.9 | % | September 2029 |
(1) payable semi-annually |
Senior Unsecured Bonds - Series 4
On July 1, 2020, the Company concluded an auction tender and accepted subscriptions for New Israeli Shekels ("NIS") 1.0 billion aggregate principal amount of senior unsecured bonds (the “Senior Unsecured Bonds - Series 4”). The Senior Unsecured Bonds - Series 4 are denominated in NIS and were converted to approximately $289.8 million using a cross-currency swap transaction shortly after the completion of such issuance as further detailed below. The Senior Unsecured Bonds - Series 4 are payable semi-annually in arrears starting December 2020 and will be repaid in 10 equal annual payments commencing June 2022 unless prepaid earlier by the Company pursuant to the terms and conditions of the trust instrument that governs the Senior Unsecured Bonds - Series 4. The proceeds from the Senior Unsecured Bonds - Series 4 were used to pay the total consideration of $43.4 million in the Pomona purchase transaction as further detailed under Note 2 to the consolidated financial statements and to repay certain existing indebtedness with the balance being used to support the Company's growth plans. As of December 31, 2021, the covenants have been met.
| | Amount | | | Amount Outstanding as of | | | Annual | | Maturity |
Loan | | Issued | | | December 31, 2021 | | | Interest Rate (1) | | Date |
| | (Dollars in millions) | | | | | | |
Senior Unsecured Bonds - Series 4 | | $ | 289.8 | | | $ | 321.5 | | | | 3.35 | % | June 2031 |
(1) payable semi-annually |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cross Currency Swap
Concurrently with the issuance of the Senior Unsecured Bonds - Series 4, the Company entered into a long-term cross currency swap with the objective of hedging the currency rate fluctuations related to the aggregated principal amount and interest of the Senior Unsecured Bonds - Series 4 at an average fixed rate of 4.34%. The terms of the Cross Currency Swap match those of the Senior Unsecured Bonds - Series 4, including the notional amount of the principal and interest payment dates. The Company designated the Cross Currency Swap as a cash flow hedge as per ASC 815, Derivatives and Hedging and accordingly measures the Cross Currency Swap instrument at fair value. The changes in the Cross Currency Swap fair value are initially recorded in Other Comprehensive Income (Loss) and reclassified to Derivatives and foreign currency transaction gains (losses) in the same period or periods during which the hedged transaction affects earnings and is presented in the same line item in the consolidated statements of operations and comprehensive income as the earnings effect of the Senior Unsecured Bonds - Series 4.
Senior Unsecured Bonds - Series 3
In September 2016, the Company concluded an auction tender and accepted subscriptions for two series of senior unsecured bonds comprised of approximately $67.0 million aggregate principal amount of senior unsecured bonds (the “Series 2 Bonds”) and approximately $137.0 million aggregate principal amount of senior unsecured bonds (the “Series 3 Bonds” and together with the Series 2 Bonds, the “Senior Unsecured Bonds”).
In September 2020, the Company fully repaid the Series 2 Bonds. The Series 3 Bonds will mature in September 2022 in a single bullet payment unless earlier prepaid by the Company pursuant to the terms and conditions of the trust instrument that governs such Senior Unsecured Bonds.
On April 6, 2020, the Company concluded an auction tender and accepted subscriptions for an additional aggregate principal amount of approximately $51.1 million of its Series 3 Senior Unsecured Bonds (the “Additional Series 3 Bonds”) for total consideration of $50.0 million, representing an effective interest rate of 4.45%. The Additional Series 3 Bonds will mature in September 2022 and will be repaid at maturity in a single bullet payment, unless earlier prepaid by the Company pursuant to the terms and conditions of the trust instrument that governs such Senior Unsecured Bonds.
On April 20, 2020, the Company concluded an additional auction tender and accepted subscriptions for an aggregate principal amount of approximately $14.5 million of its Series 3 Senior Unsecured Bonds (the “Second Addition to Series 3 Bonds”). The Second Addition to Series 3 Bonds will mature in September 2022 and will be repaid at maturity in a single bullet payment, unless earlier prepaid by the Company pursuant to the terms and conditions of the trust instrument that governs such Senior Unsecured Bonds.
On May 13, 2020, the Company concluded an additional auction tender and accepted subscriptions for an aggregate principal amount of approximately $15.3 million under Series 3 Senior Unsecured Bonds (the “Third Addition to Series 3 Bonds”). The Third Addition to Series 3 Bonds will mature in September 2022 and will be repaid at maturity in a single bullet payment, unless earlier prepaid by the Company pursuant to the terms and conditions of the trust instrument that governs such Senior Unsecured Bonds.
| | Amount | | | Amount Outstanding as of | | | Annual | | Maturity |
Loan | | Issued | | | December 31, 2021 | | | Interest Rate (1) | | Date |
| | (Dollars in millions) | | | | | | |
Senior Unsecured Bonds - Series 3 | | | $218.0 | | | | $218.0 | | | | 4.45% | | September 2022 |
(1) payable semi-annually |
As of December 31, 2021, the covenants have been met. |
Senior Unsecured Loan
On March 22, 2018 the Company entered into a definitive loan agreement (the "Migdal Loan Agreement") with Migdal Insurance Company Ltd., Migdal Makefet Pension and Provident Funds Ltd. and Yozma Pension Fund of Self-Employed Ltd., all entities within the Migdal Group, a leading Israeli insurance company and institutional investor in Israel. The Migdal Loan Agreement provides for a loan by the lenders to the Company in an aggregate principal amount of $100.0 million (the "Migdal Loan"). The Migdal Loan is repaid in 15 semi-annual payments of $4.2 million each, commencing on September 15, 2021, with a final payment of $37.0 million on March 15, 2029.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Loan is subject to early redemption by the Company prior to maturity from time to time (but not more frequently than once per quarter) and at any time in whole or in part, at a redemption price set forth in the Migdal Loan Agreement. If the rating of the Company is downgraded to "ilA-"(or equivalent), of any of Standard and Poor’s, Moody’s or Fitch (whether in Israel or outside of Israel) (each a “Credit Rating Agency”), the interest rate applicable to the Migdal Loan will increase by 0.50%. If the rating of the Company is further downgraded to a lower level by any Credit Rating Agency, the interest rate applicable to the Migdal Loan will be increased by 0.25% for each additional downgrade. In no event will the cumulative increase in the interest rate applicable to the Loan exceed 1% regardless of the cumulative rating downgrade. A subsequent upgrade or reinstatement of a rating by any Credit Rating Agency will reduce the interest rate applicable to the Migdal Loan by 0.25% for each upgrade (but in no event will the interest rate applicable the Migdal Loan fall below the base interest rate of 4.8%). Additionally, if the ratio between short-term and long-term debt to financial institutions and bondholders, deducting cash and cash equivalents to EBITDA is equal to or higher than 4.5, the interest rate on all amounts then outstanding under the Migdal Loan shall be increased by 0.5% per annum over the interest rate then-applicable to the Migdal Loan.
The Migdal Loan Agreement includes various affirmative and negative covenants, including a covenant that the Company maintain (i) a debt to adjusted EBITDA ratio below 6, (ii) a minimum equity amount (as shown on its consolidated financial statements, excluding noncontrolling interests) of not less than $750 million, and (iii) an equity attributable to Company's stockholders to total assets ratio of not less than 25%. In addition, the Migdal Loan Agreement restricts the Company from making dividend payments if its equity falls below $800 million and otherwise restricts dividend payments in any one year to not more than 50% of the net income of the Company of such year as shown on the Company’s consolidated annual financial statements as long as any of the Company's bonds issued in Israel prior to March 27, 2018 remain outstanding. The Migdal Loan Agreement includes other customary affirmative and negative covenants and events of default. As of December 31, 2021, the covenants have been met.
On March 25, 2019, the Company entered into a first addendum (“First Addendum”) to the Migdal Loan Agreement with the Migdal Group dated March 22, 2018. The First Addendum provides for an additional loan by the lenders to the Company in an aggregate principal amount of $50.0 million (the “Additional Migdal Loan”). The Additional Migdal Loan is repaid in 15 semi-annual payments of $2.1 million each, commencing on September 15, 2021, with a final payment of $18.5 million on March 15, 2029. The Additional Migdal Loan was entered into under substantially the same terms and conditions of the Migdal Loan Agreement as disclosed above.
In April 2020, the Company entered into a second addendum (the “Second Addendum”) to the loan agreement with the Migdal Group dated March 22, 2018. The Second Addendum provides for an additional loan by the lenders to the Company in an aggregate principal amount of $50.0 million (the “Second Addendum Migdal Loan”). The principal amount of $31.5 million of the Second Addendum Migdal Loan will be repaid in 15 equal semi-annual payments commencing on September 15, 2021 and ending on September 15, 2028. The principal amount of $18.5 million is repaid in one bullet payment on March 15, 2029. The Second Addendum Migdal Loan was entered into under substantially the same terms and conditions of the Migdal Loan Agreement.
| | Amount | | | Amount Outstanding as of | | | Annual | | Maturity |
Loan | | Issued | | | December 31, 2021 | | | Interest Rate (1) | | Date |
| | (Dollars in millions) | | | | | | |
Migdal Loan | | $ | 100.0 | | | $ | 95.8 | | | | 4.80 | % | March 2029 |
Additional Migdal Loan | | | 50.0 | | | | 47.9 | | | | 4.60 | % | March 2029 |
Second Addendum Migdal Loan | | | 50.0 | | | | 47.9 | | | | 5.44 | % | March 2029 |
Total Senior Unsecured Loan | | $ | 200.0 | | | $ | 191.6 | | | | | | |
(1) payable semi-annually in arrears. |
Loan Agreements with DEG (the Olkaria III Complex)
On October 20, 2016, OrPower 4 entered into a new $50.0 million subordinated loan agreement with Deutsche Investitions-und Entwicklungsgesellschaft mbH ("DEG") (the “DEG 2 Loan Agreement”) and on December 21, 2016, OrPower 4 completed a drawdown of the full loan amount of $50 million, with a fixed interest rate of 6.28% for the duration of the loan (the “DEG 2 Loan”). The DEG 2 Loan is being repaid in 20 equal semi-annual principal installments which commenced on December 21, 2018, with a final maturity date of June 21, 2028. Proceeds of the DEG 2 Loan were used by OrPower 4 to refinance Plant 4 of the Olkaria III Complex, which was originally financed using equity. The DEG 2 Loan is subordinated to the senior loan provided by DFC for Plants 1-3 of the Olkaria III Complex. The DEG 2 Loan is guaranteed by the Company.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 4, 2019, OrPower 4 entered into an additional $41.5 million subordinated loan agreement with DEG (the “DEG 3 Loan Agreement”) and on February 28, 2019, OrPower 4 completed a drawdown of the full loan amount, with a fixed interest rate of 6.04% for the duration of the loan (the “DEG 3 Loan”). The DEG 3 Loan is being repaid in 19 equal semi-annual principal installments, which commenced on June 21, 2019, with a final maturity date of June 21, 2028. Proceeds of the DEG 3 Loan were used by OrPower 4 to refinance upgrades to Plant 1 of the Olkaria III Complex, which were originally financed using equity. The DEG 3 Loan is subordinated to the senior loan provided by DFC (formerly OPIC) for Plants 1-3 of the Olkaria III Complex. The DEG 3 Loan is guaranteed by the Company. As of December 31, 2021, the covenants have been met.
| | Amount | | | Amount Outstanding as of | | | Annual | | Maturity |
Loan | | Issued | | | December 31, 2021 | | | Interest Rate (1) | | Date |
| | (Dollars in millions) | | | | | | |
DEG 2 Loan | | $ | 50.0 | | | $ | 32.5 | | | | 6.28 | % | June 2028 |
DEG 3 Loan | | | 41.5 | | | | 28.4 | | | | 6.04 | % | June 2028 |
| | $ | 91.5 | | | $ | 60.9 | | | | | | |
(1) payable semi-annually | | | | | | | | | | | | | |
Non-Recourse and Limited-Recourse Third-Party Debt
Finance Agreement with DFC (formerly OPIC) (the Olkaria III Complex)
On August 23, 2012, OrPower 4, the Company’s wholly owned subsidiary, entered into a Finance Agreement with U.S. International Development Finance Corporation, an agency of the U.S. 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 OPIC Loan is comprised of up to three tranches:
| | Amount | | | Amount Outstanding as of | | | Annual | | Maturity |
Loan | | Issued | | | December 31, 2021 | | | Interest Rate (1) | | Date |
| | (Dollars in millions) | | | | | | |
OPIC Loan - Tranche I | | $ | 85.0 | | | $ | 42.5 | | | | 6.34 | % | December 2030 |
OPIC Loan - Tranche II | | | 180.0 | | | | 90.0 | | | | 6.29 | % | June 2030 |
OPIC Loan - Tranche III | | | 45.0 | | | | 24.2 | | | | 6.12 | % | December 2030 |
Total OPIC Loan | | $ | 310.0 | | | $ | 156.7 | | | | | | |
The OPIC Loan is collateralized by substantially all of OrPower 4’s assets and by a pledge of all of the equity interests in OrPower 4. There are various restrictive covenants under the OPIC Loan, which include a required historical and projected 12-month DSCR. As of December 31, 2021, the covenants have been met.
