NOTE 4 — UNCONSOLIDATED INVESTMENTS

Unconsolidated investments consist of the following:

	June 30,			December 31,
	2016			2015
	(Dollars in thousands)
Sarulla	$	(15,347	)	$	(8,100	)

The Sarulla Project

The Company holds a 12.75% equity interest in a consortium which is in the process of developing the Sarulla geothermal power project in Indonesia with an 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 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. 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.

For the first phase, engineering and procurement has been substantially completed and construction is in progress with major activities relating to mechanical and electrical equipment installation. Major equipment, including Ormat’s OECs and Toshiba’s steam turbine, has arrived to the site and are currently installed. The drilling of production and injection wells for the first phase is completed.

For the second phase, engineering and procurement has been substantially completed, infrastructure work is in progress and most of the equipment to be supplied by Ormat was delivered.

For the third phase, engineering and procurement is still in progress, infrastructure work is in progress and manufacturing of equipment to be supplied by Ormat is underway as planned. Currently, for the second and third phases drilling activities is still ongoing and the project achieved to date, based on preliminary estimates, approximately 70% of the required production capacity and approximately 15% of the required injection capacity.

The project has missed a few milestones defined under the loan documents, but has received waivers from the lenders. As of June 30, 2016, the project is in compliance with milestones agreed with the lenders. The project is experiencing delays in the field development and certain cost overruns resulting from delays and excess drilling costs. Although estimated cost at completion is still within the approved budget (including contingencies), the lenders have requested that the sponsors commit additional equity. The sponsors have agreed and financing documents were revised to reflect this request. With respect to Ormat’s role as a supplier, all contractual milestones under the supply agreement were achieved.

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 (loss). During the three and six months ended June 30, 2016, the project recorded a loss equal to $15.6 million and $40.5 million, respectively, net of deferred tax of $8.0 million and $20.9 million, respectively, of which the Company's share was $2.0 million and $5.2 million, respectively, which were recorded in other comprehensive income (loss). The related accumulated loss recorded by the Company in other comprehensive income (loss) as of June 30, 2016 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. The Company started to recognize revenue from the project during the third quarter of 2014 and will continue to recognize revenue until the end of the first half of 2017. The Company has eliminated the related intercompany profit of $8.4 million against equity in loss of investees.

During the six months ended June 30, 2016, the Company did not make any additional equity investments in the Sarulla project.