Edgar Filing: ORMAT TECHNOLOGIES, INC.

ora20140930_10q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, 2014

	or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from to

Commission file number: 001-32347

ORMAT TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	88-0326081
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

6225 Neil Road, Reno, Nevada	89511-1136
(Address of principal executive offices)	(Zip Code)

(775) 356-9029

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐	Accelerated filer ☑	Non-accelerated filer ☐	Smaller reporting company ☐
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 6, 2014, the number of outstanding shares of common stock, par value $0.001 per share, was 45,530,627.

ORMAT TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2014

PART I — FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	4

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	54

ITEM 4.	CONTROLS AND PROCEDURES	54

PART II — OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	54

ITEM 1A.	RISK FACTORS	55

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	55

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	55

ITEM 4.	MINE SAFETY DISCLOSURES	55

ITEM 5.	OTHER INFORMATION	55

ITEM 6.	EXHIBITS	56

SIGNATURES		57

Certain Definitions

Unless the context otherwise requires, all references in this quarterly report to “Ormat”, “the Company”, “we”, “us”, “our company”, “Ormat Technologies” or “our” refer to Ormat Technologies, Inc. and its consolidated subsidiaries.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,			December 31,
	2014			2013
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	42,451		$	57,354
Restricted cash, cash equivalents and marketable securities (all related to variable interest entities ("VIEs"))		127,452			51,065
Receivables:
Trade		75,224			95,365
Related entity		506			442
Other		9,165			11,049
Due from Parent		970			382
Inventories		17,337			22,289
Costs and estimated earnings in excess of billings on uncompleted contracts		14,784			21,217
Deferred income taxes		2,613			523
Prepaid expenses and other		36,879			29,654
Total current assets		327,381			289,340
Unconsolidated investments		1,339			7,076
Deposits and other		21,679			22,114
Deferred income taxes		—			891
Deferred charges		35,399			36,738
Property, plant and equipment, net ($1,378,484 and $1,381,083 related to VIEs, respectively)		1,459,316			1,452,336
Construction-in-process ($143,548 and $136,947 related to VIEs, respectively)		268,349			288,827
Deferred financing and lease costs, net		28,969			30,178
Intangible assets, net		29,481			31,933
Total assets	$	2,171,913		$	2,159,433
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	78,411		$	98,047
Billings in excess of costs and estimated earnings on uncompleted contracts		45,310			7,903
Current portion of long-term debt:
Limited and non-recourse (all related to VIEs):
Senior secured notes		31,211			31,137
Other loans		17,995			20,377
Full recourse		24,116			28,875
Total current liabilities		197,043			186,339
Long-term debt, net of current portion:
Limited and non-recourse (all related to VIEs):
Senior secured notes		379,036			270,310
Other loans		269,123			311,078
Full recourse:
Senior unsecured bonds (plus unamortized premium based upon 7% of $898)		250,366			250,596
Other loans		40,298			53,467
Revolving credit lines with banks		28,100			112,017
Liability associated with sale of tax benefits		44,757			60,985
Deferred lease income		61,294			63,496
Deferred income taxes		67,328			55,035
Liability for unrecognized tax benefits		5,606			4,950
Liabilities for severance pay		21,984			23,841
Asset retirement obligation		19,801			18,679
Other long-term liabilities		3,633			3,529
Total liabilities		1,388,369			1,414,322

Commitments and contingencies (Note 10)

Equity:
The Company's stockholders' equity:
Common stock, par value $0.001 per share; 200,000,000 shares authorized; 45,530,627 and 45,460,653 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively		46			46
Additional paid-in capital		740,651			735,295
Retained earnings (accumulated deficit)		36,835			(3,088	)
Accumulated other comprehensive income (loss)		(5,710	)		487

		771,822			732,740
Noncontrolling interest		11,722			12,371
Total equity		783,544			745,111
Total liabilities and equity	$	2,171,913		$	2,159,433

The accompanying notes are an integral part of the condensed consolidated financial statements