Finance Agreement with DFC (the Platanares power plant)
On April 30, 2018, Geotérmica Platanares, S.A. de C.V. (“Platanares”), a Honduran sociedad anónima de capital variable and an indirect subsidiary of Ormat Technologies, Inc., entered into a Finance Agreement (the “Finance Agreement”) with DFC, pursuant to which DFC will provide to Platanares senior secured non-recourse debt financing in an aggregate principal amount of up to $114.7 million (the “Platanares Loan”), the proceeds of which will be used principally for the refinancing and financing of the Platanares 35 MW geothermal power plant located in western Honduras. The finance agreement was amended and closed in October of 2018.
| | Amount | | | Amount Outstanding as of | | | Annual | | Maturity |
Loan | | Issued | | | December 31, 2021 | | | Interest Rate (1) | | Date |
| | (Dollars in millions) | | | | | | |
DFC - Platanares Loan | | $ | 114.7 | | | $ | 88.1 | | | | 7.02 | % | September 2032 |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Platanares Loan is secured by a first priority lien on all of the assets and ordinary shares of Platanares. The Finance Agreement contains various restrictive covenants applicable to Platanares, among others (i) to maintain a projected and historic debt service coverage ratio; (ii) to maintain on deposit in a debt service reserve account and well reserve account funds or assets with a value in excess of a minimum threshold and (iii) covenants that restrict Platanares from making certain payments or other distributions to its equity holders. As of December 31, 2021, as a result of the overdue debt outstanding of ENEE as further described under Note 1 to the consolidated financial statements, Platanares is restricted from making certain equity distributions.
Loan Agreement with Banco Industrial S.A. and Westrust Bank (International) Limited
On July 31, 2015, Ortitlan, Limitada, the Company’s wholly owned subsidiary, obtained a 12-year secured term loan in the principal amount of $42.0 million (the "Amatitlan Loan") for the 20 MW Amatitlan power plant in Guatemala. Under the credit agreement with Banco Industrial S.A. and Westrust Bank (International) Limited, the Company can expand the Amatitlan power plant with financing to be provided either via equity, additional debt from Banco Industrial S.A. or from other lenders, subject to certain limitations on expansion financing in the credit agreement.
The loan is payable in 48 quarterly payments commencing September 30, 2015. The loan bears interest at a rate per annum equal to the sum of LIBOR (which cannot be lower than 1.25%) plus a margin of (i) 4.35% as long as the Company’s guaranty of the loan (as described below) is outstanding or (ii) 4.75% otherwise.
| | Amount | | | Amount Outstanding as of | | Annual | Maturity |
Loan | | Issued | | | December 31, 2021 | | Interest Rate (1) | Date |
| | (Dollars in millions) | | | |
Amatitlan Loan | | $ | 42.0 | | | $ | 19.3 | | LIBOR+4.35% | June 2027 |
There are various restrictive covenants under the Amatitlan credit agreement. These include, among other things, (i) a financial covenant to maintain a Debt Service Coverage Ratio (as defined in the credit agreement) and (ii) limitations on Restricted Payments (as defined in the credit agreement) that among other things would limit dividends that could be paid. As of December 31, 2021, the covenants have been met. The loan is collateralized by substantially all the assets of the borrower and a pledge of all of the membership interests of the borrower. The Company expects that the scheduled discontinuation of the LIBOR will have no material effect on its consolidated financial statements as the loan agreements includes a mechanism for a substitute rate.
Plumstriker Loan
On May 4, 2019, a wholly owned indirect subsidiary of the Company (“Plumstriker”) and its two subsidiaries entered into a $23.5 million loan agreement with a United States (“U.S.”) financing division of a leading global industrial company for the financing of two 20 MW battery energy storage projects located in New Jersey.
On May 30, 2019, Plumstriker completed the drawdown of the full loan amount, bearing interest of three months U.S. Libor plus a 3.5% margin. The loan is being repaid in 29 equal quarterly principal installments of 1.25% of the loan, and additional 14 unequal semi-annual principal payments, which commenced on June 30, 2019. Proceeds of the loan were used to refinance investments in the Plumsted and Stryker projects. The debt repayment of the loan is not guaranteed by the Company or any of its subsidiaries. The Company expects that the scheduled discontinuation of the LIBOR will have no effect on its consolidated financial statements as the loan agreements includes a mechanism for a substitute rate. As of December 31, 2021, the covenants have been met.
| | Amount | | | Amount Outstanding as of | | Annual | Maturity |
Loan | | Issued | | | December 31, 2021 | | Interest Rate (1) | Date |
| | (Dollars in millions) | | | |
Plumstriker Loan | | | $23.5 | | | | $14.7 | | LIBOR+3.5% | May 2026 |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Don A. Campbell Senior Secured Notes — Non-Recourse
On November 29, 2016, ORNI 47 LLC (“ORNI 47”), the Company’s subsidiary, entered into a note purchase agreement (the “ORNI 47 Note Purchase Agreement”) with MUFG Union Bank, N.A., as collateral agent, Munich Reinsurance America, Inc. and Munich American Reassurance Company (the “Purchasers”) pursuant to which ORNI 47 issued and sold to the Purchasers $92.5 million aggregate principal amount of its Senior Secured Notes (the “DAC 1 Senior Secured Notes”) in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. ORNI 47 is the owner of the first phase of the Don A. Campbell geothermal power plant (“DAC 1”), and part of the ORPD LLC (“ORPD”) portfolio.
The net proceeds from the sale of the DAC 1 Senior Secured Notes, were used to refinance the development and construction costs of the DAC 1 geothermal power plant, which were originally financed using equity.
The DAC 1 Senior Secured Notes constitute senior secured obligations of ORNI 47 and are secured by all of the assets of ORNI 47. The ORNI 47 Note Purchase Agreement requires ORNI 47 to comply with certain covenants, including, among others, restrictions on the incurrence of indebtedness or liens, amendment or modification of material project documents, the ability of ORNI 47 to merge or consolidate with another entity. In addition, there are restrictions on the ability of ORNI 47 to make distributions to its shareholders, which include a required historical and projected DSCR. As of December 31, 2021, the covenants for this loan have not been met which resulted in certain restrictions on equity distribution by ORNI 47.
| | Amount | | | Amount Outstanding as of | | | Annual | | Maturity |
Loan | | Issued | | | December 31, 2021 | | | Interest Rate (1) | | Date |
| | (Dollars in millions) | | | | | | |
DAC 1 Senior Secured Notes | | | $92.5 | | | | $67.9 | | | | 4.03% | | September 2033 |
OFC 2 Senior Secured Notes
In September 2011, OFC 2, the Company’s wholly owned subsidiary and OFC 2’s 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 2 Senior Secured Notes (“OFC 2 Senior Secured Notes”) due December 31, 2034. 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 includes certain specified conditions required by the DOE in connection with its guarantee of the OFC 2 Senior Secured Notes.
On October 31, 2011, the OFC 2 Issuers completed the sale of $151.7 million in aggregate principal amount Series A Notes due 2032 (the “Series A Notes”). The net proceeds from the sale of the Series A Notes 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.
On August 29, 2014, OFC 2 sold $140.0 million of OFC 2 Senior Secured Notes (the “Series C Notes”) to finance the construction of the second phase of the McGinness Hills project. The Series C Notes are the last tranche under the Note Purchase Agreement with John Hancock Life Insurance Company and are guaranteed by the DOE’s Loan Programs Office in accordance with and subject to the DOE's Loan Guarantee Program under Section 1705 of Title XVII of the Energy Policy Act of 2005.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 historical debt service coverage ratio requirement and a projected future DSCR requirement. As of December 31, 2021, the covenants have been met.
| | Amount | | | Amount Outstanding as of | | | Annual | | Maturity |
Loan | | Issued | | | December 31, 2021 | | | Interest Rate (1) | | Date |
| | (Dollars in millions) | | | | | | |
OFC 2 Senior Secured Notes - Series A | | $ | 151.7 | | | $ | 79.6 | | | | 4.69 | % | December 2032 |
OFC 2 Senior Secured Notes - Series C | | | 140.0 | | | | 93.8 | | | | 4.61 | % | December 2032 |
Total OFC 2 Senior Secured Notes | | $ | 291.7 | | | $ | 173.4 | | | | | | |
(1) payable quarterly in arrears |
The Company provided a guaranty in connection with the issuance of the Series A Notes and Series C Notes. The guaranty may be drawn in the event of, among other things, 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 guarantee may also be drawn if there is a payment default on the OFC 2 Senior Secured Notes or upon the occurrence of certain fundamental defaults that result in the acceleration of the OFC 2 Senior Secured Notes, in each case, prior to the date that the relevant facility(ies) financed by such OFC 2 Senior Secured Notes reaches completion and meets the applicable operational performance levels. The Company’s liability under the guaranty with respect to 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. The Company’s liability under the guarantee with respect to the other trigger event described above is not so limited.
Other Limited Recourse Loans
On April 24, 2018, the Company completed the acquisition of USG. As part of the acquisition the Company assumed the following non-recourse loans:
Prudential Capital Group – Idaho non-recourse
In May 2016, USG’s wholly owned subsidiary (Idaho USG Holdings LLC) entered into a loan agreement with the Prudential Capital Group to finance its development activities. The original principal totaled $20.0 million. The principal and interest payments are due semi-annually and the principal is partially repaid through 2023 and the loan is secured by the Company’s ownership interests in the Neal Hot Springs and the Raft River projects. As of December 31, 2021, the covenants for this loan have been met.
U.S. Department of Energy – non-recourse
On August 31, 2011, USG’s wholly owned subsidiary, USG Oregon LLC (“USG Oregon”), completed the first funding drawdown associated with the U.S. Department of Energy (“DOE”) of $96.8 million loan guarantee (“Loan Guarantee”) to construct its power plant at Neal Hot Springs project in Eastern Oregon. In connection with the Loan Guarantee, the DOE has been granted a security interest in all of the equity interests of USG Oregon, as well as in the assets of USG Oregon, including a mortgage on real property interests relating to the Neal Hot Springs site. As of December 31, 2021, the covenants for this loan have been met.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prudential Capital Group – Nevada non-recourse
On September 26, 2013, USG’s wholly owned subsidiary ("USG Nevada LLC"), entered into a note purchase agreement with the Prudential Capital Group to finance Phase I of the San Emidio geothermal project located in northwest Nevada. Principal payments are due quarterly based upon minimum debt service coverage ratios established according to projected operating results made at the loan origination date and available cash balances. The loan agreement is secured by USG Nevada LLC’s right, title and interest in and to its real and personal property, including the San Emidio project and the equity interests in USG Nevada LLC. As of December 31, 2021, the covenants for this loan have not been met which resulted in certain restrictions on equity distribution by this subsidiary.
| | Amount | | | Amount Outstanding as of | | | Annual | | Maturity |
Loan | | Issued | | | December 31, 2021 | | | Interest Rate (1) | | Date |
| | (Dollars in millions) | | | | | | |
Prudential Capital Group – Idaho non-recourse | | $ | 20.0 | | | $ | 16.8 | | | | 5.80 | % | March 2023 |
U.S. Department of Energy – non-recourse | | | 96.8 | | | | 39.0 | | | | 2.60 | % | February 2035 |
Prudential Capital Group – Nevada non-recourse | | | 30.7 | | | | 25.1 | | | | 6.75 | % | December 2037 |
Total | | $ | 147.5 | | | $ | 80.9 | | | | | | |
(1) payable semi-annually, except for Nevada non-recourse which is payable quarterly |
Bpifrance Loan - Non Recourse
On April 4, 2019, an indirect subsidiary of the Company (“Guadeloupe”), entered into a $8.9 million loan agreement with Banque Publique d’Investissement (“Bpifrance”). On April 29, 2019, Guadeloupe completed the drawdown of the full loan amount, bearing a fixed interest rate of 1.93%. The loan will be repaid in 20 equal quarterly principal installments, commencing June 30, 2021. The final maturity date of the loan is March 31, 2026. The loan is not guaranteed by the Company or any of its other subsidiaries. As of December 31, 2021, $7.7 million is outstanding under the Bpifrance Loan.
Société Générale Loan - Limited Recourse
On April 9, 2019, Guadeloupe, entered into a $8.9 million loan agreement with Société Générale. On April 29, 2019, Guadeloupe completed the drawdown of the full loan amount of the loan, bearing a fixed interest rate of 1.52%. The loan is being repaid in 28 quarterly principal installments, which commenced on July 29, 2019. The final maturity date of the loan is April 29, 2026. The loan has a limited guarantee by one of the Company’s subsidiaries. As of December 31, 2021, $5.9 million was outstanding under the Société Géneralé Loan.
