Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Richard Putnam – Director, IR

Brent Cook – CEO

Marty Petersen – CFO

Steve Brown – EVP, Construction and Engineering

Patrick Schwartz – President

Analysts

Elaine Kwei – Piper Jaffray

Raser Technologies, Inc (RZ) Q4 2008 Earnings Call Transcript March 18, 2009 4:30 PM ET

Richard Putnam

(Starts Abruptly) access through the link that was posted on our press release. We encourage you to follow along with those slides as part of our discussion. Right now, everybody is in a listen-only mode. If you want to be able to ask questions or talk on the phone you’ll need to also call into the conference call. That is, press the info button at the top and that number and ID are there so you can call in.

We’ll be taking a number of questions and in fact, there has already been a number of questions posted on this call and we’re trying to address as many as those as we possibly can during this time. Before we begin, I would note that this webcast is being recorded and will be archived and available at this website and we’ll also put it on our RaserTech.com website as soon as we can get it loaded there.

The final housekeeping item is the obligatory cautionary language that you’ll see on slide number two. We push over to that right now so you can see that. During this discussion, we expect that there maybe some forward-looking statements as defined by the SEC. These forward-looking statements are based upon information that’s currently available to management and maybe subject to certain risks and uncertainties. We would encourage you to become familiar with these risks and uncertainties, which are discussed in the company’s filings with the SEC and these filings can be accessed on our website at RaserTech.com.

Before I turn the time over to Brent to welcome you, I’d like to introduce those that will be participating on our webcast today – Brent Cook, our CEO; Patrick Schwartz, our President; Marty Petersen, Chief Financial Officer; and Steve Brown, our Executive Vice President of Construction.

I’ll now turn the time over to Brent.

Brent Cook

Thanks, Richard. I appreciate you introducing us and taking a few moments to go through those housekeeping items. We welcome you to the fourth quarter 2008 conference call for Raser Technologies. We appreciate your interest and your involvement. We’ll try to be concise and to the point here so that we can get as many questions as possible and I’ve asked Marty Petersen to walk us through some of the financial numbers to begin with. And after that, I will take the opportunity to explain further where we are at, and then perceive some of the questions that I think are going to be asked, and hopefully, do an outline that will be a good explanation of the company’s vision and where we are going.

So, Marty, would you go ahead?

Marty Petersen

Sure. Thanks, Brent. This quarter was a very active quarter from an accounting and finance standpoint. Among other things, we completed the major construction items of our first geothermal power plant in Thermo, Utah. As I have stated before, the Thermo plant is presented on a consolidated basis for GAAP accounting purposes. We believe that in general our other plants will also be consolidated. We will, however, need to do the analysis on each plant and the financing structures finalized for each of the plants.

Given that we expect to finance each of these plants separately on a non-recourse basis to Raser, the consolidated presentation has nuances that can be a little bit confusing on the purpose. I will try to identify for you those issues today. The result of consolidating the plant level financials on the P&L is that we will show all power sales revenue and plant expenses on the income statement. For the balance sheet and cash flow statement, you will see the plant level assets and liabilities, capital expenditures, et cetera.

However, even though the plant level debt appears on Raser’s balance sheet, remember that it is non-recourse to Raser parent and we have labeled to that as such on the balance sheet. As you look at the income statement on slide three, I’d like to point out a few items. One thing to know in the slide is that for the quarterly results, we show the sequential quarters of Q3 against Q4 rather than Q4 of last year against Q4 of this year since we feel the sequential quarter comparison is more relevant.

Although we began generating electricity at the Thermo plant in the fourth quarter, this was considered test power that was generated as we began testing the units. As a result, there was no revenue recorded for that quarter in the power systems segment. Our total operating expenses increased $21.8 million for the year and $12.2 million for this quarter over the September quarter. Most of this increase is non-cash. For the year, 79% or $17.4 million of the $21.8 million increase was non-cash.

