Note 13 - Tax Monetization Transactions

12 Months Ended

Dec. 31, 2018

Notes to Financial Statements

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

NOTE

13

—TAX MONETIZATION TRANSACTIONS

Opal Geo 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.

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.

Tungsten Mountain partnership 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.

Under the agreements, prior to

December 31, 2026 (

“Target Flip Date”), the Company’s fully 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 in 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 going forward basis.

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

may

be needed to cause 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.

Other completed tax monetization transactions

On

May 31, 2017,

the Company’s partners JPM and Morgan Stanley achieved their target after-tax yield on its investment in OPC and on

October 31, 2017,

Ormat Nevada purchased all of the Class B membership units in OPC from JPM and Morgan Stanley for

$1.9

million. As a result, Ormat Nevada is now the sole owner of all of the economic and voting interests in OPC and continues to consolidate OPC in its financial statements. The purchase of Class B membership units of OPC was recorded in equity as a reduction of

$6.5

million to Noncontrolling Interest with the surplus of

$8.5

million charged to Additional Paid-in Capital.

In

March 2017,

JPM achieved its target after-tax yield on its investment in ORTP and on

July 10, 2017,

Ormat Nevada purchased all of the Class B membership units in ORTP from JPM for

$2.4

million. As a result, Ormat Nevada is now the sole owner of all of the economic and voting interests in ORTP and continues to consolidate ORTP in its financial statements. The purchase of Class B membership units of ORTP was recorded in equity as a reduction to Noncontrolling Interest of

$7.0

million with the surplus of $

$2.9

million charged to Additional Paid-in Capital.