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, 2016 and December 31, 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.

				March 31, 2016
				Fair Value
	Carrying Value at March 31, 2016			Total			Level 1		Level 2			Level 3
	(Dollars in thousands)
Assets:
Current assets:
Cash equivalents (including restricted cash accounts)	$	47,457		$	47,457		$	47,457	$	—		$	—
Derivatives:
Currency forward contracts (2)		1,759			1,759			—		1,759			—
Liabilities:
Current liabilities:
Derivatives:
Call and put options on oil price (1)	$	(1,612	)	$	(1,612	)	$	—	$	(1,612	)	$	—
Call option on natural gas price (1)		(1,196	)		(1,196	)		—		(1,196	)		—
	$	46,408		$	46,408		$	47,457	$	(1,049	)	$	—

				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 call and put option transactions on oil and natural gas prices, valued primarily based on observable inputs, including spot prices for related commodity indices, and is included within “Accounts payable and accrued expenses” on March 31, 2016 in the consolidated balance sheets with the corresponding gain or loss being recognized within “Foreign currency translation and transaction 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 “accounts payable and accrued expenses” on March 31, 2016 and December 31, 2015, in the consolidated balance sheet with the corresponding gain or loss being recognized within “Foreign currency translation and 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 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	Location of recognized gain	Three Months Ended March 31,
hedging instruments	(loss)	2016			2015

Call options on natural gas price	Foreign currency translation and transaction losses		518			—
Call and put options on oil price	Foreign currency translation and transaction losses		(643	)		—
Swap transactions on natural gas price	Electricity revenue		—			317
Currency forward contracts	Foreign currency translation and transaction gains (losses)		1,814			(1,251	)
		$	1,689		$	(934	)

On March 6, 2014, the Company entered into an Natural Gas Index (“NGI”) swap contract with a bank for notional quantity of approximately 2.2 million British Thermal Units (“MMbtu”) for settlement effective January 1, 2015 until March 31, 2015, in order to reduce its exposure to fluctuations in natural gas prices to below $4.95 per MMbtu under its power purchase agreements (“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.

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 effective 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 $32.75 to $35.5 and expiration dates effective 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 $41.0 to $42.5 instead of $33.0 to $33.5. 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 $28.5 to $37.5 and $28.0 to $38.5, respectively. The net cost from the additional transactions in March 2016 was $0.3 million.

The foregoing futures and swaps transactions were not designated as hedge transactions and are marked to market with the corresponding gains or losses recognized within “Foreign currency translation and 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 $0.1 million in the three months ended March 31, 2016 under foreign currency translation and transaction gains (losses), compared to a net gain of $0.3 million in the three months ended March 31, 2015 under Electricity revenues.

There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 during the three months ended March 31, 2016.

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

	Fair Value				Carrying Amount
	March 31, 2016		December 31, 2015		March 31, 2016		December 31, 2015
	(Dollars in millions)				(Dollars in millions)
Olkaria III Loan - DEG	$	24.5	$	24.2	$	23.7	$	23.7
Olkaria III Loan - OPIC		262.7		262.6		260.1		264.6
Amatitlan Loan		40.7		41.7		39.4		40.3
Senior Secured Notes:
Ormat Funding Corp. ("OFC")		29.8		30.0		30.0		30.0
OrCal Geothermal Inc. ("OrCal")		44.8		43.8		43.3		43.3
OFC 2 LLC ("OFC 2")		231.9		231.1		257.4		262.0
Senior Unsecured Bonds		259.1		264.5		250.0		250.0

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 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,

2016:

	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Olkaria III - DEG	$	—	$	—	$	24.5	$	24.5
Olkaria III - OPIC		—		—		262.7		262.7
Amatitlan loan		—		40.7		—		40.7
Senior Secured Notes:
OFC		—		29.8		—		32.0
OrCal		—		—		44.8		44.8
OFC 2		—		—		231.9		231.9
Senior unsecured bonds		—		—		259.1		259.1
Other long-term debt		—		5.0		—		5.0
Revolving credit lines with banks		—		9.0		—		9.0
Deposits		16.0		—		—		16.0

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		—		31.6
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