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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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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, 2015
	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	(I.R.S. Employer
incorporation or organization)	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 3, 2015, the number of outstanding shares of common stock, par value $0.001 per share, was 49,035,593.

 

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ORMAT TECHNOLOGIES, INC.

 

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015

 

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	58
ITEM 4.	CONTROLS AND PROCEDURES	58
PART II — OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	59
ITEM 1A.	RISK FACTORS	60
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	60
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	60
ITEM 4.	MINE SAFETY DISCLOSURES	60
ITEM 5.	OTHER INFORMATION	60
ITEM 6.	EXHIBITS	61
SIGNATURES		62

  

  

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,
		2015				2014
		(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	171,541			$	40,230
Restricted cash and cash equivalents (all related to VIEs)			70,523				93,248
Receivables:
Trade			52,313				48,609
Related entity			—				451
Other			9,946				10,141
Due from Parent			—				1,337
Inventories			16,595				16,930
Costs and estimated earnings in excess of billings on uncompleted contracts			14,459				27,793
Deferred income taxes			1,344				251
Prepaid expenses and other			34,011				34,884
Total current assets			370,732				273,874
Deposits and other			17,506				20,044
Deferred charges			36,235				37,567
Property, plant and equipment, net ($1,522,076 and $1,339,342 related to VIEs, respectively)			1,580,379				1,437,637
Construction-in-process ($125,425 and $162,006 related to VIEs, respectively)			230,561				296,722
Deferred financing and lease costs, net			24,718				27,057
Intangible assets, net			26,202				28,655
Total assets		$	2,286,333			$	2,121,556
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	85,226			$	88,276
Deferred income taxes			975				974
Short term revolving credit lines with banks (full recourse)			—				20,300
Billings in excess of costs and estimated earnings on uncompleted contracts			22,616				24,724
Current portion of long-term debt:
Limited and non-recourse (all related to VIEs):
Senior secured notes			33,197				34,368
Other loans			21,495				17,995
Full recourse			17,228				19,116
Total current liabilities			180,737				205,753
Long-term debt, net of current portion:
Limited and non-recourse (all related to VIEs):
Senior secured notes			317,909				360,366
Other loans			288,753				264,625
Full recourse:
Senior unsecured bonds (plus unamortized premium based upon 7% of $590)			250,058				250,289
Other loans			23,070				34,351
Unconsolidated investments			12,667				3,617
Liability associated with sale of tax benefits			18,580				39,021
Deferred lease income			58,325				60,560
Deferred income taxes			31,360				66,220
Liability for unrecognized tax benefits			7,112				7,511
Liabilities for severance pay			18,826				20,399
Asset retirement obligation			20,282				19,142
Other long-term liabilities			697				2,956
Total liabilities			1,228,376				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; 49,035,593 and 45,537,162 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively			49				46
Additional paid-in capital			846,998				742,006
Retained earnings			128,352				41,539
Accumulated other comprehensive income			(12,844	)			(8,668	)
			962,555				774,923
Noncontrolling interest			95,402				11,823
Total equity			1,057,957				786,746
Total liabilities and equity		$	2,286,333			$	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 September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		(Dollars in thousands, except per share data)								(Dollars in thousands, except per share data)
Revenues:
Electricity		$	97,245			$	102,506			$	278,124			$	289,015
Product			65,607				37,736				145,446				121,266
Total revenue			162,852				140,242				423,570				410,281
Cost of revenues:
Electricity			61,501				61,727				179,604				186,083
Product			42,019				23,040				89,826				75,307
Total cost of revenue			103,520				84,767				269,430				261,390
Gross margin			59,332				55,475				154,140				148,891
Operating expenses:
Research and development expenses			335				250				1,112				395
Selling and marketing expenses			4,383				4,258				12,099				10,853
General and administrative expenses			7,950				7,179				25,597				20,847
Write-off of unsuccessful exploration activities			185				—				359				8,107
Operating income			46,479				43,788				114,973				108,689
Other income (expense):
Interest income			53				35				106				236
Interest expense, net			(17,748	)			(22,494	)			(54,435	)			(65,084	)
Foreign currency translation and transaction gains (losses)			1,296				(2,946	)			(641	)			(3,639	)
Income attributable to sale of tax benefits			8,634				5,487				18,917				18,334
Gain from sale of property, plant and equipment			—				—				—				7,628
Other non-operating income (expense), net			(131	)			243				(1,523	)			649
Income before income taxes and equity in losses of investees			38,583				24,113				77,397				66,813
Income tax (provision) benefit			38,211				(6,444	)			26,696				(17,731	)
Equity in losses of investees, net			(3,133	)			(899	)			(4,892	)			(1,210	)
Net income			73,661				16,770				99,201				47,872
Net income attributable to noncontrolling interest			(1,522	)			(256	)			(2,616	)			(670	)
Net income attributable to the Company's stockholders		$	72,139			$	16,514			$	96,585			$	47,202
Comprehensive income:
Net income			73,661				16,770				99,201				47,872
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			(4,318	)			(1,069	)			(4,154	)			(5,157	)
Loss in respect of derivative instruments designated for cash flow hedge			22				(933	)			68				(933	)
Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge			(29	)			(35	)			(90	)			(107	)
Comprehensive income			69,336				14,733				95,025				41,675
Comprehensive income attributable to noncontrolling interest			(1,522	)			(256	)			(2,616	)			(670	)
Comprehensive income attributable to the Company's stockholders		$	67,814			$	14,477			$	92,409			$	41,005
Earnings per share attributable to the Company's stockholders:
Basic:
Net income		$	1.47			$	0.36			$	2.00			$	1.04
Diluted:
Net income		$	1.41			$	0.36			$	1.93			$	1.03
Weighted average number of shares used in computation of earnings per share attributable to the Company's stockholders:
Basic			49,023				45,690				48,388				45,594
Diluted			51,113				46,102				50,011				45,917
Dividend per share declared		$	0.06			$	0.05			$	0.2			$	0.16

