Note 8 - Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE

8

— 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

December

31,

2016

and

2015

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.

				December 31, 2016
				Fair Value
	Carrying Value at December 31, 2016			Total			Level 1		Level 2			Level 3
	(Dollars in thousands)
Assets:
Current assets:
Cash equivalents (including restricted cash accounts)	$	14,922		$	14,922		$	14,922	$	—		$	—
Derivatives:
Contingent receivable (1)		1,443			1,443			—		—			1,443
Liabilities:
Current liabilities:
Derivatives:
Contingent payables (1)		(11,581	)		(11,581	)		—		—			(11,581	)
Warrants (1)		(3,429	)		(3,429	)							(3,429	)
Currency forward contracts (2)		(481	)		(481	)		—		(481	)		—
	$	874		$	874		$	14,922	$	(481	)	$	(13,567	)

				December 31, 2015
				Fair Value
	Carrying Value at December 31, 2015			Total			Level 1		Level 2			Level 3
	(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)	$	31,428		$	31,428		$	31,428	$	—		$	—
Derivatives:
Currency forward contracts (2)		7			7			—		7			—
Liabilities:
Current liabilities:
Derivatives:
Currency forward contracts (2)		(169	)		(169	)		—		(169	)		—
	$	31,266		$	31,266		$	31,428	$	(162	)	$	—

(1)

  

These amounts relate to contingent receivables and payables pertaining to the Guadeloupe power plant purchase transaction, valued primarily based on unobservable inputs and are included within "Prepaid expenses and other" and "Other long-term liabilities" on

December

31,

2016

in the consolidated balance sheets with the corresponding gain or loss being recognized within "Derivatives and foreign currency transaction gains (losses)" 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 “prepaid expenses and other” and “accounts payable and accrued expenses” on

December

31,

2016

and

December

31,

2015,

in the consolidated balance sheet with the corresponding gain or loss being recognized within “Derivatives and foreign currency transaction gains (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 mark

et 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 (loss) on derivative instruments not designated as hedges:

		Amount of recognized gain (loss)
Derivatives not designated as hedging instruments	Location of recognized gain (loss)	2016			2015			2014
		(Dollars in thousands)
Call options on natural gas price	Derivatives and foreign currency transaction gain (losses)	$	(1,340	)	$	—		$	—
Call and put options on oil price	Derivatives and foreign currency transaction gain (losses)		(1,313	)		—			—
Swap transaction on oil price	Electricity revenues		—			—			2,728
Swap transactions on natural gas price	Electricity revenues		—			1,158			2,996
Contingent considerations	Derivatives and foreign currency transaction gain (losses)		(1,527	)		—			—
Currency forward contracts	Derivatives and foreign currency transaction gain (losses)		238			(1,206	)		(4,949	)
		$	(3,942	)	$	(48	)	$	775

On

September

3,

2013,

the Company entered into a Natural Gas Index (“NGI”) swap contract with a bank covering a 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 fluctuations in natural gas prices under its Power Purchase Agreements (“PPAs”) with Southern California Edison to below

$4.035

per MMbtu. 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 covering a 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 fluctuations in natural gas prices under its PPAs with Southern California Edison to below

$4.103

per MMbtu. 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 swap contract with a bank covering a 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 (“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,

and on

May

14,

2015,

the Company entered into NGI swap contracts with a bank covering a notional quantity of approximately

2.2

MMbtu for settlement effective

January

1,

2015

until

March

31,

2015,

and covering a notional quantity of approximately

2.4

MMbtu for settlement effective

June

1,

2015

until

December

31,

2015,

respectively, in order to reduce its exposure to fluctuations in natural gas prices under its PPAs with Southern California Edison to below

$4.95

per MMbtu and below

$3.00

per MMbtu, respectively. The contracts did not have any up-front costs. Under the terms of these contracts, the Company made, and will make, floating rate payments to the bank and received, and will receive, fixed rate payments from the bank on each settlement date. The swap contracts have monthly settlements whereby the difference between the fixed price 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

and

June

1,

2015

to

December

31,

2015)

are settled on a cash basis.

On

February

2,

2016,

the Company entered into Henry Hub Natural Gas Future contracts under which it

 has written a number of call options covering a notional quantity of approximately

4.1

MMbtu with exercise prices of

$2

and expiration dates ranging from

February

24,

2016

until

December

27,

2016

in order to reduce its exposure to fluctuations in natural gas prices under its PPAs with Southern California Edison. The Company received an aggregate premium of approximately

$1.9

million from these call options. The call option contracts have monthly expiration dates at which the options can be called and the Company would have to settle its liability on a cash basis.