Financing Liability
On July 13, 2021, the Company closed a transaction with TG Geothermal Portfolio, LLC (a subsidiary of Terra-Gen, LLC) (the "Seller") to acquire two contracted geothermal assets in Nevada with a total net generating capacity of 67.5 MW, a greenfield development asset adjacent to one of the plants, and an underutilized transmission line. Financing liability is related to a sale and leaseback transaction entered into by the Seller in September 2015 under which it sold and leased back the undivided interests in the Dixie Valley power plant asset through June 2038. The lease transaction was accounted for by the Seller as a finance lease due to the Seller's continued involvement and management of the power plant and the existence of an early buy-out option in September 2024, which continues to be applicable to the Company. The fair value of the financing liability at the acquisition date was $258.4 million. Further details on the Terra-Gen business combination are described under Note 2 to the consolidated financial statements. As of December 31, 2021, the covenants have been met.
| | Amount Outstanding as of | | | Annual | | Maturity |
Loan | | December 31, 2021 | | | Interest Rate (1) | | Date (2) |
| | (Dollar in millions) | | | | | | |
Financing Liability - Dixie Valley | | $ | 252.9 | | | | 2.55 | % | March 2033 |
(1) payable semi-annually |
(2) final maturity date of the financing liability is assuming execution of the buy-out option in September 2024. |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revolving Credit Lines with Commercial Banks
As of December 31, 2021, the Company has credit agreements with a number of financial institutions for an aggregate amount of $623.0 million (including $60.0 million from MUFG Union Bank, N.A. (“Union Bank”) and $35.0 million from HSBC Bank USA N.A. as described below). Under the terms of these credit agreements, the Company, or its Israeli subsidiary, Ormat Systems Ltd. (“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 $408.0 million; and (ii) the issuance of one or more letters of credit in the amount of up to $120.0 million. The credit agreements mature between March 2022 and November 2023. Loans and draws under the credit agreements or under any letters of credit will bear interest at the respective bank’s cost of funds or USD LIBOR plus a margin. As of December 31, 2021, no loans were outstanding and letters of credit with an aggregate amount of $78.3 million were issued and outstanding under such credit agreements (excluding the amounts outstanding under the section Credit Agreements below with Union bank and HSBC bank).
Credit Agreements
Credit Agreement with MUFG Union Bank
Ormat Nevada has a credit agreement with MUFG Union Bank under which it has an aggregate available credit of up to $60.0 million as of December 31, 2021. The credit termination date is June 30, 2022.
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 lenders. 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 Nevada’s obligations under the credit agreement. Ormat Nevada’s 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, 2021: (i) the actual 12-month debt to EBITDA ratio was 2.4; (ii) the 12-month DSCR was 4.8; and (iii) the distribution leverage ratio was 0.66. 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, 2021, letters of credit in the aggregate amount of $59.1 million were issued and outstanding under this credit agreement.
Credit Agreement with HSBC Bank USA N.A.
Ormat Nevada has a credit agreement with HSBC Bank USA, N.A for one year with annual renewals. The current expiration date of the facility under this credit agreement is October 31, 2022. On December 31, 2021, the aggregate amount available under the credit agreement was $35.0 million. This credit line is limited to the issuance, extension, modification or amendment of letters of credit. In addition, Ormat Nevada has an uncommitted discretionary demand line of credit in the aggregate amount of $35.0 million available for letters of credit including up to $20 million of credit. 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 Nevada’s obligations under the credit agreement. Ormat Nevada’s obligations under the credit agreement are otherwise unsecured.
There are various restrictive covenants under the credit agreement, including 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, 2021: (i) the actual 12-month debt to EBITDA ratio was 2.4; (ii) the 12-month DSCR was 4.8; and (iii) the distribution leverage ratio was 0.66. 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 HSBC.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2021, letters of credit in the aggregate amount of $35.0 million were issued and outstanding under the committed portion of this credit agreement and $2.5 million under the uncommitted portion of the agreement.
Chubb Surety Bond
In May 2017, the Company entered into a surety bond agreement (the “Surety Agreement”) with Chubb Limited (“Chubb”) pursuant to which the Company may request that Chubb issue up to an aggregate $200.0 million of surety bonds with respect to the contractual obligations of the Company and its subsidiaries in exchange for bank letters of credit or as otherwise may be required. There is no expiration date for the Surety Agreement, but it may be terminated by the Company at any time upon twenty days’ prior written notice to Chubb. Delivery of such termination notice will not affect any surety bonds issued and outstanding prior to the date on which such notice is delivered. As of December 31, 2021, Chubb issued a surety bond in the amount of $182.6 million under the Surety Agreement.
Short-term Commercial Paper
On June 27, 2019, the Company entered into a framework agreement for participation in the issuance of commercial paper (the "Agreement") with Discount Capital Underwriting Ltd. under which the Company allowed the participants to submit proposals for purchasing and to purchase the Company's commercial paper ("Commercial Paper") in accordance with the provisions of the Agreement. On July 3, 2019, the Company completed the issuance of the Commercial Paper in the aggregate amount of $50.0 million. The Commercial Paper was issued for a period of 90 days and extended automatically for additional 90 day periods for up to five years, unless the Company notifies the participants otherwise or a notice of termination is provided by the participants in accordance with the provisions of the Agreement. The Commercial Paper bore an annual interest of three months LIBOR +0.75% which was paid at the end of each 90 day period. The Commercial Paper was fully repaid during 2020.
Restrictive Covenants
The Company’s 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 the Company's 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 the Company's assets, or a change of control in the Company's 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 $750 million and in no event less than 25% 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 6; and (iii) dividend distribution not to exceed 50% of net income for that year. As of December 31, 2021: (i) total equity was $1,998.5 million and the actual equity to total assets ratio was 45.2%, and (ii) the 12-month debt, net of cash, cash equivalents marketable securities and short-term bank deposits to Adjusted EBITDA ratio was 4.02. During the year ended December 31, 2021, the Company distributed interim dividends in an aggregate amount of $27.0 million.
Future minimum payments
Future minimum payments under long-term debt, including financing liability assumed as part of the Terra-Gen business combination as further described above and under Note 2 to the consolidated financial statements, as of December 31, 2021 are as follows:
| | (Dollars in thousands) | |
| | | | |
Year ending December 31: | | | | |
2022 | | $ | 386,289 | |
2023 | | | 189,103 | |
2024 | | | 253,044 | |
2025 | | | 167,193 | |
2026 | | | 168,468 | |
Thereafter | | | 761,433 | |
Total | | $ | 1,925,530 | |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 —TAX MONETIZATION TRANSACTIONS
Steamboat Hills tax monetization transaction
On October 25, 2021, one of the Company’s wholly-owned subsidiaries that indirectly owns the 28.4 MW Steamboat Hills Repower Geothermal power plant entered into a partnership agreement with a private investor. Under the transaction documents, the private investor acquired membership interests in the Steamboat Hills Repower Geothermal power plant project for an initial purchase price of approximately $38.9 million and for which it will pay additional installments that are expected to amount to approximately $5.3 million. The Company will continue to operate and maintain the power plant and will receive substantially all the distributable cash flow generated by the power plant, as described below.
Under the transaction documents, prior to December 31, 2029 (“Target Flip Date”), the Company’s wholly-owned subsidiary, Ormat Nevada Inc. ("Ormat Nevada"), receives substantially all of the distributable cash flow generated by the project, while the private investor receives substantially all of the tax attributes of the project. Following the later of the Target Flip Date and the date on which the private investor reaches its target return, Ormat Nevada will receive 97.5% of the distributable cash and 95.0% of the taxable income, on a go forward basis. In the event that the private investor will not reach its target return by the Target Flip Date, then for the period between the Target Flip Date and the date on which the private investor reaches its target return, the private investor will receive 100% of the distributable cash generated by the power plant and 99% of the tax attributes as long as the project is generating Production Tax Credits ("PTCs") (and 5% of the tax attributes afterwards).
On the Target Flip Date, Ormat Nevada has the option to purchase the private investor’s interests at the then-current fair market value, plus an amount that causes the private investor to reach its target return, if needed. If Ormat Nevada exercises this purchase option, it will become the sole owner of the project again.
McGinness Hills 3 tax monetization transaction
On August 14, 2019, one of the Company’s wholly-owned subsidiaries that indirectly owns the 48 MW McGinness Hills phase 3 geothermal power plant entered into a partnership agreement with a private investor. Under the transaction documents, the private investor acquired membership interests in the McGinness Hills phase 3 geothermal power plant for an initial purchase price of approximately $59.3 million and for which it will pay additional installments that are expected to amount to approximately $9 million and can reach up to $22 million based on the actual generation. The Company will continue to consolidate, operate and maintain the power plant and will receive substantially all the distributable cash flow generated by the power plant and the private investor will receive substantially all of the tax attributes, as described below.
Pursuant to the transaction documents, prior to December 31, 2027 (“Target Flip Date”), one of the Company’s wholly owned subsidiaries receives substantially all of the distributable cash flow generated by the McGinness Hills phase 3 power plant, while the private investor receives substantially all of the tax attributes of the project. Following the later of the Target Flip Date and the date on which the private investor reaches its target return, the Company will receive 97.5% of the distributable cash generated by the power plant and 95.0% of the tax attributes, on a go forward basis. In the event that the private investor will not reach its target return by the Target Flip Date, then for the period between the Target Flip Date and the date on which the private investor reaches its target return, the private investor will receive 100% of the distributable cash generated by the power plant and 99% of the tax attributes as long as the project is generating PTCs (and 5% of the tax attributes afterwards).
On the Target Flip Date, the Company, through one of its wholly-owned subsidiaries, has the option to purchase the private investor’s interests at the then-current fair market value, plus an amount that causes the private investor to reach its target return, if needed. If the Company exercises this purchase option, it will become the sole owner of the project again.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tungsten Mountain tax monetization transaction
On May 17, 2018, one of the Company’s wholly-owned subsidiaries that indirectly owns the 26 MW Tungsten Mountain Geothermal power plant entered into a partnership agreement with a private investor. Under the transaction documents, the private investor acquired membership interests in the Tungsten Mountain Geothermal power plant project for an initial purchase price of approximately $33.4 million and for which it will pay additional installments that are expected to amount to approximately $13 million. The Company will continue to operate and maintain the power plant and will receive substantially all the distributable cash flow generated by the power plant, as described below.
Under the transaction documents, prior to December 31, 2026 (“Target Flip Date”), the Company’s wholly-owned subsidiary, Ormat Nevada Inc. ("Ormat Nevada"), receives substantially all of the distributable cash flow generated by the project, while the private investor receives substantially all of the tax attributes of the project. Following the later of the Target Flip Date and the date on which the private investor reaches its target return, Ormat Nevada will receive 97.5% of the distributable cash and 95.0% of the taxable income, on a go forward basis. In the event that the private investor will not reach its target return by the Target Flip Date, then for the period between the Target Flip Date and the date on which the private investor reaches its target return, the private investor will receive 100% of the distributable cash generated by the power plant and 99% of the tax attributes as long as the project is generating PTCs (and 5% of the tax attributes afterwards).
On the Target Flip Date, Ormat Nevada has the option to purchase the private investor’s interests at the then-current fair market value, plus an amount that causes the private investor to reach its target return, if needed. If Ormat Nevada exercises this purchase option, it will become the sole owner of the project again.
Opal Geo tax monetization transaction
On December 16, 2016, Ormat Nevada entered into an equity contribution agreement (the “Equity Contribution Agreement”) with OrLeaf LLC (“OrLeaf”) and JPM with respect to Opal Geo. Also on December 16, 2016, OrLeaf, a newly formed limited liability company formed by Ormat Nevada and ORPD LLC, entered into an amended and restated limited liability company agreement of Opal Geo (the “LLC Agreement”) with JPM. The transactions contemplated by the Equity Contribution Agreement and LLC Agreement will allow the Company to monetize federal PTCs and certain other tax benefits relating to the operation of five geothermal power plants located in Nevada.
In connection with the transactions contemplated by the Equity Contribution Agreement and the LLC Agreement, Ormat Nevada transferred its indirect ownership interest in the McGinness Hills (Phase I and Phase II), Tuscarora, Jersey Valley and second phase of the Don A. Campbell (“DAC 2”) geothermal power plants to Opal Geo. Prior to such transfer, Ormat Nevada held an approximately 63.25% indirect ownership interest in DAC 2 through ORPD LLC, a joint venture between Ormat Nevada and Northleaf Geothermal Holdings LLC (“Northleaf”), an affiliate of Northleaf Capital Partners, and held, directly or indirectly, a 100% ownership interest in the remaining geothermal power plants that were transferred to Opal Geo.
Pursuant to the Equity Contribution Agreement, JPM contributed approximately $62.1 million to Opal Geo in exchange for 100% of the Class B Membership Interests of Opal Geo. JPM also agreed to make deferred capital contributions to Opal Geo based on the amount of electricity generated by the DAC 2 and McGinness Hills Phase II power plants which are eligible for the federal PTC. The Company expects the aggregate amount of JPM’s deferred capital contributions to equal approximately $21 million and to be paid over time covering the period through December 31, 2022.
Under the LLC Agreement, until December 31, 2022, OrLeaf will receive distributions of 97.5% of any distributable cash generated by operation of the power plants while JPM will receive distributions of 2.5% of any distributable cash generated by operation of the power plants. Unless JPM has already achieved its target internal rate of return on its investment in Opal Geo, from December 31, 2022 until JPM has achieved its target internal rate of return, JPM will receive 100% of any distributable cash generated by operation of the power plants. Thereafter, OrLeaf will receive distributions of 97.5%, and JPM will receive 2.5%, of any distributable cash generated by operation of the power plants.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the LLC Agreement, all items of Opal Geo income and loss, gain, deduction and credit (including the federal production tax credits relating to the operation of the two PTC eligible power plants) will be allocated, until JPM has achieved its target internal rate of return on its investment in Opal Geo (and for so long as the two PTC eligible power plants are generating PTCs), 99% to JPM and 1% to OrLeaf, or 5% to JPM and 95% to OrLeaf if PTCs are no longer available to either of the two PTC eligible power plants. Once JPM achieves its target internal rate of return, all items of Opal Geo income and loss, gain, deduction and credit will be allocated 5% to JPM and 95% to OrLeaf.
