Ormat Technologies, Inc.
Q2 2008 Earnings Call Transcript

Published: 19 Aug 2008

[Operator:]

Good morning. My name is Jackie and I’ll be your conference operator today. At this time I would like to welcome everyone to the Ormat Technologies second quarter 2008 Earnings Conference Call. (Operator instructions) It is now my pleasure to turn the floor over to Mary McCaffrey of KCSA Strategic Communications. Ma'am, you may begin your conference.

[Mary McCaffrey:]

Thank you, Jackie, and thank you all for joining us today. This is Mary McCaffrey with KCSA Strategic Communications, Investors Relations Consultant to Ormat Technologies. At this point you should have all received the second quarter 2008 earnings press release. If you have not received the release, please refer to Ormat’s corporate website at www.ormat.com. Hosting the call today are Dita Bronicki, Chief Executive Officer; Yoram Bronicki, President and Chief Operating Officer; Joseph Tenne, Ormat’s Chief Financial Officer; and Smadar Lavi, Vice President of Corporate Finance and Investor Relations. Before we begin, we would like to remind you that information provided during this call may contain statements relating to current expectations, estimates, forecasts and projections about future events that are forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward looking statements generally relate to company’s plans, objectives, and expectations for future operations and are based on management’s current estimates and projections of future results or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of such risks and uncertainties, please see Risk Factors as described in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 5th, 2008. In addition, during this call, statements may be made that include a financial measured defined as non-GAAP financial measures by the Securities and Exchange Commission such as adjusted EBITDA. This measure may be different from non-GAAP financial measures used by other companies. The presentation of this financial information is not intended to be considered in isolation or as a substitute for financial information prepared and presented in accordance with GAAP. Management of Ormat Technologies believes that adjusted EBITDA may provide meaningful supplemental information regarding liquidity measurement that both management and investors benefit from referring to this non-GAAP financial measure in assessing Ormat Technologies' liquidity and when planning future or forecasting periods. This non-GAAP financial measure may also facilitate management’s internal comparison to the company’s historical liquidity. Before I turn the call over to management, I would like to mention that a slide presentation accompanies this call and can be accessed on Ormat’s website under the event as sound in the Investor Relations tab. With that said, I would like to now turn the call over to Dita, Yoram and Joseph who would like to make some formal remarks and review the financials. Following these remarks, management would be glad to answer any questions that you many have. Dita, the call is yours.

[Dita Bronicki:]

Thank you, Mary McCaffrey [ph] and good morning everyone. Thank you for joining us today. Let us begin on slide four. The quarter and half year points were characterized by good result, accompanied with construction and exploration program to continue on track. We had another strong performance in our electricity segment during both periods despite our performing maintenance on several projects. The second quarter in particular had substantial maintenance work and the project shutdown for enhancement CapEx [ph]. The strong hold that we were able to achieve was the result of additional capacity we had added over the last two years which outgrew these expenses. We achieved 11.6% goal in electricity on a year over year basis and 22.5% when comparing electricity segment revenues from the first half of 2008 to the same period in 2007. Turning to slide five, another important achievement is that we have built a strong backlog in our Product segment. Since the beginning of the year, we received backlog of approximately $176 million for supply and construction of recoverable energy generation and Geothermal Power plant, including $66 million that is still subject to a noticeable fee. These product orders are globally (inaudible) with new build in New Zealand, Turkey and the United States which shows that the need for clean energy is a growing and global concern. On construction activities, we remain on schedule through the full quarter and we expect to have 101 megawatts on line by the end of the year. The projects for 2009 and beyond also remain on schedule. We continue to secure our goal. We acquired leases on federal land in Nevada and private land in California during the quarter. In the auction for federal land (inaudible) we acquired two small power fields. Our consultants were not excited about the quality of the properties that were offered in this auction. As you will see, our construction program, which Yoram will talk about in more detail in just a bit and our exploration activities remain robust. We also added to our capital provision which is an important component of our property. As presented on slide six, we closed the second Tax Monetization deal that we entered into last year from which we will receive $64 million. We also receive approximately $150 million made from the sale of 12.1 million shares of common stock in a block play to Lehman Brothers. This gave us additional funds that delayed our need to save into our corporate line of credit. This additional capital created (inaudible) so that we are well insulated from possible issues in the financing market (inaudible). We have no capital constraints to move forward with the (inaudible) construction program and our ability to secure funding to help us initiate future programs remain strong. And let's move to slide seven. Looking at the regulatory environment, while we are optimistic that the production facilities will be extended, the question still remains to win. The tax credit at year end (inaudible). However, given that it is an election year, we may not see such until after the November election. As we have previously stated, if the PTC does not start, we will have the (inaudible) depreciation as mitigating measures along the better prices on some of our properties [ph]. The recent interest in renewable energy by mainstream corporation and more importantly by both presidential candidates as well as the continued effort of the renewable energy industry provided a marketable amount of support for the (inaudible) climate change legislation, such as PTC and the carbon cap and trade. With that, I'll turn the call over to Yoram for a review of operation. Yoram?

