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Ormat Technologies Inc. (NYSE:ORA)

Q3 2008 Earnings Call Transcript

November 6, 2008 9:00 am ET

Executives

Marybeth Csaby - KCSA Strategic Communications

Dita Bronicki - Chief Executive Officer

Yoram Bronicki - President and Chief Operating Officer

Joseph Tenne - Chief Financial Officer

Smadar Lavi - President of Corporate Finance and Investor Relations

Analysts

Ben Kallo - Stanford Group

[Neva Harvey] - Barclays Capital

Emily Christy - RBC Capital Markets

Ted Durban - Goldman Sachs

Dan Mannes - Avondale

Brian Yerger - Jesup and Lamont

Operator

Good morning. My name is Kelly and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Ormat Technologies Third Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be question-and-answer session. (Operator Instructions). Thank you.

Ms. Csaby, you may begin your conference.

Marybeth Csaby - KCSA Strategic Communications

Thank you, Kelly, and thank you all for joining us today. This is Marybeth Csaby with KCSA Strategic Communications, Investors Relations Consultant to Ormat Technologies. At this point, you should have all received the third 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, President of Corporate Finance and Investor Relations.

Before beginning, we would like to remind you that information provided during this call may contain statements related 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 the Company’s plans, objectives, and expectations for future operations and are based on management’s current estimates and projections of future results and 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 as filed with the Securities and Exchange Commission on March 5, 2008, and on the Form 10-Q filed for the Securities and Exchange Commission on November 5, 2008.

GAAP financial measures double Securities and Exchange Commission -- In addition, during this call, statements maybe made that include financial measured defined as non-GAAP financial measures by the Securities and Exchange Commission such as adjusted EBITDA. This measure maybe 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 the 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 and forecasting future 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 remind everyone that a slide presentation accompanies this call and can be accessed on Ormat’s website at www.ormat.com under the events link as found in the Investor Relations tab.

With that said, I would now like to 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 you many have. Dita, the call is yours.

Dita Bronicki - Chief Executive Officer

Thank you, Marybeth and thank you all of you for taking this time once again to listen to our call. I am pleased to be with you today and talk about another important quarter for Ormat. It was good quarter for our operation and it was a busy quarter with several exciting development.

Let me begin with some general information about to our business and at the end, I would like to discuss the current credit crisis and while we believe it will have minimal, if any impact on our (inaudible) growth trend. Following my comments Yoram will review operation, and then Joseph will review third quarter financial and as usually the Q&A session will follow our remarks.

Starting with Slide 4, total revenue for the third quarter was strong up 25.5% from the third quarter of last year. Electricity segment revenues were up 12.1% and our product segment was particularly is strong growing 71%. Despite the significant decrease in revenue net income remained at the level similar to last year primarily due to two factors. The weakening of the US dollar impacting activities outside of the United States and 1.5 million non-recurring consulting and legal expenses related to an acquisition which did not materialize.

Moving to Slide 5, we completed our Phase I small project in New Zealand and are moving closer to commercial operation of the Olkaria in North Brawley power plant. This will bring our portfolio to approximately 500 megawatt by the end of the year, an increase of approximately 100 megawatt from last year. (Inaudible), I would like to mention the recent OFC note holder approval for the following activities.

We received the (inaudible) to replace one existing Mammoth plans with the more efficient and larger plant that would increase current capacity at Mammoth by up to 30 megawatt. We can also at some point, explore experimental solar project to enhance the capacity at our Ormesa and maybe always to (inaudible). And finally, we have the consent to monitor the production tax credits for Ormesa and Burdette. Let’s emphasize that this is not only productivity, it is only a (inaudible) to do it once we decide to do full.

On the foundation for future goal, we completed solar production related to our land position and secured approximately 20,000 acre of the federal land in Nevada and California, and as already mentioned in our previous call we secured geothermal rights for approximately 35,000 acres of land to explore geothermal energy in the vicinity of Anchorage, Alaska. We believe Alaska holds great potential for geothermal. We are confident that our technology and knowledge base is well up to the task of meeting some of the challenges that are unique to this region.