Under the LLC Agreement, OrLeaf, which owns 100% of the Class A Membership Interests in Opal Geo, will serve as the managing member of Opal Geo and control the day-to-day management of Opal Geo and its portfolio of five power plants. However, in certain limited circumstances (such as bankruptcy of Orleaf, fraud or gross negligence by OrLeaf) JPM may remove OrLeaf as the managing member of Opal Geo. JPM, as the Class B Member of Opal Geo, has consent and approval rights with respect to certain items that are designated as major decisions for Opal Geo and the five power plants. In addition, by virtue of certain provisions in OrLeaf’s own limited liability company agreement, and consistent with the ORPD LLC formation documents, Northleaf has similar consent and approval rights with respect to OrLeaf’s determination of major decisions pertaining to the DAC 2 power plant. In both cases, these major decisions are generally equivalent to customary minority protection rights. As a result, the Company’s wholly owned subsidiary, Ormat Nevada, which serves as the managing member of OrLeaf and as the managing member of ORPD LLC, will effectively retain the day-to-day control and management of Opal Geo and its portfolio of five power plants.
The LLC Agreement contains certain customary restrictions on transfer applicable to both OrLeaf and JPM with respect to their respective Membership Interests in Opal Geo, and also provides OrLeaf with a right of first offer in the event JPM desires to transfer any of its Class B Membership Interests, pursuant to which OrLeaf may purchase such Class B Membership Interests. The LLC Agreement also provides OrLeaf with the option to purchase all of the Class B Membership Interests on either December 31, 2022 or the date that is 9 years after the closing date under the Equity Contribution Agreement at a price equal to the greater of (i) the fair market value of the Class B Membership Interests as of the date of purchase (subject to certain adjustments) and (ii) $3 million.
Pursuant to the Equity Contribution Agreement, the Company has provided a guaranty for the benefit of JPM of certain of OrLeaf’s indemnification obligations to JPM under the LLC Agreement. In addition, Ormat Nevada also provided a guaranty for the benefit of JPM of all present and future payment and performance obligations of OrLeaf under the LLC Agreement and each ancillary document to which OrLeaf is a party.
JPM’s approximately $62.1 million capital contribution to Opal Geo was recorded as a $3.7 million allocation to noncontrolling interests and a $58.5 million allocation to liability associated with sale of tax benefits as described in Note 1. JPM also agreed to make deferred capital contributions to Opal Geo based on the amount of electricity generated by the DAC 2 and McGinness Hills Phase II power plants which are eligible for the federal PTC.
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, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands) | |
Balance at beginning of year | | $ | 63,457 | | | $ | 50,183 | | | $ | 39,475 | |
Revision in estimated cash flows | | | 10,504 | | | | (165 | ) | | | (335 | ) |
Liabilities incurred and acquired | | | 6,953 | | | | 10,207 | | | | 8,334 | |
Accretion expense | | | 3,977 | | | | 3,232 | | | | 2,709 | |
Balance at end of year | | $ | 84,891 | | | $ | 63,457 | | | $ | 50,183 | |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2021, the total future compensation cost related to unvested stock-based awards that are expected to vest is $8.9 million, which will be recognized over a weighted average period of 1.2 years.
During the years ended December 31, 2021, 2020 and 2019, the Company recorded compensation related to stock-based awards as follows:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands) | |
Cost of revenues | | $ | 4,656 | | | $ | 4,435 | | | $ | 3,633 | |
Selling and marketing expenses | | | 766 | | | | 1,081 | | | | 916 | |
General and administrative expenses | | | 3,746 | | | | 4,314 | | | | 4,810 | |
Total stock-based compensation expense | | | 9,168 | | | | 9,830 | | | | 9,359 | |
Tax effect on stock-based compensation expense | | | 872 | | | | 858 | | | | 736 | |
Net effect of stock-based compensation expense | | $ | 8,296 | | | $ | 8,972 | | | $ | 8,623 | |
During the fourth quarter of 2021, 2020 and 2019, the Company evaluated the trends the employees stock-based award forfeiture rate and determined that the actual rates are 11.1%, 10.8% and 10.7%, respectively. This represents an increase of 2.8%, 0.9%, and 101.9%, respectively, from prior estimates. As a result of the change in the estimated forfeiture rate, there was an immaterial impact on stock-based compensation expense for each of the respective periods.
Valuation assumptions
The Company estimates the fair value of the stock-based awards using the Complex Lattice, Tree-based option-pricing model. The dividend yield forecast is expected to be at least 20% of the Company’s yearly net profit, which is equivalent to a 0.6% yearly weighted average dividend rate in the year ended December 31, 2021. 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, | |
| | 2021 | | | 2020 | | | 2019 | |
For stock based awards issued by the Company: | | | | | | | | | | | | |
Risk-free interest rates | | | 0.7 | % | | | 0.4 | % | | | 1.8 | % |
Expected lives (in weighted average years) | | | 3.8 | | | | 5.8 | | | | 3.5 | |
Dividend yield | | | 0.6 | % | | | 0.6 | % | | | 0.7 | % |
Expected volatility (weighted average) | | | 36.7 | % | | | 28.8 | % | | | 25.1 | % |
The Company estimated the forfeiture rate (on a weighted average basis) as follows:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
Weighted average forfeiture rate | | | 6.1 | % | | | 8.2 | % | | | 8.6 | % |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-based awards
The 2012 Incentive Compensation Plan
In May 2012, the Company’s shareholders adopted the 2012 Incentive Plan, which provides for the grant of the following types of awards: incentive stock options, non-qualified stock options, restricted stock units ("RSUs"), stock appreciation rights ("SARs”), stock units, performance awards, phantom stock, incentive bonuses, and other possible related dividend equivalents to employees of the Company, directors and independent contractors. Under the 2012 Incentive Plan, a total of 4,000,000 shares of the Company’s common stock were reserved for issuance, all of which could be issued as options or as other forms of awards. Options and SARs granted to employees under the 2012 Incentive Plan typically vest and become exercisable as follows: 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date. Options granted to non-employee directors under the 2012 Incentive Plan will vest and become exercisable one year after the grant date. Restricted stock units granted to directors and members of senior management vest according to a vesting schedule as follows: for the directors, 100% on the first anniversary of the grant date and for members of senior management, 25% on each of the first, second, third and fourth anniversaries of the grant date. The term of stock-based awards typically ranges from six to ten years from the grant date. The shares of common stock issued in respect of awards under the 2012 Incentive Plan are issued from the Company’s authorized share capital upon exercise of options or SARs. The 2012 Incentive Plan expired in May 2018 upon adoption of the 2018 Incentive Compensation Plan (“2018 Incentive Plan”), except as to stock-based awards outstanding under the 2012 Incentive Plan on that date.
The 2018 Incentive Compensation Plan
In May 2018, the Company held its 2018 Annual Meeting of Stockholders at which the Company's stockholders approved the 2018 Incentive Plan. The 2018 Incentive Plan provides for the grant of the following types of awards: incentive stock options, RSUs, SARs, Performance Stock Units ("PSUs"), stock units, performance awards, phantom stock, incentive bonuses and other possible related dividend equivalents to employees of the Company, directors and independent contractors. Under the 2018 Incentive Plan, a total of 5,000,000 shares of the Company’s common stock were authorized and reserved for issuance, all of which could be issued as options or as other forms of awards. SARs, RSUs and PSUs granted to employees under the 2018 Incentive Plan typically vest and become exercisable as follows: 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date. SARs, RSUs and PSUs granted to directors under the 2018 Incentive Plan typically vest and become exercisable (100%) on the first anniversary of the grant date. The term of stock-based awards typically ranges from six to ten years from the grant date. The shares of common stock issued in respect of awards under the 2018 Incentive Plan are issued from the Company’s authorized share capital upon exercise of options or SARs.
As of December 31, 2021, 2,591,783 shares of the Company’s common stock are available for future grants under the 2018 Incentive Plan.
In November 2021, the Company granted its directors an aggregate of 11,804 RSUs under the Company’s 2018 Incentive Plan. The RSUs have a vesting period of one year from the grant date.
The average fair value of each RSU on the grant date was $76.2. The Company calculated the fair value of each RSU on the grant date using the complex lattice, tree-based option-pricing model based on the following assumptions:
Risk-free interest rates | | | 0.14% | - | 0.16% | |
Expected life (in years) | | | | 1 | | |
Dividend yield | | | | 0.65% | | |
Expected volatility (weighted average) | | | | 43.26% | | |
On December 31, 2020, the Company granted certain members of its management an aggregate of 573 Stock Appreciation Rights ("SARs"), 2,103 RSUs and 1,952 Performance Stock Units ("PSUs") under the Company’s 2018 Incentive Plan. The exercise price of each SAR was $90.28 which represented the fair market value of the Company’s common stock on the grant date. The SARs will expire six years from date of the grant and the SARs, RSUs and PSUs have a vesting period of between 2 to 4 years from the grant date.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The average fair value of each SAR, RSU and PSU on the grant date was $25.50, $89.15 and $96.10, respectively. The Company calculated the fair value of each SAR on the grant date using the complex lattice, tree-based option-pricing model based on the following assumptions:
Risk-free interest rates | | | 0.13% | - | 0.51% | |
Expected life (in years) | | | 2 | - | 6 | |
Dividend yield | | | | 0.61% | | |
Expected volatility (weighted average) | | | 37.68% | - | 30.15% | |
On November 3, 2020, the Company granted some of its directors an aggregate of 11,835 SARs and 10,010 RSUs under the Company’s 2018 Incentive Plan. The exercise price of each SAR was $67.54 which represented the fair market value of the Company’s common stock on the grant date. The SARs will expire in six years from date of the grant and the SARs and RSUs have a vesting period one year from the grant date.
The average fair value of each SAR and RSU on the grant date was $18.25 and $67.13, respectively. The Company calculated the fair value of each SAR on the grant date using the complex lattice, tree-based option-pricing model based on the following assumptions:
Risk-free interest rates | | | 0.12% | - | 0.44% | |
Expected life (in years) | | | 1 | - | 6 | |
Dividend yield | | | | 0.61% | | |
Expected volatility (weighted average) | | | 45.2% | - | 29.4% | |
On May 12, 2020, the Company granted certain members of its management an aggregate of 46,795 SARs, 6,142 RSUs and 5,637 PSUs under the Company’s 2018 Incentive Plan. The exercise price of each SAR was $68.34 which represented the fair market value of the Company’s common stock on the grant date. The SARs will expire six years from date of grant and the SARs, RSUs and PSUs have a vesting period of between 2 to 4 years from the grant date.
The fair value of each SAR, RSU and PSU on the grant date was $17.6, $67.2 and $73.2, respectively. The Company calculated the fair value of each SAR on the grant date using the complex lattice, tree-based option-pricing model based on the following assumptions:
Risk-free interest rates | | | | 0.44% | | |
Expected life (in years) | | | 2 | - | 6 | |
Dividend yield | | | | 0.63% | | |
Expected volatility (weighted average) | | | | 28.14% | | |
On June 15, 2020, the Company granted certain directors, members of its management and employees an aggregate of 852,475 SARs, 11,068 RSUs and 10,962 PSUs under the Company’s 2018 Incentive Plan. The exercise price of each SAR was $69.14 which represented the fair market value of the Company’s common stock on the grant date. The SARs will expire six years from date of grant, except for 1,156 SARs which have an expiration date of 5 months from the grant date, and the SARs, RSUs and PSUs have a vesting period of between 2 to 4 years from the grant date.
The fair value of each SAR, RSU and PSU on the grant date was $18.0, $68.0 and $65.0, respectively. The Company calculated the fair value of each SAR on the grant date using the complex lattice, tree-based option-pricing model based on the following assumptions:
Risk-free interest rates | | | 0.44% | - | 0.28% | |
Expected life (in years) | | | 2 | - | 6 | |
Dividend yield | | | | 0.64% | | |
Expected volatility (weighted average) | | | 28.5% | - | 5.2% | |
On July 1, 2020, the Company granted its newly appointed CEO an aggregate of 45,365 SARs, 6,020 RSUs and 6,540 PSUs under the Company’s 2018 Incentive Plan. The exercise price of each SAR was $63.40 which represented the fair market value of the Company’s common stock on the grant date. The SARs will expire six years from date of grant and the SARs, RSUs and PSUs have a vesting period of between 2 to 4 years from the grant date.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each SAR, RSU and PSU on the grant date was $16.5, $62.3 and $57.3, respectively. The Company calculated the fair value of each SAR on the grant date using the complex lattice, tree-based option-pricing model based on the following assumptions:
Risk-free interest rates | | | 0.41% | - | 0.17% | |
Expected life (in years) | | | 2 | - | 6 | |
Dividend yield | | | | 0.64% | | |
Expected volatility (weighted average) | | | 28.5% | - | 35.7% | |
On November 7, 2019, the Company granted its directors an aggregate of 11,495 SARs and 9,420 RSUs under the Company’s 2018 Incentive Plan. The exercise price of each SAR was $76.87 which represented the fair market value of the Company’s common stock on the grant date. The SARs will expire six years from date of grant and both the SARs and RSUs will fully vest on the first anniversary of the grant date.
