Edgar Filing: ORMAT TECHNOLOGIES, INC.

ora20150331_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 March 31, 2015

☐	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 May 7, 2015, the number of outstanding shares of common stock, par value $0.001 per share, was 48,828,331.

ORMAT TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2015

PART I — FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	5

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	50

ITEM 4.	CONTROLS AND PROCEDURES	51

PART II — OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	52

ITEM 1A.	RISK FACTORS	53

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	53

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	53

ITEM 4.	MINE SAFETY DISCLOSURES	53

ITEM 5.	OTHER INFORMATION	53

ITEM 6.	EXHIBITS	53

SIGNATURES		54

iii

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)

	March 31,			December 31,
	2015			2014
	(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	70,724		$	40,230
Restricted cash and cash equivalents (all related to VIEs)		115,530			93,248
Receivables:
Trade		56,300			48,609
Related entity		---			451
Other		9,732			10,141
Due from Parent		—			1,337
Inventories		17,286			16,930
Costs and estimated earnings in excess of billings on uncompleted contracts		7,426			27,793
Deferred income taxes		496			251
Prepaid expenses and other		29,566			34,884
Total current assets		307,060			273,874
Deposits and other		17,963			20,044
Deferred charges		37,301			37,567
Property, plant and equipment, net ($1,421,996 and $1,339,342 related to VIEs, respectively)		1,535,757			1,437,637
Construction-in-process ($82,045 and $162,006 related to VIEs, respectively)		230,037			296,722
Deferred financing and lease costs, net		27,369			27,057
Intangible assets, net		27,846			28,655
Total assets	$	2,183,333		$	2,121,556
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	83,676		$	88,276
Deferred income taxes		975			974
Short term revolving credit lines with banks (full recourse)		30,600			20,300
Billings in excess of costs and estimated earnings on uncompleted contracts		57,861			24,724
Current portion of long-term debt:
Limited and non-recourse (all related to VIEs):
Senior secured notes		36,544			34,368
Other loans		17,995			17,995
Full recourse		17,203			19,116
Total current liabilities		244,854			205,753
Long-term debt, net of current portion:
Limited and non-recourse (all related to VIEs):
Senior secured notes		355,776			360,366
Other loans		260,125			264,625
Full recourse:
Senior unsecured bonds (plus unamortized premium based upon 7% of $744)		250,212			250,289
Other loans		32,684			34,351
Unconsolidated investments		7,688			3,617
Liability associated with sale of tax benefits		33,685			39,021
Deferred lease income		59,815			60,560
Deferred income taxes		70,247			66,220
Liability for unrecognized tax benefits		7,190			7,511
Liabilities for severance pay		18,499			20,399
Asset retirement obligation		19,514			19,142
Other long-term liabilities		3,872			2,956
Total liabilities		1,364,161			1,334,810
Commitments and contingencies (Note 10)
Equity:
The Company's stockholders' equity:
Common stock, par value $0.001 per share; 200,000,000 shares authorized; 48,828,331 and 45,537,162 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively		49			46
Additional paid-in capital		771,591			742,006
Retained earnings		47,673			41,539
Accumulated other comprehensive income		(11,971	)		(8,668	)
		807,342			774,923
Noncontrolling interest		11,830			11,823
Total equity		819,172			786,746
Total liabilities and equity	$	2,183,333		$	2,121,556

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

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended March 31,
	2015			2014
	(Dollars in thousands, except per share data)
Revenues:
Electricity	$	89,953		$	94,817
Product		30,278			47,619
Total revenues		120,231			142,436
Cost of revenues:
Electricity		55,581			57,034
Product		20,625			31,943
Total cost of revenues		76,206			88,977
Gross margin		44,025			53,459
Operating expenses:
Research and development expenses		363			(87	)
Selling and marketing expenses		3,433			3,379
General and administrative expenses		10,204			7,596
Write-off of unsuccessful exploration activities		174			—
Operating income		29,851			42,571
Other income (expense):
Interest income		9			111
Interest expense, net		(17,828	)		(20,518	)
Foreign currency translation and transaction losses		(1,366	)		(638	)
Income attributable to sale of tax benefits		5,552			6,717
Other non-operating income, net		283			63
Income before income taxes and equity in losses of investees		16,501			28,306
Income tax provision		(5,459	)		(6,320	)
Equity in losses of investees, net		(775	)		(197	)
Net income		10,267			21,789
Net loss attributable to noncontrolling interest		(235	)		(237	)
Net income attributable to the Company's stockholders	$	10,032		$	21,552
Comprehensive income:
Net income		10,267			21,789
Other comprehensive income (loss), net of related taxes:
Change in unrealized gains or losses in respect of the Company's share in derivatives instruments of unconsolidated investment		(3,296	)		—
Loss in respect of derivative instruments designated for cash flow hedge		23			—
Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge		(30	)		(36	)
Comprehensive income		6,964			21,753
Comprehensive loss attributable to noncontrolling interest		(235	)		(237	)
Comprehensive income attributable to the Company's stockholders	$	6,729		$	21,516
Earnings per share attributable to the Company's stockholders - basic and diluted
Net income	$	0.21		$	0.47
Weighted average number of shares used in computation of earnings per share attributable to the Company's stockholders:
Basic		47,244			45,479
Diluted		48,079			45,660
Dividend per share declared	$	0.08		$	0.06