[Yoram Bronicki:]

Thank you Dita and good morning everyone. We would like to begin with slide nine. We had a good quarter and a first half in terms of energy production. In the US, our generation was up 3.6% quarterly and 16.1% on a semi-annual basis, excluding the mammoth generation. Main factors that had an adverse effect on our generation this quarter were low utilization factor of the compressor station affecting our OREG I project, the planned shutdown of the Steamboat 2 and Steamboat 3 plants that was done in support of the complex, and a generator failure in (inaudible). For the impact of these challenges, we believe that the low loads in the OREG I compressor station is likely to continue during the next 18 months, but the impact on total revenue is not material. The Steamboat repowering project is progress very well. We have already placed half of the turbines in service and expect completion before the end of the quarter. And the generator failure will have a more pronounced impact on the third quarter generation, but we expect to complete the repairs still this month. Moving to slide ten, our major capital project is on tract to add an additional 174 megawatts by the end of 2009 or in early 2010. Throughout the rest of 2008, we expect to add approximately 101 megawatts. The projects coming on line in the second half of this year or early 2009 are 50 megawatts from the North Brawley project and 35 megawatts from the phase II of the Olkaria project in Kenya. In addition, we expect 11 megawatts from OREG II and five megawatts from the GDL project in New Zealand. In 2009 and in early 2010, we expect additional 73 megawatts of capacity in the following projects. 50 megawatts at East Brawley, 11 megawatts from the remaining OREG II facility, eight megawatts from the Puna expansion, and four megawatts from the Peetz recovered energy project. Now to the next slide. The projects beyond 2009 are mostly in exploration and development stages and include work to develop between 18 and 30 megawatts plant from our Buffalo and Grass Valley project. We also expect to develop 30 to 40 megawatts project in Carson Lake, Nevada, for which we will retain 50% ownership. Last week, the Nevada PUC approved their joint venture with Nevada Power relating to this project. Additional we have signed a PPA in California for Imperial Valley project that we expect will be 30 and 100 megawatts, and is expected to be completed by 2012. We also plan to increase the generation capacity of the Mammoth plant by 20 to 30 megawatts where our share will be 50%. And an update on our Sarulla project is on slide twelve. Our interest in the consortium was formally reduced to a 12.75%, when in July PLM, the state power company approved the entry of Kyushu Electric Power Company to the consortium. With the current progress in the financing activities, we expect construction to start only in the second half of 2009. Our CapEx requirements are explained on slide thirteen. We plan to invest $211 million for the projects that I have previously mentioned throughout the remainder of 2008. In addition, our operating projects with capital expenditures approximately $24 million for the remainder of the year. We have updated our budget for exploration as we expect to invest $22 million through 2008 and additional $35 million in 2009. Approximately $15 million is budgeted for machinery and equipment through the balance of 2008. There are two additional rigs, one production and one work-over rig that are due to be delivered in the third quarter of 2008. Looking ahead, our product segment is on the next slide. We have had a good deal of interest in both our Geothermal and Recovered Energy solution. In July, we entered into an engineering procurement and construction contract valued at approximately $42 million for the construction of Geothermal Power plant in New Zealand. We have previously worked with the owner of the plant, Contact Energy Limited, which are New Zealand's largest geothermal power plant owner and operator. We are also the equipment supplier for a new geothermal power plant in Turkey. The contract value for this project is approximately $16 million. Then to recap, since the beginning of the year we entered into four EPC contracts which are listed in the presentation and include a $76 million EPC contract with Nevada Geothermal Power for a geothermal project, a six megawatt REG power plant for Nevada Power, a 5.3 megawatt REG power plant in Minnesota, and the New Zealand contract mentioned earlier. Also, these contracts bring our product segment backlog to approximately $189 million as of the end of July 2008, out of which $6 million is subject to (inaudible). Thank you and I will now turn the call to our CFO, Joseph Tenne. Joseph?