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
	(In thousands, except per share data)						(In thousands, except per share data)
Revenues:
Electricity	$	102,506		$	88,994		$	289,015		$	245,005
Product		37,736			41,755			121,266			157,329
Total revenues		140,242			130,749			410,281			402,334
Cost of revenues:
Electricity		61,727			61,356			186,083			175,085
Product		23,040			29,637			75,307			110,335
Total cost of revenues		84,767			90,993			261,390			285,420
Gross margin		55,475			39,756			148,891			116,914
Operating expenses:
Research and development expenses		250			838			395			3,446
Selling and marketing expenses		4,258			2,575			10,853			17,861
General and administrative expenses		7,179			6,546			20,847			20,264
Write-off of unsuccessful exploration activities		—			—			8,107			—
Operating income		43,788			29,797			108,689			75,343
Other income (expense):
Interest income		35			742			236			870
Interest expense, net		(22,494	)		(18,459	)		(65,084	)		(51,826	)
Foreign currency translation and transaction gains (losses)		(2,946	)		1,258			(3,639	)		3,844
Income attributable to sale of tax benefits		5,487			5,027			18,334			14,342
Gain from sale of property, plant and equipment		—			—			7,628			—
Other non-operating income, net		243			137			649			1,583
Income before income taxes and equity in losses of investees		24,113			18,502			66,813			44,156
Income tax provision		(6,444	)		(5,201	)		(17,731	)		(15,028	)
Equity in losses of investees		(899	)		(158	)		(1,210	)		(149	)
Income from continuing operations		16,770			13,143			47,872			28,979
Discontinued operations:
Income from discontinued operations (including gain on disposal of $0, $0, $0 and $3,646, respectively)		—			—			—			5,311
Income tax provision		—			—			—			(614	)
Total income from discontinued operations		—			—			—			4,697
Net income		16,770			13,143			47,872			33,676
Net income attributable to noncontrolling interest		(256	)		(193	)		(670	)		(600	)
Net income attributable to the Company's stockholders	$	16,514		$	12,950		$	47,202		$	33,076
Comprehensive income:
Net income		16,770			13,143			47,872			33,676
Other comprehensive income (loss), net of related taxes:
Change in unrealized gains or losses in respect of the Company's share in derivative instruments of unconsolidated investment		(1,069	)		—			(5,157	)		—
Loss in respect of derivative instruments designated for cash flow hedge		(933	)		—			(933	)		—
Amortization of unrealized gains or losses in respect of derivative instruments designated for cash flow hedge		(35	)		(40	)		(107	)		(124	)
Comprehensive income		14,733			13,103			41,675			33,552
Comprehensive income attributable to noncontrolling interest		(256	)		(193	)		(670	)		(600	)
Comprehensive income attributable to the Company's stockholders	$	14,477		$	12,910		$	41,005		$	32,952

Earnings per share attributable to the Company's stockholders
Basic:
Income from continuing operations	$	0.37		$	0.29		$	1.04		$	0.62
Discontinued operations		—			—			—			0.10
Net income	$	0.37		$	0.29		$	1.04		$	0.72

Diluted:
Income from continuing operations	$	0.36		$	0.28		$	1.03		$	0.62
Discontinued operations		—			—			—			0.10
Net income	$	0.36		$	0.28		$	1.03		$	0.72


Weighted average number of shares used in computation of earnings per share attributable to the Company's stockholders:
Basic		45,690			45,438			45,594			45,433
Diluted		46,102			45,494			45,917			45,454
Dividend per share declared	$	0.05		$	0.04		$	0.16		$	0.04

The accompanying notes are an integral part of the condensed consolidated financial statements.

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

	The Company's Stockholders' Equity
							Retained			Accumulated
					Additional		Earnings			Other Income
	Common Stock				Paid-in		(Accumulated			Comprehensive						Noncontrolling			Total
	Shares		Amount		Capital		Deficit)			(Loss)			Total			Interest			Equity
	(In thousands, except per share data)
Balance at December 31, 2012, as revised		45,431	$	46	$	732,140	$	(44,326	)	$	651		$	688,511		$	7,096		$	695,607
Stock-based compensation		—		—		4,548		—			—			4,548			—			4,548
Exercise of options by employees and directors		23		—		437		—			—			437			—			437
Cash paid to non-controlling interest		—		—		—		—			—			—			(509	)		(509	)
Cash dividend paid, $0.04 per share		—		—		—		(1,816	)		—			(1,816	)		—			(1,816	)
Increase in noncontrolling interest due to sale of equity interest in ORTP LLC		—		—		—		—			—			—			5,151			5,151
Net income		—		—		—		33,076			—			33,076			600			33,676
Other comprehensive loss, net of related taxes:
Amortization of gains in respect of derivative instruments designated for cash flow hedge (net of related tax of $52)		—		—		—		—			(124	)		(124	)		—			(124	)
Balance at September 30, 2013		45,454	$	46	$	737,125	$	(13,066	)	$	527		$	724,632		$	12,338		$	736,970

Balance at December 31, 2013		45,461	$	46	$	735,295	$	(3,088	)	$	487		$	732,740		$	12,371		$	745,111
Stock-based compensation		—		—		4,308		—			—			4,308			—			4,308
Exercise of options by employees and directors		70		—		889		—			—			889			—			889
Cash paid to noncontrolling interest		—		—		—		—			—			—			(589	)		(589	)
Cash dividend declared, $0.16 per share		—		—		—		(7,279	)		—			(7,279	)		—			(7,279	)
Acquisition of noncontrolling interest in Crump		—		—		159		—			—			159			(987	)		(828	)
Increase in noncontrolling interest		—		—		—		—			—			—			257			257
Net income		—		—		—		47,202			—			47,202			670			47,872
Other comprehensive income, net of related taxes:
Loss in respect of derivative instruments designated for cash flow hedge (net of related tax of $572)		—		—		—		—			(933	)		(933	)		—			(933	)
Change in unrealized gains or losses in respect of the Company's share in derivative instruments of unconsolidated investment (net of related tax of $0)		—		—		—		—			(5,157	)		(5,157	)		—			(5,157	)
Amortization of gains in respect of derivative instruments designated for cash flow hedge (net of related tax of $44)		—		—		—		—			(107	)		(107	)		—			(107	)
Balance at September 30, 2014		45,531	$	46	$	740,651	$	36,835		$	(5,710	)	$	771,822		$	11,722		$	783,544

The accompanying notes are an integral part of the condensed consolidated financial statements.