And on slide 6. During the quarter, we continued to demonstrate that Ormat is the leader in technology innovation. We have several projects, in particular this quarter that we nice and so important.

The first is the geothermal energy project with the Department of Energy to test a small geothermal power unit at a producing oil rig. We have begun to generate power from this well. This fuel for energy is intended to increase productivity and extend the longevity of [OREG].

The second project relates to EGS. The DOE has chosen Ormat to demonstrate the viability of EGS with regard to $3.4 million rollout to improve both in the Brady facility using the EGS technology.

The third project to create energy using the temperature differential vaporization process at a liquefied natural gas regasification was initially announced back in2006 with ENAGAS, Spain. We have recently received the notice to proceed from ENAGAS. The project has long been under development and we are pleased to finally be able to begin manufacturing in parallel to continue R&D activity.

Before I talk about how the current market impacts Ormat, I would like to first to turn the call over to Yoram for review of operation. Yoram?

Yoram Bronicki - President and Chief Operating Officer

Thank you, Dita, and good morning everyone. I would like to begin with slide 8.

Generation for the quarter was up 1.3% to about 508,000 megawatt-hours, but for the first nine months it is up 10.9% to about 1.62 million megawatt-hours. The increases in our overall US generation resulted from both new equipment that was put in service and improved performance from existing power plants. I’d like to mention a few events which offset our overall US power generation.

Generation out of the Steamboat 2 and 3 plants was low this past quarter as we are in the midst of the plant’s upgrade. The upgrade was successfully completed in early October and included the replacement of the four regional waterflow expenders with the direct drive gearless 11 megawatt turbine, each designed and manufactured by Ormat specifically for geothermal use. With the completion of this project and the installation of our field proven turbines, we are seeing significant improvement in both the performance and availability of the two plants which have been plagued by high operating expenses and low run time for a long time.

In addition, we experienced decreased [uptick] from the Ormesa complex as a result of the generator failure. Repair work was completed in the Ormesa complex is now back to its full capacity. Also, the mild summer in the Midwest caused lower threshold loads, which resulted in a lower than expected generation out of the OREG 1.

I also want to mention the change in the energy rate for two of our plants, Heber II and Puna. In Heber II, the “Adder” which is an additional energy rate pay down their projects PPA and has expired. And as of August of this year the energy rates for the Heber II is similar to the energy rate traded for all our SO4 contracts of approximately 6.2 cents per kilowatt hour. Puna is our only plant that does not have a fix energy rate. Instead the rates were completed in a quarterly basis, on the short run awarded cost formula that is tied to the cost of oil with the certain flow. However the PEC has changed the rate adjustment from quarterly to monthly calculation. This change will slightly increase the volatility of the Puna revenue.

Furthermore, I want to point out that while we have had the benefit of higher rates from Puna due to exceptionally high oil prices through the summer of this year, this trend has been reversed and the cost have dropped to the levels of early 2007.

Slide 9, address the development and construction. We finished the construction of an 8.2 megawatt net power plant located in Nicaragua in New Zealand, transmission lines still needed to be completed for the power plant to search for output. As of right now, we own 49% of the project and we expect to exercise our option to purchase the remaining 51%.

We had completed the construction of Phase II of the Olkaria III 35 megawatt project. The project has begun to startup phase which we expect to complete in this current quarter. In addition the 50 megawatt North Brawley project is in final stage of construction. Construction and drilling activities are proceeding in parallel with the projects startup phase. We expect to complete these activities by the end of 2008 as well.

Turning now to an update on our exploration activity on Slide 10. In the two years, that we have been doing Greenfield exploration work in Nevada and California, we succeeded in developing some of the resources, the most notable one is Brawley; however, as is the case with exploration activity not all resource development turned into commercial project. So the resources in Nevada are in various stages of exploration. And at this time we cannot say how many of them will support commercial power plant. These resources are not being commercially viable our plants for future growth will have to be modified.