[Joseph Tenne:]

Thank, Yoram, and good morning everyone. Starting with slide sixteen, for the second quarter of 2008, total revenues were $80.2 million, a 4.6% decrease from revenues of $84.1 million in the same quarter of 2007. Total cost of revenues was $57.2 million compared to $59.5 million in the same quarter of 2007. Turning to slide seventeen. Total electricity revenues for the second quarter of 2008 were $61.8 million, up 11.6% from $55.4 million experienced in the second quarter of 2007. Revenues were impacted positively this quarter as a result of $4 million from additional revenue generated in the United States resulting from new plants coming on line, and increase in the energy rate in the Puna project due to higher oil prices, and a net increase of $2.4 million in revenues from the Amatitlan project in Guatemala and from our Momotombo project in Nicaragua, revenue offset by a decreasing generation of the Steamboat 2 and 3 project of the replacement of the turbines, which required shutdown of the project for a period of time, and a decrease in the generation of OREG 1 project as Yoram mentioned before. Cost of revenues in our electricity segment was $41.5 million compared to $35.3 million in the second quarter last year. The increase in cost of electricity segment revenues resulted mainly from project timing issues whereas a portion of our scheduled project maintenance cost that would otherwise have been incurred during the first quarter of 2008 were incurred in the rest of the year, costs relating to new project placing service and an increase in labor and material costs in existing plants. And in our product segment, a segment on slide eighteen, total revenues for the second quarter of 2008 were $18.4 million, a 35.7% decrease over total revenues of $28.7 million in the same quarter last year. As we often said, our product segment's revenue is unpredictable and this quarter reflects last year's lower (inaudible) due to volatility and timing of our receipt of purchases order and the timing of revenue recognition in accordance with the presenters of (inaudible). Cost of product segment revenues was $15.7 million, down 35.1% from $24.2 million in the same period last year. Now to slide nineteen. Combined gross margins were 28.7% in the second quarter of 2008 compared to 29.2% in the second quarter of 2007. Gross margin for the electricity segment was 32.8% for this quarter compared to 36.2% for the same quarter last year. Product segment gross margin was 14.9% in this quarter of 2008 compared to 15.6% in the same quarter last year. Moving to slide twenty. For the second quarter of 2008 net income of $12.2 million or $0.28 per share as compared to net income of$8.5 million or $0.22 per share for the second quarter of 2008 [ph]. Such increase in net income was principally attributable to $4.2 million decrease in our interest expense, a $2.6 million increase in minority interest. This was partially offset by an increase of $600,000 in income tax provision, a $600,000 decrease in interest income, and a $1.4 million increase in foreign currency translation and transaction losses, and $800,000 decrease in equity income during this period. Net income for the second quarter of 2008 and 2007, both includes stock-based compensation related to stock options of $1 million. On slide 21, adjusted EBITDA for the quarter was $29.2 million as compared with $30.6 million for the same quarter in 2007. Adjusted EBITDA includes consolidated EBITDA and the company's share in operating income and depreciation and amortization, totaling $1.3 million and $4 million for the quarters ended June 30, 2008 and 2007 respectively related to the company's 50% interest in the Mammoth project in California. Additionally the 2007 period includes our consolidated interest in the Leyte Project in the Philippines which transitions back to the Philippines government in September 2007. Turning to slide 22. As of June 30, 2008 the company had cash, cash equivalents and marketable securities of $137.8 million compared to $60.7 million as of December 31, 2007. This increase in cash and cash equivalents assets was principally due to $150 million in net proceeds from the sale of 3.1 million shares of common stock in a block trade last May, $63.1 million net proceeds from second closing of the OPC tax monetization transaction last April, $33.3 million in net proceeds from our unregistered sale of 693,000 shares to our parent in January 2008, and a $49.6 million derived from operating activities in the first half of 2008. This was partially offset by our use during the first half of 2008 of $178 million of cash resources to fund capital expenditure, and $34 million to repay long-term debt to our parent and for third parties. In addition, we have $3.1 million and $2.8 million of marketable securities as of June 30, 2008 and December 31, 2007 respectively classified as noncurrent assets. This specification is due to auction in the first quarter of 2007 of certain auction rate securities in our portfolio. In the next accompanying slide, we present our total long-term debt as of the end of the second quarter of 2008 and the payment schedule. Moving to slide 24, on August 5, 2008, Ormat's Board of Directors approved the payment of quarterly cash dividend of $0.05 per share pursuant to the company's dividend policy, which targets an annual payout ratio of at least 20% of the company's net income, subject to Board approval. The dividend will be paid on August 29, 2008 to shareholders of record as of the close of business on August 19, 2008. The company expects to pay a dividend of $0.05 per share next quarter as well. Thank you all and I would like to turn the call back to Dita for final remarks before we move on to Q&As.