 

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			—				—				4,308				—				—				4,308				—				4,308
Exercise of options by employees and directors			70				—				889				—				—				889				—				889
Cash paid to non controlling interest			—				—				—				—				—				—				(589	)			(589	)
Cash dividend declared, $0.16 per share			—				—				—				(7,279	)			—				(7,279	)			—				(7,279	)
Increase in noncontrolling interest			—				—				—				—				—				—				257				257
Acquisition of noncontrolling interest in Crump			—				—				159				—				—				159				(987	)			(828	)
Net income			—				—				—				47,202				—				47,202				670				47,872
Other comprehensive income (loss), 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 unrealized 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
Balance at December 31, 2014			45,537			$	46			$	742,006			$	41,539			$	(8,668	)		$	774,923			$	11,823			$	786,746
Stock-based compensation			—				—				3,077				—				—				3,077				—				3,077
Exercise of options by employees and directors			502				—				4,612				—				—				4,612				—				4,612
Share exchange with Parent (Note 1)			2,996				3				26,012				—				—				26,015				—				26,015
Cash paid to noncontrolling interest			—				—				—				—				—				—				(4,507	)			(4,507	)
Cash dividend declared, $0.2 per share			—				—				—				(9,772	)			—				(9,772	)			—				(9,772	)
Issuance of shares to noncontrolling interest, net of transaction costs			—				—				71,291				—				—				71,291				85,470				156,761
Net income			—				—				—				96,585				—				96,585				2,616				99,201
Other comprehensive income (loss), net of related taxes:
Loss in respect of derivative instruments designated for cash flow hedge (net of related tax of $42)			—				—				—				—				68				68				—				68
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)			—				—				—				—				(4,154	)			(4,154	)			—				(4,154	)
Amortization of unrealized gains in respect of derivative instruments designated for cash flow hedge (net of related tax of $56)			—				—				—				—				(90	)			(90	)			—				(90	)
Balance at September 30, 2015			49,035			$	49			$	846,998			$	128,352			$	(12,844	)		$	962,555			$	95,402			$	1,057,957

 

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

  

