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Note 5 - Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2015

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, 2015 and 2014 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.

						March 31, 2015
						Fair Value
		Carrying Value at March 31, 2015				Total				Level 1				Level 2				Level 3
		(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)		$	97,641			$	97,641			$	97,641			$	—			$	—
Liabilities:
Current liabilities:
Derivatives:
Currency forward contracts ⁽²⁾			(2,020	)			(2,020	)			—				(2,020	)			—
		$	95,621			$	95,621			$	97,641			$	(2,020	)		$	—

						December 31, 2014
						Fair Value
		Carrying Value at December 31, 2014				Total				Level 1				Level 2				Level 3
		(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)		$	85,076			$	85,076			$	85,076			$	—			$	—
Derivatives:
Swap transaction on natural gas price ⁽¹⁾			4,129				4,129				—				4,129				—
Liabilities:
Current liabilities:
Derivatives:
Currency forward contracts ⁽²⁾			(2,882	)			(2,882	)			—				(2,882	)			—
		$	86,323			$	86,323			$	85,076			$	1,247			$	—

⁽¹⁾

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 “accounts payable and accrued expenses” on December 31, 2014, in the consolidated balance sheets with the corresponding gain or loss being recognized within “electricity revenue” in the consolidated statement of operations and comprehensive income.

⁽²⁾

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” and “prepaid expenses and other” on March 31, 2015 and December 31, 2014, respectively, in the consolidated balance sheet with the corresponding gain or loss being recognized within “foreign currency translation and transaction losses” in the consolidated statement of operations and comprehensive income.

The amounts set forth in the tables above include investments in debt instruments and money market funds (which are included in cash equivalents). 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 consolidated statements of operations and comprehensive income on derivative instruments not designated as hedges:

				Amount of recognized gain (loss)
Derivatives not designated as				Three Months Ended March 31,
hedging instruments		Location of recognized gain (loss)		2015				2014


Swap transaction on oil price		Electricity revenues			—				907
Swap transactions on natural gas price		Electricity revenues			317				(3,276	)
Currency forward contracts		Foreign currency translation and transaction losses			(1,251	)			(231	)
				$	(934	)		$	(2,600	)

On September 3, 2013, the Company entered into a Natural Gas Index (“NGI”) swap contract with a bank for notional quantity of approximately 4.4 million British Thermal Units (“MMbtu”) 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 Power Purchase Agreements (“PPAs”) with Southern California Edison. The contract did not have up-front costs. Under the terms of this contract, the Company made floating rate payments to the bank and received fixed rate payments from the bank on each settlement date. The swap contract had a 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) was settled on a cash basis.

On October 16, 2013, the Company entered into an NGI swap contract with a bank for notional quantity of approximately 4.2 million MMbtu 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 made floating rate payments to the bank and received fixed rate payments from the bank on each settlement date. The swap contract had a monthly settlement 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) was settled on a cash basis.

On October 16, 2013, the Company entered into a New York Harbor Ultra-Low Sulfur Diesel (“ULSD”) swap contract with a bank for notional quantity 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 Hawaii Electric Light Company’s (“HELCO”) uses to calculate the energy rate. The contract did not have any up-front costs. Under the term of this contract, the Company made floating rate payments to the bank and received fixed rate payments from the bank on each settlement date ($125.15 per BBL). The swap contract had a monthly settlement whereby the difference between the fixed price of $125.15 per BBL and the monthly average market price was settled on a cash basis.

On March 6, 2014, the Company entered into an NGI swap contract with a bank for notional quantity of approximately 2.2 million MMbtu 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 made floating rate payments to the bank and receive fixed rate payments from the bank on each settlement date. The swap contract had 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) was settled on a cash basis.

The foregoing swap transactions were not designated as hedge transactions and are marked to market with the corresponding gains or losses recognized within “electricity revenues” in the consolidated statements of operations and comprehensive income (loss). The Company recognized a net gain from these transactions of $0.3 million in the three months ended March 31, 2015, compared to net loss of $2.4 million in the three months ended March 31, 2014.

There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 during the three months ended March 31, 2015.

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

			Fair Value								Carrying Amount
			March 31, 2015				December 31, 2014				March 31, 2015				December 31, 2014
			(Dollars in millions)								(Dollars in millions)
Olkaria III Loan - DEG			$	32.6			$	32.2			$	31.6			$	31.6
Olkaria III Loan - OPIC				277.5				279.4				278.1				282.6
Senior Secured Notes:
Ormat Funding Corp. ("OFC")				72.7				71.4				67.2				67.2
OrCal Geothermal Inc. ("OrCal")				56.5				55.5				55.1				55.1
OFC 2 LLC ("OFC 2")				239.5				238.8				270.1				272.5
Senior Unsecured Bonds				263.8				265.4				250.2				250.4
Loan from institutional investors				10.2				12.2				10.0				11.9

The fair value of OFC Senior Secured Notes is determined using observable market prices as these securities are traded. The fair value of all the 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, 2015:

		Level 1				Level 2				Level 3				Total
		(Dollars in millions)
Olkaria III - DEG		$	—			$	—			$	32.6			$	32.6
Olkaria III - OPIC			—				—				277.5				277.5
Senior Secured Notes:
OFC			—				72.7				—				72.7
OrCal			—				—				56.5				56.5
OFC 2			—				—				239.5				239.5
Senior unsecured bonds			—				—				263.8				263.8
Loan from institutional investors			—				—				10.2				10.2
Other long-term debt			—				8.3				—				8.3
Revolving credit lines with banks			—				30.6				—				30.6
Deposits			15.4				—				—				15.4

The following table presents the fair value of financial instruments as of December 31, 2014:

		Level 1				Level 2				Level 3				Total
		(Dollars in millions)
Olkaria III Loan - DEG		$	—			$	—			$	32.2			$	32.2
Olkaria III Loan - OPIC			—				—				279.4				279.4
Senior Secured Notes:
OFC			—				71.4				—				71.4
OrCal			—				—				55.5				55.5
OFC 2			—				—				238.8				238.8
Senior unsecured bonds			—				—				265.4				265.4
Loan from institutional investors			—				—				12.2				12.2
Other long-term debt			—				10.0				—				10.0
Revolving lines of credit			—				20.3				—				20.3
Deposits			17.3				—				—				17.3

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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