[Dita Bronicki:]

If you will turn to the last slide regarding the revenue guidance for 2008, we increased our guidance for electricity segment and expect our Electricity segment revenues to be $250 million. We also expect an additional $9 million of revenues from our share of electricity revenues generated by a subsidiary which is accounted for under the equity method. With respect to our products segment, we maintain our expected revenues of between $70 million and $80 million for 2008. I would like to thank you for your continued support to Ormat. These results we believe fill the validation of our vision of our business and our continued education towards building our future. Our market leadership position, strong balance sheet, and (inaudible) integration will allow us to continue to capitalize on the opportunities we see in the market. And the same vision allowed us to (inaudible) company towards achieving its goal. Thank you again for joining us on this call, we will be happy to take your questions now. Jackie, please.

[Operator:]

Thank you. (Operator instructions) Your first question is coming from Ben Kallo with Stanford Group. Please go ahead.

[Ben Kallo:]

Good morning.

[Dita Bronicki:]

Good morning.

[Ben Kallo:]

Could you give us some detail on what affected product segment gross margin this quarter? And then I know we have talked in the past you kind of gave some rough guidance about where that margin should go, trend towards? And could you update us on that?

[Dita Bronicki:]

Well, I think that the product segment margins behaved as we expected them to behave, and our expectations for the whole year remain unchanged, I think we correlate the level of 2005 in the order of 20% or little more. And no change there. And the volume and the mix is what creates the result.

[Ben Kallo:]

Okay. On the electricity segment, how should we – it looks like margins kind of jumped around a lot there. How should we think about going forward? I know Q3 tends to be strong, and maybe if you give some update on Steamboat, how that will affect margin? And then Q4, I think – hello.

[Dita Bronicki:]

I hear you.

[Ben Kallo:]

And then maybe in Q4, an update on what those margins typically are in the electricity side? Are we doing more maintenance maybe in Q4, or I know there is some shutdown maybe at Puna there.

[Dita Bronicki:]

Overall, we expect the gross margin in the electricity segment to be as we said, I don't remember, suppose in the first quarter or second, or year end, which is in the order of 35%, 36% gross margin. We don't expect to deviate from it because the shutdown of Steamboat 2 and 3 was expected. It's not an unexpected event. It is told that the third quarter is very stronger than certainly the first quarter, but also the second quarter, and this is coming from the fact that we do have a substantial amount under full contract which have much higher revenue in the summer months than in the winter months. But all in all, we expect to be on line with our expectations.

[Ben Kallo:]

Okay, good. And then on the Steamboat, the decision to replay four turbines, I know in the last call you talked about replacing two turbines. What made you replay four turbines instead of two?

[Yoram Bronicki:]

No I don't think – this is Yoram. I don't think we said we'll replace two. There are four turbines in the Steamboat 2 and 3 complex and we're guiding them out and putting new equipment in.

[Dita Bronicki:]

Maybe the confusion with Steamboat project, Steamboat 2 and Steamboat 3, so maybe this caused the confusion but it's four turbines in total, two in each project.

[Ben Kallo:]

Okay. Okay. And then when was that construction affecting Steamboat 3 and 4 that started in early July or did it started within Q2?

[Yoram Bronicki:]

No, it started in Q2, actually towards the end of May I think is when we started taking equipment down.

[Ben Kallo:]

Okay. And then as far as the update on the electricity segment's revenue, how much of that $5 million is related to higher revenue at Puna?

[Dita Bronicki:]

A big pulp.

[Ben Kallo:]

Okay. So you're getting benefit from high oil prices here and could you remind me how often that resets the electricity prices?