On

February

24,

2016,

the Company entered into Brent Oil Future contracts under which it has written a number of call options covering a notional quantity of approximately

185,000

barrels (“BBL”) of Brent with exercise prices of

$32.80

to

$35.50

and expiration dates ranging from

March

24,

2016

until

December

22,

2016

in order to reduce its exposure to fluctuations in Brent prices under its PPA with HELCO. The Company received an aggregate premium of approximately

$1.1

million from these call options. The call option contracts have monthly expiration dates whereby the options can be called and the Company would have to settle its liability on a cash basis. Moreover, during

March

2016,

the Company rolled

2

existing call options covering a total notional quantity of

31,800

BBL of Brent in order to limit its exposure to

$41

to

$42.50

instead of

$32.80

to

$33.50.

In addition, the Company entered into short risk reversal transactions (sell call and buy put options) by rolling existing call options covering notional quantities of

16,500

BBL and

17,000

BBL in order to limit its exposure from the outstanding call options originally entered into in

February

2016

to a range of

$28.50

to

$37.50

and

$28

to

$38.50,

respectively.

The foregoing future, forward and swap transactions have not been designated as hedge transactions and are marked to market with the corresponding gains or losses recognized within “Derivatives and foreign currency transaction gains (losses)” and “Electricity revenues” in the consolidated statements of operations and comprehensive income, respectively. The Company recognized a net

 loss from these transactions of

$2.4

million,

$1.2

million and

$4.9

million in the years ended

December

31,

2016,

2015

and

2014,

respectively, under Derivatives and foreign currency transaction gains (losses), and a net gain of

$1.2

million and

$5.7

million, in the years ended

December

31,

2015,

and

2014,

respectively, under Electricity revenues.

There were no transfers of assets or liabilities between Level

 

1,

Level

2

and Level 

3

during the year ended

December

 

31,

2016.

The fair value of the Company

’s long-term debt is as follows:

	Fair Value				Carrying Amount
	2016		2015		2016		2015
	(Dollars in millions)				(Dollars in millions)
Olkaria III Loan - DEG	$	16.3	$	24.2	$	15.8	$	23.7
Olkaria III Loan - OPIC		253.4		262.6		246.6		264.6
Olkaria IV Loan - DEG 2		50.9		—		50.0		—
Amatitlan Loan		37.3		41.7		36.8		40.3
Senior Secured Notes:
Ormat Funding Corp. ("OFC")	17.0			30.0		17.0		30.0
OrCal Geothermal Inc. ("OrCal")		37.4		43.8		35.2		43.3
OFC 2 LLC ("OFC 2")		249.0		231.1		247.2		262.0
Don A. Campbell 1 ("DAC1")		88.9		—		92.4		—
Senior Unsecured Bonds		200.1		264.5		204.3		250.0
Other long-term debt		10.4		6.7		11.2		6.7

The fair value of OFC Senior Secured Notes was 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 and deposits approximates fair value.

The following table presents the fair value of financial instruments as of

December

 

31,

2016:

	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Olkaria III - DEG	$	—	$	—	$	16.3	$	16.3
Olkaria III - OPIC		—		—		253.4		253.4
Olkaria IV - DEG 2		—		—		50.9		50.9
Amatitlan loan		—		37.3		—		37.3
Senior Secured Notes:
OFC		—		17.0		—		17.0
OrCal		—		—		37.4		37.4
OFC 2		—		—		249.0		249.0
Don A. Campbell 1 ("DAC1")		—		—		88.9		88.9
Senior unsecured bonds		—		—		200.1		200.1
Other long-term debt		—		3.3		7.1		10.4
Deposits		14.4		—		—		14.4

The following table presents the fair value of financial instruments as of

December

 

31,

2015:

	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Olkaria III Loan - DEG	$	—	$	—	$	24.2	$	24.2
Olkaria III Loan - OPIC		—		—		262.6		262.6
Amatitlan Loan		—		41.7		—		41.7
Senior Secured Notes:
OFC		—		30.0		—		30.0
OrCal		—		—		43.8		43.8
OFC 2		—		—		231.1		231.1
Senior unsecured bonds		—		—		264.5		264.5
Other long-term debt		—		6.7		—		6.7
Deposits		15.9		—		—		15.9