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended September 30,
		2015				2014
		(Dollars in thousands)
Cash flows from operating activities:
Net income		$	99,201			$	47,872
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			80,463				74,836
Amortization of premium from senior unsecured bonds			(230	)			(230	)
Accretion of asset retirement obligation			1,140				1,122
Stock-based compensation			3,077				4,308
Amortization of deferred lease income			(2,014	)			(2,014	)
Income attributable to sale of tax benefits, net of interest expense			(13,068	)			(10,130	)
Equity in losses of investees			4,893				1,210
Mark-to-market of derivative instruments			3,906				(4,467	)
Loss on disposal of property, plant and equipment			531				—
Write-off of unsuccessful exploration activities			360				8,107
Gain on severance pay fund asset			(102	)			798
Gain on sale of a subsidiary			—				(7,628	)
Gain on acquisition of controlling interest			—				—
Deferred income tax provision			(34,613	)			13,071
Liability for unrecognized tax benefits			(399	)			656
Deferred lease revenues			(221	)			(188	)
Other			484				(181	)
Changes in operating assets and liabilities, net of amounts acquired:
Receivables			(2,879	)			21,624
Costs and estimated earnings in excess of billings on uncompleted contracts			13,334				6,433
Inventories			335				4,952
Prepaid expenses and other			(3,033	)			(5,163	)
Deposits and other			(294	)			279
Accounts payable and accrued expenses			(21,904	)			(10,868	)
Due from/to related entities, net			451				(64	)
Billings in excess of costs and estimated earnings on uncompleted contracts			(2,108	)			37,407
Liabilities for severance pay			(1,573	)			(1,857	)
Other long-term liabilities			(2,259	)			(527	)
Due from/to Parent			(513	)			(588	)
Net cash provided by operating activities			122,965				178,770
Cash flows from investing activities:
Cash acquired in organizational restructuring and share exchange with parent (Note 1)			15,391				—
Net change in restricted cash, cash equivalents and marketable securities			22,725				(76,387	)
Cash received from sale of a subsidiary			—				35,250
Capital expenditures			(117,588	)			(122,587	)
Cash grant received from the U.S. Treasury under Section 1603 of the ARRA			—				27,427
Investment in unconsolidated companies			—				(631	)
Decrease in severance pay fund asset, net of payments made to retired employees			2,934				1,493
Net cash used in investing activities			(76,538	)			(135,435	)
Cash flows from financing activities:
Proceeds from sale of membership interests to noncontrolling interest, net of transaction costs			156,761				—
Proceeds from long-term loans, net of transaction costs			42,000				140,000
Proceeds from exercise of options by employees			4,612				741
Payment for acquisition of noncontrolling interest in Crump			-				(1,490	)
Purchase of OFC Senior Secured Notes			(30,638	)			(12,860	)
Proceeds from revolving credit lines with banks			598,800				2,400,683
Repayment of revolving credit lines with banks			(619,100	)			(2,484,600	)
Cash received from non-controlling interest			1,654				2,234
Repayments of long-term debt			(40,532	)			(80,223	)
Cash paid to non-controlling interest			(13,863	)			(9,215	)
Cash paid for interest rate cap			-				(1,505	)
Deferred debt issuance costs			(5,038	)			(4,724	)
Cash dividends paid			(9,772	)			(7,279	)
Net cash provided by (used in) financing activities			84,884				(58,238	)
Net change in cash and cash equivalents			131,311				(14,903	)
Cash and cash equivalents at beginning of period			40,230				57,354
Cash and cash equivalents at end of period		$	171,541			$	42,451
Supplemental non-cash investing and financing activities:
Increase (decrease) in accounts payable related to purchases of property, plant and equipment		$	18,930			$	(5,221	)

 

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

 

  

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, 2015, the consolidated results of operations and comprehensive income (loss) for the nine-month periods ended September 30, 2015 and 2014 and the consolidated cash flows for the nine-month periods ended September 30, 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 nine-month period ended September 30, 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.

 

Deferred tax asset in Kenya

 

On September 11, 2015, Kenya's Income Tax Act was amended pursuant to certain provisions of the recently adopted Finance Act, 2015. Among other matters, these amendments retain the enhanced investment deduction of 150% under Section 17B of the Income Tax Act, extend the period for deduction of tax losses from 5 years to 10 years under Sections 15(4) and 15(5) of the Income Tax Act, and amend the effective date from January 1, 2016 to January 1, 2015 under Sections 15(4) and 15(5) of the Income Tax Act.

 

Previously, the Company had a valuation allowance for the additional 50% investment deduction reducing its deferred tax asset in Kenya as the utilization of the related tax losses was not probable within the original five year carryforward period. As a result of the change in legislation and the expected continued profitability during the extended carryforward period, the Company expects that it will be able to fully utilize the carryforward tax losses within the ten year period and as such released the valuation allowance in Kenya resulting in a $49.4 million of tax benefits in the three month period ended September 30, 2015.