[Dita Bronicki:]

Once a quarter.

[Ben Kallo:]

Okay, once a quarter. Okay, I'll jump back in queue then. Thank you.

[Dita Bronicki:]

Thank you.

[Operator:]

Thank you. Your next question is from Michael Lapides with Goldman Sachs. Please go ahead.

[Michael Lapides:]

Hey guys, congratulations on a good quarter. Just want to – when I go back and look at slides 11 and 12 I think the projects under development, can you walk us through which ones are incremental to the same slides you presented at first quarter.

[Dita Bronicki:]

I don't remember what we have in the third quarter but I believe that Mammoth was not included in the prior quarter, and I don't know about the Imperial Valley. Madel [ph] can you help on that?

[Unidentified Participant:]

Two semi projects say added to the slide, Imperial Valley is a project that we signed for a contract for 2012 and the other one is Mammoth.

[Michael Lapides:]

Got it. Okay. Other question, how – when you think about Sarulla, what is the timeframe for the different stages or different legs of Sarulla that come on line?

[Dita Bronicki:]

The first milestone is to get to financial close. This is what we'll start the project. And in order to count the deadline for financial close is to get all the government approval for the project agreement. As we speak now, we are still missing one approval. All of the project agreements are signed but we are still missing one approval. It doesn't mean that we are not – that we have not started to financing, but you cannot really work aggressively and effectively until you have all approvals in place. Then once the financial close occurs and some work will be done before financial closing in order to support financial close. But once it occurs, it's going to be built over a full year period with the first phase expected to come on line about 20 months from financial close and then every eight to ten months in additional bids.

[Michael Lapides:]

Got it. Thank you.

[Operator:]

Thank you. Your next question is from Emily Christy with RBC Capital Markets.

[Emily Christy:]

Good morning. Just have a couple of questions for you. I was wondering if you could talk a little bit about the competitive landscape in the US with yesterday's auction you mentioned the land parcel (inaudible) liking for the most part almost double the year before. Could you talk a little bit about that?

[Dita Bronicki:]

Well, there is clearly a bigger interest as new developers are entering the market. I am surprised by the prices that others have paid for this. We have done an analysis of the geology and the potential of these parcels and have understood why it was overpaid the way it was overpaid. It's the only thing that I can say. I can also say that this did not only vent us during the quarter towards additional leases from private land owners, it's competitive prices, I will say, reasonable economic prices. I think we already made provision that we do not have to overpay.

[Emily Christy:]

Okay. And then turning to the international scene. You know a number of countries recently have higher interest in geothermal energy as a bigger portion of their country's electricity. What kind of opportunities do you see there as opposed to a year ago? Did you see a project portfolio shift towards international versus US or how do you look at that?

[Dita Bronicki:]

We definitely see increased activity on the international scene as well. We've seen to be very, very active. We hear Indonesia to be a very active. We don't see it yet but we hear that. Talking about it, they are not there yet, but I think it will supplement the US market. It's not going to be a shift from the US market to the International market. It's going to be a supplement.

[Emily Christy:]

Okay. Thank you very much.

[Operator:]

Thank you. Your next question is from Charles Fishman with Piper Jaffray.

[Charles Fishman:]

Good morning. On OREG 1, you indicated that the – we're experiencing lower availability. And is that coming off a pipeline. I would think that resources pretty well define, and I guess why would that occur and you expected on the other three facilities. You could address that. And I guess why is it not material to revenue? Were you able to just overcome it or is it just because it's so small?

[Yoram Bronicki:]

So, I'll start with the end. It is because the revenue is compared to the rest of the – or the contribution of the OREG facilities to our revenue mix is not high. And so this is why it is – the impact is not huge. And to answer your first question, there is a – there are historical numbers for pipeline gas flow but these numbers change and there are two things that – two main factors that can change them. One is additional competition from other or new pipelines and the other is really climate –the local climate where the gas is shipped to which is mostly I think Chicago area. And the combination of the two competitions and general gas consumption created a dip in the utilization of this specific pipeline that we're on. We think that this will improve in the foreseeable future, but at this time, of course, but the competition is a little more now, and it will affect the other – just like it affects OREG 1, it will affect OREG 2 though, the pipeline itself is not shutdown the way that the OREG 1 facilities are placed. Today, they actually maybe – they may be affected where in OREG 2 facility would not have been affected. But yes.