We have started to develop the East Brawley field which is adjacent to North Brawley. North Brawley is an example where exploration and development were carried out in parallel with power plant construction. Based on the preliminary testing of the East Brawley wells which shows the conservative size for the power plant, which will rebuilt with an initial capacity of 30 megawatt. Once the East and North Brawley well fields are operated simultaneously, we will determine how much more capacity can be added to East Brawley.

Looking at Slide 11, these are the exploration project that we currently have under way to support growth beyond 2009. In the Nevada exploration work Jersey Valley appears to be a successful development. We completed the drilling of three wells and are now in the process of flow testing them to determine the well field size.

In Carson Lake following an unsuccessful first well we are now drilling a second well. The data we received on the temperature of the second well is encouraging, but it is too early to determine the potential of the resource. Two more sites in Nevada are in earlier stages of development and we do not have yet data to determine the potential of these two sites.

Our original plan was to complete three projects in Nevada in 2010, but it seems like the resource confirm to date in conjunction with burning process can support only one or two projects. Additional capacity in California for late 2010 or early 2011 is also already under development. An excellent development in this area that occurred this last quarter has taken the ownership of our third drilling rig that operates on the Mainland.

Slide 12, summarizes our growth plans. We plan to add approximately 70 megawatt in generating capacity by the end of 2009. 22 megawatts will be added from OREG 2 recovered energy projects, we are in advance construction of two 5.5 megawatt plant which will be completed by the end of 2008 or early 2009, and are at early stages activity of the remaining two plants.

Also in 2009, we planned for the enhancement program to our Puna plant, which we expect to be complete by the end of 2009 and 4 megawatt from the [Peach] recovered energy project which is scheduled to be commissioned in early 2009, also as we already mentioned 30 megawatts will be added from the East Brawley project. Additional 4 megawatt will be added from exercising our option to acquire the remaining 51% interest of the GDL project in New Zealand. 5.2 megawatts from the GRE, REG project in Minnesota, which is expected to be commissioned in late 2009 or early 2010. Based on the exploration results and updates we provided today, we plan to complete in 2010 and 2011 projects with the potential capacity of between 150 and 200 megawatts.

Slide 13, describes the product side of our business. This quarter we increased our product backlog, which stands at $165 million, out of which 19 is subject to a [noise] to proceed.

Thank you. And I will now turn the call to our CFO, Joseph Tenne.

Joseph Tenne - Chief Financial Officer

Thank you, Yoram and good morning everyone. Starting with Slide 15, for the third quarter of 2008, total revenues were $99.7 million, a 25.5% increase from revenues of $79.5 million in the same quarter of 2007, consisting of the 12.1% increase in revenues in the electricity segment and 31% increase in the product segment. Total cost of revenues was $68.5 million compared to $50.5 million in the same quarter of 2007.

Turning to Slide 16, total electricity revenues for the third quarter of 2008 were $68.8 million up 12.1% from $61.4 million in the third quarter of 2007. This increase is primarily attributable to $3.4 million from additional revenues generated in United States as a result of increasing our generation capacity, increasing the energy rate in the Puna project due to higher oil prices and then a net increase of $4 million in revenues from our international plants, Amatitlan in Guatemala and from our Momotombo project in Nicaragua. Revenue were offset by a decreasing generation of the Steamboat 2 and 3 project as a results of the replacement of its turbines, and a decrease in the generation of Ormesa OREG 1 project as Yoram mentioned earlier.

Cost of revenues in our electricity segment was $44.7 million as compared to $35.5 million in the third quarter of 2007. The increase in cost of electricity segment revenue resulted mainly from cost relating to new project placed into service and the write-off of the old Steamboat 2/3 turbines.

And in our product segment on Slide 17, total revenues for the third quarter of 2008 were $30.9 million, a 71% increase over total revenues of $18.1 million in the same quarter of last year. Revenues from the product segment in the third quarter increased inline with our expectations for the whole year. Total cost of revenues attributable to our product segment for the third quarter of 2008 was $23.7 million as compared to $15 million for the same quarter last year. This increase is attributable to an increase in our products revenue as well as to a different product mix.

