Note 14 - Tax Monetization Transactions

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Disclosure Of Investments In And Advances To Affiliates [Text Block]

NOTE

14

—TAX MONETIZATION TRANSACTIONS

OPAL

TRANSACTION

On

December

16,

2016,

the Company’s wholly owned subsidiary Ormat Nevada Inc. (“Ormat Nevada”) entered into an equity contribution agreement (the “Equity Contribution Agreement”) with OrLeaf LLC (“OrLeaf”) and JPM Capital Corporation (“JPM”) with respect to Opal Geo LLC (“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 production tax credits (“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 Don A. Campbell Phase

2

(“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

10

0%

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 production tax credit. 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.

Und

er 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

10

0%

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.

Und

er 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.

Und

er the LLC Agreement, OrLeaf, which owns

1

00%

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.

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. The contribution was recorded as

$3.7

million allocation to noncontrolling interests and

$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 production tax credit. 

OPC TRANSACTION

In

June

2007,

Ormat Nevada entered into agreements with affiliates of Morgan Stanley & Co. Incorporated and Lehman Brothers Inc. (Morgan Stanley Geothermal LLC and Lehman-OPC LLC), under which those investors purchased, for cash, interests in a newly formed subsidiary of Ormat Nevada, OPC LLC (“OPC”), entitling the investors to certain tax benefits (such as production tax credits (“PTCs”) and accelerated depreciation) and distributable cash associated with

four

geothermal power plants

.

The

first

closing under the agreements occurred in

2007

and covered the Company

’s Desert Peak

2,

Steamboat Hills, and Galena

2

power plants. The investors paid

$71.8

million at the

first

closing. The

second

closing under the agreements occurred in

2008

and covered the Galena

3

power plant. The investors paid

$63.0

million at the

second

closing.

Ormat Nevada continues to operate and maintain the power plants. Under the agreements, Ormat Nevada initially received all of the distributable cash flow generated by the power plants, while the investors received substantially all of the production tax credits and taxable income or loss (together, the “Economic Benefits”). Once Ormat Nevada recovered the capital that it has invested in the power plants, which occurred in the

fourth

quarter of

2010,

the investors receive both the distributable cash flow and the Economic Benefits. The investors

’ return is limited by the term of the transaction. Once the investors reach a target after-tax yield on their investment in OPC (the “OPC Flip Date”), Ormat Nevada will receive

95%

of both distributable cash and taxable income, on a going forward basis. Following the OPC Flip Date, Ormat Nevada also has the option to buy out the investors’ remaining interest in OPC at the then-current fair market value or, if greater, the investors’ capital account balances in OPC. Should Ormat Nevada exercise this purchase option, it would thereupon revert to being sole owner of the power plants.

The Class B membership units are provided with a

5%

residual economic interest in OPC. The

5%

residual interest commences on achievement by the investors of a contractually stipulated return that triggers the OPC Flip Date. The actual OPC Flip Date is expected to occur in the

second

quarter of

2017.

This residual

5%

interest represents a noncontrolling interest and is not subject to mandatory redemption or guaranteed payments. Cash is distributed each period in accordance with the cash allocation percentages stipulated in the agreements. Until the

fourth

quarter of

2010,

Ormat Nevada was allocated the cash earnings in OPC and therefore, the amount allocated to the

5%

residual interest represented the noncash loss of OPC which principally represented depreciation on the property, plant and equipment. As from the

fourth

quarter of

2010,

the distributable cash is allocated to the Class B membership units.

As a result of the acquisition by Ormat Nevada, on

October

30,

2009,

of all of the Class B membership units of OPC held by Lehman-OPC LLC (see below), the residual interest decreased to

3.5%.

Such residual interest increased to

5%

on

February

3,

2011

when Ormat Nevada sold its Class B membership units to JPM Capital Corporation (“JPM”) (see below).

The Company

’s voting rights in OPC are based on a capital structure that is comprised of Class A and Class B membership units. Through Ormat Nevada, the Company owns all of the Class A membership units, which represent

75%

of the voting rights in OPC. The investors own all of the Class B membership units, which represent

25%

of the voting rights in OPC. In the period from

October

30,

2009

to

February

3,

2011,

the Company owned, through Ormat Nevada, all of the Class A membership units, which represented

75%

of the voting rights in OPC, and

30%

of the Class B membership units, which represented

7.5%

of the voting rights of OPC. In total the Company had

82.5%

of the voting rights in OPC as of

December

31,

2010.

