FAIR VALUE OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2011

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 6 — 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 to sell an asset or paid to transfer 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. It 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 June 30, 2011 and December 31, 2010 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.

	Cost or Amortized Cost at June 30, 2011		Fair Value at June 30, 2011
			Total			Level 1		Level 2			Level 3
			(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)	$	23,208	$	23,208		$	23,208	$	—		$	—
Marketable securities		22,889		23,098			23,098		—			—
Derivatives(1)		—		1,031			—		1,031			—
Liabilities:
Current liabilities:
Derivatives(2)		—		(4,735	)		—		(4,735	)		—
	$	46,097	$	42,602		$	46,306	$	(3,704	)	$	—

	Cost or Amortized Cost at December 31, 2010		Fair Value at December 31, 2010
			Total		Level 1		Level 2		Level 3
			(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)	$	14,370	$	14,370	$	14,370	$	—	$	—
Derivatives(1)		—		1,030		—		1,030		—
Non-current assets:
Illiquid auction rate securities (including restricted cash accounts) ($4.5 million par value), see below(3)		4,011		3,027		—		—		3,027
	$	18,381	$	18,427	$	14,370	$	1,030	$	3,027

(1) Amounts relating to derivatives which represent currency forward contracts which are valued primarily based on observable inputs, including forward and spot prices for currencies, and are included within “receivables — other” in the balance sheet with the corresponding gain or loss being recognized within “foreign currency translation and transaction gains (losses)” in the statement of operations and comprehensive income (loss).

(2) Amounts relating to derivatives which represent interest rate lock transactions which are valued primarily based on observable inputs, including 10-year U.S. Treasury interest rates, and are included within “accounts payable and accrued expenses” in the balance sheet with the corresponding gain or loss being recognized within “interest expense, net” in the statement of operations and comprehensive income (loss).

On July 12 and 13, 2011, the Company paid an aggregate amount of $5,328,000 in respect of two interest rate lock transactions it entered into in February 25, 2011. The Company will recognize a loss of $1,633,000 in respect of such transactions in the third quarter of 2011.

(3) Included in the consolidated balance sheets as follows:

	December 31, 2010
	(Dollars in thousands)
Long-term marketable securities	$	1,287
Long-term restricted cash, cash equivalents and marketable securities		1,740
	$	3,027

The Company’s financial assets measured at fair value (including restricted cash accounts) at June 30, 2011 include investments in debt instruments (which are included in marketable securities) and money market funds (which are included in cash equivalents). The Company’s financial assets measured at fair value (including restricted cash accounts) at December 31, 2010 include investments in auction rate securities and money market funds (which are included in cash equivalents). Those securities, except for the auction rate securities, are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in an active market.

As of December 31, 2010, all of the Company’s auction rate securities are associated with failed auctions. Such securities have par values totaling $4.5 million, all of which have been in a loss position since the fourth quarter of 2007. Such auction rate securities were valued using Level 3 inputs. Historically, the carrying value of auction rate securities approximated fair value due to the frequent resetting of the interest rates. While the Company continued to earn interest on these investments at the contractual rates, the estimated market value of these auction rate securities no longer approximated par value. Due to the lack of observable market quotes on the Company’s illiquid auction rate securities, the Company utilizes valuation models that relied exclusively on Level 3 inputs including, among other things: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect the uncertainty of current market conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; (iv) assessments of counterparty credit quality; (v) estimates of the recovery rates in the event of default for each security; and (vi) overall capital market liquidity. These estimated fair values were subject to uncertainties that were difficult to predict. Therefore, such auction rate securities were classified as of December 31, 2010 as Level 3 in the fair value hierarchy.

In the first quarter of 2011, the Company identified a buyer outside of the auction process, and in April 2011, it sold the balance of the auction rate securities for consideration of $2,822,000.

The table below sets forth a summary of the changes in the fair value of the Company’s financial assets as Level 3 (i.e., illiquid auction rate securities) for the six-month periods ended June 30, 2011 and 2010:

	Six Months Ended June 30,
	2011			2010
	(Dollars in thousands)
Balance at beginning of period	$	3,027		$	3,164
Total unrealized losses:
Included in net income		(205	)		—
Included in other comprehensive income		—			(117	)
Transferred to Level 2		(2,822	)		—
Balance at end of period	$	—		$	3,047

Effective July 1, 2010, the Company adopted an accounting standards update that amends and clarifies the guidance on how entities should evaluate credit derivatives embedded in beneficial interests in securitized financial assets. The updated guidance eliminates the scope exception for bifurcation of embedded credit derivatives in interests in securitized financial assets unless they are created solely by subordination of one beneficial interest to another. The auction rate securities held by the Company are considered securitized financial assets. Based on the abovementioned guidance, the Company elected the fair value option for its auction rate securities and reclassified $693,000 (net of income taxes of $377,000) to retained earnings with an offset to other comprehensive income. Effective with the adoption of this new guidance, all changes in the fair value of auction rate securities are recognized in earnings.

The funds invested in auction rate securities that have experienced failed auctions are not accessible until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities reach maturity. As a result, the Company classified those securities with failed auctions as long-term assets in the consolidated balance sheets as of December 31, 2010.

There were no transfers of assets or liabilities between Level 1 and Level 2 during the six months ended June 30, 2011.

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

	Fair Value				Carrying Amount
	June 30, 2011		December 31, 2010		June 30, 2011		December 31, 2010
	(Dollars in millions)				(Dollars in millions)
Olkaria III Loan	$	83.1	$	88.7	$	82.9	$	88.4
Amatitlan Loan		38.4		39.5		37.9		39.0
Senior Secured Notes:
Ormat Funding Corp. (“OFC”)		129.5		129.5		130.8		136.3
OrCal Geothermal Inc. (“OrCal”)		91.3		93.5		93.2		95.6
Senior Unsecured Bonds		252.8		144.8		248.3		142.0
Loans from institutional investors		35.7		37.1		35.7		37.2

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