Now to Slide 18, combined gross margins were 31.3% in the third quarter of 2008 compared to 36.5% in the third quarter of 2007. Gross margin for the electricity segment was 35% for the third quarter of 2008 compared to 42.3% for the same quarter last year. Product segment gross margin was 23.2% in the third quarter of 2008 compared to 16.7% in the same period last year.

Moving to Slide 19, in the third quarter of this year we reported net income of $15.9 million or $0.35 per share, basic and diluted as compared to net income of $15.8 million or $0.41 per share, basic and diluted for the third quarter of 2007. Such increase in net income was principally attributable to $6.1 million decrease in interest expense and $1.6 million increase in minority interest. This was partially offset by $2 million of impairment of auction rate securities and this amount is including $1.4 million which was previously classified in other comprehensive income and $1.9 million a decrease in operating income, $900,000 increase in income tax provision, 500 million decrease in interest income, 900,000 increasing foreign currency translation and transaction losses and $1.1 million increasing equity income during this period.

Net income for this quarter in 2008, includes stock-based compensation related to stock options of $1.1 million, as compared to $1 million for the same quarter last year.

On Slide 20, adjusted EBITDA for the quarter was $36.6 million as compared with $38 million for the same quarter of 2007. Adjusted EBITDA includes consolidated EBITDA and the company's share in operating income and depreciation and amortization, totaling $1.3 million and $4.5 million for the third quarter of 2008 and 2007 respectively related to the company's unconsolidated subsidiaries.

Turning now to Slide 21. As of September 30, 2008 the company had cash and cash equivalents and also marketable securities of $38.1 million compared to $60.7 million as of December 31, 2007. During the year most of our cash was used to fund capital expenditures and to repay long-term debt to our parent and to third party.

In the next accompanying slide, slide 22, we present our total long-term debt as of the end of the third quarter of 2008 and the payment schedule.

Moving now into slide 23, on November 5, 2008, Ormat's Board of Directors approved the payment of quarterly 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 December 2, 2008 to shareholders of record as of the close of business on November 19, 2008.

Thank you all and I would like now to turn the call back to Dita for final remarks before we move on to Q&As.

Dita Bronicki - Chief Executive Officer

Thank you, Joseph. Let's turn now to slide 25. The global financial system has [roughed] out into a bulling time. We’re in the way in the financial market we have settled things to be a matter of much debate. As for Ormat we are the same company today as we were before.

The fundamentals of our business are strong and we believe are likely to remain focused. And given that, there are four points I would like to make to support the statement. The first point is that we are an established company that generates operating cash flow that we use to fund goals. This cash flow is secured by long-term part of this agreement most of them was to split and some of them was a bit in escalation sector.

Second, we have several incremental land subscribing; the total is $310 million from various commercial banks located around the world. Third, we have a healthy balance sheet. Our long term debt is amortized over the life of the loan. So no other financing is needed and there are no other loan payment and we also have the ability towards debt financing as our project of strong project using [oven] technology and having the strong funds. We believe that some project will continue to have excess to debt financing. We are now negotiating the financing for Olkaria, Amatitlan and Brawley, all closing to our original plant. Between financing proceeds inline of client’s (inaudible) we have enough space to proceed with our investment.

Let me finish the discussion on debt financing by saying that why we are expecting to see an increase in financing cost. We have already started to experience a decrease in the fuel prices which may have played what has happened in the credit markets.

And finally the fourth point, the recent expansion of the PTC for Geothermal for two years, which was a last minute addition to the revised [bail of bill] that was past in early October. Ormat has been able to successfully monetize these tax credit to our advantage and now we will have the ability to continue to do so for another three yields along if it is further expanding. I believe the smaller pool of players involved in these type of transaction due the steep market decline in sales, prevailing banks and (inaudible). There are still a number of entities that are more than willing to participate in this type of financing. In general they need for renewable energies form climate changes still an issue and will be for quite some time continuing to provide that with growth opportunities.