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

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

	The Company's Stockholders' Equity
							Retained			Accumulated
					Additional		Earnings			Other
	Common Stock				Paid-in		(Accumulated			Income						Noncontrolling			Total
	Shares		Amount		Capital		Deficit)			(Loss)			Total			Interest			Equity

	(Dollars in thousands, except per share data)

Balance at December 31, 2013		45,461	$	46	$	735,295	$	(3,088	)	$	487		$	732,740		$	12,371		$	745,111

Stock-based compensation		—		—		1,440		—			—			1,440			—			1,440
Exercise of options by employees and directors		18		—		—		—			—			—			—			—
Cash paid to non controlling interest		—		—		—		—			—			—			(140	)		(140	)
Cash dividend declared, $0.06 per share		—		—		—		(2,727	)		—			(2,727	)		—			(2,727	)
Increase in noncontrolling interest in ORTP LLC		—		—		—		—			—			—			257			257
Acquisition of noncontrolling interest in Crump		—		—		—		—			—			—			—			—
Net income		—		—		—		21,552			—			21,552			237			21,789
Other comprehensive income (loss), net of related taxes:
Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge (net of related tax of $22)		—		—		—		—			(36	)		(36	)		—			(36	)

Balance at March 31, 2014		45,479	$	46	$	736,735	$	15,737		$	451		$	752,969		$	12,725		$	765,694

Balance at December 31, 2014		45,537	$	46	$	742,006	$	41,539		$	(8,668	)	$	774,923		$	11,823		$	786,746

Stock-based compensation		—		—		1,127		—			—			1,127			—			1,127
Exercise of options by employees and directors		295		—		2,704		—			—			2,704			—			2,704
Share exchange with Parent (Note 1)		2,996		3		25,754		—			—			25,757			—			25,757
Cash paid to non controlling interest		—		—		—		—			—			—			(228	)		(228	)
Cash dividend declared, $0.08 per share		—		—		—		(3,898	)		—			(3,898	)		—			(3,898	)
Net income		—		—		—		10,032			—			10,032			235			10,267
Other comprehensive income (loss), net of related taxes:
Loss in respect of derivative instruments designated for cash flow hedge (net of related tax of $14)		—		—		—		—			23			23			—			23
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)		—		—		—		—			(3,296	)		(3,296	)		—			(3,296	)
Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge (net of related tax of $19)		—		—		—		—			(30	)		(30	)		—			(30	)

Balance at March 31, 2015		48,828	$	49	$	771,591	$	47,673		$	(11,971	)	$	807,342		$	11,830		$	819,172

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

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
	2015			2014

	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	10,267		$	21,789
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		25,639			23,417
Amortization of premium from senior unsecured bonds		(77	)		(77	)
Accretion of asset retirement obligation		372			374
Stock-based compensation		1,127			1,440
Amortization of deferred lease income		(671	)		(671	)
Income attributable to sale of tax benefits, net of interest expense		(4,044	)		(4,472	)
Equity in losses of investees		775			197
Mark-to-market of derivative instruments		4,129			224
Write-off of unsuccessful exploration activities		174			—
Loss on severance pay fund asset		140			17
Deferred income tax provision		4,054			5,896
Liability for unrecognized tax benefits		(321	)		182
Deferred lease revenues		(74	)		(63	)
Other		—			(181	)
Changes in operating assets and liabilities, net of amounts acquired:
Receivables		(6,201	)		43,118
Costs and estimated earnings in excess of billings on uncompleted contracts		20,367			(6,572	)
Inventories		(356	)		(382	)
Prepaid expenses and other		1,189			(4,074	)
Deposits and other		(79	)		(1,229	)
Accounts payable and accrued expenses		(4,903	)		(7,725	)
Billings in excess of costs and estimated earnings on uncompleted contracts		33,137			(4,086	)
Liabilities for severance pay		(1,900	)		341
Other long-term liabilities		916			765
Due from/to Parent		(513	)		(152	)
Net cash provided by operating activities		83,147			68,076
Cash flows from investing activities:
Cash acquired in organizational restructuring and share exchange with Ormat Industries (Note 1)		15,391			—
Net change in restricted cash, cash equivalents and marketable securities		(22,282	)		(23,341	)
Cash received from sale of property, plant and equipment		—			15,000
Capital expenditures		(42,386	)		(48,330	)
Cash grant received from the U.S. Treasury under Section 1603 of the ARRA		—			21,811
Investment in unconsolidated companies		—			(631	)
Increase in severance pay fund asset, net of payments made to retired employees		2,020			168
Net cash used in investing activities		(47,257	)		(35,323	)
Cash flows from financing activities:
Proceeds from exercise of options by employees		2,704			—
Purchase of OFC Senior Secured Notes		—			(12,860	)
Proceeds from revolving credit lines with banks		489,900			887,583
Repayment of revolving credit lines with banks		(479,600	)		(902,400	)
Cash received from non-controlling interest		1,654			2,234
Repayments of long-term debt		(10,494	)		(10,528	)
Cash paid to non-controlling interest		(3,503	)		(3,091	)
Cash paid for interest rate cap		—			—
Deferred debt issuance costs		(2,159	)		(391	)
Cash dividends paid		(3,898	)		(2,727	)
Net cash used in financing activities		(5,396	)		(42,180	)
Net change in cash and cash equivalents		30,494			(9,427	)
Cash and cash equivalents at beginning of period		40,230			57,354
Cash and cash equivalents at end of period	$	70,724		$	47,927
Supplemental non-cash investing and financing activities:
Decrease in accounts payable related to purchases of property, plant and equipment	$	(118	)	$	(5,641	)