The fair value of each SAR and RSU for the directors on the grant date was $19.8 and $76.4, respectively. The Company calculated the fair value of each SAR on the grant date using the Exercise Multiple-Based Lattice Pricing model based on the following assumptions:
Risk-free interest rate | | | | 1.79% | | |
Expected life (in years) | | | 1 | - | 6 | |
Dividend yield | | | | 0.57% | | |
Expected volatility | | | | 24.80% | | |
Information on the awards outstanding and the related weighted average exercise price as of and for the years ended December 31, 2021, 2020 and 2019 are presented in the table below:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | Awards (In thousands) | | | Weighted Average Exercise Price | | | Awards (In thousands) | | | Weighted Average Exercise Price | | | Awards (In thousands) | | | Weighted Average Exercise Price | |
Outstanding at beginning of year | | | 2,240 | | | $ | 57.68 | | | | 1,792 | | | $ | 50.39 | | | | 2,527 | | | $ | 46.77 | |
Granted: | | | | | | | | | | | | | | | | | | | | | | | | |
SARs (1) | | | 15 | | | | 77.22 | | | | 957 | | | | 68.82 | | | | 38 | | | | 69.13 | |
RSUs (2) | | | 12 | | | | — | | | | 35 | | | | — | | | | 9 | | | | — | |
PSUs (3) | | | 0 | | | | — | | | | 25 | | | | — | | | | — | | | | — | |
Exercised | | | (159 | ) | | | 40.47 | | | | (469 | ) | | | 45.71 | | | | (711 | ) | | | 37.83 | |
Forfeited | | | (83 | ) | | | 64.34 | | | | (100 | ) | | | 55.05 | | | | (71 | ) | | | 50.59 | |
Expired | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Outstanding at end of year | | | 2,025 | | | | 58.70 | | | | 2,240 | | | | 57.68 | | | | 1,792 | | | | 50.39 | |
Options and SARs exercisable at end of year | | | 881 | | | | 53.20 | | | | 704 | | | | 51.64 | | | | 479 | | | | 48.35 | |
Weighted-average fair value of awards granted during the year | | | | | | $ | 46.23 | | | | | | | $ | 20.84 | | | | | | | $ | 29.24 | |
(1) | 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. |
(2) | An RSU represents the right to receive one share of common stock once certain vesting conditions are met. The value of an RSU is identical to the value of the underlying stock. |
(3) | The Performance shares units shall be paid out based on achievement of three-year relative total stockholder return compared to other companies in S&P 500 index. |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock-based awards outstanding at December 31, 2021 (shares in thousands):
| | | | Awards Outstanding | | | Awards Exercisable | |
Exercise Price | | | Number of Stock-based Awards Outstanding | | | Weighted Average Remaining Contractual Life in Years | | | Aggregate Intrinsic Value | | | Number of Stock-based Awards Exercisable | | | Weighted Average Remaining Contractual Life in Years | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | — | | | | 66 | | | | 1.3 | | | $ | 5,208 | | | | — | | | | — | | | $ | — | |
| 42.87 | | | | 187 | | | | 0.5 | | | | 6,796 | | | | 187 | | | | 0.5 | | | | 6,796 | |
| 47.46 | | | | 15 | | | | 1.9 | | | | 478 | | | | 15 | | | | 1.9 | | | | 478 | |
| 51.71 | | | | 8 | | | | 3.0 | | | | 221 | | | | 4 | | | | 3.0 | | | | 110 | |
| 53.16 | | | | 31 | | | | 2.9 | | | | 819 | | | | 26 | | | | 2.9 | | | | 689 | |
| 53.44 | | | | 386 | | | | 2.5 | | | | 9,985 | | | | 227 | | | | 2.5 | | | | 5,859 | |
| 55.16 | | | | 296 | | | | 1.9 | | | | 7,137 | | | | 296 | | | | 1.9 | | | | 7,137 | |
| 57.97 | | | | 15 | | | | 2.6 | | | | 320 | | | | 15 | | | | 2.6 | | | | 320 | |
| 58.79 | | | | 1 | | | | 0.5 | | | | 19 | | | | 1 | | | | 0.5 | | | | 19 | |
| 63.35 | | | | 88 | | | | 1.9 | | | | 1,401 | | | | 88 | | | | 1.9 | | | | 1,401 | |
| 63.40 | | | | 45 | | | | 4.5 | | | | 721 | | | | — | | | | 4.5 | | | | — | |
| 67.54 | | | | 12 | | | | 4.9 | | | | 139 | | | | 12 | | | | 4.9 | | | | 139 | |
| 68.34 | | | | 47 | | | | 4.4 | | | | 513 | | | | — | | | | 4.4 | | | | — | |
| 69.14 | | | | 799 | | | | 4.4 | | | | 8,123 | | | | 1 | | | | 4.4 | | | | 12 | |
| 70.10 | | | | 1 | | | | 0.5 | | | | 5 | | | | | | | | 0.5 | | | | — | |
| 71.71 | | | | 4 | | | | 3.6 | | | | 30 | | | | 2 | | | | 3.6 | | | | 15 | |
| 76.43 | | | | 8 | | | | 3.9 | | | | 24 | | | | 8 | | | | 3.9 | | | | 24 | |
| 76.54 | | | | 9 | | | | 5.9 | | | | 23 | | | | — | | | | 5.9 | | | | | |
| 78.53 | | | | 6 | | | | 5.3 | | | | 5 | | | | — | | | | 5.3 | | | | | |
| 90.28 | | | | 1 | | | | 5.0 | | | | — | | | | — | | | | 5 | | | | — | |
| | | | | 2,025 | | | | 3.0 | | | $ | 41,967 | | | | 882 | | | | 1.8 | | | $ | 22,999 | |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock-based awards outstanding at December 31, 2020 (shares in thousands):
| | | | Awards Outstanding | | | Awards Exercisable | |
Exercise Price | | | Number of Stock-based Awards Outstanding | | | Weighted Average Remaining Contractual Life in Years | | | Aggregate Intrinsic Value | | | Number of Stock-based Awards Exercisable | | | Weighted Average Remaining Contractual Life in Years | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | — | | | | 85 | | | | 2.1 | | | $ | 7,677 | | | | — | | | | — | | | $ | — | |
| 42.87 | | | | 235 | | | | 1.5 | | | | 11,129 | | | | 235 | | | | 1.5 | | | | 11,129 | |
| 47.46 | | | | 15 | | | | 2.9 | | | | 642 | | | | 15 | | | | 2.9 | | | | 642 | |
| 51.71 | | | | 8 | | | | 4.0 | | | | 309 | | | | 0 | | | | 4.0 | | | | 0 | |
| 53.16 | | | | 31 | | | | 3.9 | | | | 1,164 | | | | 21 | | | | 3.9 | | | | 792 | |
| 53.44 | | | | 486 | | | | 3.5 | | | | 17,893 | | | | 129 | | | | 3.5 | | | | 4,719 | |
| 55.16 | | | | 296 | | | | 2.9 | | | | 10,384 | | | | 213 | | | | 2.9 | | | | 7,484 | |
| 57.97 | | | | 15 | | | | 3.6 | | | | 485 | | | | 15 | | | | 3.6 | | | | 485 | |
| 58.79 | | | | 1 | | | | 1.5 | | | | 33 | | | | — | | | | 1.5 | | | | — | |
| 63.35 | | | | 94 | | | | 2.9 | | | | 2,525 | | | | 68 | | | | 2.9 | | | | 1,843 | |
| 63.40 | | | | 45 | | | | 5.5 | | | | 1,219 | | | | — | | | | 5.5 | | | | — | |
| 67.54 | | | | 12 | | | | 5.9 | | | | 269 | | | | — | | | | 5.9 | | | | — | |
| 68.34 | | | | 47 | | | | 5.4 | | | | 1,027 | | | | — | | | | 5.4 | | | | — | |
| 69.14 | | | | 842 | | | | 5.4 | | | | 17,820 | | | | — | | | | 5.4 | | | | — | |
| 71.71 | | | | 4 | | | | 4.6 | | | | 74 | | | | — | | | | 4.6 | | | | — | |
| 72.14 | | | | 15 | | | | 4.7 | | | | 272 | | | | — | | | | 4.7 | | | | — | |
| 76.43 | | | | 8 | | | | 4.9 | | | | 117 | | | | 8 | | | | 4.9 | | | | 117 | |
| 90.28 | | | | 1 | | | | 2.8 | | | | — | | | | — | | | | 2.8 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2,240 | | | | 3.9 | | | $ | 73,039 | | | | 704 | | | | 2.6 | | | $ | 27,211 | |
The aggregate intrinsic value in the above tables represents the total pretax intrinsic value, based on the Company’s stock price of $79.3 and $90.28 as of December 31, 2021 and 2020, respectively, which would have potentially been received by the stock-based award holders had all stock-based award holders exercised their stock-based award as of those dates. The total number of in-the-money stock-based awards exercisable as of December 31, 2021 and 2020 was 881,393 and 704,169, respectively.
The total pretax intrinsic value of options exercised during the year ended December 31, 2021 and 2020 was $6.1 million and $11.0 million, respectively, based on the average stock price of $78.4 and $69.2 during the years ended December 31, 2021 and 2020, respectively.
NOTE 16 — INTEREST EXPENSE, NET
The components of interest expense are as follows:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands) | |
Interest related to sale of tax benefits | | $ | 12,246 | | | $ | 9,344 | | | $ | 11,786 | |
Interest expense | | | 84,994 | | | | 79,018 | | | $ | 71,883 | |
Less — amount capitalized | | | (14,582 | ) | | | (10,409 | ) | | $ | (3,285 | ) |
| | $ | 82,658 | | | $ | 77,953 | | | $ | 80,384 | |
NOTE 17 — INCOME TAXES
U.S. and foreign components of income from continuing operations, before income taxes and equity in income (losses) of investees consisted of:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands) | |
U.S | | $ | 37,032 | | | $ | 43,273 | | | $ | 14,187 | |
Non-U.S. (foreign) | | | 66,519 | | | | 125,444 | | | | 123,116 | |
Total income from continuing operations, before income taxes and equity in losses | | $ | 103,551 | | | $ | 168,717 | | | $ | 137,303 | |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the provision (benefit) for income taxes, net are as follows:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands) | |
Current: | | | | | | | | | | | | |
Federal | | $ | — | | | $ | 0 | | | $ | — | |
State | | | 400 | | | | 363 | | | | 172 | |
Foreign | | | 25,096 | | | | 61,574 | | | | 16,969 | |
Total current income tax expense | | $ | 25,496 | | | $ | 61,937 | | | $ | 17,141 | |
| | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | |
Federal | | | (3,267 | ) | | | 22,682 | | | | (12,179 | ) |
State | | | 9,301 | | | | 7,277 | | | | 4,671 | |
Foreign | | | (6,680 | ) | | | (24,893 | ) | | | 35,980 | |
Total deferred tax provision (benefit) | | | (646 | ) | | | 5,066 | | | | 28,472 | |
Total Income tax provision | | $ | 24,850 | | | $ | 67,003 | | | $ | 45,613 | |
Reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
U.S. federal statutory tax rate | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % |
Foreign tax credits | | | (0.4 | ) | | | (0.3 | ) | | | (22.8 | ) |
Withholding tax | | | 6.0 | | | | 4.4 | | | | 10.4 | |
Valuation allowance - U.S. | | | (10.4 | ) | | | 3 | | | | (3.7 | ) |
State income tax, net of federal benefit | | | 8.8 | | | | 3.8 | | | | 3.7 | |
Uncertain tax positions | | | 3.6 | | | | (7.5 | ) | | | 2.1 | |
Effect of foreign income tax, net | | | (5.2 | ) | | | 8.5 | | | | 9.7 | |
Production tax credits | | | (4.2 | ) | | | (1.8 | ) | | | (5 | ) |
Subpart F income | | | 0.0 | | | | 0.2 | | | | 0.5 | |
Tax on global intangible low-tax income | | | 9.3 | | | | 11.1 | | | | 16.9 | |
Intra-entity transfers of assets other than inventory | | | (1.8 | ) | | | (0.4 | ) | | | 0.3 | |
Noncontrolling interest | | | (2.5 | ) | | | (1.6 | ) | | | (0.4 | ) |
Other, net | | | (0.1 | ) | | | (0.7 | ) | | | 0.5 | |
Effective tax rate | | | 24.0 | % | | | 39.7 | % | | | 33.2 | % |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred tax assets and liabilities consist of the following:
| | December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Deferred tax assets (liabilities): | | | | | | | | |
Net foreign deferred taxes, primarily depreciation | | $ | (54,899 | ) | | $ | (66,452 | ) |
Depreciation | | | (62,996 | ) | | | (23,835 | ) |
Intangible drilling costs | | | (11,501 | ) | | | (6,689 | ) |
Net operating loss carryforward - U.S. | | | 32,848 | | | | 35,346 | |
Tax monetization transaction | | | (62,533 | ) | | | (46,449 | ) |
Right-of-use assets | | | (5,101 | ) | | | (3,753 | ) |
Lease liabilities | | | 5,148 | | | | 3,846 | |
State and Investment tax credits | | | 813 | | | | 813 | |
Production tax credits | | | 108,103 | | | | 103,592 | |
Foreign tax credits | | | 92,240 | | | | 92,077 | |
Withholding tax | | | (20,521 | ) | | | (12,416 | ) |
Stock options amortization | | | 2,106 | | | | 1,510 | |
Basis difference in partnership interest | | | (45,683 | ) | | | (41,818 | ) |
Excess business interest | | | 13,662 | | | | 10,971 | |
Sale and leaseback transaction | | | 64,070 | | | | — | |
Other assets | | | 10,169 | | | | — | |
Accrued liabilities and other | | | 4,161 | | | | 6,777 | |
Total | | | 70,086 | | | | 53,520 | |
Less - valuation allowance | | | (11,298 | ) | | | (22,193 | ) |
Total, net | | $ | 58,788 | | | $ | 31,327 | |
The following table presents a reconciliation of the beginning and ending valuation allowance:
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Balance at beginning of the year | | $ | 22,193 | | | $ | 17,412 | |
Additions to valuation allowance | | | 2,029 | | | | 20,214 | |
Release of valuation allowance | | | (12,924 | ) | | | (15,433 | ) |
Balance at end of the year | | $ | 11,298 | | | $ | 22,193 | |
At December 31, 2021, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately $57.3 million, all of which was generated before 2018 and expires by 2038.