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2014			2013
	(In thousands)
Cash flows from operating activities:
Net income	$	47,872		$	33,676
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		74,836			70,911
Amortization of premium from senior unsecured bonds		(230	)		(231	)
Accretion of asset retirement obligation		1,122			1,147
Stock-based compensation		4,308			4,548
Amortization of deferred lease income		(2,014	)		(2,014	)
Income attributable to sale of tax benefits, net of interest expense		(10,130	)		(6,621	)
Equity in losses of investees		1,210			149
Mark-to-market of derivative instruments		(4,467	)		3,487
Write-off of unsuccessful exploration activities		8,107			—
Loss (gain) on severance pay fund asset		798			(399	)
Gain on sale of a subsidiary and property, plant and equipment		(7,628	)		(3,646	)
Deferred income tax provision		13,071			14,235
Liability for unrecognized tax benefits		656			1,598
Deferred lease revenues		(188	)		(167	)
Other		(181	)		(819	)
Changes in operating assets and liabilities, net of amounts acquired:
Receivables		21,624			(23,181	)
Costs and estimated earnings in excess of billings on uncompleted contracts		6,433			(26,588	)
Inventories		4,952			273
Prepaid expenses and other		(5,163	)		(6,175	)
Deposits and other		279			4,296
Accounts payable and accrued expenses		(10,868	)		(21,449	)
Due from/to related entities, net		(64	)		(69	)
Billings in excess of costs and estimated earnings on uncompleted contracts		37,407			(12,700	)
Liabilities for severance pay		(1,857	)		1,068
Other long-term liabilities		(527	)		959
Due from/to Parent		(588	)		(62	)
Net cash provided by operating activities		178,770			32,226
Cash flows from investing activities:
Short-term deposit		—			3,010
Net change in restricted cash and cash equivalents		(76,387	)		(7,660	)
Cash received from sale of a subsidiary and property, plant and equipment		35,250			7,699
Capital expenditures		(122,587	)		(144,637	)
Cash grant received from the U.S. Treasury under Section 1603 of the ARRA		27,427			14,685
Investment in unconsolidated companies		(631	)		(2,467	)
Increase in severance pay fund asset, net of payments made to retired employees		1,493			1,172
Net cash used in investing activities		(135,435	)		(128,198	)
Cash flows from financing activities:
Proceeds from long-term loans		140,000			45,000
Proceeds from exercise of options by employees		741			437
Proceeds from the sale of limited liability company interest in ORTP, LLC, net of transaction costs		—			31,376
Payment for acquisition of noncontrolling interest in Crump		(1,490	)		—
Purchase of OFC Senior Secured Notes		(12,860	)		(11,888	)
Proceeds from revolving credit lines with banks		2,400,683			2,170,287
Repayment of revolving credit lines with banks		(2,484,600	)		(2,120,605	)
Repayments of long-term debt		(80,223	)		(37,480	)
Cash paid to non-controlling interest		(9,215	)		(10,184	)
Cash paid for interest rate cap		(1,505	)		—
Cash received from non-controlling interest		2,234			—
Deferred debt issuance costs		(4,724	)		(348	)
Cash dividends paid		(7,279	)		(1,816	)
Net cash provided by (used in) financing activities		(58,238	)		64,779
Net change in cash and cash equivalents		(14,903	)		(31,193	)
Cash and cash equivalents at beginning of period		57,354			66,628
Cash and cash equivalents at end of period	$	42,451		$	35,435
Supplemental non-cash investing and financing activities:
Increase (decrease) in accounts payable related to purchases of property, plant and equipment	$	(5,221	)	$	7,744
Accrued liabilities related to financing activities	$	—		$	(1,347	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — GENERAL AND BASIS OF PRESENTATION

These unaudited condensed consolidated interim financial statements of Ormat Technologies, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not contain all information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s consolidated financial position as of September 30, 2014, the consolidated results of operations and comprehensive income for the three and nine-month periods ended September 30, 2014 and 2013 and the consolidated cash flows for the nine-month periods ended September 30, 2014 and 2013.

The financial data and other information disclosed in the notes to the condensed consolidated financial statements related to these periods are unaudited. The results for the three and nine-month periods ended September 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2013. The condensed consolidated balance sheet data as of December 31, 2013 was derived from the audited consolidated financial statements for the year ended December 31, 2013, but does not include all disclosures required by U.S. GAAP.

Dollar amounts, except per share data, in the notes to these financial statements are rounded to the closest $1,000.

Other comprehensive income

For the nine months ended September 30, 2014 and 2013, the Company reclassified $107,000 and $124,000, respectively, from other comprehensive income, of which $173,000 and $200,000, respectively, were recorded to reduce interest expense and $66,000 and $88,000, respectively, were recorded against the income tax provision, in the condensed consolidated statements of operations and comprehensive income. For the three months ended September 30, 2014 and 2013, the Company reclassified $35,000 and $40,000, respectively, from other comprehensive income, of which $57,000 and $76,000, respectively, were recorded to reduce interest expense and $22,000 and $25,000, respectively, were recorded against the income tax provision, in the condensed consolidated statements of operations and comprehensive income.

Termination fee

On March 15, 2013, the Company finalized the agreement with Southern California Edison Company (“Southern California Edison”), by which the G1 and G3 Standard Offer #4 power purchase agreements (“PPAs”) were terminated and a termination fee of $9.0 million was recorded in the first quarter of 2013 in selling and marketing expenses. Under the agreement, the Company will continue to sell power from G2, the third plant of the Mammoth complex, under its existing PPA with Southern California Edison, with the term of the contract extended by an additional six years until early 2027.

