FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2012

FAIR VALUE OF FINANCIAL INSTRUMENTS

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 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 March 31, 2012 and December 31, 2011 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 March 31, 2012		Fair Value at March 31, 2012
			Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)	$	43,371	$	43,371	$	43,371	$	—	$	—
Marketable Securities		15,453		15,719		15,719		—		—
Derivatives(1)		—		296		—		296		—
	$	58,824	$	59,386	$	59,090	$	296	$	—

	Cost or Amortized Cost at December 31, 2011		Fair Value at December 31, 2011
			Total			Level 1		Level 2			Level 3
	(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)	$	61,649	$	61,649		$	61,649	$	—		$	—
Marketable Securities		18,284		18,521			18,521		—			—
Liabilities:
Current liabilities:
Derivatives(2)		—		(890	)		—		(890	)		—
	$	79,933	$	79,280		$	80,170	$	(890	)	$	—

(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 which are netted against contracted rates and then multiplied against notational amounts, and are included within “receivables — others” in the balance sheet with the corresponding gain or loss being recognized within “foreign currency translation and transaction gains (losses)” in the condensed consolidated statement of operations and comprehensive income (loss).

(2) Amounts relating to derivatives which represent currency forward contracts which are valued primarily based on observable inputs, including forward and spot prices for currencies which are netted against contracted rates and then multiplied against notational amounts, and are included within “accounts payable and accrued expenses” in the balance sheet with the corresponding gain or loss being recognized within “foreign currency translation and transaction gains (losses)” in the condensed consolidated statement of operations and comprehensive income (loss).

The Company’s financial assets measured at fair value (including restricted cash accounts) at March 31, 2012 and December 31, 2011 include investments in debt instruments (which are included in marketable securities) and money market funds (which are included in cash equivalents). Those 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 March 31, 2011, 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. The Company’s auction rate securities at December 31, 2010, 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 utilized 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. Therefore, such auction rate securities have been classified as of March 31, 2011 as Level 2 in the fair value hierarchy, based on the prices which were negotiated in March 2011.

The table below sets forth a summary of the changes in the fair value of the Company’s financial assets classified as Level 3 (i.e. illiquid auction rates securities) for the three months ended March 31, 2011:

	(Dollars in thousands)
Balance at beginning of period	$	3,027
Total unrealized losses:
Included in net income		(205	)
Transferred to Level 2		(2,822	)
Balance at end of period	$	—

There were no transfers of assets or liabilities between Level 1 and Level 2 during the three months ended March 31, 2012.

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

	Fair Value				Carrying Amount
	March 31, 2012		December 31, 2011		March 31, 2012		December 31, 2011
	(Dollars in millions)				(Dollars in millions)
Olkaria III Loan	$	80.3	$	79.2	$	77.4	$	77.4
Amatitlan Loan		36.6		37.2		36.2		36.8
Senior Secured Notes:
Ormat Funding Corp. (“OFC”)		118.7		114.8		125.0		125.0
OrCal Geothermal Inc. (“OrCal”)		85.8		84.4		85.9		85.9
OFC 2 LLC (“OFC 2”)		125.0		131.0		151.7		151.7
Senior Unsecured Bonds		238.7		252.8		248.3		248.3
Loans from institutional investors		32.5		34.2		32.6		34.2

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 estimated current borrowing rates. The fair value of revolving lines of credit is determined using 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 fair value of financial instruments as of March 31, 2012:

	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Olkaria III Loan	$	—	$	—	$	80.3	$	80.3
Amatitlan Loan		—		—		36.6		36.6
Senior Secured Notes:
Ormat Funding Corp. (“OFC”)		—		118.7		—		118.7
OrCal Geothermal Inc. (“OrCal”)		—		—		85.8		85.8
OFC 2 LLC (“OFC 2”)		—		—		125.0		125.0
Senior Unsecured Bonds		—		—		238.7		238.7
Loan from institutional investors		—		—		32.5		32.5
Other long-term debt		—		—		50.0		50.0
Deposits		21.1		—		—		21.1
Revolving lines of credit		—		227.6		—		227.6