 

Amatitlan financing 

 

On July 31, 2015, one of our indirect wholly-owned subsidiaries, Ortitlản, Limitada, obtained a 12-year secured term loan in the principal amount of $42.0 million for the 20 MW Amatitlan power plant in Guatemala. Under the credit agreement with Banco Industrial S.A. and Westrust Bank (International) Limited, we can expand the Amatitlan power plant with financing to be provided either via equity, additional debt from Banco Industrial S.A. or from other lenders, subject to certain limitations on expansion financing in the credit agreement.

 

The loan is payable in 48 quarterly payments commencing September 30, 2015. The loan bears interest at a rate per annum equal to of the sum of the LIBO Rate (which cannot be lower than 1.25%) plus a margin of (i) 4.35% as long as the Company’s guaranty of the loan (as described below) is outstanding or (ii) 4.75% otherwise. Interest is payable quarterly, on March 30, June 30, September 30 and December 30 of each year, on the stated maturity date of the loan and on any prepayment or payment of the loan. The loan must be prepaid on the occurrence of certain events, such as casualty, condemnation, asset sales and expansion financing not provided by the lenders under the credit agreement, among others. The loan may be voluntarily prepaid if certain conditions are satisfied, including payment of a premium (ranging from 100-50 basis points) if prepayment occurs prior to the eighth anniversary of the loan.

 

  

There are various restrictive covenants under the Amatitlan credit agreement. These include, among others, (i) a financial covenant to maintain a Debt Service Coverage Ratio (as defined in the credit agreement) of not less than 1.15 to 1.00 as of the last day of any fiscal quarter and (ii) limitations on Restricted Payments (as defined in the credit agreement) that among other things would limit dividends that could be paid to us unless the historical and projected Debt Service Coverage Ratio is not less than 1.25 to 1.00 for the four fiscal quarterly periods (calculated as a single accounting period). As of September 30, 2015, the actual historical and projected 12-month Debt Service Coverage Ratio was 7.94 and 1.97, respectively. The credit agreement includes various events of default that would permit acceleration of the loan (subject in some cases to grace and cure periods). These include, among others, a Change of Control (as defined in the credit agreement) and failure to maintain certain required balances in debt service and maintenance reserve accounts. The credit agreement includes certain equity cure rights for failure to maintain the Debt Service Coverage Ratio and the minimum amounts required in the debt service and maintenance reserve accounts.

 

The loan is secured by substantially all the assets of the borrower and a pledge of all of the membership interests of the borrower.

 

The Company has guaranteed payment of all obligations under the credit agreement and related financing documents. The guaranty is limited in the sense that the Company is only required to pay the guaranteed obligations if a “trigger event” occurs. A trigger event is the occurrence and continuation of a default by Instituto Nacional de Electricidad (“INDE”) in its payment obligations under the power purchase agreement for the Amatitlàn power plant or a refusal by INDE to receive capacity and energy sold under that power purchase agreement. Our obligations under the guaranty may be terminated prior to payment in full of the guaranteed obligations under certain circumstances described in the guaranty. If our guaranty is terminated early, the interest rate payable on the loan would increase as described above.

 

As of September 30, 2015, $41.1 million of this loan is outstanding.

  

OFC Senior Secured Notes prepayment

 

In June 2015, the Company repurchased $30.6 million aggregate principal amount of its OFC Senior Secured Notes from certain OFC noteholders. As a result of the repurchase, the Company recognized a loss of $1.7 million, including amortization of deferred financing cost of $0.5 million, which is included in other non-operating income (expense), net in the consolidated statements of operations and comprehensive income for the nine months ended September 30, 2015.

 

Northleaf transaction

 

On April 30, 2015, Ormat Nevada Inc. (“Ormat Nevada”), a wholly-owned subsidiary of the Company, closed the sale of approximately 36.75% of the aggregate membership interests in ORPD LLC (“ORPD”), a new holding company and subsidiary of Ormat Nevada, that indirectly owns 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 to Northleaf Geothermal Holdings, LLC for $162.3 million. The net proceeds to the Company were $156.8 million after payment of $5.5 million of transaction costs. The sale was made under the Agreement for Purchase of Membership Interests dated February 5, 2015. This transaction closed on April 30, 2015 and resulted in a taxable gain in the U.S. of approximately $102.1 million, for which the Company will utilize a portion of its Net Operating Loss (“NOL”) and tax credit carryforwards to fully offset the tax impact of the gain.

