Note 5 - Fair Value of Financial Instruments | 9 Months Ended |
Sep. 30, 2014 |
Fair Value Disclosures [Abstract] | ' |
Fair Value Disclosures [Text Block] | ' |
NOTE 5 — FAIR VALUE OF FINANCIAL INSTRUMENTS |
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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: |
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Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; |
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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; |
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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). |
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The following table sets forth certain fair value information at September 30, 2014 and December 31, 2013 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. |
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| | Carrying | | | | |
| | value at | | | | |
| | September 30, | | | Fair Value at September 30, 2014 | |
| | 2014 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
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| | (Dollars in thousands) | |
Assets | | | | | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | | | | | |
Cash equivalents (including restricted cash accounts) | | $ | 116,118 | | | $ | 116,118 | | | $ | 116,118 | | | $ | — | | | $ | — | |
Derivatives: | | | | | | | | | | | | | | | | | | | | |
Swap transaction on oil price(1) | | | 1,134 | | | | 1,134 | | | | — | | | | 1,134 | | | | — | |
Swap transaction on natural gas price(2) | | | 502 | | | | 502 | | | | — | | | | 502 | | | | — | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | |
Currency forward contracts(3) | | | (2,183 | ) | | | (2,183 | ) | | | — | | | | (2,183 | ) | | | — | |
| | $ | 115,571 | | | $ | 115,571 | | | $ | 116,118 | | | $ | (547 | ) | | $ | — | |
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| | Carrying | | | | |
| | value at | | | | |
| | December 31, | | | Fair Value at December 31, 2013 | |
| | 2013 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
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| | (Dollars in thousands) | |
Assets | | | | | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | | | | | |
Cash equivalents (including restricted cash accounts) | | $ | 40,015 | | | $ | 40,015 | | | $ | 40,015 | | | $ | — | | | $ | — | |
Derivatives: | | | | | | | | | | | | | | | | | | | | |
Currency forward contracts(3) | | | 2,290 | | | | 2,290 | | | | — | | | | 2,290 | | | | — | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | |
Derivatives: | | | | | | | | | | | | | | | | | | | | |
Swap transaction on oil price(1) | | | (2,490 | ) | | | (2,490 | ) | | | — | | | | (2,490 | ) | | | — | |
Swap transaction on natural gas price(2) | | | (341 | ) | | | (341 | ) | | | — | | | | (341 | ) | | | — | |
| | $ | 39,474 | | | $ | 39,474 | | | $ | 40,015 | | | $ | (541 | ) | | $ | — | |
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-1 | 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" and "accounts payable and accrued expenses" 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). | | | |
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-2 | 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 "prepaid expenses and other" and "accounts payable and accrued expenses" 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). | | | |
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-3 | This amount relates 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 (losses)" in the condensed consolidated statement of operations and comprehensive income (loss). | | | |
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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. |
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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: |
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| | | | Amount of recognized gain (loss) | | | |
Derivatives not designated | | Location of recognized gain (loss) | | Three Months Ended | | | Nine Months Ended | | | |
as hedging instruments | September 30, | September 30, | | |
| | | | 2014 | | | 2013 | | | 2014 | | | 2013 | | | |
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| | | | (Dollars in thousands) | | | (Dollars in thousands) | | | |
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Put options on oil price | | Electricity revenues | | $ | — | | | $ | (824 | ) | | $ | — | | | $ | (1,256 | ) | | |
Swap transaction on oil price | | Electricity revenues | | | 1,657 | | | | — | | | | 1,885 | | | | (294 | ) | | |
Swap transaction on natural gas price | | Electricity revenues | | | 2,295 | | | | 477 | | | | (609 | ) | | | 81 | | | |
Currency forward contracts | | Foreign currency translation and transaction gains (losses) | | | (2,422 | ) | | | 1,970 | | | | (2,430 | ) | | | 4,895 | | | |
| | | | $ | 1,530 | | | $ | 1,623 | | | $ | (1,154 | ) | | $ | 3,426 | | | |