The accompanying notes are an integral part of the 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 March 31, 2015, the consolidated results of operations and comprehensive income (loss) for the three-month periods ended March 31, 2015 and 2014 and the consolidated cash flows for the three-month periods ended March 31, 2015 and 2014.

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-month period ended March 31, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015.

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, 2014. The condensed consolidated balance sheet data as of December 31, 2014 was derived from the audited consolidated financial statements for the year ended December 31, 2014, 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.

Share Exchange Transaction

On February 12, 2015, the Company completed the share exchange transaction with its then-parent entity, Ormat Industries Ltd. ("OIL") following which, the Company became a noncontrolled public company and its public float increased from approximately 40% to approximately 76% of its total shares outstanding. Under the terms of the share exchange, OIL shareholders received 0.2592 shares for each share in OIL, or an aggregate of approximately 30.2 million shares, reflecting a net issuance of approximately 3.0 million shares (after deducting the 27.2 million shares that OIL held in the Company). Consequently, the number of total shares of the Company outstanding increased from approximately 45.5 million shares to approximately 48.5 million shares.

In exchange, the Company also received $15.4 million in cash, $0.6 million in other assets and $12.1 million in land and buildings and assumed $0.5 million in liabilities. OIL's principal business purpose was to hold its interest in the Company and the transaction resulted in a transfer of non-material assets from OIL to the Company. Therefore, it does not represent a change in reporting entity and the Company recognized the transfer of net assets at their carrying value as presented in OIL's financial statements. Any activities of OIL will be accounted for prospectively by the Company.

Other comprehensive income

For the three months ended March 31, 2015 and 2014, the Company classified $7,000 and $36,000, respectively, from accumulated other comprehensive income, of which $12,000 and $58,000, respectively, were recorded to reduce interest expense and $5,000 and $22,000, respectively, were recorded against the income tax provision, in the condensed consolidated statements of operations and comprehensive income.

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. The Company recognized the pre-tax gain of approximately $7.6 million in the second quarter of 2014.

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 March 31, 2015 and December 31, 2014, the Company had deposits totaling $41,175,000 and $23,488,000, respectively, in seven U.S. financial institutions that were federally insured up to $250,000 per account. At March 31, 2015 and December 31, 2014, the Company’s deposits in foreign countries amounted to approximately $41,190,000 and $24,304,000, respectively.

At March 31, 2015 and December 31, 2014, accounts receivable related to operations in foreign countries amounted to approximately $26,790,000 and $21,935,000, respectively. At March 31, 2015 and December 31, 2014, accounts receivable from the Company’s primary customers amounted to approximately 47.0% and 69.0%, respectively, of the Company’s accounts receivable.

Sierra Pacific Power Company and Nevada Power Company (subsidiaries of NV Energy, Inc.) accounted for 24.0% and 15.3% of the Company’s total revenues for the three months ended March 31, 2015 and 2014, respectively.

Southern California Edison accounted for 8.8% and 12.1% of the Company’s total revenues for the three months ended March 31, 2015 and 2014, respectively.

Kenya Power and Lighting Co. Ltd. accounted for 17.8% and 14.3% of the Company’s total revenues for the three months ended March 31, 2015 and 2014, 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 three-month period ended March 31, 2015

Service Concession Arrangements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-05, Service Concession Arrangements, Topic 853. The update provides that an operating entity should not account for a service concession arrangement within the scope of this update as a lease in accordance with Topic 840, Leases. The amendments also specify that the infrastructure used in a service concession arrangement should not be recognized as property, plant, and equipment of the operating entity. A service concession arrangement is an arrangement between a public-sector entity grantor and an operating entity under which the operating entity operates the grantor’s infrastructure and may provide the construction, upgrading, or maintenance services of the grantor’s infrastructure. The amendments apply to an operating entity of a service concession arrangement entered into with a public-sector entity grantor when the arrangement meets both of the following conditions: (1) the grantor controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price and (2) The grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement. The guidance was applied on a modified retrospective basis to service concession arrangements in existence at January 1, 2015. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