Solar project sale

On March 26, 2014, the Company signed an agreement with RET Holdings, LLC to sell the Heber Solar project in Imperial County, California for $35.25 million. The Company received the first payment of $15.0 million during the first quarter of 2014 and the second payment for the remaining $20.25 million was paid in the second quarter of 2014. Due to certain contingencies in the sale agreement, the Company deferred the pre-tax gain of approximately $7.6 million until the contingencies were resolved in the second quarter of 2014.

Write-off of unsuccessful exploration activities

Write-off of unsuccessful activities for the nine months ended September, 30, 2014, was $8.1 million. This represents the write-off of exploration costs related to the Company’s exploration activities in the Wister site in California, which the Company determined in the second quarter of 2014 would not support commercial operations.

Acquisition of interests in Crump Geyser and North Valley Geothermal projects

On August 5, 2014, the Company signed a definitive Purchase and Sale Agreement with Alternative Earth Resources Inc. (“AER”), pursuant to which the Company paid $1.5 million in cash and (i) purchased AER's (a) 50% interest in Crump Geyser Company (“CGC”), which holds the rights to the Crump Geyser geothermal project, and (b) rights to the North Valley geothermal project (ii) obtained an option, exercisable over a four-year period, to purchase certain of AER's New Truckhaven geothermal lease. Prior to this transaction, CGC was consolidated by the Company as variable interest entity. As a result of the acquisition of the remaining interest, the Company continues to consolidate Crump, but now as a wholly owned indirect subsidiary, and so the carrying value of the non-controlling interest of CGC of $1.0 million was reclassified to the Company's equity and the difference of $0.2 million between the fair value of the consideration paid and the related carrying value of the nonconrolling interest acquired was recorded within “additional paid-in capital” in the condensed consolidated statement of equity.

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Concentration of credit risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of temporary cash investments and accounts receivable.

The Company places its temporary cash investments with high credit quality financial institutions located in the United States (“U.S.”) and in foreign countries. At September 30, 2014 and December 31, 2013, the Company had deposits totaling $23,016,000 and $13,805,000, respectively, in seven U.S. financial institutions that were federally insured up to $250,000 per account. At September 30, 2014 and December 31, 2013, the Company’s deposits in foreign countries amounted to approximately $31,279,000 and $56,133,000, respectively.

At September 30, 2014 and December 31, 2013, accounts receivable related to operations in foreign countries amounted to approximately $42,914,000 and $32,231,000, respectively. At September 30, 2014 and December 31, 2013, accounts receivable from the Company’s primary customers (as described immediately below) amounted to approximately 54.1% and 35.0% of the Company’s accounts receivable, respectively.

Sierra Pacific Power Company and Nevada Power Company (subsidiaries of NV Energy, Inc.) accounted for 14.6% and 15.3% of the Company’s total revenues for the three months ended September 30, 2014 and 2013, respectively, and 16.6% and 17.0% for the nine months ended September 30, 2014 and 2013, respectively.

Southern California Edison accounted for 19.8% and 20.9% of the Company’s total revenues for the three months ended September 30, 2014 and 2013, respectively, and 15.2% and 14.9% for the nine months ended September 30, 2014 and 2013, respectively.

Hawaii Electric Light Company accounted for 7.3% and 8.7% of the Company’s total revenues for the three months ended September 30, 2014 and 2013, respectively, and 8.8% and 8.9% for the nine months ended September 30, 2014 and 2013, respectively.

Kenya Power and Lighting Co. Ltd. accounted for 15.7% and 13.9% of the Company’s total revenues for the three months ended September 30, 2014 and 2013, respectively, and 15.6% and 10.9% for the nine months ended September 30, 2014 and 2013, respectively.

The Company performs ongoing credit evaluations of its customers’ financial condition. The Company has historically been able to collect on all of its receivable balances, and accordingly, no provision for doubtful accounts has been made.

NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS

New accounting pronouncements effective in the nine-month period ended September 30, 2014

Presentation of Unrecognized Tax Benefits

In July 2013, the Financial Accounting Standards Board (“FASB”) clarified the accounting guidance on presentation of the unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance states that an unrecognized tax benefit (or a portion thereof) should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except for certain exceptions specified in the guidance. The exceptions include when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to reduce any income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and is to be made assuming the disallowance of the tax position at the reporting date. This accounting update is effective for fiscal periods after December 15, 2013. The provision was applied prospectively to all unrecognized tax benefits that exist on January 1, 2014. The adoption of this guidance did have a material impact on the condensed consolidated financial statements.

New accounting pronouncements effective in future periods

Reporting Discontinued Operations and Disclosures

In April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendment, required to be applied prospectively for reporting periods beginning after December 15, 2014, limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on operations and financial results. The amendment requires expanded disclosures for discontinued operations and also requires additional disclosures regarding disposals of individually significant components that do not qualify as discontinued operations. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. This amendment has no impact on our current disclosures, but will in the future if we dispose of any individually significant components of the Company.

Revenues from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenues from Contracts with Customers, Topic 606, which was a joint project of the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The update provides that an entity should recognize revenue in connection with the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, an entity is required to apply each of the following steps: (1) identify the contract(s) with the customer; (2) identify the performance obligations in the contracts; (3) determine the transaction price; (4) allocate the transaction price to the performance obligation in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the potential impact, if any, of the adoption of these amendments on its consolidated financial statements.