At December 31, 2021, the Company had PTCs in the amount of $108.1 million. These PTCs are available for a 20-year period and begin to expire in 2022. At December 31, 2021, the Company had U.S. foreign tax credits (“FTCs”) in the amount of $92.2 million. These FTCs are available for a 10-year period and begin to expire in 2022.
At December 31, 2021, the Company had state NOL carryforwards of approximately $297.7 million, $294.4 million which expire between 2025 and 2040 and $2.8 million are available to be carried forward for an indefinite period. At December 31, 2021, the Company had state tax credits in the amount of $1.0 million. These state tax credits are available to be carried forward for an indefinite period.
The Company has recorded deferred tax assets for net operating losses, foreign tax credits, and production tax credits. Realization of the deferred tax assets and tax credits is dependent on generating sufficient taxable income in appropriate jurisdictions prior to expiration of the NOL carryforwards and tax credits. Based upon available evidence of the Company’s ability to generate additional taxable income in the future and historical losses in prior years, a valuation allowance in the amount of $11.3 million and $22.2 million is recorded against the U.S. deferred tax assets as of December 31, 2021 and 2020, respectively, as it is more likely than not that the deferred tax assets will not be realized. The overall decrease in the valuation allowance of $10.9 million is due to a decreased valuation allowance related to FTCs, partially offset by a valuation allowance increase related to PTCs,. The Company is maintaining a valuation allowance of $11.3 million against a portion of the U.S. FTCs and PTCs, capital loss carryforward, and state NOLs that are expected to expire before they can be utilized in future periods.
On April 24, 2018, the Company acquired 100% of stock of USG for approximately $110 million. Under the acquisition method of accounting, the Company recorded a net deferred tax asset of $1.7 million comprised primarily of federal and state NOLs netted against deferred tax liabilities for partnership basis differences and fixed assets. The total amount of acquired federal and state NOLs, which are subject to limitations under Section 382, were $113.9 million and $49.9 million, respectively. A valuation allowance of $1.8 million has been recorded against such acquired state NOLs, as it is more likely than not that the deferred tax asset will not be realized.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The FASB released guidance Staff Q&A, Topic 740, No. 5, that states a company can make an accounting policy election to either recognize deferred taxes related to GILTI or to provide for the GILTI tax expense in the year the tax is incurred as a period cost. The Company has elected to treat any GILTI inclusions as a period cost. We have elected and applied the tax law ordering approach when considering GILTI as part of our valuation allowance.
The following table presents the deferred taxes on the balance sheet as of the dates indicated:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
| | | | | | | | |
Non-current deferred tax assets | | $ | 143,450 | | | $ | 119,299 | |
Non-current deferred tax liabilities | | | (84,662 | ) | | | (87,972 | ) |
Non-current deferred tax assets, net | | | 58,788 | | | | 31,327 | |
Uncertain tax benefit offset (1) | | | (95 | ) | | | (95 | ) |
| | $ | 58,693 | | | $ | 31,232 | |
(1) The non-current deferred tax asset has been reduced by the uncertain tax benefit of $0.1 million in accordance with ASU 2013-11, Income Taxes.
At December 31, 2021, the Company is no longer indefinitely reinvested with respect to the earnings of its foreign subsidiaries due to forecasted changes in cash needs and the impact of U.S. tax reform. The Company has accrued withholding taxes that would be owed upon future distributions of such earnings. Accordingly, as of December 31, 2021, the Company has accrued $17.3 million of foreign withholding taxes on future distributions of foreign earnings.
Uncertain tax positions
The Company is subject to income taxes in the United States (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company's tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite evidence supporting the position. The Company adjusts these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve positions and changes to reserves that are considered probable.
At December 31, 2021 and 2020, there are $5.7 million and $2.0 million of unrecognized tax benefits, respectively, that if recognized would reduce the effective tax rate. Interest and penalties assessed by taxing authorities on an underpayment of income taxes are included as a component of income tax provision in the consolidated statements of operations and comprehensive income.
A reconciliation of the Company's unrecognized tax benefits is as follows:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | |
| | (Dollars in thousands) | |
Balance at beginning of year | | $ | 1,673 | | | $ | 10,623 | |
Additions based on tax positions taken in prior years | | | 9 | | | | 283 | |
Additions based on tax positions taken in the current year | | | 3,408 | | | | 1,570 | |
Reduction based on tax positions taken in prior years | | | (14 | ) | | | (10,803 | ) |
Balance at end of year | | $ | 5,076 | | | $ | 1,673 | |
The Company and its U.S. subsidiaries file consolidated income tax returns for federal and state (where applicable) purposes. As of December 31, 2021, the Company has not been subject to U.S. federal or state income tax examinations.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company remains open to examination by the Internal Revenue Service for the years 2002-2019 and by local state jurisdictions for the years 2004-2019. These examinations may lead to ordinary course adjustments or proposed adjustments to the Company's taxes or the Company's net operating losses with respect to years under examination as well as subsequent periods.
The Company’s foreign subsidiaries remain open to examination by the local income tax authorities in the following countries for the years indicated:
Israel | 2019 - 2021 |
Kenya | 2018 - 2021 |
Guatemala | 2016 - 2021 |
Honduras | 2015 - 2021 |
Guadeloupe | 2019 - 2021 |
Management believes that the liability for unrecognized tax benefits is adequate for all open tax years based on its assessment of many factors, including among others, past experience and interpretations of local income tax regulations. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. As a result, it is possible that federal, state and foreign tax examinations will result in assessments in future periods. To the extent any such assessments occur, the Company will adjust its liability for unrecognized tax benefits. The Company is not able to reasonably estimate the amount of unrecognized tax benefits that will be reduced within the next twelve months.
Tax benefits in the United States
The U.S. government encourages production of electricity from geothermal resources through certain tax subsidies. On February 9, 2018 the Bipartisan Budget Act of 2018 was enacted extending the PTC and ITC in lieu of PTCs for geothermal projects that began construction before 2018. On December 20, 2019, the Tax Extenders Bill was enacted, further extending the PTC and ITC in lieu of PTCs. Therefore, geothermal projects that begin construction before 2021 and meet certain other “beginning of construction” rules qualify for PTCs for their first 10-years of operations; alternatively, the owner of the project may elect to claim the ITC in lieu of PTCs. In either case, under current tax rules for tax credits, any unused tax credit has a 1-year carry back and a 20-year carry forward.
If the Company claims the ITC, the Company’s “tax basis” in the plant that it can recover through bonus or accelerated depreciation (if elected) must be reduced by half of the ITC. If the Company claims the PTC, there is no reduction in the tax basis for depreciation. Whether the Company claims the PTC or the ITC in lieu of PTC, for assets acquired and placed in service after September 27, 2017, the Company is eligible to expense 100% of the cost of qualified property (“bonus depreciation”). In later years, the first-year bonus depreciation deduction phases down, as follows:
| ● | 80% for property placed in service after Dec. 31, 2022 and before Jan. 1, 2024. |
| ● | 60% for property placed in service after Dec. 31, 2023 and before Jan. 1, 2025. |
| ● | 40% for property placed in service after Dec. 31, 2024 and before Jan. 1, 2026. |
| ● | 20% for property placed in service after Dec. 31, 2025 and before Jan. 1, 2027. |
The Company could also elect in lieu of bonus depreciation to depreciate most of its "tax basis" in the plant for tax purposes over five years on an accelerated basis, meaning that more of the cost may be deducted in the first few years than during the remainder of the depreciation period.
Income taxes related to foreign operations
Guadeloupe - The Company’s operations in Guadeloupe are taxed at a maximum rate of 31% in 2019, a rate of 28% in 2020, 26.5% in 2021 and 25% in 2022.
Guatemala — The enacted tax rate is 25%. Orzunil, a wholly owned subsidiary, was granted a benefit under a law which promotes development of renewable power sources. The law allows Orzunil to reduce the investment made in its geothermal power plant from income tax payable, which currently reduces the effective tax rate to zero. Ortitlan, another wholly owned subsidiary, was granted a tax exemption for a period of ten years ending August 2017. Starting August 2017, Ortitlan pays income tax of 7% on its Electricity revenues.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Honduras - The Company’s operations in Honduras are exempt from income taxes for the first ten years starting at the commercial operation date of the power plant, which was in September 2017..
Israel — The Company’s operations in Israel through its wholly owned Israeli subsidiary, Ormat Systems Ltd. (“Ormat Systems”), were taxed at a reduced corporate tax rate of 16% in 2017 and 23% in 2018 and 16% thereafter, under the “Benefited Enterprise” tax regime of the Encouragement of Capital Investments Law, 1959 (the “Investment Law”), with respect to two of its investment programs. In January 2011, new legislation amending the Investment Law by adding, inter alia, the Preferred Enterprise Regime was enacted. Under the Preferred Enterprise Regime, a uniform reduced corporate tax rate would apply to all qualified income of certain industrial companies, as opposed to the Investment Law incentives that are limited to income from a “Benefited Enterprise” during their benefits period. According to the amendment, the uniform tax rate applicable to the zone where the production facilities of Ormat Systems are located would be 16% in 2014 and thereafter. Ormat Systems decided to irrevocably comply with the new law starting in 2011.
On December 29, 2016, the Investment Law was amended (“73 Amendment”), which includes, inter alia, two new tax incentive opportunities. These are the Preferred Technological Enterprise (“PTE”) and Special Preferred Technological Enterprise (“SPTE”). In order to benefit from either of these options, a Company must meet certain qualifications and receive formal approval from the Israel Innovation Authority (“IIA”). The Company received such approval on January 20, 2021, which allowed the Company to use the reduced corporate tax rate of 12% on its "Preferred Technological Income" for the tax years 2018, 2019 and 2020. The benefit of the reduced corporate tax rate has been reflected in these financial statements.
The Investment Law also included a specific order that allowed companies to distribute earnings that were previously untaxed after paying a reduced corporate tax rate of 10% versus 25% under the prior tax regime. Ormat elected to pay the 10% corporate rate on such previously untaxed earnings during 2021 which now allows such earnings to be dividended.
Kenya - The Company’s operations in Kenya are taxed at the rate of 37.5%.
Tax audit in Israel
On December 28, 2020, the Company entered into a settlement agreement with the Israel Tax Authority ("ITA") in relation to a tax audit for the income tax years 2015 to 2018. The settlement amount for the audit period was $4.3 million and was paid on January 7, 2021. This settlement closes and concludes all years within the audit period.
Tax audit in Kenya
The Company was audited by the Kenya Revenue Authority ("KRA") for income tax years 2013 to 2017 for which it had received during 2019, and 2020 three separate Notices of Assessments ("NoA") detailing different issues relating to certain findings in respect of the KRA review of such years.
On October 19, 2020, the Company entered into a settlement agreement in relation to the second NoA that was issued by the KRA on December 4, 2019 totaling approximately $190 million of proposed adjustments, including interest and penalties. The settlement agreement extended the audit period for the issues addressed within the assessment, to cover the period from 2013 through 2019 and resulted in a total settlement payment of approximately $28 million, including interest and penalties, related to late payment in respect of 2019 taxable income. Additionally, the settlement included a deferral of tax benefits to be utilized in years subsequent to 2019 in an amount of approximately $28 million. The assessment was paid on October 27, 2020.
On December 21, 2020, the Company entered into a settlement agreement with the KRA in relation to the first and third NoA's that were issued by the KRA on June 28, 2019 and May 12, 2020, respectively, totaling approximately $9 million, including interest and penalties. The total settlement amount reflected in the agreement was $1.5 million, which was paid on December 28, 2020. This concluded all open audits and NoA with the KRA.