New accounting pronouncements effective in future periods

Amendments to the Consolidation analysis

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, Topic 810. The update provides that all reporting entities that hold a variable interest in other legal entities will need to re-evaluate their consolidation conclusions and potentially revised their disclosures. This amendment affect both variable interest entity (“VIE”) and voting interest entity (“VOE”) consolidation models. The update does not change the general order in which the consolidation models are applied. A reporting entity that holds an economic interest in, or is otherwise involved with, another legal entity (has a “variable interest”) should first determine if the VIE model applies, and if so, whether it holds a controlling financial interest under that model. If the entity being evaluated for consolidation is not a VIE, then the VOE model should be applied to determine whether the entity should be consolidated by the reporting entity. Since consolidation is only assessed for legal entities, the determination of whether there is a legal entity is important. It is often clear when the entity is incorporated, but unincorporated structures can also be legal entities and judgment may be required to make that determination. The update contains a new example that highlights the judgmental nature of this legal entity determination. The update is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The Company is currently evaluating the potential impact, if any, of the adoption of this update on its consolidated financial statements.

Simplifying the Presentation of Debt Costs

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Costs, Subtopic 835-30. The update provides that debt issuance costs related to a recognized debt liability be presented in the balance sheet as direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of the adoption of these amendments on its consolidated financial statements.

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:

	March 31,		December 31,
	2015		2014
	(Dollars in thousands)
Raw materials and purchased parts for assembly	$	6,127	$	4,840
Self-manufactured assembly parts and finished products		11,159		12,090
Total	$	17,286	$	16,930

NOTE 4 — UNCONSOLIDATED INVESTMENTS

Unconsolidated investments consist of the following:

	March 31,			December 31,
	2015			2014
	(Dollars in thousands)
Sarulla	$	(7,688	)	$	(3,617	)

The Sarulla Project

The Company is a 12.75% member of a 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 (“PGE”), 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 in 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 approximately 110 MW each, utilizing both steam and brine extracted from the geothermal field to increase the power plant’s efficiency.

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

On May 16, 2014, the consortium reached financial closing of $1.17 billion in 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 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 three months ended March 31, 2015, the project recorded a loss equal to $25.9 million, of which the Company's share was $3.3 million which was recorded in other comprehensive income. The accumulated loss as of March 31, 2015 is $11.4 million.

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 OECs to the power plant and has added the $255.1 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 months ended March 31, 2015, the Company recognized Products revenues of $15.8 million. The Company has eliminated the related intercompany profit of $0.8 million against equity in loss of investees.

During the three months ended March 31, 2015, the Company did not make any additional investment contributions to the Sarulla project.

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 March 31, 2015 and 2014 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.

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

				March 31, 2015
				Fair Value
	Carrying Value at March 31, 2015			Total			Level 1		Level 2			Level 3
	(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)	$	97,641		$	97,641		$	97,641	$	—		$	—
Liabilities:
Current liabilities:
Derivatives:
Currency forward contracts ⁽²⁾		(2,020	)		(2,020	)		—		(2,020	)		—
	$	95,621		$	95,621		$	97,641	$	(2,020	)	$	—

				December 31, 2014
				Fair Value
	Carrying Value at December 31, 2014			Total			Level 1		Level 2			Level 3
	(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)	$	85,076		$	85,076		$	85,076	$	—		$	—
Derivatives:
Swap transaction on natural gas price ⁽¹⁾		4,129			4,129			—		4,129			—
Liabilities:
Current liabilities:
Derivatives:
Currency forward contracts ⁽²⁾		(2,882	)		(2,882	)		—		(2,882	)		—
	$	86,323		$	86,323		$	85,076	$	1,247		$	—

⁽¹⁾

This amount relates to derivatives which represent swap contract on natural gas prices, valued primarily based on observable inputs, including forward and spot prices for related commodity indices, and are included within “accounts payable and accrued expenses” on December 31, 2014, in the consolidated balance sheets with the corresponding gain or loss being recognized within “electricity revenue” in the consolidated statement of operations and comprehensive income.

⁽²⁾

These amounts relate 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 notional amounts, and are included within “accounts payable and accrued expenses” and “prepaid expenses and other” on March 31, 2015 and December 31, 2014, respectively, in the consolidated balance sheet with the corresponding gain or loss being recognized within “foreign currency translation and transaction losses” in the consolidated statement of operations and comprehensive income.

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.