The largest non-cash component is a $13.6 million impairment we took on three wells. This includes the well we drilled at our Truckee, Nevada site. While the well exhibits characteristics suggesting that it could be used in a power plant at the site, we determined that we probably wouldn’t develop the Truckee site for a while as we focus on some of our larger resources. As a result, we felt it prudent to take an impairment charge on that well.

The next well is the first one we drilled at our Thermo site. This well exhibited very favorable characteristics, but became encumbered with hardware down the hole. After much deliberation, we decided to impair this well and drill a new one just a few yards away. There is another well – another Thermo well that is a marginal well that we finished in the fourth quarter, but given the other wells that we have at the site, we felt that it is less likely that we will use this well. Therefore, we determined that taking an impairment charge on the well was more prudent and a conservative decision.

Regarding general and administrative expenses, you can see that we reduced these expenses slightly for both the year and the quarter. Power project development is the expense category in which we include all of our geothermal expenses including power systems personnel, exploration costs, and professional services from third parties for the geothermal operations.

As you would expect, we saw a significant increase in the year as we ramped up our geothermal operations. I want to also point out however that for the fourth quarter, these expenses decreased by almost $1 million primarily because the prior quarter included costs associated with completing the Merrill Lynch umbrella financing structure. The $1.4 million increase in research and development for the year is primarily related to the PHEV project we are working on with FEV and one of the big three automakers.

Minority interest is broken out into two lines, but it all relates to the Merrill Lynch tax equity interest in the Thermo plant. My apologies in advance for a complex explanation of what these numbers represent. But as part of our agreement with our tax equity partner, we agreed to a target IRR for them on the project.

At the end of each quarter, we assume a hypothetical liquidation of the Thermo 1 assets. The minority interest charge is largely the result of a contractual assumption that Merrill Lynch receives their target IRR on the investment at that time. The $5.3 million is a large number because we are measuring it at a time when the capital costs have all been incurred, but the plant is not yet generating the tax benefits for Merrill Lynch.

Assuming the plant operates as expected, you should see this minority interest number turn positive. However, because of new accounting rules that we went – that went into effect on January 1st of this year, this number will likely not be included in the earnings per share calculation going forward. The second minority interest number is just Merrill Lynch’s share of the Thermo operating loss. So, you can basically net those two minority interest numbers together.

Turning to the balance sheet on the slides four and five, I want to discuss a few items that might be helpful with things otherwise may not be apparent. In addition to the $1.5 million in unrestricted cash on the balance sheet, we ended the year with $27.5 million in restricted cash plus an additional $10 million in equipment deposits. The restricted cash shown in four lines on the balance sheet that is held for certain construction and well field development activities at Thermo and for the payment of coupon payments of our convertible notes that we issued last year. We also have a $15 million line of credit in place.

The construction in progress account totaled $74 million at year-end. This is comprised of approximately $54 million for the Thermo 1 plant, $18 million for the Lightning Dock project in New Mexico, and $2 million among other projects. Most of the major equipment items have been delivered to the Lightning Dock site and are reflected in that number.

Power project equipment is a new line item on the balance sheet this quarter. This represents geothermal equipment we have taken delivery on that isn’t assigned to a specific project at the moment. This is primarily made up of the UTC power generating units.

The other item I want to highlight is the accounts payable and accrued expenses. You’ll note that the balance is $64 million. Of this total, $33 million or 50% of the total is owed to UTC for power generating units we have received for projects other than for Thermo No. 1. You’ll recall that our agreement with UTC is that this amount isn’t due and payable until we close the project financing on the respective plants those units are associated with, and a portion is held until the completion of certain milestone tests on the plants.

An additional $8 million or 13% of the total balance is also owed to UTC for the Thermo power generating unit and is payable after certain milestones. These payments will be made from the restricted cash on the balance sheet and that has already been funded.

You can see that the financials reflect a ramping up of the business. The current economic environment presents many challenges to most companies. Despite the challenges, I believe we have made tremendous progress towards our goals. Besides that, we have a number of external factors going our way in the form of government stimulus and incentives and the overall clean tech environment. We intend to take full advantage of these benefits in funding our future development.

