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Note 5 - Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2014

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

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 upon selling an asset or paid upon transferring 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. The guidance 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, 2014 and December 31, 2013 for financial assets and liabilities measured at fair value by level within the fair value hierarchy, as well as carrying value. 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.

		Carrying Value				March 31, 2014
		at March 31,				Fair Value
		2014				Total				Level 1				Level 2				Level 3
		(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)		$	62,946			$	62,946			$	62,946			$	-			$	-
Derivatives:
Swap transaction on oil price ⁽¹⁾			663				663				-				663				-
Swap transaction on natural gas price ⁽²⁾			223				223				-				223				-
Currency forward contracts ⁽³⁾			1,113				1,113				-				1,113				-
Liabilities:
Current liabilities:
Derivatives:
Swap transaction on natural gas price⁽²⁾			(3,941	)			(3,941	)			-				(3,941	)			-
		$	61,004			$	61,004			$	62,946			$	(1,942	)		$	-

		Carrying Value				December 31, 2013
		at December 31,				Fair Value
		2013				Total				Level 1				Level 2				Level 3
		(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)		$	40,015			$	40,015			$	40,015			$	-			$	-
Derivatives:
Currency forward contracts ⁽³⁾			2,290				2,290				-				2,290				-
Liabilities:
Current liabilities:
Derivatives:
Swap transaction on oil price ⁽¹⁾			(2,490	)			(2,490	)			-				(2,490	)			-
Swap transaction on natural gas price⁽²⁾			(341	)			(341	)			-				(341	)			-
		$	39,474			$	39,474			$	40,015			$	(541	)		$	-

(1)	This amount relates to derivatives which represent swap contracts 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" and "accounts payable and accrued expenses" in the condensed consolidated balance sheet with the corresponding gain or loss being recognized within "electricity revenues" in the condensed consolidated statement of operations and comprehensive income (loss).

(2)	This amount relates to derivatives which represent swap contracts 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" and "accounts payable and accrued expenses" in the condensed consolidated balance sheet with the corresponding gain or loss being recognized within "electricity revenues" in the condensed consolidated statement of operations and comprehensive income (loss).

(3)	This amount relates 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 notational amounts, and are included within "prepaid expenses and other" in the condensed consolidated 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 amounts set forth in the tables above include investments in debt instruments, money market funds (which are included in cash equivalents) and short-term bank deposits. Those securities and deposits are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in an active market.

The following table presents the amounts of gain (loss) recognized in the condensed consolidated statements of operations and comprehensive income (loss) on derivative instruments not designated as hedges:

				Amount of recognized gain (loss)
				Three Months Ended March 31,
Derivatives not designated as hedging instruments		Location of recognized gain (loss)		2014				2013
				(Dollars in thousands)

Put options on oil price		Electricity revenues		$	—			$	(927	)
Swap transaction on oil price		Electricity revenues			907				(295	)
Swap transaction on natural gas price		Electricity revenues			(3,276	)			(3,390	)
Currency forward contracts		Foreign currency translation and transaction gains (losses)			(231	)			2,035
				$	(2,600	)		$	(2,577	)

On September 3, 2013, the Company entered into an NGI swap contract with a bank for notional volume of approximately 4.4 million MMbtus for settlement effective January 1, 2014 until December 31, 2014, in order to reduce its exposure to NGI below $4.035 per MMbtu under its PPAs with Southern California Edison. The contract did not have up-front costs. Under the terms of this contract, the Company makes floating rate payments to the bank and receives fixed rate payments from the bank on each settlement date. The swap contract has monthly settlement whereby the difference between the fixed price of $4.035 per MMbtu and the market price on the first commodity business day on which the relevant commodity reference price is published in the relevant calculation period (January 1, 2014 to December 1, 2014) is being settled on a cash basis.

On October 16, 2013, the Company entered into an NGI swap contract with a bank for notional volume of approximately 4.2 million MMbtus for settlement effective January 1, 2014 until December 31, 2014, in order to reduce its exposure to NGI below $4.103 per MMbtu under its PPAs with Southern California Edison. The contract did not have any up-front costs. Under the terms of this contract, the Company makes floating rate payments to the bank and receives fixed rate payments from the bank on each settlement date. The swap contract has monthly settlements whereby the difference between the fixed price of $4.103 per MMbtu and the market price on the first commodity business day on which the relevant commodity reference price is published in the relevant calculation period (January 1, 2014 to December 1, 2014) is being settled on a cash basis.