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

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

		Amount of recognized gain (loss)
Derivatives not designated as		Three Months Ended March 31,
hedging instruments	Location of recognized gain (loss)	2015			2014


Swap transaction on oil price	Electricity revenues		—			907
Swap transactions on natural gas price	Electricity revenues		317			(3,276	)
Currency forward contracts	Foreign currency translation and transaction losses		(1,251	)		(231	)
		$	(934	)	$	(2,600	)

On September 3, 2013, the Company entered into a Natural Gas Index (“NGI”) swap contract with a bank for notional quantity of approximately 4.4 million British Thermal Units (“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 Power Purchase Agreements (“PPAs”) with Southern California Edison. The contract did not have up-front costs. Under the terms of this contract, the Company made floating rate payments to the bank and received fixed rate payments from the bank on each settlement date. The swap contract had a 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) was 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 made floating rate payments to the bank and received fixed rate payments from the bank on each settlement date. The swap contract had a monthly settlement 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) was settled on a cash basis.

On October 16, 2013, the Company entered into a New York Harbor Ultra-Low Sulfur Diesel (“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 Hawaii Electric Light Company’s (“HELCO”) uses to calculate the energy rate. The contract did not have any up-front costs. Under the term of this contract, the Company made floating rate payments to the bank and received fixed rate payments from the bank on each settlement date ($125.15 per BBL). The swap contract had a monthly settlement whereby the difference between the fixed price of $125.15 per BBL and the monthly average market price was 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 made floating rate payments to the bank and receive fixed rate payments from the bank on each settlement date. The swap contract had 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) was settled on a cash basis.

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

The foregoing swap transactions were not designated as hedge transactions and are marked to market with the corresponding gains or losses recognized within “electricity revenues” in the consolidated statements of operations and comprehensive income (loss). The Company recognized a net gain from these transactions of $0.3 million in the three months ended March 31, 2015, compared to net loss of $2.4 million in the three months ended March 31, 2014.

There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 during the three months ended March 31, 2015.

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

	Fair Value				Carrying Amount
	March 31, 2015		December 31, 2014		March 31, 2015		December 31, 2014
	(Dollars in millions)				(Dollars in millions)
Olkaria III Loan - DEG	$	32.6	$	32.2	$	31.6	$	31.6
Olkaria III Loan - OPIC		277.5		279.4		278.1		282.6
Senior Secured Notes:
Ormat Funding Corp. ("OFC")		72.7		71.4		67.2		67.2
OrCal Geothermal Inc. ("OrCal")		56.5		55.5		55.1		55.1
OFC 2 LLC ("OFC 2")		239.5		238.8		270.1		272.5
Senior Unsecured Bonds		263.8		265.4		250.2		250.4
Loan from institutional investors		10.2		12.2		10.0		11.9

The fair value of OFC Senior Secured Notes is determined using observable market prices as these securities are traded. The fair value of all the long-term debt is determined by a valuation model, which is based on a conventional discounted cash flow methodology and utilizes assumptions of 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.

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 March 31, 2015:

	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Olkaria III - DEG	$	—	$	—	$	32.6	$	32.6
Olkaria III - OPIC		—		—		277.5		277.5
Senior Secured Notes:
OFC		—		72.7		—		72.7
OrCal		—		—		56.5		56.5
OFC 2		—		—		239.5		239.5
Senior unsecured bonds		—		—		263.8		263.8
Loan from institutional investors		—		—		10.2		10.2
Other long-term debt		—		8.3		—		8.3
Revolving credit lines with banks		—		30.6		—		30.6
Deposits		15.4		—		—		15.4

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

The following table presents the fair value of financial instruments as of December 31, 2014:

	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Olkaria III Loan - DEG	$	—	$	—	$	32.2	$	32.2
Olkaria III Loan - OPIC		—		—		279.4		279.4
Senior Secured Notes:
OFC		—		71.4		—		71.4
OrCal		—		—		55.5		55.5
OFC 2		—		—		238.8		238.8
Senior unsecured bonds		—		—		265.4		265.4
Loan from institutional investors		—		—		12.2		12.2
Other long-term debt		—		10.0		—		10.0
Revolving lines of credit		—		20.3		—		20.3
Deposits		17.3		—		—		17.3

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 are 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 (“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 typically 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 empowers the Company’s Board of Directors, in its discretion, to amend the 2012 Incentive Plan in certain respects. Consistent with its authority to amend the Incentive Plan, in February 2014 the Board adopted and approved certain amendments to the Incentive Plan. 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

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Acceleration of vesting: Section 15(l) of the 2012 Incentive Plan was amended to clarify our 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, as amended).

NOTE 7 — INTEREST EXPENSE, NET

The components of interest expense are as follows:

	Three Months Ended March 31,
	2015			2014

Interest related to sale of tax benefits	$	1,880		$	2,579
Interest expense		16,895			18,391
Less — amount capitalized		(947	)		(452	)
	$	17,828		$	20,518

NOTE 8 — EARNINGS PER SHARE

Basic earnings per share attributable to the Company’s stockholders (“earnings per share”) is computed by dividing net income or loss attributable to the Company’s stockholders by the weighted average number of shares of common stock outstanding for the period. The Company does not have any equity instruments that are dilutive, except for employee stock-based awards.

