Note 2 - Business Acquisitions and Others

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Business Combination Disclosure [Text Block]

NOTE 2 —BUSINESS ACQUISITIONS AND OTHERS

Ijen transaction

On July 2, 2019, the Company agreed to acquire 49% in the Ijen geothermal project company from a subsidiary of Medco Power (“Medco”), which is party to a Power Purchase Agreement and holds a geothermal license to develop the Ijen project in East Java in Indonesia for a total consideration of approximately $2.7 million. As part of the transaction, the Company committed to make additional funding for the exploration and development of the project, subject to specific conditions. During the fourth quarter of 2019, the Company made an additional cash investment of $7.4 million.  Medco retains 51% ownership in the project company and the Company and Medco will develop the project jointly. The Company accounted for its investment in the Ijen geothermal project company under the equity method prescribed by ASC 323 - Investments - Equity Method and Joint Ventures.

USG transaction

On April 24, 2018, the Company completed the acquisition of USG. The total cash consideration (exclusive of transaction expenses) was approximately $110 million, comprised of approximately $106 million funded from available cash of Ormat Nevada Inc. (to acquire the outstanding shares of common stock of USG) and approximately $4 million funded from available cash of USG (to cash-settle outstanding in-the-money options for common stock of USG). As a result of the acquisition, USG became an indirect wholly owned subsidiary of Ormat, and Ormat indirectly acquired, among other things, interests held by USG and its subsidiaries in:

•      three operating power plants at Neal Hot Springs, Oregon; San Emidio, Nevada; and Raft River, Idaho with a total net generating capacity of approximately 38 MW; and

•      development assets which include a project at the Geysers, California; a second phase project at San Emidio, Nevada; a greenfield project in Crescent Valley, Nevada; and the El Ceibillo project located near Guatemala City, Guatemala.

As a result of the acquisition, the Company expanded its overall generation capacity and improved the profitability of the purchased assets through cost reduction and synergies. The Company accounted for the transaction in accordance with Accounting Standard Codification ASC 805, Business Combinations and following the transaction, the Company consolidates USG, in accordance with Accounting Standard Codification ASC 810, Consolidation.

The following table summarizes the purchase price allocation to the fair value of the assets acquired and liabilities assumed (in millions):

Cash and cash equivalents and restricted cash	$	37.9
Property, plant and equipment and construction-in-process		77.3
Intangible assets (1)		127.0
Goodwill (2)		12.7
Deferred taxes		1.7
Total assets acquired	$	256.6
Other working capital	$	(8.2	)
Long-term term debt		(98.3	)
Asset retirement obligation		(9.0	)
Noncontrolling interest		(34.9	)
Total liabilities assumed	$	(150.4	)
Total assets acquired, and liabilities assumed, net	$	106.2

(1) Intangible assets are primarily related to long-term electricity power purchase agreements and depreciated over an average of 19 years.

(2) Goodwill is primarily related to the expected synergies in operations as a result of the purchase transaction. The goodwill is allocated to the Electricity segment and not deductible for tax purposes.

The fair value of the noncontrolling interest of $34.9 million reflects the 40% minority interests in the Neal Hot Springs project that was evaluated using the income approach. The fair value of the noncontrolling interest was based on the following significant inputs: (i) forecasted cash flows assumed to be generated in correspondence with the remaining life of the related power purchase agreement which is approximately 20 years; (ii) revenues were estimated in accordance with the price and generation capacity of the related power purchase agreement; (iii) assumed terminal value based on the realizable value of the project at the end of the power purchase agreement term; and (iv) assumed discount rate of approximately 9%.

Total Electricity revenues and operating profit related to the three USG power plants of approximately $21.4 million and $2.5 million, respectively, for the period started at the acquisition date to December 31, 2018 were included in the Company’s consolidated statements of operations and comprehensive income for the year ended December 31, 2018. The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2017:

	Pro forma for the		Pro forma for the
	year ended December 31, 2018		year ended December 31, 2017
	(Dollars in thousands)
Electricity revenues	$	521,175	$	497,650
Total revenues		730,563		724,869
Income from continuing operations before income taxes and equity in losses of investees		134,142		169,546

Viridity transaction

On March 15, 2017, the Company completed the acquisition of substantially all of the business and assets of Viridity Energy, Inc., a privately held Philadelphia-based company formerly engaged in the provision of demand response, energy management and energy storage services. At closing, Viridity Energy Solutions Inc. (“Viridity”), a wholly owned subsidiary of the Company, paid initial consideration of $35.3 million. Additional contingent consideration with an estimated fair value of $12.4 million was set upon the achievement of certain performance milestones to be measured at the end of fiscal years 2017 and 2020. The first performance milestone measured at the end of 2017 was not achieved and as of December 31, 2018 the Company estimated that the second milestone to be measured at the end of fiscal year 2020 will not be achieved. As a result, the Company reversed the related contingent considerations in the amount of $0.6 million and $10.3 million in 2017 and 2018, respectively, both were recorded under general and administrative expenses in the consolidated statement of operations and comprehensive income (loss).

The Company accounted for the transaction in accordance with Accounting Standard Codification 805, Business Combinations, and consequently recorded intangible assets of $34.7 million primarily relating to Viridity’s storage activities with a weighted-average amortization period of 19 years, approximately $0.4 million of working capital and fixed assets and $13.5 million of goodwill. Following the transaction, the Company consolidated Viridity in accordance with Accounting Standard Codification 810, Consolidation. The acquisition enabled the Company to enter the growing energy storage and demand response markets and expand its market presence.

In 2018, the Company recorded an impairment charge for the full amount of goodwill associated with its storage and energy management services in its consolidated statements of operations and comprehensive income (loss). Further information related to this impairment charge is disclosed in Note 9 – “Intangible assets and goodwill” to the consolidated financial statements.