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On September 3, 2013, the Company entered into an NGI swap contract with a bank for notional quantity of approximately 4.4 million 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 PPAs with Southern California Edison. The contract did not have up-front costs. Under the terms of this contract, the Company makes floating rate payments to the bank and receives fixed rate payments from the bank on each settlement date. The swap contract has 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) is being settled on a cash basis. |
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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 makes floating rate payments to the bank and receives fixed rate payments from the bank on each settlement date. The swap contract has monthly settlements 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) is being settled on a cash basis. |
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On October 16, 2013, the Company entered into a New York Harbor 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 HELCO uses to calculate the energy rate. The contract did not have any up-front costs. Under the term of this contract, the Company will make floating rate payments to the bank and receive fixed rate payments from the bank on each settlement date ($125.15 per BBL). The swap contract has monthly settlements whereby the difference between the fixed price and the monthly average market price will be settled on a cash basis. |
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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 will make floating rate payments to the bank and receive fixed rate payments from the bank on each settlement date. The swap contract has 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) will be settled on a cash basis. |
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The foregoing swap transactions have not been designated as hedge transactions and are marked to market with the corresponding gains or losses recognized within “Electricity revenues” in the condensed consolidated statements of operations and comprehensive income. For the nine months ended September 30, 2014 and 2013, the Company recognized a net gain and a net loss from these transactions of $1.3 million and $1.5 million, respectively. For the three months ended September 30, 2014 and 2013, the Company recognized a net gain and a net loss from these transactions of $4.0 million and $0.3 million, respectively. |
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There were no transfers of assets or liabilities between Level 1 and Level 2 during the nine months ended September 30, 2014. |
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The fair value of the Company’s long-term debt approximates its carrying amount, except for the following: |
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| | Fair Value | | | Carrying Amount | | | | | |
| | September 30, | | | December 31, | | | September 30, | | | December 31, | | | | | |
2014 | 2013 | 2014 | 2013 | | | | |
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| | (Dollars in millions) | | | (Dollars in millions) | | | | | |
Olkaria III loan - DEG | | $ | 36.6 | | | $ | 40.3 | | | $ | 35.5 | | | $ | 39.5 | | | | | |
Olkaria III loan - OPIC | | | 276.8 | | | | 279.6 | | | | 287.1 | | | | 299.9 | | | | | |
Amatitlan loan | | | — | | | | 34.8 | | | | — | | | | 31.5 | | | | | |
Senior secured notes: | | | | | | | | | | | | | | | | | | | | |
Ormat Funding LLC ("OFC") | | | 78 | | | | 83.5 | | | | 72.5 | | | | 90.8 | | | | | |
OrCal Geothermal LLC ("OrCal") | | | 64.3 | | | | 65.8 | | | | 63.2 | | | | 66.2 | | | | | |
OFC 2 LLC ("OFC 2") | | | 233.9 | | | | 119 | | | | 274.5 | | | | 144.4 | | | | | |
Senior unsecured bonds | | | 264.9 | | | | 270.6 | | | | 250.4 | | | | 250.6 | | | | | |
Loans from institutional investors | | | 14.2 | | | | 20.1 | | | | 13.9 | | | | 19.5 | | | | | |
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The fair value as of December 31, 2013, of OFC senior secured notes was determined using observable market prices as these securities are traded. The fair value as of September 30, 2014 of the 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 a comparison of market-based price sources that are reflective of similar credit ratings to those of the Company. |
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On June 20, 2014, Phase I of Tuscarora facility achieved project completion under the OFC 2 Note Purchase Agreement. In accordance with the terms of the Note Purchase Agreement, the Company recalibrated the original financing assumptions and as a result the loan amount was adjusted through a principal prepayment of approximately $4.3 million. |
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On August 29, 2014, OFC 2, a wholly-owned indirect subsidiary of the Company signed a $140.0 million loan under the OFC 2 senior secured notes to finance the construction of the McGinness Hills Phase 2 project in Nevada. This drawdown is the last tranche available under the OFC 2 Note Purchase Agreement with John Hancock Life Insurance Company and guaranteed by the U.S. Department of Energy's Loan Programs Office. The $140.0 million loan, which matures in December 2032, carries a 4.61% coupon with principal to be repaid on a quarterly basis. The OFC 2 Notes, which include loans for the Tuscarora, Jersey Valley and McGinness Hills complexes, are rated "BBB" by Standard & Poor's. |