[Charles Fishman:]

But this really doesn't change your outlook on these recoverable energy generation units. You still think that's a very viable market?

[Yoram Bronicki:]

Yes, I think that there are many reasons towards additional uses of natural – additional use of natural gas. We view it as a way short term way to address greenhouse emissions. So, natural gas will be consumed. This is a net or this is a way to significantly reduce the amount of emissions that power generation is making. So, it certainly works hand in hand with anything else that happens in trying to deal with greenhouse gases.

[Charles Fishman:]

But there was no problems with the technology, was strictly a little difference in the resource than you were expecting.

[Yoram Bronicki:]

Correct. Correct.

[Charles Fishman:]

Thank you.

[Operator:]

Thank you. Your next question is from Angie Storozynski with Macquarie. Please go ahead.

[Angie Storozynski:]

Yes, thank you. I have two questions. First of all given that you continue buying geothermal acreage and I understand that you have to have some geological studies of the acreage to assess the geothermal potential of the lands you're buying. Would it be possible for you guys to disclose what is the geothermal potential of the land that you're holding? That's one. And secondly, how about your growth strategy? I mean I didn't hear you say anything about the 100 megawatts per annum long term growth, looking at your projects under development, it seems like you may reach this goal over the next maybe two years, longer term we don't have much of a visibility. Should we infer that those acreage – the acreage that you're buying is going to allow you to grow at 100 megawatts per annum or should we instead assume that you need to simply acquire some other players or potential existing asset to get to this 100 megawatts per annum, and any comments on that?

[Dita Bronicki:]

When we say 100 megawatts per year, we're talking of running all of them. We're not talking our positions, we are talking of running. And if you look even at this year or next, we will add according to our plan 180 or 190 megawatts in the two years. It's not 100, it's a little over 100 this year and a little less than 100 next year, but this will – and if you look our development portfolio for the next two years, it's also today as strong as between 140 to 250 megawatts for additional two years. So we are today close to that amount. The request to disclose what is the potential of each sites that we have, is something that we cannot warn. I think that (inaudible) is speculating, and not say giving fixed because in a thermal development, until you have (inaudible) two wells in the slim hole and fix them, you cannot really estimate what's the potential of the vessel. And every information which is given out is a grace or an assumption, but not an estimate. We are trying to (inaudible) a site that has a good potential of success, plus we have to know that not all of the sites will be successful. Some will succeed better than we expect and some will succeed less than we expect, so even fail. But we expect to get enough resources to support our goals in the years to come.

[Angie Storozynski:]

Okay, and one more. Given that there seems to be many megawatts to be added by the end of the year. Yoram mentioned that some of the developments may stretch until the first quarter of 2009 and we have the exploration of the PDC by the end of the year, and then even though as you mentioned the ITC is there, it reverts back to 10% only. How likely is it that some of the projects will not be eligible for those subsidies and if so, do you have any clauses in your signed PPAs that would help your margins in case the project do not qualify for the subsidies.

[Dita Bronicki:]

The answer is yes in some of the contracts, not in all of the contracts. I mean from the contracts that we have in 2008, there is only one which is sensitive to PTC. Clearly they will carry up, there's nothing to do with PTC because it is in Kenya, this project has nothing to do with PTC because it is in New Zealand. If it is only the North Brawley project which is subject to PTC, we currently have all expectations in the (inaudible) will be placed in service before the end of the year. And we hope it will. We also believe that PTC will be expanded in one form or another either this year or next year, but that's a different story. As to some of the agreements which are scheduled for 2009 and 2010, some of the US contracts do have a higher power rate in case PTC will not be available. But there is a mitigation above the ITC which I believe is always lower than the PTC, but the higher salaries is another mitigating factor which will make this project economical. I must admit that PTC is more economical than those mitigating factors, but it will still make them economical.

[Angie Storozynski:]

Okay, thank you.

[Operator:]

Thank you. Your next question is from Dan Mannes with Avondale. Please go ahead.

[Daniel Mannes:]

Good morning.

[Dita Bronicki:]

Good morning Dan.

[Daniel Mannes:]

Couple of follow-up questions. First on Steamboat, on the turbine replacement. Can give us an idea of the timeframe of the outage? Are you talking two weeks or are you talking of months, just to give us an idea of the potential impact in the quarter?