NOTE 3 — INVENTORIES

Inventories consist of the following:
	September 30, 2014		December 31, 2013

	(Dollars in thousands)
Raw materials and purchased parts for assembly	$	10,412	$	6,326
Self-manufactured assembly parts and finished products		6,925		15,963
Total	$	17,337	$	22,289

NOTE 4 — UNCONSOLIDATED INVESTMENTS

Unconsolidated investments consist of the following:

	September 30, 2014		December 31, 2013

	(Dollars in thousands)
Sarulla	$	1,339	$	7,076

The Sarulla Project

The Company (through a subsidiary) is a 12.75% equity stake member of a consortium (the “Sarulla Consortium”) which is in the process of developing the Sarulla geothermal power project in Indonesia with expected generating capacity of approximately 330 megawatts (“MW”). The Sarulla project is located in Tapanuli Utara, North Sumatra, Indonesia and will be owned and operated by the consortium members under the framework of a Joint Operating Contract (“JOC”) and Energy Sales Contract (“ESC”) that were signed on April 4, 2013. Under the JOC, PT Pertamina Geothermal Energy, the concession holder for the project, has provided the consortium with the right to use the geothermal field, and under the ESC, PT PLN, the state electric utility, will be the off-taker at Sarulla for a period of 30 years. In addition to its equity holdings in the consortium, the Company designed the Sarulla plant and is expected to supply its Ormat Energy Converters (“OECs”) to the power plant. The supply contract was signed on October 2013.

The consortium has started preliminary testing and development activities at the site and signed an engineering procurement and construction agreement (“EPC”) with an unrelated third party. The project will be constructed in three phases of 110 MW each, utilizing both steam and brine extracted from the geothermal field to increase the power plant’s efficiency.

On May 16, 2014, the consortium reached financial closing of $1.17 billion financing agreements to finance the development of the Sarulla project with a consortium of lenders comprised of Japan Bank for International Cooperation (“JBIC”), the Asian Development Bank and six commercial banks and obtained construction and term loan under limited recourse financing package backed by political risk guarantee from JBIC.

Of the $1.17 billion, $0.1 billion (which was drawn down by the Sarulla project company on May 23, 2014) bears a fixed interest rate and $1.07 billion bears interest at a rate linked to Libor.

The Sarulla consortium entered into interest rate swap agreements with various international banks in order to fix the Libor interest rate on up to $0.96 billion of the $1.07 billion credit facility at a rate of 3.4565%. The interest rate swap became effective as of June 4, 2014 along with the second draw-down by the project company of $50.0 million.

The Sarulla project company has accounted for the interest rate swap as a cash flow hedge upon which changes in the fair value of the hedging instrument, relative to the effective portion, will be recorded in other comprehensive income. As such, during the period, the project recorded a loss equal to $40.5 million, of which the Company's share was $5.2 million which was recorded in other comprehensive income

The first phase of operations is expected to commence in 2016 and the remaining two phases of operations are scheduled to commence within 18 months thereafter. The Company will supply its Ormat Energy Converters to the power plant and has added the $254.0 million supply contract to its product segment backlog. According to the current plan, the Company started to recognize revenue from the project during the third quarter of 2014 and will continue to recognize revenues over the course of the next three to four years. For the three and nine months ended September 30, 2014, the Company recognized Products revenues of $13.8 million.

During the first nine months of 2014, the Company made additional investment contributions of $0.6 million to the Sarulla project, consistent with its pro rata share in the consortium.

The Company’s share in the results of operations of the Sarulla project was not significant for each of the periods presented in these condensed consolidated financial statements.

NOTE 5 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value measurement guidance clarifies that fair value is an exit price, representing the amount that would be received upon selling an asset or paid upon transferring a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the fair value measurement guidance are described below:

Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

Level 2 — Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 — Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

The following table sets forth certain fair value information at September 30, 2014 and December 31, 2013 for financial assets and liabilities measured at fair value by level within the fair value hierarchy, as well as cost or amortized cost. As required by the fair value measurement guidance, assets and liabilities are classified in their entirety based on the lowest level of inputs that is significant to the fair value measurement.

	Carrying
	value at
	September 30,			Fair Value at September 30, 2014
	2014			Total			Level 1		Level 2			Level 3

	(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)	$	116,118		$	116,118		$	116,118	$	—		$	—
Derivatives:
Swap transaction on oil price⁽¹⁾		1,134			1,134			—		1,134			—
Swap transaction on natural gas price⁽²⁾		502			502			—		502			—
Liabilities:
Current liabilities:
Currency forward contracts⁽³⁾		(2,183	)		(2,183	)		—		(2,183	)		—
	$	115,571		$	115,571		$	116,118	$	(547	)	$	—

	Carrying
	value at
	December 31,			Fair Value at December 31, 2013
	2013			Total			Level 1		Level 2			Level 3

	(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)	$	40,015		$	40,015		$	40,015	$	—		$	—
Derivatives:
Currency forward contracts⁽³⁾		2,290			2,290			—		2,290			—
Liabilities
Current liabilities:
Derivatives:
Swap transaction on oil price⁽¹⁾		(2,490	)		(2,490	)		—		(2,490	)		—
Swap transaction on natural gas price⁽²⁾		(341	)		(341	)		—		(341	)		—
	$	39,474		$	39,474		$	40,015	$	(541	)	$	—

(1)	This amount relates to derivatives which represent swap contracts on oil prices, valued primarily based on observable inputs, including forward and spot prices for related commodity indices, and are included within "prepaid expenses and other" and "accounts payable and accrued expenses" in the condensed consolidated balance sheet with the corresponding gain or loss being recognized within "electricity revenues" in the condensed consolidated statement of operations and comprehensive income (loss).