To summarize, please turn to the next slide in which we see that the sources of cash that I mentioned will be sufficient to support our CapEx requirement for the remainder of 2008 and the full year of 2009. We plan to invest $80 million for projects that I previously mentioned for the remainder of 2008 and additional 286 million for 2009.

In addition our operating project of capital expenditure budget of approximately $64 million for the rest of 2008 and 2009. We expect to invest $49 million for the rest of 2008 and 2009 in the exploration. Approximately $5 million are budgeted to invest in machinery and equipment for the same period till the end of 2009. To recap, our capital sources to support this $484 million of CapEx requirement are approximately $615 million, which means they exceed our move.

As you return to the guidance on Slide 27, we expect our electricity segment revenue for 2008 to be $260 million. We also expect an additional $9 million of further 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 are (inaudible) as we currently expected 2008 product revenue will be between 78 and $80 million.

I would like to thank you for your participation in today's call and your continued support for Ormat. We are extremely encouraged by the (inaudible) to us by the industry as well as confidence in our ability to execute our business strategy. We look forward to fields of communication.

Operator at this time, I would like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ben Kallo with Stanford Group.

Ben Kallo

Hi, good morning.

Dita Bronicki

Good morning Ben.

Ben Kallo

So you talked about the financing through the tax amortization I assume that’s probably you are working on Brawley, because that’s the only US project yet you have to complete in the rest of the year. What type of entities have expressed interest, are the bank still or there are other types of companies out there that need this tax credits?

Dita Bronicki

Bank and insurance companies.

Ben Kallo

Okay. And then with the improvements at Steamboat and then one nerves to proceed I saw there is also talk of tax amortization there. Can you get cash credit as you improved some of these plants? Are you eligible because of the improvements?

Dita Bronicki

Yes. The law unable to get -- that a PTC when you do a repair for plant. And Brawley is that if the improvement is I believe 80% of the value then it is eligible to PTC.

Ben Kallo

And so can you estimate how many megawatts you have available for that?

Dita Bronicki

For PTC?

Ben Kallo

Right, outside of the new plants coming online so Steamboat upgrade…

Dita Bronicki

There is nothing that we can talk about. If you are only failing to the consent felicitation and worked out the PTC, which are not -- which are variable, it’s mainly their best plant what used to be Galena and Steamboat and the Ormesa project which was completed in 2007, and then you have new equipment and you have a recovery. That really will have a combination of new equipment and like powering, (inaudible) not eligible to PTC.

Ben Kallo

Okay. And then because of the current credit environment, how is the market for acquisition, you are viewing that with some of the small players that are doing stalled out now in their development efforts.

Dita Bronicki

It’s a good question, and I am not sure, exactly how to answer it. I think the opportunities will come for acquisition, I cannot pinpoint which one of them, but they think that it will open up opportunities for acquisition.

Ben Kallo

Okay. Thank you.

Operator

Your next question comes from the [Neva Harvey] with Barclays Capital.

Neva Harvey

Thanks for taking for may question. My first one is with regards to financing. And it sounds that you got an additional 150 million in credit lines, brining totaled in 2010, just to clarify, these are untapped or you haven’t got anything on them yet?

Dita Bronicki

Actually, we've drew 25 million.

Neva Harvey

Okay. So you have drawn 25. And can you give us some additional color in terms of the terms of you know, when your expire is just based on for (inaudible) can you just give us some additional details?

Dita Bronicki

It’s (inaudible) for beyond using one yield, they are similarly LIBOR plus in margin, some are modified LIBOR plus less than margin, but it's in fairly commercial terms. No we didn’t see any major change.

Neva Harvey

Okay, thank you. But my second question is with regards to CapEx. At the end of Q2 you forecasted that for the rest of the 2008, you are going to spend around 272 million. When I backed out CapEx spending for this just recent quarter, turn to about 120, and then you disclosed that your forecast spending of about 100 million for the rest of the year? I was wondering what happened I guess to that 50 million different, is that being the [sprint] to '09, is that just being kind of entirely, if you could just tell us a little bit more what's gong to happen with that?