[Yoram Bronicki:]

It's roughly a three-month outage, though it is not a – it was not 100% of the plant, we ran for the majority of the three months, at least half of the complex was running. So it is – we have done a staggered or doing a staggered outage of the unit.

[Daniel Mannes:]

So, just so I understand, when you say half the complex, I mean it's two sets of two turbines at 2 and 3. So for instance, from unit 2 off which is I think 23 megs for three months and it will be the same thing for unit 3?

[Yoram Bronicki:]

Yeah, we started with Steamboat 3. In summer conditions, I think that the impact of taking Steamboat 3 down is close to 10 megawatts.

[Daniel Mannes:]

(inaudible)

[Yoram Bronicki:]

Yes. So we started with Steamboat 3 and we're now doing Steamboat 2.

[Daniel Mannes:]

Okay. Briefly just on the FX, just so I understand where the FX kicks in, is that because of the cost of construction on your product side which is really employees or is there some other FX through the system.

[Dita Bronicki:]

It's mainly the (inaudible) in the US, but not only we have some procurements in Euros which had an impact. We have activity in New Zealand which is impacted. We have activity in Canada which is impacted. But the majority is content.

[Daniel Mannes:]

Okay. And then last question on the power purchase agreements and on the mitigation to the higher rates. Is that really state driven? I mean, I guess the follow-on question there is I assume since the bilateral contacts in Nevada, you have more flexibility in that kind of negotiation, like you build those in the California contracts or is that not really an option?

[Dita Bronicki:]

Until now the California (inaudible) to do it.

[Daniel Mannes:]

You said until now, does that mean it's changing or does that mean...

[Dita Bronicki:]

I don't know.

[Daniel Mannes:]

Okay.

[Dita Bronicki:]

I don't know.

[Daniel Mannes:]

Okay, great. Thank you very much.

[Operator:]

Thank you. Your next question is from Brian Yerger with Jesup and Lamont.

[Brian Yerger:]

Good afternoon. Thanks for taking my call. I just have two questions on the international side. First could you give us any visibility on the financing announcement for the Sarulla project? Do you have any timing there or when that will be completed?

[Dita Bronicki:]

Up to a year is our expectation, I think we have said that the lead lender is going to be (inaudible).

[Brian Yerger:]

Okay. Second question would be, what is your competitive positioning in Kenya? I noted the President had announced very favorable towards more development of geothermal in Kenya. Do you have a lot of competition there? Do you expect it to, over the next couple of years, to secure some more projects in Kenya? What is your positioning there?

[Dita Bronicki:]

I think we are well positioned in Kenya because we have built a power plant in Kenya on our balance sheet six or seven years ago when no one was willing to do investment in Kenya. I think the question is will Kenya develop its geothermal (inaudible) and I think this has not been decided yet.

[Brian Yerger:]

Okay. Thank you.

[Operator:]

Thank you. Vijay Singh with Janco Partners.

[Vijay Singh:]

Hi good morning.

[Dita Bronicki:]

Good morning.

[Vijay Singh:]

My question is on OPC like transactions if you're looking to monetize tax credit. With the current PTC uncertainty and the financial conditions of some of your prospective investors who are probably taking write-offs of their own. Is that impeding in any way to do more OPC types of transactions on all?

[Dita Bronicki:]

The market is still there for tax monetization transactions. We are actually talking now about monetizing the value of North Brawley. The market is there.

[Vijay Singh:]

Okay. Okay, great. Thanks, that's all I have.

[Operator:]

Thank you. Your next question is from Ben Kallo with the Stanford Group.

[Ben Kallo:]

Hi guys. I had one follow-up question or actually two follow-up questions. Sales and marketing seemed to tick down quite a bit in this quarter. Is that something we should expect going forward?

[Joseph Tenne:]

Mainly related and we said it in the 10-Q which is with the (inaudible). It's mainly related to the product segment because most of marketing and selling expenses are related to that part. And since it went down this quarter, the expense is also down. It's something that usually would be straight forward in the next quarter.

[Ben Kallo:]

Okay. And then on I guess a broader question is, you talked earlier about the competition getting a little stiffer in securing land. How does that work? How are you seeing your investment returns look with that, and then also with the higher prices for electricity prices and then I guess higher costs for raw materials? So how does all of that stuff offset each other as far as your project returns go?