The table below shows the reconciliation of the number of shares used in the computation of basic and diluted earnings per share:

	Three Months Ended March 31,
	2015		2014

Weighted average number of shares used in computation of basic earnings per share		47,244		45,479
Add:
Additional shares from the assumed exercise of employee stock options		835		181

Weighted average number of shares used in computation of diluted earnings per share		48,079		45,660

The number of stock-based awards that could potentially dilute future earnings per share and that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive was 1,037,612 and 3,349,877 for the three months ended March 31, 2015 and 2014, respectively.

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 9 — BUSINESS SEGMENTS

The Company has two reporting segments: Electricity and Product Segments. These segments are managed and reported separately as each offers different products and serves different markets. The Electricity Segment is engaged in the sale of electricity from the Company’s power plants pursuant to PPAs. The Product Segment is engaged in the manufacture, including design and development, of turbines and power units for the supply of electrical energy and in the associated construction of power plants utilizing the power units manufactured by the Company to supply energy from geothermal fields and other alternative energy sources. Transfer prices between the operating segments are determined based on current market values or cost plus markup of the seller’s business segment.

Summarized financial information concerning the Company’s reportable segments is shown in the following tables:

	Electricity		Product		Consolidated
	(Dollars in thousands)
Three Months Ended March 31, 2015:
Net revenues from external customers	$	89,953	$	30,278	$	120,231
Intersegment revenues		—		19,757		19,757
Operating income (loss)		23,954		5,897		29,851
Segment assets at period end *		1,981,813		201,520		2,183,333
* Including unconsolidated investments		—		—		—

Three Months Ended March 31, 2014:
Net revenues from external customers	$	94,817	$	47,619	$	142,436
Intersegment revenues		—		20,594		20,594
Operating income (loss)		30,918		11,653		42,571
Segment assets at period end *		2,003,991		130,356		2,134,347
* Including unconsolidated investments		7,510		—		7,510

Reconciling information between reportable segments and the Company’s consolidated totals is shown in the following table:

	Three Months Ended March 31,
	2015			2014


Revenues:
Total segment revenues	$	120,231		$	142,436
Intersegment revenues		19,757			20,594
Elimination of intersegment revenues		(19,757	)		(20,594	)
Total consolidated revenues	$	120,231		$	142,436

Operating income:
Operating income	$	29,851		$	42,571
Interest income		9			111
Interest expense, net		(17,828	)		(20,518	)
Foreign currency translation and transaction losses		(1,366	)		(638	)
Income attributable to sale of equity interest		5,552			6,717
Other non-operating income, net		283			63
Total consolidated income before income taxes and equity in income of investees	$	16,501		$	28,306

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 10 — COMMITMENTS AND CONTINGENCIES

●

Jon Olson and Hilary Wilt, together with Puna Pono Alliance, an unincorporated association, filed suit on February 17, 2015, in the Third Circuit Court for the State of Hawaii, requesting declaratory and injunctive relief requiring that Puna Geothermal Venture (“PGV”) conform to an ordinance that the plaintiffs allege will prohibit PGV from engaging in night drilling operations at its KS-16 well site. PGV believes that the allegations have no merit, and will continue to defend itself vigorously.

●

On July 8, 2014, Global Community Monitor, LiUNA, and two residents of Bishop, California filed a complaint in the United States District Court for the Eastern District of California, alleging that Mammoth Pacific, L.P., Ormat Technologies, Inc. and Ormat Nevada, Inc. are operating three geothermal generating plants in Mammoth Lakes, California (MP-1; MP-II and PLES-I) in violation of the federal Clean Air Act (“CAA”) and Great Basin Unified Air Pollution Control District (“District”) rules. The Company believes the complaint is without merit, and intends to vigorously defend itself against the allegations set forth in the complaint and to take all necessary legal action to have the complaint dismissed. Filing of the complaint in and of itself does not have any immediate adverse implications for the Mammoth plants.

●

On April 5, 2012, the International Brotherhood of Electrical Workers Local 1260 (“Union”) filed a petition with the National Labor Relations Board (“NLRB”) seeking to organize the operations and maintenance employees at the Puna Project. PGV lost the union election by a slim margin in May 2012. The election results and the Employer’s obligation to negotiate with the Union were appealed to the United States Court of Appeals for the Ninth Circuit, but were remanded back to the NLRB after the U.S. Supreme Court’s decision in Noel Canning, 573 U.S., 134 S.Ct. 2550 (2014). On November 26, 2014, the NLRB found that a certification of representative should be issued. In January 2015, the parties submitted a briefing to the NLRB as to whether summary judgment is appropriate. PGV currently expects a decision in this matter will be rendered within the next two to four months. Depending on the decision, PGV expects to review its options and either accept negotiations with the Union or continue to appeal the decision.

●

In January 2014, Ormat learned that two former employees alleged in a "qui tam" complaint filed in the United States District Court for the Southern District of California that the Company and certain of its subsidiaries (collectively, the "Ormat Parties") submitted fraudulent applications and certifications to obtain grants, particularly for the Puna and North Brawley projects. The United States Department of Justice declined to intervene, and the former employees proceeded on their own and served the Ormat Parties with their initial complaint in April 2014, and then filed an amended complaint in May 2014. Pursuant to the Ormat Parties' motion to move the venue of the proceeding, and despite the complainants’ objection, the file was reassigned from the United States District Court for the Southern District of California to the District of Nevada.