NOTE 18 — BUSINESS SEGMENTS
The Company has three reporting segments: the Electricity segment, the Product segment and the Energy Storage segment. These segments are managed and reported separately as each offers different products and serves different markets.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| • | Under the Electricity segment, the Company builds, owns and operates geothermal, solar PV and recovered energy-based power plants in the United States and geothermal power plants in foreign countries, and sell the electricity generated by those power plants. |
| • | Under the Product segment, the Company designs, manufactures and sells equipment for geothermal and recovered energy-based electricity generation and remote power units and provide services relating to the engineering, procurement and construction of geothermal and recovered energy-based power plants. |
| • | Under the Energy Storage segment, the Company provides energy storage and related services as well as services relating to the engineering, procurement, construction, operation and maintenance of energy storage units. |
Transfer prices between the operating segments were determined on current market values or cost plus markup of the seller’s business segment.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables, including, as further described under Note 1 to the consolidated financial statements, the Company's disaggregated revenues from contracts with customers as required by ASC 606:
| | Electricity | | | Product | | | Energy Storage | | | Consolidated | |
| | (Dollars in thousands) | |
Year Ended December 31, 2021: | | | | | | | | | | | | | | | | |
Revenues from external customers: | | | | | | | | | | | | | | | | |
United States (1) | | $ | 404,303 | | | $ | 5,414 | | | $ | 30,393 | | | $ | 440,110 | |
Foreign (2) | | | 181,468 | | | | 41,506 | | | | — | | | | 222,974 | |
Net revenues from external customers | | | 585,771 | | | | 46,920 | | | | 30,393 | | | | 663,084 | |
Intersegment revenues | | | — | | | | 129,589 | | | | — | | | | — | |
Depreciation and amortization expense | | | 164,490 | | | | 7,719 | | | | 10,763 | | | | 182,972 | |
Operating income (loss) | | | 171,550 | | | | (3,641 | ) | | | 1,448 | | | | 169,357 | |
Segment assets at period end (3) (*) | | | 4,142,341 | | | | 113,817 | | | | 169,520 | | | | 4,425,678 | |
Expenditures for long-lived assets | | | 383,307 | | | | 10,687 | | | | 25,278 | | | | 419,272 | |
* Including unconsolidated investments | | | 105,886 | | | | — | | | | — | | | | 105,886 | |
| | | | | | | | | | | | | | | | |
Year Ended December 31, 2020: | | | | | | | | | | | | | | | | |
Revenues from external customers: | | | | | | | | | | | | | | | | |
United States (1) | | | 341,399 | | | | 5,800 | | | | 15,824 | | | | 363,023 | |
Foreign (2) | | | 199,994 | | | | 142,325 | | | | — | | | | 342,319 | |
Net revenues from external customers | | $ | 541,393 | | | $ | 148,125 | | | $ | 15,824 | | | $ | 705,342 | |
Intersegment revenues | | | — | | | | 113,200 | | | | — | | | | — | |
Depreciation and amortization expense | | | 144,357 | | | | 6,010 | | | | 6,245 | | | | 156,612 | |
Operating income (loss) | | | 205,256 | | | | 13,145 | | | | (4,388 | ) | | | 214,013 | |
Segment assets at period end (3) (*) | | | 3,607,384 | | | | 145,911 | | | | 135,692 | | | | 3,888,987 | |
Expenditures for long-lived assets | | | 267,843 | | | | 18,011 | | | | 34,884 | | | | 320,738 | |
* Including unconsolidated investments | | | 98,217 | | | | — | | | | — | | | | 98,217 | |
| | | | | | | | | | | | | | | | |
Year Ended December 31, 2019: | | | | | | | | | | | | | | | | |
Revenues from external customers: | | | | | | | | | | | | | | | | |
United States (1) | | | 333,797 | | | | 30,562 | | | | 13,597 | | | | 377,956 | |
Foreign (2) | | | 206,536 | | | | 160,447 | | | | 1,105 | | | | 368,088 | |
Net revenues from external customers | | | 540,333 | | | | 191,009 | | | | 14,702 | | | | 746,044 | |
Intersegment revenues | | | — | | | | 84,614 | | | | — | | | | — | |
Depreciation and amortization expense | | | 138,426 | | | | 5,308 | | | | 5,027 | | | | 148,761 | |
Operating income (loss) | | | 177,192 | | | | 23,180 | | | | (6,576 | ) | | | 193,796 | |
Segment assets at period end (3) (*) | | | 3,044,909 | | | | 126,018 | | | | 79,567 | | | | 3,250,494 | |
Expenditures for long-lived assets | | | 259,898 | | | | 9,156 | | | | 10,932 | | | | 279,986 | |
* Including unconsolidated investments | | | 81,140 | | | | — | | | | — | | | | 81,140 | |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) | Electricity segment revenues in the United States are all accounted under lease accounting, except for $83.4 million, $68.1 million and $61.3 million for the years 2021, 2020 and 2019, which are accounted under ASC 606. Product and Energy Storage segment revenues in the United States are accounted under ASC 606, as further described under Note 1 to the consolidated financial statements. |
(2) | Electricity segment revenues in foreign countries are all accounted under lease accounting. Product and Energy Storage segment revenues in foreign countries are accounted under ASC 606 as further described under Note 1 to the consolidated financial statements. |
(3) | Electricity segment assets include goodwill in the amount of $85.3 million, $20.5 million and $20.1 million as of December 31, 2021, 2020 and 2019, respectively, $65.4 million of which was added in the third quarter of 2021 as a result of the Terra-Gen Transaction as further described under Note 2 to the consolidated financial statements. Energy Storage segment assets include goodwill in the amount of $4.6 million, $4.1 million and $0.0 million as of December 31, 2021, 2020 and 2019, respectively. No goodwill is included in the Product segment assets as of December 31, 2021, 2020 and 2019. |
Reconciling information between reportable segments and the Company’s consolidated totals is shown in the following table:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands) | |
Revenues: | | | | | | | | | | | | |
Total segment revenues | | $ | 663,084 | | | $ | 705,342 | | | $ | 746,044 | |
Intersegment revenues | | | 129,589 | | | | 113,200 | | | | 84,614 | |
Elimination of intersegment revenues | | | (129,589 | ) | | | (113,200 | ) | | | (84,614 | ) |
| | | | | | | | | | | | |
Total consolidated revenues | | $ | 663,084 | | | $ | 705,342 | | | $ | 746,044 | |
| | | | | | | | | | | | |
Operating income (expense): | | | | | | | | | | | | |
Operating income | | $ | 169,357 | | | $ | 214,013 | | | $ | 193,796 | |
Interest income | | | 2,124 | | | | 1,717 | | | | 1,515 | |
Interest expense, net | | | (82,658 | ) | | | (77,953 | ) | | | (80,384 | ) |
Derivatives and foreign currency transaction gains (losses) | | | (14,720 | ) | | | 3,802 | | | | 624 | |
Income attributable to sale of tax benefits | | | 29,582 | | | | 25,720 | | | | 20,872 | |
Other non-operating income (expense), net | | | (134 | ) | | | 1,418 | | | | 880 | |
Total consolidated income before income taxes and equity in earnings (losses) of investees | | $ | 103,551 | | | $ | 168,717 | | | $ | 137,303 | |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company sells electricity, products and energy storage services mainly to the geographical areas set forth below based on the location of the customer. The following tables present certain data by geographic area:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands) | |
Revenues from external customers attributable to: | | | | | | | | | | | | |
United States | | $ | 440,110 | | | $ | 363,023 | | | $ | 377,956 | |
Indonesia | | | 8,056 | | | | — | | | | 0 | |
Kenya | | | 102,844 | | | | 115,474 | | | | 121,661 | |
Turkey | | | 2,723 | | | | 65,535 | | | | 88,938 | |
Chile | | | 7,035 | | | | 32,418 | | | | 25,540 | |
Guatemala | | | 26,868 | | | | 27,391 | | | | 28,624 | |
New Zealand | | | 6,770 | | | | 34,985 | | | | 31,222 | |
Honduras | | | 35,233 | | | | 35,197 | | | | 34,446 | |
Other foreign countries | | | 33,445 | | | | 31,319 | | | | 37,657 | |
Consolidated total | | $ | 663,084 | | | $ | 705,342 | | | $ | 746,044 | |
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands) | |
Long-lived assets (primarily power plants and related assets) located in: | | | | | | | | | | | | |
United States | | $ | 2,527,429 | | | $ | 2,084,021 | | | $ | 1,870,335 | |
Kenya | | | 297,427 | | | | 289,266 | | | | 284,526 | |
Other foreign countries | | | 217,371 | | | | 232,953 | | | | 224,676 | |
Consolidated total | | $ | 3,042,227 | | | $ | 2,606,240 | | | $ | 2,379,537 | |
The following table presents revenues from major customers:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | Revenues | | | % | | | Revenues | | | % | | | Revenues | | | % | |
| | (Dollars in thousands) | | | | | | | (Dollars in thousands) | | | | | | | (Dollars in thousands) | | | | | |
Southern California Public Power (1) | | $ | 157,318 | | | | 23.7 | | | $ | 145,450 | | | | 20.6 | | | $ | 133,725 | | | | 17.9 | |
Sierra Pacific Power Company and Nevada Power Company (1)(2) | | | 120,206 | | | | 18.1 | | | | 123,734 | | | | 17.5 | | | | 125,486 | | | | 16.8 | |
KPLC (1) | | | 102,844 | | | | 15.5 | | | | 115,474 | | | | 16.4 | | | | 121,661 | | | | 16.3 | |
(1 )Revenues reported in Electricity segment.
(2) Subsidiaries of NV Energy, Inc.
NOTE 19 — TRANSACTIONS WITH RELATED ENTITIES
There were no transactions between the Company and related entities, other than those disclosed elsewhere in these consolidated financial statements.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 — EMPLOYEE BENEFIT PLAN
401(k) Plan
The Company has a 401(k) Plan (the “Plan”) for the benefit of its U.S. employees. Employees of the Company and its U.S. subsidiaries who have completed 60 days of employment are eligible to participate in the Plan. Contributions are made by employees through pre- and post-tax deductions up to 60% of their annual salary. In 2021, 2020 and 2019, the Company matched employee contributions, after completion of one year of service, up to a maximum of 4%, 4% and 4% of the employee’s annual salary, respectively. The Company’s contributions to the Plan were $1.8 million, $1.6 million and $1.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Severance plan
The Company, through Ormat Systems, provides limited non-pension benefits to all current employees in Israel who are entitled to benefits in the event of termination or retirement in accordance with the Israeli Government sponsored programs. These plans generally obligate the Company to pay one month’s salary per year of service to employees in the event of involuntary termination. There is no limit on the number of years of service in the calculation of the benefit obligation. The liabilities for these plans are recorded at each balance sheet date by determining the undiscounted obligation as if it were payable at that point in time. Such liabilities have been presented in the consolidated balance sheets as “liabilities for severance pay”. The Company has an obligation to partially fund the liabilities through regular deposits in pension funds and severance pay funds. The amounts funded amounted to $9.1 million and $10.7 million at December 31, 2021 and 2020, respectively, and have been presented in the consolidated balance sheets as part of “Deposits and other”. The severance pay liability covered by the pension funds is not reflected in the financial statements as the severance pay risks have been irrevocably transferred to the pension funds. Under the Israeli severance pay law, restricted funds may not be withdrawn or pledged until the respective severance pay obligations have been met. As allowed under the program, earnings from the investment are used to offset severance pay costs. Severance pay expenses for the years ended December 31, 2021, 2020 and 2019 were $2.0 million, $3.0 million and $3.5 million, respectively, which are net of income (including loss) amounting to $1.3 million, $0.9 million, and $1.0 million, respectively, generated from the regular deposits and amounts accrued in severance funds.
The Company expects to pay the following future benefits to its employees upon their reaching normal retirement age:
| | | (Dollars in thousands) | |
Year ending December 31: | | | | | |
2022 | | | $ | 4,526 | |
2023 | | | | 92 | |
2024 | | | | 263 | |
2025 | | | | 951 | |
2026 | | | | 664 | |
2027-2044 | | | | 9,110 | |
Total | | | $ | 15,606 | |
The above amounts were determined based on the employees’ current salary rates and the number of years’ service that will have been accumulated at their retirement date. These amounts do not include amounts that might be paid to employees that will cease working with the Company before reaching their normal retirement age.
NOTE 21 — COMMITMENTS AND CONTINGENCIES
Geothermal resources
The Company, through its project subsidiaries in the United States and other foreign locations, controls certain rights to geothermal fluids through certain leases with the BLM or through private leases. Royalties on the utilization of the geothermal resources are computed and paid to the lessors as defined in the respective agreements. Royalty expense under the geothermal resource agreements were $25.2 million, $20.8 million and $21.7 million for the years ended December 31, 2021, 2020 and 2019, respectively.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Letters of credit
In the ordinary course of business with customers, vendors, and lenders, the Company is contingently liable for performance under letters of credit totaling $185.0 million at December 31, 2021. Management does not expect any material losses to result from these letters of credit because performance is not expected to be required.
Purchase commitments
The Company purchases raw materials for inventories, construction-in-process and services from a variety of vendors. During the normal course of business, in order to manage manufacturing lead times and help assure adequate supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure goods and services based upon specifications defined by the Company, or that establish parameters defining the Company’s requirements. At December 31, 2021, total obligations related to such supplier agreements were approximately $249.2 million (out of which approximately $152.8 million relate to construction-in-process). All such obligations are payable in 2022.