I also want to reiterate though that we do not anticipate financing our projects through the equity capital markets. Rather, we intend to tap government incentives, prepaid power purchase agreements, joint venture financing, and other means.

Brent Cook

Thanks, Marty. I appreciate that update on the financials. You’ll remain around on the call. We’ll have you Marty, available for questions if there are any on the financials.

I’d like to take a few minutes now and outline the developments in Raser. First, our discussion should be focused, I think, on the geothermal or power systems division. Probably, the best approach to this is to revisit the development of timeline regarding Thermo. You’ll recall that we broke ground in May and began construction in June of 2008. The major construction of the plant was actually completed by October of 2008 and the first test energy was generated in November, and 49 of the 50 units were tested by the end of the year by December 31st of that year.

However, what a lot of people who may not be aware of is by February of 2009 the local utility has finally completed their SCADA installation, which is the supervisory control and data acquisition equipment necessary and this paved the way for us to begin our true ramp-up. We’ve been able to operate all aspects of the plant now and are extremely pleased with the construction and operations of the plant. All of the 50 units have been formally tested and commissioned individually and we’ve been able to operate on a sustained basis, utilizing two of our wells now for several weeks at about 3.5 to 4 megawatts.

Recently, we tied in a third production well just this past week and we will begin utilizing the additional capacities to run this well in the near future. We also completed drilling of another well near the plant. After we have cleaned the well and completed testing and evaluation of this well, we will also tie this well in. And piping to this well is minimal since the well is drilled about 300 to 400 feet from the plant.

We will always seek for refinements and improvements in the plant as time goes by, but our current focus is to complete the remaining piping of the well field as expeditiously as possible and we are very pleased with the plant and have minimal punch list items that need to be addressed.

Steve Brown is here with me. I think with regards to punch list items, Steve, you want to give them maybe an idea of some of the remaining items that are to be done and status of those?

Steve Brown

Sure, Brent. The remaining items that we have are associated with pipe insulation, typically we insulate the geothermal pipe to keep the heat until it gets to the plant and just given the nature of how we did things that (inaudible) wrapped up right now and then we have our electricians still onboard helping us finalize the instrumentation and control of the plant.

In general, the plant was constructed very efficiently and we had a minimal punch list items and (inaudible) corrective action items that needed to be taken. So, we’re real happy with how things went there.

Brent Cook

That’s good. And on that instrumentation, the plant’s degenerating units are operating in their normal mode, but what you are doing is bringing all those into one control room. Is that correct?

Steve Brown

Yes, we have to gather all the operating data on the 50 units and bring it into one central data storage area that the operators and also United Technologies can help monitor the performance of the plant.

Brent Cook

Okay. And I would just emphasize that that’s mainly for data collection purposes that the plant can operate as is and we’ve received dozens and dozens of visits and complements from various power companies, governmental officials, and interested geothermal participants.

Most continue to be amazed at the speed that this plant has been able to be (inaudible). However, I recognize that most people here are focused on sales and ramp-up and we now – and I would like to speak to that for just a moment. We now have six production wells that are available to us and two, possibly three reinjection wells depending upon the – one of the impaired wells available for the project.

We purposefully drilled some of these wells near our Thermo 2 location or in Swing well positions. Which well we utilize depends upon the testing of the most recent well that was completed. As I mentioned, we just tied in the third production well to the plant and will begin using that water soon. We’ve also completed the piping with regards to our second reinjection well and this has allowed us to feel very comfortable about the ramp-up process now.

Now, a brief explanation of the Thermo resource. It’s been determined that the area we control at Thermo is an unusually large geographical area and resource, what I would call moderate heat, and it contains a large amount of water flowing in various depths and temperatures. This water at various depths and temperatures has allowed us to determine that there is multiple production zones of temperatures and it’s made it a little challenging to know the exact temperature and blend of the wells to the plant.