Dita Bronicki

It's probably timing different. So some of the actual payments will be deferred by a quarter.

Neva Harvey

In terms of the actual expenditures on your part?

Dita Bronicki

Pardon me.

Neva Harvey

In terms of the actual expenditures on your part that any different until just the later part?

Dita Bronicki

I would say the total -- there are two things, #1, I couldn’t follow the number that you have noted. So I am not sure and I am answering exactly to your question, but when we estimate CapEx, we estimate as of the time being of the expenditures, sometimes it happens when we expect it, sometime it is because of payment or because of timing of doing the expenditures. It may shift from a quarter to quarter and some time from yield to or over a yield. There is also a small change in our project, (inaudible) 2009, it's almost you noticed it, but once you analyze, we see that it’s really has been slightly reduced in size. The reduction in size or it reduces the capital expenses which are required for it. So it’s probably a combination of all of these factors.

Neva Harvey

Okay, cool. Thank you very much.

Dita Bronicki

Welcome.

Operator

Your next question comes from Emily Christy with RBC Capital Markets.

Emily Christy

Good morning.

Dita Bronicki

Hi, Emily.

Emily Christy

All my questions have been asked. But just if you could give a little more color on the potential M&A in terms of what Ormat will be looking for geothermal rights or producing assets or any kind of more color as to how you are looking at that?

Dita Bronicki

Well, looking at it with the open eyes, it's early to say, which means we are -- our architect for growth has not diminished. And we are willing to (inaudible) as well as in us this can still be the (inaudible) the same way as we have acquired in Alaska, I would say from the state, as well as it’s (inaudible) will be very interested in it. So it's really the entire range.

Emily Christy

Okay. Thank you very much.

Dita Bronicki

Thank you.

Operator

Your next question comes from Ted Durban with Goldman Sachs.

Ted Durban

Hi. Thanks for taking my question. Just a question on utility request for proposal. What specific RFPs for renewables are outstanding right now in Nevada and Southern California? And can you talk about when those results might be known?

Dita Bronicki

In the NLC, the other utility has an RFP, which needs to be submitted next week. We have no idea when will that going to come out. I am not familiar with anything.

Ted Durban

And how big is the energy one?

Dita Bronicki

NPL Energy?

Ted Durban

I am sorry. How big is the request?

Dita Bronicki

I mean, it’s fairly mixed. I mean, you can – I don’t how many performance are they going to raise and how many are they going to issue is not something that was disclosed in my knowledge.

Ted Durban

Okay, great. I guess that’s all my questions. Thanks.

Dita Bronicki

Thank you.

Operator

Your next question comes from Dan Mannes with Avondale.

Dan Mannes

A couple of follow-up questions, first on the product segment. Based on our estimates, this is probably the gross margin quarter you have seen in product probably in a year-and-a-half since I guess you started to see some margin compression there. Was there anything unique this quarter? Was this better pricing maybe on some prior deals? Or was this just sort of a lumpiness related to the better revenue in the quarter?

Dita Bronicki

It’s a little bit, Dan. We predicted that in the next – in the last two quarters of the year, the gross margin is going to be a little higher than in the first two quarter, but it was a little higher than normal also, so you have both of them in my answer. So we are not able to be more specific.

Dan Mannes

But you mentioned also at the end of your comments, you are starting to see maybe some softening on material prices. I don’t know that you saw in Q3, but does that give you a little bit of a better outlook on the gross margin for both that business and as well as the capital side of the power business?

Dita Bronicki

Yes, but not immediately. First of all in Q4 we didn’t see consequently. Q3 was a crazy quarter with respect to material cost and we are seeing now some softening of material cost but its impact on our either product segment or construction is going to stay – I don’t know at least six months if not tomorrow because for the immediate projects we have already acquired in material and (inaudible) mid to high prices.