(2)	This amount relates to derivatives which represent swap contracts on natural gas prices, valued primarily based on observable inputs, including forward and spot prices for related commodity indices, and are included within "prepaid expenses and other" and "accounts payable and accrued expenses" in the condensed consolidated balance sheet with the corresponding gain or loss being recognized within "electricity revenues" in the condensed consolidated statement of operations and comprehensive income (loss).

(3)	This amount relates to derivatives which represent currency forward contracts, valued primarily based on observable inputs, including forward and spot prices for currencies, netted against contracted rates and then multiplied against notational amounts, and are included within "prepaid expenses and other" in the condensed consolidated balance sheet with the corresponding gain or loss being recognized within "foreign currency translation and transaction gains (losses)" in the condensed consolidated statement of operations and comprehensive income (loss).

The amounts set forth in the tables above include investments in debt instruments and money market funds (which are included in cash equivalents). Those securities and deposits are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in an active market.

The following table presents the amounts of gain (loss) recognized in the condensed consolidated statements of operations and comprehensive income (loss) on derivative instruments not designated as hedges:

		Amount of recognized gain (loss)
Derivatives not designated as hedging instruments	Location of recognized gain (loss)	Three Months Ended September 30,						Nine Months Ended September 30,
		2014			2013			2014			2013

		(Dollars in thousands)						(Dollars in thousands)

Put options on oil price	Electricity revenues	$	—		$	(824	)	$	—		$	(1,256	)
Swap transaction on oil price	Electricity revenues		1,657			—			1,885			(294	)
Swap transaction on natural gas price	Electricity revenues		2,295			477			(609	)		81
Currency forward contracts	Foreign currency translation and transaction gains (losses)		(2,422	)		1,970			(2,430	)		4,895
		$	1,530		$	1,623		$	(1,154	)	$	3,426

On September 3, 2013, the Company entered into an NGI swap contract with a bank for notional quantity of approximately 4.4 million MMbtu for settlement effective January 1, 2014 until December 31, 2014, in order to reduce its exposure to NGI below $4.035 per MMbtu under its PPAs with Southern California Edison. The contract did not have up-front costs. Under the terms of this contract, the Company makes floating rate payments to the bank and receives fixed rate payments from the bank on each settlement date. The swap contract has monthly settlement whereby the difference between the fixed price of $4.035 per MMbtu and the market price on the first commodity business day on which the relevant commodity reference price is published in the relevant calculation period (January 1, 2014 to December 1, 2014) is being settled on a cash basis.

On October 16, 2013, the Company entered into an NGI swap contract with a bank for notional quantity of approximately 4.2 million MMbtu for settlement effective January 1, 2014 until December 31, 2014, in order to reduce its exposure to NGI below $4.103 per MMbtu under its PPAs with Southern California Edison. The contract did not have any up-front costs. Under the terms of this contract, the Company makes floating rate payments to the bank and receives fixed rate payments from the bank on each settlement date. The swap contract has monthly settlements whereby the difference between the fixed price of $4.103 per MMbtu and the market price on the first commodity business day on which the relevant commodity reference price is published in the relevant calculation period (January 1, 2014 to December 1, 2014) is being settled on a cash basis.

On October 16, 2013, the Company entered into a New York Harbor ULSD swap contract with a bank for notional quantity of 275,000 BBL effective from January 1, 2014 until December 31, 2014 to reduce the Company’s exposure to fluctuations in the energy rate caused by fluctuations in oil prices under the 25 MW PPA for the Puna complex. The Company entered into this contract because the swap had a high correlation with the avoided costs (which are incremental costs that the power purchaser avoids by not having to generate such electrical energy itself or purchase it from others) that HELCO uses to calculate the energy rate. The contract did not have any up-front costs. Under the term of this contract, the Company will make floating rate payments to the bank and receive fixed rate payments from the bank on each settlement date ($125.15 per BBL). The swap contract has monthly settlements whereby the difference between the fixed price and the monthly average market price will be settled on a cash basis.

On March 6, 2014, the Company entered into an NGI swap contract with a bank for notional quantity of approximately 2.2 million MMbtu for settlement effective January 1, 2015 until March 31, 2015, in order to reduce its exposure to NGI below $4.95 per MMbtu under its PPAs with Southern California Edison. The contract did not have any up-front costs. Under the terms of this contract, the Company will make floating rate payments to the bank and receive fixed rate payments from the bank on each settlement date. The swap contract has monthly settlements whereby the difference between the fixed price of $4.95 per MMbtu and the market price on the first commodity business day on which the relevant commodity reference price is published in the relevant calculation period (January 1, 2015 to March 1, 2015) will be settled on a cash basis.

The foregoing swap transactions have not been designated as hedge transactions and are marked to market with the corresponding gains or losses recognized within “Electricity revenues” in the condensed consolidated statements of operations and comprehensive income. For the nine months ended September 30, 2014 and 2013, the Company recognized a net gain and a net loss from these transactions of $1.3 million and $1.5 million, respectively. For the three months ended September 30, 2014 and 2013, the Company recognized a net gain and a net loss from these transactions of $4.0 million and $0.3 million, respectively.