 

Following the transaction, the Company maintains control of ORPD and continues to consolidate the entity with non-controlling interest being recorded. Consequently, the Company recorded the net proceeds from the issuance of membership interests as an increase to additional paid-in capital of $71.3 million and non-controlling interests of $85.5 million. See Note 11 for tax details.

 

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 in the Company 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 as of the closing of the share exchange.

 

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, there was no change in the reporting entity as a result of the transaction 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.

 

 

OFC 2 loan prepayment

 

On June 20, 2014, Phase I of the Tuscarora Facility achieved Project Completion under the OFC 2 Note Purchase Agreement. In accordance with the terms of the Note Purchase Agreement and following recalibration of the financing assumptions, the loan amount was adjusted through a principal prepayment of $4.3 million.

 

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

 

Other comprehensive income

 

For the nine months ended September 30, 2015 and 2014, the Company classified $22,000 and $107,000, respectively, from accumulated other comprehensive income, of which $35,000 and $173,000, respectively, were recorded to reduce interest expense and $13,000 and $66,000, 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, 2015 and 2014, the Company classified $7,000 and $35,000, respectively, from accumulated other comprehensive income, of which $10,000 and $57,000, respectively, were recorded to reduce interest expense and $3,000 and $22,000, respectively, were recorded against the income tax provision, in the condensed consolidated statements of operations and comprehensive income. 

 

Write-off of unsuccessful exploration activities

 

Write-off of unsuccessful exploration activities for the three and nine months ended September 30, 2015 were $0.2 million and $0.4 million, respectively. Write-off of unsuccessful exploration 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 and (ii) obtained an option, exercisable over a four-year period, to purchase certain of AER's New Truckhaven geothermal leases. Prior to this transaction, CGC was consolidated by the Company as a variable interest entity. As a result of the acquisition of the remaining interest, the Company continues to consolidate CGC, but now as a wholly owned indirect subsidiary, and so the carrying value of the noncontrolling 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.

 

 

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, 2015 and December 31, 2014, the Company had deposits totaling $41,071,000 and $23,488,000, respectively, in seven U.S. financial institutions that were federally insured up to $250,000 per account. At September 30, 2015 and December 31, 2014, the Company’s deposits in foreign countries amounted to approximately $134,986,000 and $24,304,000, respectively.

 

At September 30, 2015 and December 31, 2014, accounts receivable related to operations in foreign countries amounted to approximately $22,981,000 and $21,935,000, respectively. At September 30, 2015 and December 31, 2014, accounts receivable from the Company’s primary customers amounted to approximately 73.7% 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 15.3% and 14.7% of the Company’s total revenue for the three months ended September 30, 2015 and 2014, respectively and 19.3% and 16.6% for the nine months ended September 30, 2015 and 2014, respectively.

 

Southern California Edison accounted for 13.4% and 19.9% of the Company’s total revenue for the three months ended September 30, 2015 and 2014, respectively, and 11.1% and 15.2% for the nine months ended September 30, 2015 and 2014, respectively.

 

Kenya Power and Lighting Co. Ltd. accounted for 13.5% and 15.8% of the Company’s total revenue for the three months ended September 30, 2015 and 2014, respectively, and 15.4% and 15.6% for the nine months ended September 30, 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.

 

ORMAT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited) 

 

NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS

 

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

 

Simplifying the Measurement of Inventory

 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, Topic 330. The update contains no amendments to disclosure requirements, but replaces the concept of ‘lower of cost or market’ with that of ‘lower of cost and net realizable value’. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. The amendments should be applied prospectively with early adoption permitted. The Company is currently evaluating the potential impact, if any, of the adoption of this update on its consolidated financial statements.

 

Amendments to Fair Value Measurement

 

In June 2015, the FASB issued ASU 2015-10, Amendment to Fair Value Measurement, Subtopic 820-10. The amendment provides that the reporting entity shall disclose for each class of assets and liabilities measured at fair value in the statement of financial position the following information: for recurring fair value measurements, the fair value measurement at the end of the reporting period, and for non-recurring fair vale measurement, the fair value measurement at the relevant measurement date and the reason for the measurement. The amendments in this update are effective for annual reporting periods beginning after December 15, 2015, including interim periods within those reporting periods. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the potential impact, if any, of the adoption of this update on its consolidated financial statements.

