FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2013

FAIR VALUE OF FINANCIAL INSTRUMENTS

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, 2013 and December 31, 2012 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 March 31, 2013		Fair Value at March 31, 2013
			Total			Level 1		Level 2			Level 3
	(Dollars in thousands)
Assets
Current assets:
Cash equivalents (including restricted cash accounts)	$	91,551	$	91,551		$	91,551	$	—		$	—
Derivatives:
Put options on oil price(1)		—		845			—		845			—
Currency forward contracts(2)		—		2,712			—		2,712			—
Liabilities
Current liabilities:
Swap transaction on natural gas price(3)		—		(1,623	)		—		(1,623	)		—
	$	91,551	$	93,485		$	91,551	$	1,934		$	—

	Cost or Amortized Cost at December 31, 2012		Fair Value 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	$	—	$	—
Derivatives:
Put options on oil price(1)		—		1,842		—		1,842		—
Currency forward contracts(2)		—		1,675		—		1,675		—
Swap transaction on natural gas price(3)		—		2,804		—		2,804		—
Swap transaction on oil price(4)		—		336		—		336		—
	$	54,298	$	60,955	$	54,298	$	6,657	$	—

⁽¹⁾ This amount relates to derivatives which represent European put transactions 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 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⁾ 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 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” in the condensed consolidated statement of operations and comprehensive income (loss).

⁽³⁾  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 “accounts payable and accrued expenses” and “prepaid expenses and other” in March 31, 2013 and December 31, 2012, respectively, 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).

⁽⁴⁾ 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” 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).

          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:

Derivatives not designated as hedging instruments	Location of gain (loss) recognized	Amount of gain (loss) recognized
		Three Months Ended March 31,
		2013			2012
		(Dollars in thousands)
Put options on oil price	Electricity revenues	$	(927	)	$	—
Swap transaction on oil price	Electricity revenues		(295	)		—
Swap transaction on natural gas price	Electricity revenues		(3,390	)		—
Currency forward contracts	Foreign currency translation and transaction gains		2,035			673
		$	(2,577	)	$	673

The Company’s financial assets measured at fair value (including restricted cash accounts) at March 31, 2013 and December 31, 2012 include short-term bank deposits and money market funds (which are included in cash equivalents). Those assets are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in an active market.

There were no transfers of assets or liabilities between Level 1 and Level 2 during the three months ended March 31, 2013.

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

	Fair Value				Carrying Amount
	March 31, 2013		December 31, 2012		March 31, 2013		December 31, 2012
	(Dollars in millions)				(Dollars in millions)
Olkaria III Loan - DEG	$	49.3	$	48.8	$	47.4	$	47.4
Amatitlan Loan		37.9		38.9		33.6		34.3
Senior Secured Notes:
Ormat Funding LLC (“OFC”)		93.2		105.0		101.3		114.1
OrCal Geothermal LLC (“OrCal”)		78.5		77.3		76.5		76.5
OFC 2 LLC (“OFC 2”)		131.2		131.2		150.5		150.5
Senior unsecured bonds		271.0		273.2		250.8		250.9
Loans from institutional investors		26.1		27.7		25.3		27.0

The fair value of OFC Senior Secured Notes is determined using observable market prices as these securities are traded. The fair value of other long-term debt is determined by a valuation model, which is based on a conventional discounted cash flow methodology and utilizes assumptions of estimated current borrowing rates. The fair value of revolving lines of credit is determined using 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, 2013:

	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Olkaria III Loan - DEG	$	—	$	—	$	49.3	$	49.3
Amatitlan Loan		—		—		37.9		37.9
Senior Secured Notes:
OFC		—		93.2		—		93.2
OrCal		—		—		78.5		78.5
OFC 2		—		—		131.2		131.2
Senior unsecured bonds		—		—		271.0		271.0
Loan from institutional investors		—		—		26.1		26.1
Other long-term debt		—		35.0		—		35.0
Revolving credit lines with banks		—		88.3		—		88.3
Deposits		22.2		—		—		22.3