FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

12 Months Ended

Dec. 31, 2012

Fair Value Information for Financial Assets and Liabilities, as well as Cost or Amortized Cost

The following table sets forth certain fair value information at December 31, 2012 and 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 December 31, 2012		Fair Value at December 31, 2012
	Cost or Amortized Cost at December 31, 2012		Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)	$	54,298	$	54,298	$	54,298	$	—	$	—
Marketable Securities		—		—		—		—		—
Derivatives:
Put options on oil price⁽¹⁾		—		1,842		—		1,842		—
Swap transaction on oil price⁽²⁾		—		336		—		336		—
Swap transaction on natural gas price⁽³⁾		—		2,804		—		2,804		—
Currency forward contracts⁽⁴⁾		—		1,675		—		1,675		—

	$	54,298	$	60,955	$	54,298	$	6,657	$	—


	Cost or Amortized Cost at December 31, 2011		Fair Value at December 31, 2011
	Cost or Amortized Cost 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:
Currency forward contracts⁽⁵⁾		—		(890	)		—		(890	)		—

	$	79,933	$	79,820		$	80,170	$	(890	)	$	—

⁽¹⁾

This amount relates to derivatives which represent swap contract on oil prices, valued primarily based on observable inputs, including forward and spot prices for related commodity indices, and are included within “prepaid expenses and other” in the consolidated balance sheet with the corresponding gain or loss being recognized within “electricity revenues” in the consolidated statement of operations and comprehensive income (loss).

⁽²⁾

⁽³⁾

This amount relates to derivatives which represent swap contract on natural gas prices, valued primarily based on observable inputs, including forward and spot prices for related commodity indices, and are included within “prepaid expenses and other” in the consolidated balance sheet with the corresponding gain or loss being recognized within “electricity revenues” in the consolidated statement of operations and comprehensive income (loss).

⁽⁴⁾

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 “prepaid expenses and other” in the consolidated balance sheet with the corresponding gain or loss being recognized within “foreign currency translation and transaction gains (losses)” in the consolidated statement of operations and comprehensive income (loss).

⁽⁵⁾

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” in the consolidated balance sheet with the corresponding gain or loss being recognized within “foreign currency translation and transaction gains (losses)” in the consolidated statement of operations and comprehensive income (loss).

Summary of Changes in Fair Value of Financial Assets Classified as Level 3

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 rate securities) for each of the years ended December 31, 2011 and 2010:


	Year Ended December 31,
	2011			2010
	(Dollars in thousands)
Balance at beginning of period	$	3,027		$	3,164
Sale of auction rate securities		(2,822	)		—
Total unrealized gains (losses):
Included in net income		(205	)		(137	)

Balance at end of year	$	—		$	3,027

Fair Value of Long-term Debt Approximates Its Carrying Amount, Exceptions

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


	Fair Value				Carrying Amount
	December 31,				December 31,
	2012		2011		2012		2011
	(Dollars in millions)				(Dollars in millions)
Olkaria III Loan – DEG	$	48.8	$	79.2	$	47.4	$	77.4
Amatitlan Loan		38.9		37.2		34.3		36.8
Senior Secured Notes:
Ormat Funding Corp. (“OFC”)		105.0		114.8		114.1		125.0
OrCal Geothermal Inc. (“OrCal”)		77.3		84.4		76.5		85.9
OFC 2 LLC (“OFC 2”)		131.2		131.0		150.5		151.7
Senior Unsecured Bonds		273.2		252.8		250.9		248.3
Loan from institutional investors		27.7		34.2		27.0		34.2

Fair Value of Financial Instruments

The following table presents the fair value of financial instruments as of December 31, 2012:


	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Amatitlan loan	$	—	$	—	$	38.9	$	38.9
Senior Secured Notes:
OFC		—		105.0		—		105.0
OrCal		—		—		77.3		77.3
OFC 2		—		—		131.2		131.2
Senior unsecured bonds		—		—		273.2		273.2
Loan from institutional investors		—		—		27.7		27.7
Olkaria III Loan—DEG		—		—		48.8		48.8
Other long-term debt		—		36.7		—		36.7
Revolving credit lines with banks		—		73.6		—		73.6
Deposits		21.7		—		—		21.7

Significant Unobservable Inputs for Each Year Included In Valuation

Below are the significant unobservable inputs for each year included in the valuation as of the year ended December 31, 2012.


(Dollars in thousands, except realized price)
	Valuation Technique		Amount or Range	Weighted Average
Generation output (MWh)		DCF	224,836	224,836
Average realized price ($/MWh)		DCF	$84.50 — $111.25	$92.31
Operating costs		DCF	$12,687 — $20,430	$16,163

OREG 4, a recovered energy generation power plant, was also tested for impairment in the third quarter of 2012 due to continued low run time of the compressor station that serves as it heat source, which resulted in low power generation and revenues. Based on these indicators, the power plant was tested for recoverability by estimating its future cash flows over the life of the plant.

As a result, the OREG 4 power plant was written down to its fair value of $3.6 million. The impairment loss of $7.3 million is presented in the consolidated statement of operations and comprehensive income (loss) under “Impairment Charges”.

In estimating the fair value for the power plant, the Company primarily relied on the “Income Approach”, using assumptions that the Company believes market participants would utilize in making such valuation. The “Income Approach” is based on the principle that the value of an asset is equal to the present value of the cash flows that the asset is expected to generate. To estimate the fair value of the power plant, a DCF analysis was utilized and the estimate for the WACC of 8% developed in the valuation is for independent power producers and geothermal power producers.

In addition to the WACC rate of 8%, other significant inputs of the future net cash flow estimates included in the valuation are generation output, average realized price, and operating costs. These future net cash flow estimates are classified as Level 3 within the fair value hierarchy. Below are the significant unobservable inputs for each year included in the valuation as of the quarter ended September 30, 2012.


(Dollars in thousands, except realized price)
	Valuation Technique		Amount or Range	Weighted Average
Generation output (MWh)		DCF	11,916 — 15,456	15,097
Average realized price ($/MWh)		DCF	$49.00 — $71.50	$60.36
Operating costs		DCF	$86 — $595	$400

- Definition

Tabular disclosure of the fair value measurement of assets using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (1) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets) and gains or losses recognized in other comprehensive income (loss), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (2) purchases, sales, issues, and settlements (each type disclosed separately); and (3) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs), by class of asset.

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- Definition

Tabular disclosure of the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, assets, and liabilities. Such certain disclosures about the financial instruments, assets, and liabilities include: (1) the fair value of the required items together with their carrying amounts (as appropriate) and (2) the methodology and assumptions used in developing such estimates of fair value.

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- Definition

The entire disclosure of the fair value measurement of assets and liabilities, which includes financial instruments measured at fair value that are classified in shareholders' equity, which may be measured on a recurring or nonrecurring basis.

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