 

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 revise their disclosures. This amendment affects 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 those reporting periods. Early adoption is permitted, including adoption in an interim 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 August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, Subtopic 835-30. The update clarifies that given the absence of authoritative guidance within Update 2015-03 for debt issuance costs described below, debt issuance costs related to line-of-credit arrangement can be deferred and presented as assets and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings under the line-of-credit arrangement. 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, if any, of the adoption of these amendments on its consolidated financial statements.

 

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 plans to adopt this update in its interim period beginning January 1, 2016 and expects the potential impact to be a reclassification of the debt issuance costs totaling $20.3 million as of September 30, 2015.

 

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, 2017, including interim periods within those reporting periods. Early adoption is permitted no earlier than 2017 for calander fiscal year entities. 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,				December 31,
		2015				2014
		(Dollars in thousands)
Raw materials and purchased parts for assembly		$	5,470			$	4,840
Self-manufactured assembly parts and finished products			11,125				12,090
Total		$	16,595			$	16,930

  

  

NOTE 4 — UNCONSOLIDATED INVESTMENTS

 

Unconsolidated investments consist of the following:

 

		September 30,				December 31,
		2015				2014
		(Dollars in thousands)
Sarulla		$	(12,667	)		$	(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 will supply its Ormat Energy Converters (“OECs”) to the power plant, as further described below. 

 

The project is being 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. The first phase of operations is expected to commence towards the end of 2016 and the remaining two phases of operations are scheduled to commence within 18 months thereafter. Engineering, procurement and construction (“EPC”) are in progress. The infrastructure work has been substantially completed and major equipment, including Ormat’s partial OECs and Toshiba’s steam turbine, have arrived in country. The drilling of production and injection wells is also in progress in all three phases. However, the project company is experiencing delays in drilling and reaching EPC milestones, as well as cost overruns, mainly in the field development of the second and third phases of the project. The consortium members are currently examining the significance of these cost overruns and their implications for the project's budget as well as for the financing of the project (described below).

 

On May 16, 2014, the consortium closed $1.17 billion in financing for 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 loans on a limited recourse basis backed by a 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 nine months ended September 30, 2015, the project recorded a loss equal to $32.6 million, of which the Company's share was $4.2 million which was recorded in other comprehensive income. The related accumulated loss recorded by the Company as of September 30, 2015 is $12.3 million.

 

Pursuant to a supply agreement that was signed in October 2013, the Company is supplying its OECs to the power plant and has added the $255.6 million supply contract to its product segment backlog. All of the scheduled milestones under Ormat’s supply agreement were achieved and the manufacturing work is currently progressing as planned. The Company started to recognize revenue from the project during the third quarter of 2014 and will continue to recognize revenue over the course of the next two to three years. The Company has eliminated the related intercompany profit of $5.2 million against equity in loss of investees.

 

During the nine months ended September 30, 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 September 30, 2015 and December 31, 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.

 

						September 30, 2015
						Fair Value
		Carrying Value at September 30, 2015				Total				Level 1				Level 2				Level 3
		(Dollars in thousands)
Assets:
Current assets:
Cash equivalents (including restricted cash accounts)		$	44,187			$	44,187			$	44,187			$	—			$	—
Derivatives:
Swap transaction on natural gas price (1)			223				223				—				223				—
Liabilities:
Current liabilities:
Derivatives:
Currency forward contracts (2)			(1,548	)			(1,548	)			—				(1,548	)			—
		$	42,862			$	42,862			$	44,187			$	(1,325	)		$	—

 

 

						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 a swap contract on natural gas prices, valued primarily based on observable inputs, including forward and spot prices for related commodity indices, and is included within “prepaid expenses and other” and “accounts payable and accrued expenses” on September 30, 2015 and December 31, 2014, respectively, 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” on September 30, 2015 and December 31, 2014, 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.  