Grants and royalties
The Company, through Ormat Systems, had historically, through December 31, 2003, requested and received grants for research and development from the Office of the Chief Scientist of the Israeli Government. Ormat Systems is required to pay royalties to the Israeli Government at a rate of 3.5% to 5.0% of the revenues derived from products and services developed using these grants. No royalties were paid for the years ended December 31, 2021, 2020 and 2019. The Company is not liable for royalties if the Company does not sell such products and services. Such royalties are capped at the amount of the grants received plus interest at LIBOR. The cap at December 31, 2021 and 2020, amounted to $2.2 million and $2.1 million, respectively, of which approximately $1.2 million and $1.1 million, represents interest based on the LIBOR rate as defined above, for 2021 and 2020, respectively.
Lease commitments
The Company's lease commitments are detailed under Note 22, Leases to the consolidated financial statements.
Contingencies
| ● | On May 21, 2018, a motion to certify a class action was filed in Tel Aviv District Court against Ormat Technologies, Inc. and 11 officers and directors. The alleged class is defined as "All persons who purchased Ormat shares on the Tel Aviv Stock Exchange between August 3, 2017 and May 13, 2018". The motion alleges that the Company and other respondents violated Sections 31(a)(1) and 38C of the Israeli Securities Law, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, because they allegedly: (1) misled investors by stating in the Company's financial statements that it maintains effective internal controls over its accounting policies and procedures, even though the Company's internal controls had material weaknesses which led to erroneous accounting in its 2017 unaudited quarterly reports that had to be restated, including adjustments to the Company’s net income and shareholders’ equity; and (2) failed to issue an immediate report in Israel until May 16, 2018, analogous to the report that was released in the United States on May 11, 2018 stating, inter alia, that the errors in its financial reports affected its balance sheet and would be remedied in its 2017 Annual Report. Agreed motions were filed from time to time with, and granted by, the Tel Aviv District Court to stay the proceedings in Israel in light of the United States case (Mac Costas). On June 30, 2020, pursuant to the execution and submission of a settlement agreement to the United States court for approval, which resolves the matters raised with respect to the entire class of shareholders (whether traded on the Tel Aviv Stock Exchange or U.S. stock exchange), the Company filed a motion informing the Tel Aviv court of the settlement. On March 3, 2021, the Tel Aviv District Court approved the parties’ joint motion for withdrawal and dismissal of the plaintiff’s July 2, 2020 motion for an Anti-Suit Injunction and issued an order to the Tel Aviv Stock Exchange members executing the settlement. The final settlement was concluded with the payment of an immaterial amount by the Company. |
| ● | On June 11, 2018, a putative class action filed by Mac Costas on behalf of alleged shareholders that purchased or acquired the Company's ordinary shares between August 8, 2017 and May 15, 2018 was commenced in the United States District Court for the District of Nevada against the Company and its Chief Executive Officer and Chief Financial Officer, which was subsequently amended by a consolidated complaint filed by lead plaintiff Phoenix Insurance in May 13, 2019. The complaint asserts claim against all defendants pursuant to Section 10(b) of the Exchange Act, as amended, and Rule 10b-5 thereunder and against its officers pursuant to Section 20(a) of the Exchange Act. The complaint alleges that the Company's Form 10-K for the years ended December 31, 2016 and 2017, and Form 10-Qs for each of the quarters in the nine months ended September 30, 2017 contained material misstatements or omissions, among other things, with respect to the Company’s tax provisions and the effectiveness of its internal control over financial reporting, and that, as a result of such alleged misstatements and omissions, the plaintiffs suffered damages. On December 6, 2019 the Company’s motion to dismiss was denied by the court. On March 23, 2020, pursuant to out of court mediation, a term sheet for a proposed settlement of the action without admission of liability or wrongdoing, was signed between the parties and on June 10, 2020, a joint stipulation and motion for preliminary approval of the comprehensive executed settlement documentation was filed for the court for approval. On January 21, 2021, the Court issued its Order and Final Judgement certifying the Class, approving the method of notification of the settlement pursued, and approving the final settlement and proposed Plan of Allocation as well as the plaintiff's attorneys and plaintiff’s awards. The final settlement was concluded with an immaterial amount for the Company. |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| ● | On September 11, 2018, the Klein derivative action (Klein Action) was filed against the Company, our board and its Chief Executive Officer and Chief Financial Officer in the United States District Court for the District of Nevada, and on October 22, 2018, the Matthew derivative action (Matthew Action) was filed against the Company, certain named present and former board members (Barniv, Beck, Boehm, Clark, Falk, Freeland, Granot, Joyal, Nishigori, Sharir, Stern and Wong) in the United States District Court, District of Nevada. The Klein complaint asserts four derivative causes of action generally arising from Ormat's restatement of its financial statements: (i) the individual defendants allegedly breached their fiduciary duties by allowing the Company to improperly report its financials; (ii) the individual defendants allegedly were unjustly enriched by being compensated while breaching their fiduciary duties; (iii) the individual defendants allegedly committed corporate waste in paying officers and directors and by incurring legal costs and potential liability; and (iv) the director defendants allegedly breached Section 14(a) of the Exchange Act in connection with the issuance of the 2018 proxy. The Matthew complaint similarly alleges derivatively a breach of fiduciary duties, abuse of control, gross mismanagement, and corporate waste by the named directors. On January 24, 2019, the Nevada Court entered an order consolidating the Klein Action and Matthew Action. On July 10, 2020, a comprehensive settlement package and derivative stipulation of settlement was submitted to the court, and on October 12, 2020, Plaintiff filed an unopposed motion to the Nevada Court requesting preliminary approval of the corporate governance enhancement settlement. On March 29, 2021, the Nevada Court issued its final order and judgement resolving all actions to the claim, dismissing them with prejudice, and approving the final settlement. The sum the Company will bear for implementation of the settlement is not material. |
| ● | On March 29, 2016, a former local sales representative in Chile, Aquavant, S.A., filed a claim on the basis of unjust enrichment against Ormat’s subsidiaries in the 27th Civil Court of Santiago, Chile. The claim requests that the court order Ormat to pay Aquavant $4.6 million in connection with its activities in Chile, including the EPC contract for the Cerro Pabellon project and various geothermal concessions, plus 3.75% of Ormat geothermal products sales in Chile over the next 10 years. Pursuant to various motions submitted by the defendants and the plaintiffs to various courts, including the Court of Appeals, the case was removed from the original court and then refiled before the 11th Civil Court of Santiago. On April 16, 2020, the 11th Civil Court of Santiago issued its order rejecting Plaintiff's principal claim of unjust enrichment, as an improper cause of action, rejecting Plaintiff's secondary claim for declaratory judgment, which the Court associates with the principal claim of unjust enrichment and not relating to a number of defenses raised by the Company. In May 2020, each of the parties filed separately to the court of appeals, which are pending. On October 19, 2020, the Court of Appeals dismissed all ancillary appeals on procedural issues filed by Aquavant as well as two ancillary appeals on procedural issues filed by the Company. The Company considers it has strong legal defenses and the probability of the claimant receiving an award is low. The potential amount that the Company may bear in this context cannot be reasonably estimated at this time. |
| ● | On March 3, 2021, a claim and motion to certify a class action was filed in the Tel Aviv District Court (Economic Division) on behalf of Avishai Shmuel Mano against Ormat Technologies Inc. and 23 additional named respondents, who include existing and former directors and officers of the Company. On July 1, 2021, the court accepted plaintiff's motion to withdraw the claim against the named foreign respondents, retaining only the claim against the Company and the named present and former directors and officers who are domiciled in Israel. The claim seeks economic damages of approximately $100 million purportedly caused to shareholders by defendants’ alleged inaccurate reporting and provision of misleading information to the public in breach of Sections 10(b) and 20(a) of the U.S. Securities and Exchange Act of 1934, as amended, based on claims made in a report published by short-seller Hindenburg Research on March 1, 2021. The Company timely filed its response on February 2, 2022. The Company considers it has strong legal defenses and the probability of the claimant receiving an award is low. The potential amount that the Company may bear in this context cannot be reasonably estimated at this time. |
| ● | On September 14, 2021, an arbitration was filed on behalf of Kipreos before CAM Santiago, an electrical works subcontractor who had been hired to perform certain works at the Cerro Pabellon III Project for the recovery of alleged unpaid amounts in the approximate sum of $5.2 million. Ormat’s subsidiary timely responded with a counterclaim of approximately the same amount for recovery of damages and losses due to the subcontractor’s negligent performance under its terminated contract. The former subcontractor also initiated ancillary interim proceedings in the civil courts of Santiago attempting to recover three unpaid invoices and to obtain a seizure order, pursuant to which the lower court recently issued a preliminary, administrative ruling in favor of the plaintiff regarding invoices valued approximately $570,000, subject to fulfillment of bonding requirements. The Company considers it has strong legal defenses against the arbitral claims and the probability of the claimant receiving a final award is low. |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, from time to time, the Company is named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of the Company's business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings, the Company accrues reserves when a loss is probable, and the amount of such loss can be reasonably estimated. It is the opinion of the Company’s management that the outcome of these proceedings, individually and collectively, will not be material to the Company’s consolidated financial statements as a whole.
Other matters
On March 2, 2021, the Company's board of directors established a Special Committee of independent directors to investigate, among other things, certain claims made in a report published by a short seller regarding the Company’s compliance with anti-corruption laws. The Special Committee is working with outside legal counsel to investigate the claims made. All members of the Special Committee are “independent” in accordance with the Company's Corporate Governance Guidelines, the NYSE listing standards and SEC rules applicable to board of directors in general. The Company is also providing information as requested by the SEC and Department of Justice ("DOJ") related to the claims.
NOTE 22 — LEASES
The Company is a lessee in operating lease transactions primarily consisting of land leases for its exploration and development activities. The Company is a lessee in finance lease transactions primarily consisting of fleet vehicles and office rentals. The Company is a lessor in PPAs that are accounted under lease accounting, as further described under Note 1 to the consolidated financial statements under "Revenues and cost of revenues" and "Leases".
A. | Leases in which the Company is a lessee |
The table below presents the effects on the amounts relating to total lease cost:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands) | |
Lease cost | | | | | | | | | | | | |
Finance lease cost: | | | | | | | | | | | | |
Amortization of right-of-use assets | | $ | 3,265 | | | $ | 3,422 | | | $ | 3,273 | |
Interest on lease liabilities | | | 770 | | | | 1,226 | | | | 1,330 | |
Operating lease cost | | | 3,707 | | | | 3,303 | | | | 8,057 | |
Variable lease cost | | | 2,368 | | | | 1,891 | | | | 1,647 | |
Short-term lease cost | | | — | | | | — | | | | — | |
Total lease cost | | $ | 10,110 | | | $ | 9,842 | | | $ | 14,307 | |
| | | | | | | | | | | | |
Other information | | | | | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | | | |
Operating cash flows for finance leases | | $ | 770 | | | $ | 1,226 | | | $ | 1,330 | |
Operating cash flows for operating leases | | | 3,589 | | | | 3,213 | | | | 9,004 | |
Financing cash flows for finance leases | | | 3,181 | | | | 2,890 | | | | 3,164 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | | | 948 | | | | 1,028 | | | | 5,262 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | | | 5,227 | | | | 2,614 | | | | 6,364 | |
| | December 31, | | | December 31, | |
Additional information as of the end of the year: | | 2021 | | | 2020 | |
Weighted-average remaining lease term — finance leases (in years) | | | 2.8 | | | | 5.2 | |
Weighted-average remaining lease term — operating leases (in years) | | | 17.1 | | | | 10.7 | |
Weighted-average discount rate — finance leases (in percentage) | | | 3 | % | | | 5 | % |
Weighted-average discount rate — operating leases (in percentage) | | | 5 | % | | | 5 | % |
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments under non-cancellable leases as of December 31, 2021 were as follows:
| | Operating Leases | | | Finance Leases | | | Financing Liability (1) | |
| | (Dollars in thousands) | |
Year ending December 31, | | | | | | | | | | | | |
2022 | | $ | 3,079 | | | $ | 3,326 | | | $ | 17,238 | |
2023 | | | 2,329 | | | | 1,549 | | | | 22,368 | |
2024 | | | 2,043 | | | | 854 | | | | 102,074 | |
2025 | | | 1,656 | | | | 693 | | | | 13,324 | |
2026 | | | 1,519 | | | | 514 | | | | 18,118 | |
Thereafter | | | 18,978 | | | | 3,313 | | | | 113,462 | |
Total future minimum lease payments | | | 29,604 | | | | 10,249 | | | | 286,584 | |
Less imputed interest | | | 10,578 | | | | 3,106 | | | | 33,720 | |
Total | | $ | 19,026 | | | $ | 7,143 | | | $ | 252,864 | |
(1) Financing liability was assumed as part of the Terra-Gen business combination transaction as further described under Note 2 to the consolidated financial statements and is related to the sale and lease-back transaction of the Dixie Valley geothermal assets.
ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. | Leases in which the Company is a lessor |
The table below presents the lease income recognized for lessors:
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | (Dollars in thousands) | |
Lease income relating to lease payments of operating leases | | $ | 502,355 | | | $ | 473,260 | | | $ | 479,059 | |
NOTE 23 — SUBSEQUENT EVENTS
Cash dividend
On February 23, 2022, the Company’s Board of Directors declared, approved and authorized payment of a quarterly dividend of $6.7 million ($0.12 per share) to all holders of the Company’s issued and outstanding shares of common stock on March 9, 2022, payable on March 23, 2022.