The rapid deployment approach to construction has also made it a little necessary to build flexibility into the plant and the well field. This is the great beauty of our approach. We apply surface technology and I doubt to what Mother Nature’s gift is to us. This has caused us to optimize and re-optimize more than once. The key now is to complete the well field piping and insulation as soon as possible. I expect that we will begin sales to Anaheim in the next few days. The improvements will – and in fact, frankly, I expected that we would have had sales to Anaheim by now.

The improvements will continue for the next few weeks as we tie in additional wells for the ramp-up. We’ve not – and we’ve not encountered any major concerns in plant operations, only the need to tie in additional geothermal production as we had already planned.

Now, I get asked frequently regarding legislation and the Stimulus Package. I want to take just a moment and talk about what most people know as the Stimulus Package or more appropriately, the American Recovery and Reinvestment Act of 2009. There was, as many of you know, an extension of the geothermal power PTCs or production tax credits through the year 2013 and there was also another provision that provided for grants for up to 30% of the energy projects, giving us and the geothermal industry another option. And I’ll speak a little bit about that.

This is a great benefit to us and for others who have financing available to them and I’ll discuss a little bit with regards to it. There are two primary reasons why a partner like Merrill Lynch or a tax equity partner is utilized. The first is to optimize the tax benefits or the PTCs because we are not able to utilize all those benefits. The second is to provide debt funding or financing.

We’ve always had other alternatives on debt financing such as the prepaid power purchase agreements and other types of debt financing available. What we’ve not always been able to do is optimize the tax equity. The passage of the Stimulus bill allows us to optimize this by not only having the option of doing production tax credits through a tax equity player, but it provides for us the ability to select the 30% grant option where the US Treasury themselves will provide the funding for up to 30% of the plant. This is a benefit in a time when capital markets or the banking industry is a little insecure and we’ve – we very much appreciated the administration passing this.

Also, there is ITC, smart grid, clean renewable energy bonds, which are pretty significant moving forward, but will probably not play out for a few more months. And then loan guarantee program, which I’ll discuss, which we are participating in with regards to government-backed guaranteed loans, as well as R&D financing benefits.

This allowed us to move forward with what I’ll call potential recession proofing for the funding mechanism, meaning we – many of you know that we have the Merrill Lynch instrument in place. We still have the Merrill Lynch instrument in place. We believe that they will honor that, we continue to believe that they will honor that, but we did set out to recession proof ourselves by a way of going out and taking advantage of certain things.

The grant program, as mentioned, we pushed very hard for the grant provision to be included in the Stimulus bill and we are grateful that it was because of the options that it affords us. In addition to that, the loan guarantees and we’re also taking advantage of $8 billion that the Bush administration put in place before they departed with regards to loan guarantees. Also, the creative funding of transmission options and others.

We’ll continue to pursue the traditional funding mechanisms, which you are familiar with also and they will be utilized on some projects. In the case of the Thermo project, I think we’ve signaled in the past that many of those Thermo projects, referring to 2, 3, 4 and into the future, we’ll take advantage of prepaid power purchase agreements, which we’ll have and strong power purchasing arrangements and strategic alliance relationships. Many of you’ve noticed that we have struck and taken advantage of state and municipal bonding as well with regards to some of the arrangements that we entered into.

Now, one of the questions that I frequently get also is the Calyon and I’ll call it – refer to it as the Calyon relationship or Calyon partnership. In fact, there has been questions as to whether the company was in play and other – and other types of activities that I’d like to explain that the Calyon process was a process that we had initiated with Calyon or Credit Agricole to bring in a joint venture partner and allow someone to purchase half of our Thermo resource field and provide funding for that field and this would be a mechanism for us and we’ll talk a little bit more about I’m sure in the question-and-answer time period.

But the Calyon process or strategic alliance is not for the sale of the company, it is for the sale of 50% – up to 50% of the equity in the Thermo field and these are also all funding mechanisms that we have tapped and intend to tap. All of this has led me to conclude that I guess to quote that Brian Yerger had some order advisors [ph] regarding geothermal. Our belief is that the geothermal energy area remains one of the most attractive despite the bewildering economic conditions around.

