Note 18 - Income Taxes

12 Months Ended

Dec. 31, 2013

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

NOTE 18 — INCOME TAXES

Income from continuing operations, before income taxes and equity in income (losses) of investees consisted of:

	Year Ended December 31,
	2013		2012			2011
	(Dollars in thousands)
U.S.	$	1,520	$	(283,242	)	$	(32,797	)
Non-U.S. (foreign)		49,616		71,437			37,115
	$	51,136	$	(211,805	)	$	4,318

The components of income tax provision (benefit) are as follows:

	Year Ended December 31,
	2013		2012			2011
	(Dollars in thousands)
Current:
State	$	208	$	(768	)	$	135
Foreign		2,886		7,331			10,044
	$	3,094	$	6,563		$	10,179
Deferred:
Federal		—		(17,312	)		38,566
State		—		(44	)		(2,099	)
Foreign		10,458		12,620			1,594
		10,458		(4,736	)		38,061
	$	13,552	$	1,827		$	48,240

The significant components of the deferred income tax expense (benefit) are as follows:

	Year Ended December 31,
	2013			2012 As Revised			2011
	(Dollars in thousands)
Deferred tax expense (exclusive of the effect of other components listed below)	$	(71,052	)	$	23,802		$	4,045
Write-off of power plants		—			(90,720	)		—
Usage (benefit) of operating loss carryforwards — U.S.		11,672			26,907			(35,575	)
Change in valuation allowance		(1,787	)		16,877			61,500
Change in foreign income tax		10,458			8,257			5,041
Change in lease transaction		974			1,170			1,027
Change in tax monetization transaction		46,051			5,353			(4,975	)
Change in intangible drilling costs		15,091			14,133			18,592
Benefit of production tax credits and alternative minimum tax credits		(949	)		(10,515	)		(11,594	)
Total	$	10,458		$	(4,736	)	$	38,061

The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate are as follows:

	Year Ended December 31,
	2013			2012 As Revised			2011
U.S. federal statutory tax rate		35.0	%		35.0	%		35.0	%
Valuation allowance		(3.5	)		(8.0	)		1,424.6
State income tax, net of federal benefit		(0.2	)		4.1			(35.9	)
Effect of foreign income tax, net		(7.9	)		2.4			(31.3	)
Production tax credits		(1.9	)		5.0			(268.6	)
Dividends from foreign subsidiaries		-			(39.3	)		-
Subpart F income		4.7			-			-
Depletion		-			0.3			(18.7	)
Other, net		0.3			(0.4	)		12.3
Effective tax rate		26.5	%		0.9	%		1,117.2	%

During the quarter ended December 31, 2012, the Company repatriated earnings of approximately $250.0 million from two of its wholly-owned foreign subsidiaries. These cash distributions to the Company made during 2012 were the first ever remittances of foreign earnings received by the Company and were a one-time event. The Company does not plan to repatriate the funds designated as being permanently invested outside the U.S. Of the cash distributions in 2012, $177.2 million was considered to be “Dividends from foreign subsidiaries”, which impacted the Company’s effective tax rate and $13.0 million reduced the Company’s tax basis in its foreign subsidiary. In addition, $59.8 million, which resulted in a deferred tax liability at December 31, 2012, was recognized as taxable income in 2013.

The net deferred tax assets and liabilities consist of the following:

	December 31,
	2013			2012 As Revised
	(Dollars in thousands)
Deferred tax assets (liabilities):
Net foreign deferred taxes, primarily depreciation	$	(53,621	)	$	(43,531	)
Depreciation		96,137			44,701
Intangible drilling costs		(81,972	)		(66,881	)
Net operating loss carryforward — U.S.		92,375			103,771
Dividends from foreign subsidiaries		—			(20,995	)
Tax monetization transaction		(72,521	)		(26,470	)
Lease transaction		2,437			3,410
Investment tax credits		672			1,971
Production tax credits		71,313			68,954
Alternative minimum tax credit		—			1,410
Stock options amortization		3,464			3,072
Accrued liabilities and other		2,901			653
		61,185			70,065
Less — valuation allowance		(114,806	)		(113,596	)
Total	$	(53,621	)	$	(43,531	)

The following table presents a reconciliation of the beginning and ending valuation allowance:

	Year Ended December 31,
	2013			2012 As Revised		2011
	(Dollars in thousands)
Balance at beginning of the year	$	113,596		$	61,500	$	433
Additions (releases) of valuation allowances		(1,210	)		52,096		61,067
Balance at the end of the year	$	114,806		$	113,596	$	61,500

At December 31, 2013, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately $235.4 million and state NOL carryforwards of approximately $218.1 million, net of valuation allowance of $114.8 million, available to reduce future taxable income, which expire between 2021 and 2032 for federal NOLs and between 2013 and 2032 for state NOLs. The investment tax credits (“ITCs”) in the amount of $0.7 million at December 31, 2013 are available for a 20-year period and expire between 2022 and 2024. The PTCs in the amount of $71.3 million at December 31, 2013 are available for a 20-year period and expire between 2026 and 2032.

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. The most significant factor considered in the ability of the Company to realize these deferred tax assets was the Company’s U.S. profitability over the past three years. Based on this profitability, a valuation allowance in the amount of $114.8 million and $113.6 million was recorded against the U.S. deferred tax assets as of December 31, 2013 and 2012, respectively as, at this point in time, it is more likely than not that the deferred tax assets will not be realized. If sufficient evidence of the Company’s ability to generate taxable income is established in the future, the Company may be required to reduce this valuation allowance, resulting in income tax benefits in its consolidated statement of operations.

The following table presents the deferred taxes on the balance sheets as of the dates indicated:

	Year Ended December 31,
	2013			2012 As Revised			2011
	(Dollars in thousands)
Current deferred tax assets	$	523		$	637		$	1,842
Current deferred tax liabilities		—			(20,392	)		—
Non-current deferred tax assets		891			21,283			—
Non-current deferred tax liabilities		(55,035	)		(45,059	)		(54,665	)
Balance at end of year	$	(53,621	)	$	(43,531	)	$	(52,823	)

The total amount of undistributed earnings of foreign subsidiaries for income tax purposes was approximately $68.6 million at December 31, 2013. It is the Company’s intention to reinvest undistributed earnings of its foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes or U.S. income taxes which may become payable if undistributed earnings of foreign subsidiaries were paid as dividends to the Company. The additional taxes on that portion of undistributed earnings which is available for dividends are not practicably determinable.

The distribution of $250.0 million in the form of a cash and loan from Ormat Holding Corporation and Ormat Systems, respectively, in 2012 to the Company did not represent a change in the Company’s indefinite reinvestment position. The Company has not recognized deferred tax liabilities for outside basis differences (including undistributed earnings) relating to its foreign subsidiaries because such amounts have been indefinitely reinvested.

We believe that based on our plans to increase the operations outside of the U.S., the cash generated from our operations outside of the U.S. will be reinvested outside of the U.S. In addition, the Company believes that our U.S. sources of cash and liquidity are sufficient to meet our needs in the U.S. and, accordingly, we do not currently plan to repatriate the funds we have designated as being permanently invested outside the U.S. If we change our plans, we may be required to accrue and pay U.S. taxes to repatriate these funds.

Uncertain tax positions

At December 31, 2013 and 2012, there are $5.0 million and $7.3 million of unrecognized tax benefits that if recognized would affect the annual 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 beginning and ending amounts of unrecognized tax benefits is as follows:

	Year Ended December 31,
	2013			2012		2011
	(Dollars in thousands)
Balance at beginning of year	$	7,281		$	5,875	$	5,431
Additions based on tax positions taken in prior years		200			1,381		1,207
Additions based on tax positions taken in the current year		1,146			25		612
Reduction based on tax positions taken in prior years		(3,677	)		—		(1,375	)
Balance at end of year	$	4,950		$	7,281	$	5,875

The Company and its U.S. subsidiaries file consolidated income tax returns for federal and state purposes. As of December 31, 2013, the Company has not been subject to U.S. federal or state income tax examinations. The Company remains open to examination by the Internal Revenue Service for the years 2000-2013 and by local state jurisdictions for the years 2002-2013.

The reduction of $3.7 million in 2013 is due to the statute of limitation expiration on certain tax positions..