In July 2014, the Ormat Parties filed a motion to dismiss the amended complaint, as well as a request for the court to take judicial notice of a number of documents, In response to the Ormat Parties’ filings, the complainants filed responses urging the court to reject the motion to dismiss and accompanying request to take judicial notice, and the United States filed a statement of interest urging rejection of the Ormat Parties' arguments raised with respect to the scope of the False Claims Act's “Tax Bar”, while continuing to take no position as to the overall sufficiency of the complainants' complaint. On March 24, 2015, the Nevada United States District Court issued its order regarding the pending motions, in which the Court accepted the Ormat Parties’ motions in part, and rejected them in part.

In the interim, FIMI and Ormat Industries (who were originally named on the complaint, but never served) have been removed from the complaint as co-defendants pursuant to a Tolling Agreement entered into with the complainants. The Ormat Parties continue to believe that the allegations of the lawsuit have no merit, and will continue to defend themselves vigorously.

●

In addition, from time to time, the Company is named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of our business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings, the Company accrues reserves when a loss is probable and the amount of such loss can be reasonably estimated. It is the opinion of the Company’s management that the outcome of these proceedings, individually and collectively, will not be material to the Company’s consolidated financial statements as a whole.

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 11 — INCOME TAXES

The Company’s effective tax rate for the Three Months Ended March 31, 2015 and 2014 was 33.1% and 22.3%, respectively. The effective tax rate differs from the federal statutory rate of 35% for the three months ended March 31, 2015 due to: (i) a full valuation allowance against the Company’s U.S. deferred tax assets in respect of net operating loss (“NOL”) carryforwards and unutilized tax credits (see below), (ii) lower tax rates in Israel; and (iii) a tax credit and tax exemption related to the Company’s subsidiaries in Guatemala. The effect of the tax credit and tax exemption for the three months ended March 31, 2015 and March 31, 2014 was $1,146,000 and $1,019,000, respectively.

At December 31, 2014, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately $251.4 million and state NOL carryforwards of approximately $216.5 million, net of valuation allowance of $111.3 million available to reduce future taxable income, which expire between 2021 and 2034 for federal NOLs and between 2014 and 2034 for state NOLs. The Investment Tax Credits in the amount of $0.7 million at December 31, 2014 are available for a 20-year period and expire between 2022 and 2024. Production Tax Credits in the amount of $71.4 million at December 31, 2014 are available for a 20-year period and expire between 2026 and 2034.

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. The most significant factor considered with respect to the ability of the Company to realize these deferred tax assets is the Company’s U.S. cumulative results over the past three years. The Company viewed this factor as a significant piece of negative evidence that made it difficult to support a conclusion that expected taxable income from future operations justifies recognition of deferred tax assets. Based on the results, a valuation allowance in the amount of $111.3 million and $114.8 million was recorded against the U.S. deferred tax assets as of December 31, 2014 and 2013, respectively as, at this point in time, it is more likely than not that the deferred tax assets will not be realized.

Subsequent to March 31, 2015, and as more fully described in Note 12, the Company entered into a significant non-routine transaction for the partial sale of certain assets which is expected to result in a taxable gain in the U.S., for which the Company expects to utilize a portion of its NOL carryforwards and tax credits. In 2015 or in future years, if sufficient additional evidence of the Company’s ability to generate taxable income is established in the future, the Company may be required to reduce or fully release the valuation allowance, resulting in income tax benefits in its consolidated statement of operations.

The total amount of undistributed earnings of foreign subsidiaries for income tax purposes was approximately $75.9 million at December 31, 2014. It is the Company’s intention to reinvest undistributed earnings of its foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes or U.S. income taxes which may become payable if undistributed earnings of foreign subsidiaries were paid as dividends to the Company. The additional taxes on that portion of undistributed earnings which is available for dividends are not practicably determinable.

The Company believes that based on its plans to increase the operations outside of the U.S., the cash generated from the Company’s operations outside of the U.S. will be reinvested outside of the U.S.. In addition, the Company’s U.S. sources of cash and liquidity are sufficient to meet its needs in the U.S. and, accordingly, the Company does not currently plan to repatriate the funds it has designated as being permanently invested outside the U.S. If the Company changes its plans, it may be required to accrue and pay U.S. taxes to repatriate these funds.