[Dita Bronicki:]

It's a mix bag of course. What we are seeing in the market and we can see it really clearly since the beginning of the LPA step out of this agreement that costs are going up and cost of this agreement price is going up. And the question is which one is going up faster and sometimes they match and sometimes they lag. We have done various things in order to mitigate those increased costs. For example, increase in a number of drilling rigs that we own. We substantially reduced our drilling costs as a result of owning rigs, there may be one-third and (inaudible) this quarter. On the other hand, we are seeing increased cost of material (inaudible) the land auction is a small part of it. It is not a big part of it. All in all, I think it will balance up.

[Ben Kallo:]

So as far as project returns go, I think what mid-teens is what we've talked about before. Is that similar to what you guys are seeing now?

[Dita Bronicki:]

Well, I don't remember that we said mid-teen. I think what we said our health in the United States (inaudible). Sometimes it's higher, but it's 6%.

[Ben Kallo:]

Okay, great. Thank you.

[Dita Bronicki:]

Thank you.

[Operator:]

Thank you. Your next question is from Charles Fishman with Piper Jaffray.

[Charles Fishman:]

Just a follow-up on the leases. Dita, you said the consultants in your own management was not excited about the quality of the leases. Is that the depth, the temperature, was all of the above, or was just in relation to the prices that they went for, or could you give us a little more color on that?

[Dita Bronicki:]

No, even before the prices, if you get which have restrictions on sources of the leases for example. It's a different quality than the lease which is unrestricted. The level of prior work which was done on the leases, where do we think is the center of the anomaly in which leases was too doubtful bid, all these factors will affect quality of the leases.

[Charles Fishman:]

You still have enough backlog of property though the Peetz additional rigs that you recently purchased fro quite some time?

[Dita Bronicki:]

Absolutely.

[Charles Fishman:]

Okay. Thank you.

[Operator:]

Thank you. Your next question is from Angie Storozynski with Macquarie.

[Angie Storozynski:]

Just one more question. I was just wondering we had a recent change in interpretation of the internal revenue code which basically clarified the participation of the utilities in renewable power partnerships. And do you feel that because of that you will be more inclined to co-invest with utilities in your geothermal plants or is it possible that they will eliminate potential tax equity partners given the fact that they do have large taxable incomes and they have large taxable bases to offset your production tax credits. Could you comment on that?

[Dita Bronicki:]

We don't know how the development will shape out, but we are the first geothermal company to do a joint venture with the affinity. (inaudible) project that was announced this year and just recently got PUC approval, and this is clearly the first partnership with the affinity. How much of it will be done in the marketplace, I cannot predict.

[Angie Storozynski:]

But do you think that we should assume that for instance your electric margins may in a way come down because having utility as a partner, there is a potential of transfer of risks and see the margins can compress. Is that –

[Dita Bronicki:]

I don't see any relationship between the two. No.

[Angie Storozynski:]

Okay. Thank you.

[Operator:]

There is time left for one last question from Michael Lapides with Goldman Sachs.

[Michael Lapides:]

Hi Dita, quick question. Kind of stay away a little bit from some of the operational items and revenue margin stuff, but I want to come back to financing. Can you talk a little bit about your financing plans back end of '08 through '09, you are sitting on a decent amount of cash while your free cash flow levels aren't so amazing, your debt to cap is relatively low compared to historical for you guys. Just kind of curious in terms of how you plan on balancing debt to equity etcetera to finance your growth?

[Dita Bronicki:]

I think we have a substantial amount of equity and certainly a low level of debt, but it's temporary. We are in the process of financing debt financing on a project bank level to project the Guatemala project Amatitlan, and the Kenya project, and we expect both of them to close mid fourth quarter or maybe Kenya may flip another quarter. We expect to do tax monetization transaction. (inaudible) but it's financing traditional financing. So, we see a good mix between our CapEx needs in the near term. The financings which are on the table in the corporate lines of credit that we have adds up to backup to all of that.

[Michael Lapides:]

Got it. Thank you.

[Operator:]

Thank you. I would like to turn the floor over to management for closing remarks.

[Dita Bronicki:]

I would like to thank you for your interest on this call. I think that it was a pleasure to have a high level discussion with all of you, and for your continued support in the company. Thank you all.

[Operator:]

Thank you. This does conclude today’s teleconference. You may now disconnect your lines and have a wonderful day.