Note 5 - Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

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,

2017

and

December

31,

2016

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, 2017
				Fair Value
	Carrying Value at March 31, 2017			Total			Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets:
Current assets:
Cash equivalents (including restricted cash accounts)	$	19,276		$	19,276		$	19,276	$	—	$	—
Derivatives:
Put options on gas price (3)		298			298			—		298		—
Contingent receivable (1)		1,472			1,472			—		—		1,472
Currency forward contracts (2)		1,517			1,517			—		1,517		—
Liabilities:
Current liabilities:
Derivatives:
Contingent payables (1)		(24,662	)		(24,662	)		—		—		(24,662	)
Warrants (1)		(3,507	)		(3,507	)						(3,507	)
	$	(5,606	)	$	(5,606	)	$	19,276	$	1,815	$	(26,697	)

				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	)

(1)

These amounts relate to contingent receivables and payables pertaining to the Viridity and Guadeloupe transactions, valued primarily based on unobservable inputs, and are included within "Prepaid expenses and other", "Accounts payable and accrued expenses" and "Other long-term liabilities" on March 31, 2017 and 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 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 March 31, 2017 and December 31, 2016, 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.

(3) These amounts relate to put option transactions on natural gas prices, valued primarily based on observable inputs, including spot prices for related commodity indices, and are included within "Prepaid expenses and other" on March 31, 2017 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.

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 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)	2017			2016
Put options on natural gas price	Derivatives and foreign currency transaction gains (losses)		(193	)		—
Call options on natural gas price	Derivatives and foreign currency transaction gains (losses)		—			518
Call and put options on oil price	Derivatives and foreign currency transaction gains (losses)		—			(643	)
Contingent considerations	Derivative and foreign currency transaction gains (losses)		(50	)
Currency forward contracts	Derivative and foreign currency transaction gains (losses)		2,262			1,814
		$	2,019		$	1,689

In

January,

2017,

the Company entered into Henry Hub Natural Gas Future contracts under which it has bought a number of put options covering a notional quantity of approximately

4.1

million British Thermal Units ("MMbtu") with exercise prices of

$3

and expiration dates ranging from

January

26,

2017

until

November

27,

2017

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

$0.7

million for these put options. The put option contracts have monthly expiration dates at which the options can be called and the transaction would be settled on a net 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 on 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 on which 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 between

$28.50

and

$37.50

and

$28

and

$38.50,

respectively.

The foregoing future and forward transactions were not designated as hedge transactions and are marked to market with the corresponding gains or losses recognized within “Derivatives and foreign currency transaction gains (losses

).

There were no transfers of assets or liabilities between Level

 

1,

Level

2

and Level 

3

during the

three

months ended

March

31,

2017.

The fair value of the Company

’s long-term debt approximates its carrying amount, except for the following:

	Fair Value				Carrying Amount
	March 31, 2017		December 31, 2016		March 31, 2017		December 31, 2016
	(Dollars in millions)				(Dollars in millions)
Olkaria III Loan - DEG	$	16.2	$	16.3	$	15.8	$	15.8
Olkaria III Loan - OPIC		248.9		253.4		242.1		246.6
Olkaria IV Loan - DEG 2		51.6		50.9		50.0		50.0
Amatitlan Loan		36.2		37.3		35.9		36.8
Senior Secured Notes:
Ormat Funding Corp. ("OFC")		17.0		17.0		17.0		17.0
OrCal Geothermal Inc. ("OrCal")		37.7		37.4		35.2		35.2
OFC 2 LLC ("OFC 2")		244.6		249.0		242.7		247.2
Don A. Campbell 1 ("DAC1")		87.4		88.9		90.8		92.4
Senior Unsecured Bonds		198.9		200.1		204.3		204.3
Other long-term debt		8.6		10.4		9.5		11.2

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

2017:

	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Olkaria III - DEG	$	—	$	—	$	16.2	$	16.2
Olkaria III - OPIC		—		—		248.9		248.9
Olkaria IV - DEG 2		—		—		51.6		51.6
Amatitlan loan		—		36.2		—		36.2
Senior Secured Notes:
OFC		—		17.0		—		17.0
OrCal		—		—		37.7		37.7
OFC 2		—		—		244.6		244.6
Don A. Campbell 1 ("DAC1")		—		—		87.4		87.4
Senior unsecured bonds		—		—		198.9		198.9
Other long-term debt		—		1.7		6.9		8.6
Revolving lines of credit		—		30.0		—		30.0
Deposits		15.2		—		—		15.2

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 Loan - DEG	$	—	$	—	$	16.3	$	16.3
Olkaria III Loan - 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