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

	Three Months Ended March 31,
	2015			2014
	(Dollars in thousands)
Balance at beginning of year	$	7,511		$	4,950
Additions based on tax positions taken in prior years		58			76
Additions based on tax positions taken in the current year		570			106
Reduction based on tax positions taken in prior years		(949	)		—
Balance at end of year	$	7,190		$	5,132

NOTE 12 — SUBSEQUENT EVENTS

Entry into a Material Definitive Agreement

On April 30, 2015, Ormat Nevada Inc. (“Ormat Nevada”), a wholly-owned subsidiary of the Company, closed an equity transaction for the purchase of membership interests under that certain agreement dated April 30, 2015, (the “Purchase Agreement”) between Ormat Nevada and Northleaf Geothermal Holdings, LLC (“Northleaf”), pursuant to which Ormat Nevada sold to Northleaf 100% of the Class B Membership Interests, which represent approximately 36.75% of the aggregate membership interests, in ORPD LLC, a new holding company subsidiary of Ormat Nevada (“ORPD”), and admitted Northleaf as a member of ORPD. In connection with the transaction, Ormat Nevada contributed to ORPD certain of its project company-subsidiaries that own geothermal and recovered energy generation power plants, including the Puna geothermal power plant in Hawaii, the Don A. Campbell geothermal power plant in Nevada, and nine power plant units across three recovered energy generation assets known as OREG 1, OREG 2 and OREG 3. Ormat Nevada continues to operate and maintain the power plants.

The purchase price for the sale of the ORPD membership interests under the Purchase Agreement is $162.3 million.

This transaction closed on April 30, 2015 and is expected to result in a taxable gain in the U.S. of approximately $104.0 million, for which the Company expects to utilize a portion of its NOL carryforwards and tax credits.

Cash dividend

On May 6, 2015, the Company’s Board of Directors declared, approved and authorized payment of a quarterly dividend of $2.9 million ($0.06 per share) to all holders of the Company’s issued and outstanding shares of common stock on May 19, 2015, payable on May 27, 2015.

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

Cautionary Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this quarterly report that address activities, events or developments that we expect or anticipate will or may occur in the future, including such matters as our projections of annual revenues, expenses and debt service coverage with respect to our debt securities, future capital expenditures, business strategy, competitive strengths, goals, development or operation of generation assets, market and industry developments and the growth of our business and operations, are forward-looking statements. When used in this quarterly report on Form 10-Q, the words “may”, “will”, “could”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “projects”, “potential”, or “contemplate” or the negative of these terms or other comparable terminology are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this quarterly report are primarily located in the material set forth under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, and “Notes to Condensed Consolidated Financial Statements”, but are found in other locations as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management’s current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this quarterly report on Form 10-Q completely and with the understanding that actual future results and developments may be materially different from what we expect due to a number of risks and uncertainties, many of which are beyond our control.

Specific factors that might cause actual results to differ from our expectations include, but are not limited to:

●

significant considerations, risks and uncertainties discussed in this quarterly report;

●

geothermal resource risk (such as the heat content, useful life and geological formation of the reservoir);

●

operating risks, including equipment failures and the amounts and timing of revenues and expenses;

●

financial market conditions and the results of financing efforts;

●

the impact of fluctuations in oil and natural gas prices on the energy price component under certain of our power purchase agreements (PPAs);

●

risks and uncertainties relating to the execution of our new goals;

●

environmental constraints on operations and environmental liabilities arising out of past or present operations, including the risk that we may not have, and in the future may be unable to procure, any necessary permits or other environmental authorizations;

●

construction or other project delays or cancellations;

●

political, legal, regulatory, governmental, administrative and economic conditions and developments in the United States and other countries in which we operate;

●

the enforceability of the long-term PPAs for our power plants;

●

contract counterparty risk;

●

weather and other natural phenomena including earthquakes, volcanic eruption, drought and other nature disasters;

	●	the impact of recent and future federal, state and local regulatory proceedings and changes, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry, public policies and government incentives that support renewable energy and enhance the economic feasibility of our projects at the federal and state level in the United States and elsewhere, and carbon-related legislation;

●

changes in environmental and other laws and regulations to which our company is subject, as well as changes in the application of existing laws and regulations;

●

current and future litigation;

●

our ability to successfully identify, integrate and complete acquisitions, including risks arising in connection with our acquisition of our former parent company, Ormat Industries.

●

competition from other existing geothermal energy projects and new geothermal energy projects developed in the future, and from alternative electricity producing technologies;

●

market or business conditions and fluctuations in demand for energy or capacity in the markets in which we operate;

●

the direct or indirect impact on our company’s business resulting from various forms of hostilities including the threat or occurrence of war, terrorist incidents or cyber-attacks or responses to such threatened or actual incidents or attacks, including the effect on the availability of and premiums on insurance;

●

development and construction of the solar photovoltaic (Solar PV) projects, if any, may not materialize as planned;

●

the effect of and changes in current and future land use and zoning regulations, residential, commercial and industrial development and urbanization in the areas in which we operate;

●

the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2014 and any update contained herein and other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission; and

●

other uncertainties which are difficult to predict or beyond our control and the risk that we may incorrectly analyze these risks and forces or that the strategies we develop to address them may be unsuccessful.

Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Other than as required by law we undertake no obligation to update forward-looking statements even though our situation may change in the future. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.