There were no transfers of assets or liabilities between Level 1 and Level 2 during the nine months ended September 30, 2014.

The fair value of the Company’s long-term debt approximates its carrying amount, except for the following:

	Fair Value				Carrying Amount
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013

	(Dollars in millions)				(Dollars in millions)
Olkaria III loan - DEG	$	36.6	$	40.3	$	35.5	$	39.5
Olkaria III loan - OPIC		276.8		279.6		287.1		299.9
Amatitlan loan		—		34.8		—		31.5
Senior secured notes:
Ormat Funding LLC ("OFC")		78.0		83.5		72.5		90.8
OrCal Geothermal LLC ("OrCal")		64.3		65.8		63.2		66.2
OFC 2 LLC ("OFC 2")		233.9		119.0		274.5		144.4
Senior unsecured bonds		264.9		270.6		250.4		250.6
Loans from institutional investors		14.2		20.1		13.9		19.5

The fair value as of December 31, 2013, of OFC senior secured notes was determined using observable market prices as these securities are traded. The fair value as of September 30, 2014 of the long-term debt is determined by a valuation model, which is based on a conventional discounted cash flow methodology and utilizes assumptions of estimated current borrowing rates. The fair value of revolving lines of credit is determined using a comparison of market-based price sources that are reflective of similar credit ratings to those of the Company.

On June 20, 2014, Phase I of Tuscarora facility achieved project completion under the OFC 2 Note Purchase Agreement. In accordance with the terms of the Note Purchase Agreement, the Company recalibrated the original financing assumptions and as a result the loan amount was adjusted through a principal prepayment of approximately $4.3 million.

On August 29, 2014, OFC 2, a wholly-owned indirect subsidiary of the Company signed a $140.0 million loan under the OFC 2 senior secured notes to finance the construction of the McGinness Hills Phase 2 project in Nevada. This drawdown is the last tranche available under the OFC 2 Note Purchase Agreement with John Hancock Life Insurance Company and guaranteed by the U.S. Department of Energy's Loan Programs Office. The $140.0 million loan, which matures in December 2032, carries a 4.61% coupon with principal to be repaid on a quarterly basis. The OFC 2 Notes, which include loans for the Tuscarora, Jersey Valley and McGinness Hills complexes, are rated "BBB" by Standard & Poor's.

In connection with the anticipated drawdown, on August 13, 2014, the Company entered into an on-the-run interest rate lock agreement with a financial institution with a termination date of August 15, 2014. This on-the-run interest rate lock agreement had a notional amount of $140.0 million and was designated by the Company to be a cash flow hedge. The objective of this cash flow hedge was to eliminate the variability in the changes in the 10-year U.S. Treasury rate as that is one of the components in the annual interest rate of the OFC 2 loan that was forecasted to be fixed on August 15, 2014. As such, the Company hedged the variability in total proceeds attributable to changes in the 10-year U.S. Treasury rate for the forecasted issuance of fixed rate OFC 2 loan. On August 18, 2014, which was the settlement date, the Company paid $1.5 million to the counterparty of the on-the-run interest rate lock agreement.

The Company concluded that the cash flow hedge was fully effective with no ineffective portion and no amounts excluded from the effectiveness testing, thus the total loss from the cash flow hedge was fully recognized in “Loss in respect of derivatives instruments designated for cash flow hedge” under other comprehensive income of $0.9 million noted above, which was net of related taxes of $0.6 million. The cash flow hedge loss recorded will be amortized over the life of the OFC 2 loan using the effective interest method. The Company expects to reclassify $0.2 of the loss from “Accumulated other comprehensive income (loss)” into interest expense during the next twelve months.

On September 30, 2014, Ortitlan, a wholly-owned indirect subsidiary of the Company, prepaid the outstanding amount of approximately $30.0 million loan with EIG Global Project Fund II, Ltd. (formerly TCW). The $42.0 million loan was signed in 2009 to refinance the Company's investment in the 20 MW Amatitlan geothermal power plant located in Guatemala. This repayment resulted in a one-time charge to interest expense of approximately $1.1 million, consisting of (i) prepayment premium of $0.6 million, and (ii) write-off of related deferred financing costs amounting to a $0.5 million.

The carrying value of other financial instruments, such as revolving lines of credit, deposits, and other long-term debt approximates fair value.

The following table presents the fair value of financial instruments as of September 30, 2014:

	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Olkaria III loan - DEG	$	—	$	—	$	36.6	$	36.6
Olkaria III loan - OPIC		—		—		276.8		276.8
Senior secured notes:
OFC		—		—		78.0		78.0
OrCal		—		—		64.3		64.3
OFC 2		—		—		233.9		233.9
Senior unsecured bonds		—		—		264.9		264.9
Loan from institutional investors		—		—		14.2		14.2
Other long-term debt		—		15.0		—		15.0
Revolving lines of credit		—		28.1		—		28.1
Deposits		21.7		—		—		21.7

The following table presents the fair value of financial instruments as of December 31, 2013:

	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Olkaria III loan - DEG	$	—	$	—	$	40.3	$	40.3
Olkaria III loan - OPIC		—		—		279.6		279.6
Amatitlan loan		—		—		34.8		34.8
Senior secured notes:
OFC		—		83.5		—		83.5
OrCal		—		—		65.8		65.8
OFC 2		—		—		119.0		119.0
Senior unsecured bonds		—		—		270.6		270.6
Loan from institutional investors		—		—		20.1		20.1
Other long-term debt		—		23.3		—		23.3
Revolving lines of credit		—		112.0		—		112.0
Deposits		21.3		—		—		21.3

NOTE 6 — STOCK-BASED COMPENSATION

The 2004 Incentive Compensation Plan

In 2004, the Company’s Board of Directors adopted the 2004 Incentive Compensation Plan (“2004 Incentive Plan”), which provides for the grant of the following types of awards: incentive stock options, non-qualified stock options, restricted stock, stock appreciation rights (“SARs”), stock units, performance awards, phantom stock, incentive bonuses, and other possible related dividend equivalents to employees of the Company, directors and independent contractors. Under the 2004 Incentive Plan, a total of 3,750,000 shares of the Company’s common stock have been reserved for issuance, all of which could be issued as options or as other forms of awards. Options and SARs granted to employees under the 2004 Incentive Plan cliff vest and are exercisable from the grant date as follows: 25% after 24 months, 25% after 36 months, and the remaining 50% after 48 months. Options granted to non-employee directors under the 2004 Incentive Plan cliff vest and become fully exercisable one year after the grant date. Vested stock-based awards may be exercised for up to ten years from the date of grant. The shares of common stock will be issued upon exercise of options or SARs from the Company’s authorized share capital. The 2004 Incentive Plan expired in May 2012 upon adoption of the 2012 Incentive Plan, except as to share based awards outstanding on that date.

The 2012 Incentive Compensation Plan

In May 2012, the Company’s shareholders adopted the 2012 Incentive Compensation Plan (as amended the “2012 Incentive Plan”), which provides for the grant of the following types of awards: incentive stock options, non-qualified stock options, restricted stock, SARs, stock units, performance awards, phantom stock, incentive bonuses, and other possible related dividend equivalents to employees of the Company, directors and independent contractors. Under the 2012 Incentive Plan, a total of 4,000,000 shares of the Company’s common stock have been reserved for issuance, all of which could be issued as options or as other forms of awards. Options and SARs granted to employees under the 2012 Incentive Plan will vest and become exercisable as follows: 25% vest 24 months after the grant date, an additional 25% vest 36 months after the grant date, and the remaining 50% vest 48 months after the grant date. Options granted to non-employee directors under the 2012 Incentive Plan will vest and become exercisable one year after the grant date. The term of stock-based awards typically ranges from six to ten years from the date of grant. The shares of common stock will be issued upon exercise of options or SARs from the Company’s authorized share capital.

The 2012 Incentive Plan was amended during the first half of 2014. The key amendments are as follows:

Increase of per grant limit: Section 15(a) of the 2012 Incentive Plan was amended to allow the grant of up to 400,000 shares of the Company’s common stock with respect to the initial grant of an equity award to newly hired executive officers in any calendar year; and

Acceleration of vesting: Section 15(l) of the 2012 Incentive Plan was amended to clarify the Company’s ability to provide in the applicable award agreement that part and/or all of the award will be accelerated upon the occurrence of certain predetermined events and/or conditions, such as a ”change in control“ (as defined in the 2012 Incentive Plan).

On February 11, 2014, the Company granted its Chief Financial Officer options to purchase 32,500 shares of common stock under the 2012 Incentive Plan. The exercise price of each option is $24.57, which represented the fair market value of the Company’s common stock on the grant date. Such options will expire five years from the date of grant and will vest in equal annual installments over a period of three years from the grant date, subject to acceleration upon a change of control.

The fair value of each stock option on the grant date was $5.78. The Company calculated the fair value of each stock option on the date of grant using the Black-Scholes valuation model based on the following assumptions:

Risk-free interest rates	0.81	%
Expected life (in years)	3.375
Dividend yield	0.80	%
Expected volatility	33.50	%
Forfeiture rate	0.00	%

On April 2, 2014, the Company granted its newly appointed Chief Executive Officer options to purchase up to an aggregate of 400,000 shares of common stock under the 2012 Incentive Plan. The exercise price of each option is $29.52 per share, which represented the fair market value of the Company’s common stock on the date of the grant. Options to purchase 300,000 shares of common stock will expire six years following the date of grant and will vest in equal annual installments over four years from the grant date, subject to acceleration in the event of a change of control. The remaining options to purchase 100,000 shares of common stock will vest on March 31, 2021, subject to acceleration associated with a change of control, and will expire seven and a half years from the date of grant.

The fair value of each option on the grant date was $8.33 for grant of options to purchase 300,000 shares of common stock, and $12.88 for the grant of options to purchase 100,000 shares of common stock. The Company calculated the fair value of each stock option on the date of grant using the Black-Scholes valuation model based on the following assumptions:

	Grant of options to purchase 300,000 shares of common stock			Grant of options to purchase 100,000 shares of common stock
Risk-free interest rates		2.36	%		1.64	%
Expected life (in years)		7.25			4.75
Dividend yield		0.90	%		0.90	%
Expected volatility		42.80	%		33.10	%

NOTE 7 — INTEREST EXPENSE, NET

The components of interest expense, net, are as follows: