NOTE

— 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,
	2018		2017		2016
	(Dollars in thousands)
U.S	$	14,097	$	13,680	$	(7,109	)
Non-U.S. (foreign)		123,084		157,050		148,197
Total income from continuing operations, before income taxes and equity in losses	$	137,181	$	170,730	$	141,088

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

	Year Ended December 31,
	2018			2017			2016
	(Dollars in thousands)
Current:
Federal	$	—		$	43,935		$	—
State		381			43			(276	)
Foreign		14,992			11,186			13,554
Total current income tax expense	$	15,373		$	55,164		$	13,278

Deferred:
Federal		(6,886	)		(55,718	)		57
State		(2,595	)		(3,284	)		—
Foreign		28,841			25,502			23,724
Total deferred tax benefit		19,360			(33,500	)		23,781
Total Income tax provision	$	34,733		$	21,664		$	37,059

Reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:

	Year Ended December 31,

	2018			2017			2016
U.S. federal statutory tax rate		21.0	%		35.0	%		35.0	%
Impact of federal tax reform		2.6			(12.4	)		-
Transition tax inclusion		(5.7	)		42.1			-
Foreign tax credits		(4.2	)		(50.5	)		-
Tax basis adjustment		-			-			(4.9	)
Withholding tax		5.9			34.1			-
Valuation allowance - U.S.		(17.2	)		(22.6	)		16.5
State income tax, net of federal benefit		1.0			1.1			(0.6	)
Uncertain Tax Positions		2.1			-			-
Effect of foreign income tax, net		5.6			(10.7	)		(10.3	)
Production tax credits		(3.1	)		(1.2	)		(8.3	)
Subpart F income		0.5			1.7			0.3
Tax on global intangible low-tax income		18.6			-			-
Intra-entity transfers of assets other than inventory		(2.1	)		-			-
Other, net		0.3			(3.9	)		(1.4	)
Effective tax rate		25.3	%		12.7	%		26.3	%

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

	December 31,
	2018			2017
	(Dollars in thousands)

Deferred tax assets (liabilities):
Net foreign deferred taxes, primarily depreciation	$	(57,202	)	$	(61,961	)
Depreciation		(30,500	)		(65,315	)
Intangible drilling costs		7,370			13,003
Net operating loss carryforward - U.S.		65,020			55,084
Tax monetization transaction		(17,104	)		(13,134	)
State and Investment tax credits		813			813
Production tax credits		90,913			85,193
Foreign tax credits		58,072			86,206
Withholding tax		(8,052	)		(14,400	)
Stock options amortization		1,440			1,166
Basis difference in partnership interest		(36,516	)		(16,817	)
Accrued liabilities and other		624			3,109
		74,878			72,947
Less - valuation allowance		(22,441	)		(77,571	)
Total	$	52,437		$	(4,624	)

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

	2018			2017			2016
	(Dollars in thousands)

Balance at beginning of the year	$	77,571		$	116,234		$	92,898
Additions to valuation allowance		4,747			46,560			23,336
Release of valuation allowance		(59,877	)		(85,223	)		-
Balance at end of the year	$	22,441		$	77,571		$	116,234

December 31, 2018,

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

$230.5

million. The Company had

$224.5

million generated before

December 31, 2017

which expire between

2027

and

2037,

and

$6.0

million are available to be carried forward for an indefinite period. The Company had state NOL carryforwards of approximately

$269.1

million,

$264.7

million which expire between

2025

and

2038

and

$3.3

million are available to be carried forward for an indefinite period. The state tax credits in the amount of

$0.8

million at

December 31, 2018

are available to be carried forward for an indefinite period. The Production Tax Credits (“PTCs") in the amount of

$90.9

million at

December 31, 2018

are available for a

-year period and expire between

2026

and

2038.

The Foreign Tax Credits (“FTCs”) in the amount of

$58.1

million at

December 31, 2018

are available for a

-year period and begin to expire in

2027.

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

$22.4

million and

$77.6

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

December 31, 2018

and

2017,

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

$55.1

million is due to (i) write-off of foreign tax credits due to new refinements in

965

regulations and related valuation allowance on such credits (ii) true-up of foreign tax credits due to refined transition tax calculation and (iii) new available evidence that has refined the Company’s calculations in regards to the Tax Act which is expected to result in additional taxable income in the US. The Company is maintaining a valuation allowance of

$22.4

million against a portion of the U.S. foreign tax credits and state NOLs that are expected to expire before they can be utilized in future periods.

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

$115.2

million and

$49.9

million, respectively. A valuation allowance of

$2.1

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.

December 22, 2017,

the U.S. government signed into law the Tax Act. The Tax Act makes significant changes to the U.S. tax code, including, but

not

limited to, (

) reducing the U.S. federal corporate income tax rate from

percent to

percent; (

) the transition of U.S. international taxation from a worldwide tax system to a territorial system (GILTI, BEAT, Dividends Received Deduction); (

)

one

-time transition tax on undistributed earnings of foreign subsidiaries as of

December 31, 2017; (

) eliminating the corporate alternative minimum tax; (

) creating a new limitation on deductible interest expense; and (

) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after

December 31, 2017.

The Company applied the guidance of SAB

118

for the effects of the Tax Act in

2017

and throughout

2018.

We completed our analysis to determine the effect of the Tax Act during

December 2018.

The Deemed Repatriation Tax (Transition Tax) is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain foreign subsidiaries. To determine the amount of the Transition Tax, we determined, in addition to other factors, the amount of post-

1986

E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. As a result of our initial analysis of the impact of the Act, we recorded a provisional amount of Transition Tax inclusion of

$71.9

million. We completed our accounting for such items during

2018

and recorded a final Transition Tax inclusion of

$64.2

million. The Company has sufficient NOLs to offset such earnings, therefore there is

resulting obligation due for such amount. In addition, the Company finalized its accounting related to the remeasurement of deferred taxes which resulted in a decrease of

$3.5

million to the provisional benefit of

$22.6

million recorded in

2017.

The FASB released guidance Staff Q&A, Topic

740,

No.

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.

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

	Year Ended December 31,

	2018			2017			2016
	(Dollars in thousands)

Non-current deferred tax assets	$	113,760		$	57,337		$	—
Non-current deferred tax liabilities		(61,323	)		(61,961	)		(36,411	)
Non-current deferred tax assets, net		52,437			(4,624	)		(36,411	)
Uncertain tax benefit offset (1)		(95	)		(95	)		—
	$	52,342		$	(4,719	)	$	(36,411	)

(

) 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.

During

2017,

the Company changed its intention to reinvest certain undistributed earnings of Ormat Systems Ltd., a wholly owned subsidiary in Israel. In the prior year, the Company distributed

$396.0

million, of which

$300.0

million was received in

December 2017

and the remaining

$96.0

million was received in

December 2018.

The Company recorded the tax impact of the distribution received in

2018

as part of the

2017

financials, including the

15%

Israeli withholding tax in the amount of

$14.4

million and corresponding foreign tax credit tax benefit, net of valuation allowance. In accordance with the Company’s assertion to distribute certain earnings of Ormat Systems Ltd. as of

December 31, 2018,

the Company recorded a deferred tax liability on withholding taxes of approximately

$8.1

million and foreign tax credits of

$2.2

million on anticipated earnings to be remitted of

$53

million. Foreign tax credits of

$2.2

million is recorded on the withholding taxes which is subject to valuation allowance based on the Company’s projected ability to utilize such foreign tax credits in the U.S. prior to the

-year expiration period.

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

$211.3

million at

December 31, 2018.

It is the Company’s intention to reinvest undistributed earnings of its foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, the Company has

not

recorded a deferred tax liability on foreign earnings other than for OSL. The additional taxes on that portion of undistributed earnings which is available for dividends are

not

practicably determinable.

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 evidence supporting the position. 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, 2018

and

2017,

there are

$11.8

million and

$8.9

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,

	2018			2017			2016
	(Dollars in thousands)
Balance at beginning of year	$	6,357		$	4,609		$	7,781
Additions based on tax positions taken in prior years		293			5			675
Additions based on tax positions taken in the current year		2,446			2,580			1,532
Reduction based on tax positions taken in prior years		(276	)		(837	)		(5,379	)
Balance at end of year	$	8,820		$	6,357		$	4,609

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

December 31, 2018,

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

2002

2017

and by local state jurisdictions for the years

2004

2017.