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In connection with the anticipated drawdown, on August 13, 2014, the Company entered into an on-the-run interest rate lock agreement with a financial institution with a termination date of August 15, 2014. This on-the-run interest rate lock agreement had a notional amount of $140.0 million and was designated by the Company to be a cash flow hedge. The objective of this cash flow hedge was to eliminate the variability in the changes in the 10-year U.S. Treasury rate as that is one of the components in the annual interest rate of the OFC 2 loan that was forecasted to be fixed on August 15, 2014. As such, the Company hedged the variability in total proceeds attributable to changes in the 10-year U.S. Treasury rate for the forecasted issuance of fixed rate OFC 2 loan. On August 18, 2014, which was the settlement date, the Company paid $1.5 million to the counterparty of the on-the-run interest rate lock agreement. |
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The Company concluded that the cash flow hedge was fully effective with no ineffective portion and no amounts excluded from the effectiveness testing, thus the total loss from the cash flow hedge was fully recognized in “Loss in respect of derivatives instruments designated for cash flow hedge” under other comprehensive income of $0.9 million noted above, which was net of related taxes of $0.6 million. The cash flow hedge loss recorded will be amortized over the life of the OFC 2 loan using the effective interest method. The Company expects to reclassify $0.2 of the loss from “Accumulated other comprehensive income (loss)” into interest expense during the next twelve months. |
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On September 30, 2014, Ortitlan, a wholly-owned indirect subsidiary of the Company, prepaid the outstanding amount of approximately $30.0 million loan with EIG Global Project Fund II, Ltd. (formerly TCW). The $42.0 million loan was signed in 2009 to refinance the Company's investment in the 20 MW Amatitlan geothermal power plant located in Guatemala. This repayment resulted in a one-time charge to interest expense of approximately $1.1 million, consisting of (i) prepayment premium of $0.6 million, and (ii) write-off of related deferred financing costs amounting to a $0.5 million. |
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The carrying value of other financial instruments, such as revolving lines of credit, deposits, and other long-term debt approximates fair value. |
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The following table presents the fair value of financial instruments as of September 30, 2014: |
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| | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | |
| | (Dollars in millions) | | | | | |
Olkaria III loan - DEG | | $ | — | | | $ | — | | | $ | 36.6 | | | $ | 36.6 | | | | | |
Olkaria III loan - OPIC | | | — | | | | — | | | | 276.8 | | | | 276.8 | | | | | |
Senior secured notes: | | | | | | | | | | | | | | | | | | | | |
OFC | | | — | | | | — | | | | 78 | | | | 78 | | | | | |
OrCal | | | — | | | | — | | | | 64.3 | | | | 64.3 | | | | | |
OFC 2 | | | — | | | | — | | | | 233.9 | | | | 233.9 | | | | | |
Senior unsecured bonds | | | — | | | | — | | | | 264.9 | | | | 264.9 | | | | | |
Loan from institutional investors | | | — | | | | — | | | | 14.2 | | | | 14.2 | | | | | |
Other long-term debt | | | — | | | | 15 | | | | — | | | | 15 | | | | | |
Revolving lines of credit | | | — | | | | 28.1 | | | | — | | | | 28.1 | | | | | |
Deposits | | | 21.7 | | | | — | | | | — | | | | 21.7 | | | | | |
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The following table presents the fair value of financial instruments as of December 31, 2013: |
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| | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | |
| | (Dollars in millions) | | | | | |
Olkaria III loan - DEG | | $ | — | | | $ | — | | | $ | 40.3 | | | $ | 40.3 | | | | | |
Olkaria III loan - OPIC | | | — | | | | — | | | | 279.6 | | | | 279.6 | | | | | |
Amatitlan loan | | | — | | | | — | | | | 34.8 | | | | 34.8 | | | | | |
Senior secured notes: | | | | | | | | | | | | | | | | | | | | |
OFC | | | — | | | | 83.5 | | | | — | | | | 83.5 | | | | | |
OrCal | | | — | | | | — | | | | 65.8 | | | | 65.8 | | | | | |
OFC 2 | | | — | | | | — | | | | 119 | | | | 119 | | | | | |
Senior unsecured bonds | | | — | | | | — | | | | 270.6 | | | | 270.6 | | | | | |
Loan from institutional investors | | | — | | | | — | | | | 20.1 | | | | 20.1 | | | | | |
Other long-term debt | | | — | | | | 23.3 | | | | — | | | | 23.3 | | | | | |
Revolving lines of credit | | | — | | | | 112 | | | | — | | | | 112 | | | | | |
Deposits | | | 21.3 | | | | — | | | | — | | | | 21.3 | | | | | |
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