NOTE

— INCOME TAXES

U.S. and foreign components of income (loss) from continuing operations, before income taxes and equity in income (losses) of investees consisted of:

	Year Ended December 31,
	2016			2015			2014
	(Dollars in thousands)
U.S	$	(7,109	)	$	(236	)	$	(2,623	)
Non-U.S. (foreign)		148,197			113,835			88,459
	$	141,088		$	113,599		$	85,836

The components of the provision (benefit) for income taxes, net are as follows:

	Year Ended December 31,
	2016			2015			2014
	(Dollars in thousands)
Current:
Federal	$	—		$	51		$	—
State		(276	)		252			490
Foreign		14,040			19,175			13,983
	$	13,764		$	19,478		$	14,473

Deferred:
Foreign		18,073			(34,736	)		13,135
		18,073			(34,736	)		13,135
	$	31,837		$	(15,258	)	$	27,608

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

	Year Ended December 31,
	2016			2015			2014
	(Dollars in thousands)

Other deferred tax expense (exclusive of the effect of other components listed below)	$	(1,105	)	$	541		$	(18,424	)
Usage (benefit) of operating loss carryforwards - U.S.		(14,072	)		(30,596	)		7,764
Change in valuation allowance		16,411			(14,324	)		3,526
Change in foreign valuation allowance		—			(49,701	)		—
Change in foreign income tax		18,073			14,965			13,135
Change in lease transaction		—			(452	)		2,136
Change in tax monetization transaction		48,000			16,386			5,184
Change in depreciation		(55,462	)		28,370			9,431
Change in intangible drilling costs		10,227			10,335			(9,706	)
Change in production tax credits and alternative minimum tax credit		(11,659	)		610			89
Basis difference in partnership interests		7,660			(10,870	)		—
	$	18,073		$	(34,736	)	$	13,135

Reconciliation of the U.S.

federal statutory tax rate to the Company’s effective income tax rate is as follows:

	Year Ended December 31,
	2016			2015			2014
U.S. federal statutory tax rate		35.0	%		35.0	%		35.0	%
Valuation allowance - U.S.		11.1			(1.4	)		(1.7	)
Valuation allowance - foreign		-			(43.8	)
Tax monetization		-			-			2.5
State income tax, net of federal benefit		(0.2	)		0.6			(0.7	)
Effect of foreign income tax, net		(14.1	)		(5.1	)		(4.9	)
Production tax credits		(8.3	)		(0.1	)		0.9
Subpart F income		0.3			1.3			1.4
Depletion		-			-			(1.1	)
Other, net		(1.3	)		-			0.8
Effective tax rate		22.5	%		(13.5)	%		32.2	%

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

	December 31,
	2016			2015
	(Dollars in thousands)

Deferred tax assets (liabilities):
Net foreign deferred taxes, primarily depreciation	$	(35,382	)	$	(32,654	)
Depreciation		148,419			87,943
Intangible drilling costs		(112,762	)		(102,013	)
Net capital loss carryforward - U.S.		117,924			103,850
Tax monetization transaction		(105,789	)		(80,478	)
Investment tax credits		1,341			1,341
Production tax credits		82,451			70,792
Stock options amortization		3,241			3,467
Basis difference in partnership interest		(24,462	)		(16,801	)
Accrued liabilities and other		(752	)		2,435

		74,229			37,882
Less - valuation allowance		(109,611	)		(70,536	)

Total	$	(35,382	)	$	(32,654	)

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

	Year Ended December 31,
	2016		2015			2014
	(Dollars in thousands)
Balance at beginning of the year	$	70,536	$	111,280		$	114,806
Additions to (release of) valuation allowance		39,075		(40,744	)		(3,526	)
Balance at end of the year	$	109,611	$	70,536		$	111,280

December

31,

2016,

the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately

99.6

million and state NOL carryforwards of approximately

$244.7

million, available to reduce future taxable income, which expire between

2029

and

2036

for federal NOLs and between

2018

and

2036

for state NOLs. The investment tax credits (“ITCs”) in the amount of

$1.3

million at

December

31,

2016

are available for a

-year period and expire between

2022

and

2024.

The Production Tax Credits (“PTCs”) in the amount of

$82.5

million at

December

31,

2016

are available for a

-year period and expire between

2026

and

2036.

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

$109.6

million and

$70.5

million is recorded against the U.S. deferred tax assets as of

December

31,

2016

and

2015,

respectively, as it is more likely than not that the deferred tax assets will not be realized.

The increase in valuation allowance is due to increases in investment tax credits and step-up in basis relating to the tax monetization transaction.

As more fully described in Note

November

23,

2016,

the Company closed a follow-on sale of

36.75%

of equity interest in the

second

phase of the Don A. Campbell power plant, as a result of this sale, the Company will recognize

$21.4

million of taxable income in

2016.

Following the closing, DACII was contributed to the existing ORPD, as agreed upon under the ORPD agreement with Northleaf.

December

16,

2016,

upon the formation of Opal and Orleaf, Orleaf

distributed

$43.1

million to Ormat and

$19

million to ORPD. Upon this distribution, Ormat will

recognize

taxable gain of

$4.8

million.

November

2015,

the FASB issued Accounting Standards Update

2015

17,

Balance Sheet Classification of Deferred Taxes (ASU

2015

17),

effective in fiscal years beginning after

December

15,

2016.

The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The Company has elected early adoption of the aforementioned Update in

2015.

The Company has adopted the Update prospectively. As such, the deferred tax assets and liabilities in

2016

and

2015

are being presented as noncurrent on the balance sheet.

March

2016,

the FASB issued Accounting Standards Update

2016

09,

Improvements to Employee Share-Based Payment Accounting (ASU

2016

09),

effective in fiscal years beginning after

December

15,

2016

for public companies. In general, the new guidance

allows entities to record all excess tax benefits and tax deficiencies as income tax benefit or expense in the income statement. The Company has not elected an early adoption of the aforementioned Update.

October

2016,

the FASB issued Accounting Standards Update

2016

16,

Income Taxes on Intercompany Transfers (ASU

2016

16),

effective in fiscal years beginning after

December

15,

2017

for public companies. In general, the ne

w guidance provides that the seller and buyer will immediately recognize the current and deferred income tax consequences of the intercompany asset transfer. The Company has not elected an early adoption of the aforementioned Update.

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

	Year Ended December 31,

	2016			2015			2014
	(Dollars in thousands)

Current deferred tax assets	$	—		$	—		$	251
Current deferred tax liabilities		—			—			(975	)
Non-current deferred tax liabilities		(35,382	)		(32,654	)		(66,219	)

	$	(35,382	)	$	(32,654	)	$	(66,943	)

The total amount of undistributed earnings of foreign subsidiaries for income tax purposes was approximately $

367

million at

December

31,

2016.

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 Company believes 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. 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

We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish 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 we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust 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.

December

31,

2016

and

2015,

there are

$5.7

million and

$10.4

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 our unrecognized tax benefits is as follows:

	Year Ended December 31,

	2016			2015			2014
	(Dollars in thousands)
Balance at beginning of year	$	10,385		$	7,511		$	4,950
Additions based on tax positions taken in prior years		675			(198	)		230
Additions based on tax positions taken in the current year		1,059			4,386			2,980
Reduction based on tax positions taken in prior years		(6,381	)		(1,314	)		(649	)
Balance at end of year	$	5,738		$	10,385		$	7,511

The Company and its U.S. subsidiaries file consolidated income tax returns for federal and state purposes. As of

December

31,

2016,

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

2016

and by local state jurisdictions for the years

2002

2016

These examinations

may

lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses with respect to years under examination as well as subsequent periods.

The reduction of

$6.4

million,

$1.3

million and

$0.6

million in

2016,

2015

and

2014,

respectively, was due to the statute of limitations expiration on certain tax positions as well as Ormat System's tax settlement as detailed below.

The Company

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

Israel	2015	—	2016
Kenya	2001	—	2016
Guatemala	2010	—	2016
Philippines	2010	—	2016
New Zealand	2011	—	2016

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 which has been extended by the Consolidated Appropriations Act,

2016

(CAA) until

December

31,

2019.

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

2017,

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

2016

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 that have commenced construction by

December

31,

2016.

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

-year carry back and a

-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

2011,

or that begin construction of qualifying renewable energy facilities during

2012,

2013,

2014

2015

and place them in service by

December

31,

2016,

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 revised by the CAA, the U.S. Treasury is instructed to pay the cash grant within

governmental business days of the application or the date on which the qualifying facility is placed in service.

Income taxes related to foreign operations

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 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,

2016,

2015,

and

2014

$3.3

million,

$3.6

million, and

$1.9

million, respectively

($0.07,

$0.08,

and

$0.04

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

25%

2012,

25%

2013,

26.5%

2014

and

2015

and

25%

2016

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.

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%

2011

and

2012,

12.5%

2013,

and

16%

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.

November

2012,

new legislation amending the Investment Law was enacted. Under the new legislation, companies that have retained earnings as of

December

31,

2011

from Benefited Enterprises

may

elect by

November

11,

2013

to pay a reduced corporate tax rate as set forth in the new legislation on such income and distribute a dividend from such income without being required to pay additional corporate tax with respect to such income.

Ormat Systems decided not to make such election.

Ormat Systems tax assessment for fiscal years

2010

2014

was finalized and settled in

January

2017.

The settlement resulted in no impact to income statement due to release of the related uncertain tax position liability.

Kenya

- The Company’s operations in Kenya are taxed at the rate of

37.5%.

September

11,

2015,

Kenya's Income Tax Act was amended pursuant to certain provisions of the recently adopted Finance Act,

2015.

Among other matters, these amendments retain the enhanced investment deduction of

150%

under Section

17B

of the Income Tax Act, extend the period for deduction of tax losses from

years to

years under Sections

15(4)

and

15(5)

of the Income Tax Act, and amend the effective date from

January

2016

January

2015

under Sections

15(4)

and

15(5)

of the Income Tax Act. Previously, the Company had a valuation allowance for the additional

50%

investment deduction reducing its deferred tax asset in Kenya as the utilization of the related tax losses was not probable within the original

five

year carryforward period. As a result of the change in legislation and the expected continued profitability during the extended carryforward period, the Company expects that it will be able to fully utilize the carryforward tax losses within the

ten

year period and as such released the valuation allowance in Kenya resulting in a

$49.4

million of tax benefits in the year ended

December

31,

2015.

During the

fourth

quarter of

2016,

the Company determined that its income statement tax provision and deferred tax liabilities in Kenya in prior periods were overstated by approximately

$4.7

million as a result of errors in the determination of the exchange rate impact used in the calculation of taxable income at its Kenya operations. The Company recorded an adjustment to reduce income tax expense and deferred tax liabilities by

$4.7

million in the

fourth

quarter of

2016

to correct this matter.

As previously reported by the Company, the Kenya Revenue Authority (“KRA”) conducted an audit related to the Company

’s operations in Kenya for fiscal years

2012

2013.

January

2017,

KRA concluded its audit for the subject period and issued a demand letter to the Company for additional tax payments of approximately

$16.1

million, including interest and penalties. KRA’s assessment, among other points, rejected the Company's income tax deduction of

150%

of its investment in geothermal well drilling during the relevant period, on the basis that such work falls under mining activities (and not geothermal activities) which have a different allowable deduction under the Kenya Income Tax Act. The KRA audit and assessment is not final and is subject to objection by the Company. The Company's operations in Kenya utilize a geothermal resource license from the Ministry of Energy and Petroleum. The Company does not conduct and is not involved in any mining activity under applicable Kenyan law. Therefore, the Company believes that its original tax position was and remains correct under Kenyan tax law and regulations, and has submitted a notice of objection to the KRA which it intends to pursue vigorously. If the KRA position prevails and is applied to subsequent periods, the Company's deferred tax asset of

$49.4

million recorded in

2015

may

be impacted. At present, the Company has recorded a provision based on its assessment of its reasonably expected potential exposure.

Other significant foreign countries

— The Company’s operations in New Zealand are taxed at the rate of

28%

2015,

2014

and

2013.