In that period, the investors owned

70%

of the Class B membership units, which represented

17.5%

of the voting rights of OPC. Other than in respect of customary protective rights, all operational decisions in OPC are decided by the vote of a majority of the membership units. Following the OPC Flip Date, Ormat Nevada’s voting rights will increase to

95%

and the investor’s voting rights will decrease to

5%.

Ormat Nevada retains the controlling voting interest in OPC both before and after the OPC Flip Date and therefore consolidates OPC.

On

October

30,

2009,

Ormat Nevada acquired from Lehman-OPC

LLC all of the Class B membership units of OPC held by Lehman-OPC pursuant to a right of

first

offer for a price of

$18.5

million. A substantial portion of the initial sale of the Class B membership units by Ormat Nevada was accounted for as a financing transaction. As a result, the repurchase of these interests at a discount resulted in a pre-tax gain of

$13.3

million in the year ended

December

31,

2009.

In addition, an amount of approximately

$1.1

million has been reclassified from noncontrolling interest to additional paid-in capital representing the

1.5%

residual interest of Lehman-OPC’s Class B membership units.

On

February

3,

2011,

Ormat Nevada sold to JPM all of the Class B membership units of OPC that it had acquired on

October

30,

2010

for a sale price of

$24.9

million in cash. The Company did not record any gain from the sale of its Class B membership interests in OPC to JPM

.

A substantial portion of the Class B membership units are accounted for as a financing transaction. As a result, the majority of these proceeds were recorded as a liability. In addition,

$2.3

million has been reclassified from additional paid-in capital to noncontrolling interest representing the

1.5%

residual interest of JPM’s Class B membership units.

O

RTP

TRANSACTION

In

January

 

2013,

Ormat Nevada entered into agreements with JP Morgan (“JPM”) under which JPM purchased interests in a newly formed subsidiary of Ormat Nevada, ORTP, LLC (“ORTP”), entitling JPM to certain tax benefits (such as PTCs and accelerated depreciation) associated with certain geothermal power plants in California and Nevada.

Under the terms of the transaction, Ormat Nevada transferred the Heber complex, the Mammoth complex, the Ormesa complex, and the Steamboat

2

and

3,

Burdette (Galena

1)

and Brady power plants to ORTP, and sold class

 B membership units in ORTP to JPM. In connection with the closing, JPM paid approximately

$35.7

million to Ormat Nevada and will make additional payments to Ormat Nevada of

25%

of the value of PTCs generated by the portfolio over time. The additional payments were expected to be made until

December

 

31,

2016

up to maximum amount of

$11.0

million. In the

first

quarter of

2017

and

2016,

the Company received

$1.6

million and

$2.0

million, respectively.

Ormat Nevada will continue to operate and maintain the power plants. Under the agreements, Ormat Nevada will initially receive all of the distributable cash flow generated by the power plants, while JPM will receive substantially all of PTCs and the taxable income or loss (together, the “Economic Benefits”). JPM

’s return is limited by the terms of the transaction. Once JPM reaches a target after-tax yield on its investment in ORTP (the “ORTP Flip Date”), Ormat Nevada will receive

97.5%

of the distributable cash and

95%

of the taxable income, on a going forward basis. At any time during the

twelve

-month period after the end of the fiscal year in which the ORTP Flip Date occurs (but no earlier than the expiration of

five

years following the date that the last of the power plants was placed in service for purposes of federal income taxes), Ormat Nevada also has the option to buy out JPM’s remaining interest in ORTP at the then-current fair market value. If Ormat Nevada were to exercise this purchase option, it would become the sole owner of the power plants again.

The Class B membership units entitle the holder to

5.0%

(allocation of income and loss) and

2.5%

(allocation of cash) residual economic interests in ORTP. The

5.0%

and

2.5%

residual interests commence on achievement by JPM of a contractually stipulated return that triggers the ORTP Flip Date. The actual ORTP Flip Date is expected to occur in the

second

quarter of

2017.

These residual

5.0%

and

2.5%

interests represent noncontrolling interests and are not subject to mandatory redemption or guaranteed payments.

The Company

’s voting rights in ORTP are based on a capital structure that is comprised of Class A and Class B membership units. Through Ormat Nevada the Company owns all of the Class A membership units, which represent

75%

of the voting rights in ORTP. JPM owns all of the Class B membership units, which represent

25%

of the voting rights of ORTP. Other than in respect of customary protective rights, all operational decisions in ORTP are decided by the vote of a majority of the membership units. Ormat Nevada retains the controlling voting interest in ORTP both before and after the ORTP Flip Date and therefore will continue to consolidate ORTP.