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

$0.3

million,

$0.8

million, and

$5.4

million in

2018,

2017,

and

2016,

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	-	2018
Kenya	2012	-	2018
Guatemala	2014	-	2018
Honduras	2014	-	2018
Guadeloupe	2016	-	2018
New Zealand	2012	-	2018

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. 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 begin construction before

2018.

Geothermal projects that begin construction before

2018

and meet certain other “begun construction” rules qualify for

2.4

cents per kilowatt hour of PTCs for their

first

-years of operations; alternatively, the owner of the project

may

elect a

30%

ITC in lieu of PTCs. In either case, under current tax rules for tax credits generated before

January 1, 2018,

any unused tax credit has a

-year carry back and a

-year carry forward.

If the Company claims the ITC, the Company’s “tax base” 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

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 permitted to fully expense 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 deprecation 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.

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.

Starting

August 2017,

Ortitlan pays income tax of

on its Electricity revenues. The effect of the tax exemption in the years ended

December 31, 2018,

2017,

and

2016

$2.0

million,

$2.6

million, and

$3.3

million, respectively (

$0.04,

$0.05,

and

$0.07

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

26.5%

2015,

25%

2016,

24%

2017

and

23%

2018

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. 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

16%

2014

and thereafter. Ormat Systems decided to irrevocably comply with the new law starting in

2011.

In the event of distribution of a cash dividend out of retained earnings which were tax exempt due to prior benefits, Ormat Systems would have to pay tax in respect of the amount distributed. Since the exemptions are contingent upon nondistribution of dividends and since upon liquidation the Company will have to pay a

25%

tax on exempt income, Ormat Systems recorded deferred tax liability at the rate of

25%

in respect of the tax exempt income in

2004

2008.

In the event that Ormat Systems fails to comply with the program terms, the tax benefits

may

be canceled and it

may

be required to refund the amount of the benefits utilized, in whole or in part, with the addition of linkage differences and interest.

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

(

) and

(

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

January 1, 2016

January 1, 2015

under Sections

(

) and

(

) of the Income Tax Act.

During the

fourth

quarter of

2018,

the Kenya Revenue Authority (“KRA”) notified the Company’s subsidiary in Kenya of their intention to conduct an audit primarily focusing on related parties transactions for the years

2014

2017.

The Company has submitted all of the required documents and further discussions with the KRA are currently underway.

As previously reported by the Company, the KRA conducted an audit related to the Company’s operations in Kenya for fiscal years

2012

and

2013.

June 20, 2017,

the Company has signed a Settlement Agreement with the KRA under which it paid approximately

$2.6

million in principal for full settlement of all claims raised by the KRA during the audit. The principal amount that was paid in

June 2017

was recorded as an addition to the cost of the power plants and is qualified for investment deduction at

150%

under the terms of the settlement agreement. Additionally, as per the Settlement Agreement, the Company submitted a request for waiver on the applied interest in the amount of approximately

$1.2

million, for which the Company recorded a provision to cover such a potential exposure.

Guadeloupe

- The Company’s operations in Guadeloupe are taxed at a rate of

34.43%

2017,

a maximum rate of

33.3%

2018,

a maximum rate

31%

2019,

a rate of

28%

2020,

26.5%

2021

and

25%

2022.

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.

Other significant foreign countries

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

28%

that is applied on certain qualified costs basis in

2018

and

2017.

Income taxes related to U.S. tax legislation commonly referred to as the Tax Cuts and Jobs Act

December 22, 2017,

the U.S. government signed into law the Tax Act. The Tax Act makes significant changes to the U.S. tax code, including, but

not

limited to, (

) reducing the U.S. federal corporate income tax rate from

percent to

percent; (

) the transition of U.S. international taxation from a worldwide tax system to a territorial system (GILTI, BEAT, Dividends Received Deduction); (

)

one

-time transition tax on undistributed earnings of foreign subsidiaries as of

December 31, 2017; (

) eliminating the corporate alternative minimum tax; (

) creating a new limitation on deductible interest expense; and (

) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after

December 31, 2017.