 

 

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		Location of recognized gain		Three Months Ended September 30,								Nine Months Ended September 30,
hedging instruments		(loss)		2015				2014				2015				2014
Swap transaction on oil price		Electricity revenue			—				1,657				—				1,885
Swap transactions on natural gas price		Electricity revenue			369				2,295				767				(609	)
Currency forward contracts		Foreign currency translation and transaction gains (losses)			869				(2,422	)			(1,349	)			(2,430	)
				$	1,238			$	1,530			$	(582	)		$	(1,154	)

 

On September 3, 2013, the Company entered into a Natural Gas Index (“NGI”) swap contract with a bank covering a 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 fluctuations in natural gas prices under its Power Purchase Agreements (“PPAs”) with Southern California Edison to below $4.035 per MMbtu. 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 covering a 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 fluctuations in natural gas prices under its PPAs with Southern California Edison to below $4.103 per MMbtu. 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 swap contract with a bank covering a 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 (“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, and on May 14, 2015, the Company entered into NGI swap contracts with a bank covering a notional quantity of approximately 2.2 MMbtu for settlement effective January 1, 2015 until March 31, 2015, and covering a notional quantity of approximately 2.4 MMbtu for settlement effective June 1, 2015 until December 31, 2015, respectively, in order to reduce its exposure to fluctuations in natural gas prices under its PPAs with Southern California Edison to below $4.95 per MMbtu and below $3.00 per MMbtu, respectively. The contracts did not have any up-front costs. Under the terms of these contracts, the Company made, and will make, floating rate payments to the bank and received, and will receive, fixed rate payments from the bank on each settlement date. The swap contracts have monthly settlements whereby the difference between the fixed price 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 and June 1, 2015 to December 31, 2015) are settled on a cash basis.

 

 

The foregoing swap transactions were not designated as hedge transactions and are marked to market with the corresponding gains or losses recognized within “Electricity revenue” in the consolidated statements of operations and comprehensive income. The Company recognized a net gain from these transactions of $0.8 million in the nine months ended September 30, 2015, compared to net gain of $1.3 million in the nine months ended September 30, 2014. For the three months ended September 30, 2015 and 2014, the Company recognized a net gain from these transactions of $0.4 million and $4.0 million, respectively.

 

There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 during the nine months ended September 30, 2015.

 

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

 

		Fair Value								Carrying Amount
		September 30, 2015				December 31, 2014				September 30, 2015				December 31, 2014
		(Dollars in millions)								(Dollars in millions)
Olkaria III Loan - DEG		$	28.5			$	32.2			$	27.6			$	31.6
Olkaria III Loan - OPIC			266.4				279.4				269.1				282.6
Amatitlan Loan			43.2				—				41.1				—
Senior Secured Notes:
Ormat Funding Corp. ("OFC")			36.0				71.4				33.3				67.2
OrCal Geothermal Inc. ("OrCal")			53.3				55.5				51.8				55.1
OFC 2 LLC ("OFC 2")			234.2				238.8				266.0				272.5
Senior Unsecured Bonds			262.0				265.4				250.1				250.4
Loan from institutional investors			6.2				12.2				6.0				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 September 30, 2015:

 

		Level 1				Level 2				Level 3				Total
		(Dollars in millions)
Olkaria III - DEG		$	—			$	—			$	28.5			$	28.5
Olkaria III - OPIC			—				—				266.4				266.4
Amatitlan loan			—				43.2				—				43.2
Senior Secured Notes:
OFC			—				36.0				—				36.0
OrCal			—				—				53.3				53.3
OFC 2			—				—				234.2				234.2
Senior unsecured bonds			—				—				262.0				262.0
Loan from institutional investors			—				—				6.2				6.2
Other long-term debt			—				8.3				—				8.3
Deposits			15.8				—				—				15.8

  

 

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 were 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 grant date. The shares of common stock will be issued from the Company’s authorized share capital upon exercise of options or SARs. The 2004 Incentive Plan expired in May 2012 upon adoption of the 2012 Incentive Compensation Plan (“2012 Incentive Plan”), except as to share based awards outstanding under the 2004 Incentive Plan on that date.

 

The 2012 Incentive Compensation Plan  

 

In May 2012, the Company’s shareholders adopted 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 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 grant date. The shares of common stock will be issued from the Company’s authorized share capital upon exercise of options or SARs.

 

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 this authority, in February 2014 the Board adopted and approved certain amendments to the 2012 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

 

 

●     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, as amended).

 

  

NOTE 7 — INTEREST EXPENSE, NET

 

The components of interest expense are as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014