Dan Mannes

Understood. And then just on a similar topic, on FX, obviously I had a little bit of pain there, about $1 million. Is that million related to transaction or is that a translation issue? And can you just walk me through a little bit where that comes from and should we be looking for that to turnaround since the dollar strengthened moving into Q4?

Joseph Tennes

It’s translation difference, which is the term we are using in accounting, but it includes exchange differences, it also results from hedging transaction that we are doing.

Dan Mannes

But I mean, given that most of your manufacturing recruitment is occurring in Israel and the dollar is strengthening versus Sheqel, should we be assuming both your relative cost of goods for both construction for the product segment, for the power segment, should improve just from currency a lot?

Joseph Tennes

The answer for is yes, if we are buying in Sheqel but part of it is bought in dollar. Whatever is bought in Sheqel and the cost of labor, the answer is yes.

Dan Mannes

Okay. And then just going back to the credit line side. You mentioned on the credit line, these are normal commercial terms, but first of all, the 25 million, was that drawn down in Q3 or in Q4?

Joseph Tennes

In Q4.

Dan Mannes

Okay. So at the end of Q3, it was still undrawn?

Joseph Tennes

Correct. The 310, part of it we have received in Q4 as well. The 150 we got in October and in November as well.

Dan Mannes

Okay. And are there any financial covenants on this that we should be aware of?

Joseph Tennes

Yes, there are, but relatively normal covenants, not light covenants, not something very firm fit.

Dan Mannes

Okay. And then just one final question, we saw an uptick in R&D expense in the quarter, is this related to some EGS projects or is this similar to the work you guys are doing?

Joseph Tennes

Its EGS and NMG think that it will – and we explained also in the 10-Q.

Dan Mannes

Which will be filed?

Joseph Tennes

It was filed already.

Dan Mannes

Okay, thank you.

Operator

Your next question comes from Brian Yerger with Jesup and Lamont.

Brian Yerger

Good afternoon, thanks for taking my questions. Just a followup on the last question on the R&D related to the EGS, do you see that is ongoing charge, are we significantly looking at higher R&D expenses going forward?

Dita Bronicki

The higher R&D expense is mostly becoming form EGC, EGS is a small part of it because we have substantial participation by the Department of Energy in these expenses and what we are showing financial statement is only the net amount. But allowing two EGS project internally we clerically increase the expenses, and the 4.4 million rollout which is the grant that were referred to us on the second EGS filtrate are on close are going to be in, old bills say -- I don’t know, $800 million and they are going to be incredible really, even half I believe all of your note affiliates, we are probably a year and half or two.

Brian Yerger

Okay. So it was more a significant pump on time and just small rise on going forward?

Dita Bronicki

Related to EGS.

Brian Yerger

Right. Okay, you may or may not be answer this question, but on the field acquisition, could you give us any color as to what you are looking for, was it a resource, was it a plant or was it a national company?

Dita Bronicki

Unfortunately, we are under confidentiality and we cannot disclose it.

Brian Yerger

Okay, that’s right. Okay, thank you.

Operator

(Operator Instructions). Your next question comes from Ben Kallo with Stanford Group.

Ben Kallo

Two followups. On the GDL, could you walk us through the terms or how the acquisition will happen remaining 49% and the price of that?

Dita Bronicki

There is a nominal payment for the option which is the immaterial all the cross of this will be included in our financial statement, because we have finance the construction of the project and because of this we included maybe, Joseph can explain more of the counting for it, but it wanted an impact on the go forward basis.

Joseph Tenne

What is done with consolidated it seems older (inaudible) 46 hours. Even though we have only 49% we consolidated. We finance the construction, so we have all the risks and the adoption, and as we said we are going to exercise this. So the amount that we paid for this is really minimum.

Ben Kallo

Okay, great thank you.

Joseph Tenne

You are welcome.

Operator

At this time, there are no further questions. Are there any closing remarks?

Dita Bronicki

Other then thank you all and let's continue to contemplate on renewable energy, all of us together. Thank you very much.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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