The Company’s foreign subsidiaries remain open to examination by the local income tax authorities in the following countries for the years indicated:

Israel	2009	—	2013
Kenya	2007	—	2013
Guatemala	2009	—	2013
Philippines	2009	—	2013
New Zealand	2009	—	2013

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.

Tax benefits in the U.S.

The U.S. government encourages production of electricity from geothermal resources through certain tax subsidies under the ARRA. The Company is permitted to claim 30% of the eligible cost of each new geothermal power plant in the United States, which is placed in service before January 1, 2014 as an ITC against its federal income taxes. After this date, the ITC is reduced to 10%. Alternatively, the Company is permitted to claim a PTC, which in 2013 was 2.3 cents per kWh and which may be adjusted annually for inflation. The PTC may be claimed for ten years on the electricity output of new geothermal power plants put into service by December 31, 2013. The owner of the power plant must choose between the PTC and the 30% ITC described above. In either case, under current tax rules, any unused tax credit has a 1-year carry back and a 20-year carry forward. Whether the Company claims the PTC or the ITC, it is also permitted to depreciate most of 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. If the Company claims the ITC, the Company’s “tax base” in the plant that it can recover through depreciation must be reduced by half of the ITC. If the Company claims the PTC, there is no reduction in the tax basis for depreciation. Companies that place qualifying renewable energy facilities in service, during 2009, 2010 or 2011, or that begin construction of qualifying renewable energy facilities during 2009, 2010 or 2011 and place them in service by December 31, 2013, may choose to apply for a cash grant from the U.S. Department of the Treasury (“U.S. Treasury”) in an amount equal to the ITC. Likewise, the tax base for depreciation will be reduced by 50% of the cash grant received. Under the ARRA, the U.S. Treasury is instructed to pay the cash grant within 60 governmental business days of the application or the date on which the qualifying facility is placed in service.

On June 7, 2007, April 17, 2008 and January 24, 2013, a wholly-owned subsidiary, Ormat Nevada, concluded transactions to monetize PTCs and other favorable tax attributes (see Note 12).

Income taxes related to foreign operations

Guatemala — The enacted tax rate is 31%. 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 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. The effect of the tax exemption in the years ended December 31, 2013, 2012, and 2011 is $1.9 million, $4.4 million, and $4.4 million, respectively ($0.04, $0.10, and $0.10 per share of common stock, respectively).

Israel — The Company’s operations in Israel through its wholly owned Israeli subsidiary, Ormat Systems Ltd. (“Ormat Systems”), are taxed at the regular corporate tax rate of 24% in 2011, 25% in 2012 and 2013, and 26.5% in 2014 and thereafter Ormat Systems received “Benefited Enterprise” status under Israel’s Law for Encouragement of Capital Investments, 1959 (the “Investment Law”), with respect to two of its investment programs. As a Benefited Enterprise, Ormat Systems was exempt from Israeli income taxes with respect to income derived from the first benefited investment for a period of two years that started in 2004, and thereafter such income was subject to reduced Israeli income tax rates which will not exceed 25% for an additional five years until 2010. Ormat Systems was also exempt from Israeli income taxes with respect to income derived from the second benefited investment for a period of two years that started in 2007, and thereafter such income is subject to reduced Israeli income tax rates which will not exceed 25% for an additional five years until 2013 (see also below). These benefits are subject to certain conditions, including among other things, that all transactions between Ormat Systems and its affiliates are at arm’s length, and that the management and control of Ormat Systems will be from Israel during the whole period of the tax benefits. A change in control should be reported to the Israel Tax Authority in order to maintain the tax benefits. In January 2011, new legislation amending the Investment Law was enacted. Under the new legislation, a uniform rate of corporate tax would apply to all qualified income of certain industrial companies, as opposed to the current law’s 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 15% in 2011 and 2012, 12.5% in 2013,, and 16% in 2014 and thereafter. Under the transitory provisions of the new legislation, Ormat Systems had the option either to irrevocably comply with the new law while waiving benefits provided under the previous law or to continue to comply with the previous law during a transition period with the option to move from the previous law to the new law at any stage. Ormat Systems decided to irrevocably comply with the new law starting in 2011.

Other significant foreign countries — The Company’s operations in Kenya are taxed at the rate of 37.5%. The Company’s operations in New Zealand are taxed at the rate of 28% in 2013, 2012 and 2011.