On October 16, 2013, the Company entered into a New York Harbor ULSD swap contract with a bank for notional volume of 275,000 BBL effective from January 1, 2014 until December 31, 2014 to reduce the Company’s exposure to fluctuations in the energy rate caused by fluctuations in oil prices under the 25 MW PPA for the Puna complex. The Company entered into this contract because the swap had a high correlation with the avoided costs (which are incremental costs that the power purchaser avoids by not having to generate such electrical energy itself or purchase it from others) that HELCO uses to calculate the energy rate. The contract did not have any up-front costs. Under the term of this contract, the Company will make floating rate payments to the bank and receive fixed rate payments from the bank on each settlement date ($125.15 per BBL). The swap contract has monthly settlements whereby the difference between the fixed price and the monthly average market price will be settled on a cash basis.

On March 6, 2014, the Company entered into an NGI swap contract with a bank for notional volume of approximately 2.2 million MMbtus for settlement effective January 1, 2015 until March 31, 2015, in order to reduce its exposure to NGI below $4.95 per MMbtu under its PPAs with Southern California Edison. The contract did not have any up-front costs. Under the terms of this contract, the Company will make floating rate payments to the bank and receive fixed rate payments from the bank on each settlement date. The swap contract has monthly settlements whereby the difference between the fixed price of $4.95 per MMbtu and the market price on the first commodity business day on which the relevant commodity reference price is published in the relevant calculation period (January 1, 2015 to March 1, 2015) will be settled on a cash basis.

The foregoing swap transactions have not been designated as hedge transactions and are marked to market with the corresponding gains or losses recognized within “electricity revenues” in the condensed consolidated statements of operations and comprehensive income (loss). The Company recognized a net loss from these transactions of $2.4 million and $4.6 million in the three months ended March 31, 2014 and March 31, 2013, respectively.

There were no transfers of assets or liabilities between Level 1 and Level 2 during the three months ended March 31, 2014.

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

		Fair Value								Carrying Amount
		March 31, 2014				December 31, 2013				March 31, 2014				December 31, 2013
		(Dollars in millions)								(Dollars in millions)
Olkaria III Loan - DEG		$	40.7			$	40.3			$	39.5			$	39.5
Olkaria III Loan - OPIC			280.6				279.6				296.1				299.9
Amatitlan Loan			33.7				34.8				30.8				31.5
Senior Secured Notes:
Ormat Funding LLC ("OFC")			74.9				83.5				77.6				90.8
OrCal Geothermal LLC ("OrCal")			67.1				65.8				66.2				66.2
OFC 2 LLC ("OFC 2")			119.1				119.0				141.9				144.4
Senior Unsecured Bonds			265.9				270.6				250.5				250.6
Loans from institutional investors			18.2				20.1				17.7				19.5

The fair value of OFC Senior Secured Notes is determined using observable market prices as these securities are traded. The fair value of the 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 borrowing rates. The fair value of revolving lines of credit is determined using a 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 the fair value of financial instruments as of March 31, 2014:

		Level 1				Level 2				Level 3				Total
		(Dollars in millions)
Olkaria III Loan - DEG		$	—			$	—			$	40.7			$	40.7
Olkaria III Loan - OPIC			—				—				280.6				280.6
Amatitlan Loan			—				—				33.7				33.7
Senior Secured Notes:
OFC			—				74.9				—				74.9
OrCal			—				—				67.1				67.1
OFC 2			—				—				119.1				119.1
Senior unsecured bonds			—				—				265.9				265.9
Loan from institutional investors			—				—				18.2				18.2
Other long-term debt			—				21.7				—				21.7
Revolving credit lines with banks			—				97.2				—				97.2
Deposits			21.1				—				—				21.1

The following table presents the fair value of financial instruments as of December 31, 2013:

		Level 1				Level 2				Level 3				Total
		(Dollars in millions)
Olkaria III Loan - DEG		$	—			$	—			$	40.3			$	40.3
Olkaria III Loan - OPIC			—				—				279.6				279.6
Amatitlan Loan			—				—				34.8				34.8
Senior Secured Notes:
OFC			—				83.5				—				83.5
OrCal			—				—				65.8				65.8
OFC 2			—				—				119.0				119.0
Senior unsecured bonds			—				—				270.6				270.6
Loan from institutional investors			—				—				20.1				20.1
Other long-term debt			—				23.3				—				23.3
Revolving credit lines with banks			—				112.0				—				112.0
Deposits			21.3				—				—				21.3

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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