NOTE

— UNCONSOLIDATED INVESTMENTS

Unconsolidated investments consist of the following:

	June 30,		December 31,
	2017		2016
	(Dollars in thousands)
Sarulla	$	13,957	$	(11,081	)

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

MW. The Sarulla project is located in Tapanuli Utara, North Sumatra, Indonesia and is owned and operated by the consortium members under the framework of a Joint Operating Contract (“JOC”) and Energy Sales Contract (“ESC”) that were both 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, is the off-taker at Sarulla for a period of

years. In addition to its equity interest in the consortium, the Company designed the Sarulla power plant and supplies its Ormat Energy Converters (“OECs”) to the power plant pursuant to a supply agreement (the “Supply Agreement”) that was signed in

October 2013,

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 the power plant commenced commercial operation on

March 17, 2017

and is performing well, demonstrating its ability to produce geothermal power in excess of its design capacity. Construction of the

second

phase of the power plant is nearing completion and site pre-commissioning activities have commenced. The Company expects that the

second

phase of the power plant will commence geothermal power production within

three

months. Formal testing and commercial operation under the PPA is expected to occur in the

fourth

quarter of

2017.

Engineering, procurement and construction work for the

third

phase of the power plant is in progress and most of the equipment manufactured by the Company for the

third

phase of the power plant has already been delivered. The Company has achieved all of its contractual milestones under the Supply Agreement. Drilling for the

second

and

third

phases of the power plant is ongoing and the project has achieved to date, based on preliminary estimates,

100%

of the required injection capacity and approximately

90%

of the required production capacity.

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 interest at a fixed rate and

$1.07

billion bears interest at a rate linked to LIBOR. The project has missed several milestones under the financing documents, but, in each case, has either already received, or expects to receive in the near future, waivers from the lenders. The project experienced delays in field development and cost overruns resulting from delays and excess drilling costs. Due to the cost overruns in drilling, the lenders

may

request that the project sponsors contribute additional equity to the project.

The Sarulla consortium entered into interest rate swap agreements with various international banks, effective as of

June 4, 2014,

in order to fix the interest rate linked to LIBOR on up to

$0.96

billion of the

$1.07

billion portion of the financing arrangement subject to such interest rate at

3.4565%.

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, are recorded in other comprehensive income. During the

three

and

six

months ended

June 30, 2017,

the Sarulla project company recorded losses of

$7.2

million and

$2.7

million, respectively, net of deferred tax, of which the Company

’s share was

$0.9

million and

$0.3

million, respectively. The Company’s share of such losses were recorded in other comprehensive income. During the

three

and

six

months ended

June 30, 2016,

the Sarulla project company recorded losses of

$15.6

million and

$40.5

million, respectively, net of deferred tax, of which the Company’s share was

$2.0

million and

$5.2

million, respectively. The Company’s share of such losses were recorded in other comprehensive income. The related accumulated loss recorded by the Company in other comprehensive income (loss) as of

June 30, 2017

$6.3

million.

The Company had added the

$255.6

million Supply Agreement to its Product segment backlog in

2014.

The Company started to recognize revenue from the project during the

third

quarter of

2014

and will complete the recognition revenue over the course of the year. The Company has eliminated the related intercompany profit of

$14.1

million against equity in loss of investees.

During the

three

and

six

months ended

June 30, 2017,

the Company made additional equity investments in the Sarulla project of approximately

$12.5

million and

$27.4

million, respectively, and

$39.3

million since inception.