The geothermal power due to its base load, profile, and attractive price is a clean, stable, reliable energy source for utilities and it’s much sought after. And that more stringent RPS programs and federal regulations has only increased the demand with regards for geothermal power. We are more bullish than ever regarding geothermal power, regarding Raser, we are more convinced than ever that regarding our approach to geothermal and we are very pleased to have that.

I’d like take just a second though and talk and outline some statements that have been made with regards to Raser value creation because I think that’s going to be a little confusing. I would tell you that there is basically three types of categories of power values that are created in the industry.

One is general portfolio or unproven geothermal resources. And a lot of these unproven resources are typically sold on a dollars per acre basis. The second is the proven geothermal resources, which typically sell for a dollar price value, per dollar of megawatt and then of course, there is spinning assets or spinning generation, which is also there.

Most geothermal companies are developing and proving out the geothermal resources. They may or may not be involved with power plant construction. There is – in our opinion, these three ways to increase the value of Raser Technologies is one that we do across the board. Not only are we busy in increasing our geothermal resource portfolio, but we are also busy proving out that those geothermal resources have megawatts in the ground and likewise, we stepped forward and constructed power plants.

The reason I say that is I do believe that there would be opportunities for us to create value of ramps where we may in fact sell some geothermal resources and we may in fact bring in partners with regards to the capital construction of power plants. These has helped recession proof, as I mentioned once before, some of our approaches. They also helped create value of ramps and it’s an inherent value creation for us to continue to grow our portfolio strategies.

With regards to the transportation segment, many of you are aware the PHEV vehicle has been prepared for initial road testing. It’s – it has been driven, just to answer any questions with regards to the PHEV vehicle and we are continuing to make refinements to that.

Pat, you want to make a comment about what your intention is with regards to the PHEV for just a moment?

Patrick Schwartz

Yes, we are currently in the process of doing those requirements, as you had just mentioned, necessary to begin the initial road testing on proving grounds to show the demonstration of the goals that we had established at the beginning of the project. That will begin in the Detroit area and we are doing that in preparation of introducing the vehicle at the World Congress SAE Show in Detroit on April 20th. Batteries have been a delay in the process, but things are going well and we are on plan right now.

Brent Cook

Okay. So to reiterate, you plan on unveiling it in the April’s SAE World Congress in Detroit.

Patrick Schwartz

Yes.

Brent Cook

In April.

Patrick Schwartz

Yes.

Brent Cook

Okay. And I’m sure that we’ll continue to publish some video with regards to the operation of the PHEV so they can follow along on our website.

Patrick Schwartz

Yes.

Brent Cook

Also, HHI and Wilson and I think we have – you want to make any comments about what many are those others?

Patrick Schwartz

Yes. On HHI, which is the next one on the slide, we continue to make progress in recent months on our efforts for commercialization under our Business Cooperation Agreement. We currently have two major customers that are progressing very well. HHI has successfully quoted both these major customers and they are approved to one of those customers and in process of making prototypes to satisfy qualification process at the other.

It’s currently anticipated that both customers should be placing orders with HHI during 2009 and under our agreement with HHI, Raser will be entitled to licensing and compensation fees, which are estimated to begin during the fourth quarter.

Brent Cook

Pat, just one point of clarification for those who don’t know. HHI is Hyundai Heavy Industries out of Korea.

Patrick Schwartz

Correct.

Brent Cook

Yes, thanks. I – and I guess the final comment I would make is I actually believe that automobile industry has created a significant opportunity for us right now. I’m very encouraged by some of the things happening and taking place. There is no question that the auto – the disarray in the automobile industry has also created some challenges to the approach we were taking, but I – I’m feel very much that the focus has moved in the direction that we are and always has been and we clearly have a head start. Pat, you want to comment about that at all?

Patrick Schwartz

Yes, I think we’ve made great progress on our PHEV. I think electrification is still the focus and drive for the automobile industry for the future and we’re still very excited on a commercialization perspective on continuing – it’s been tough, the OEMs have pepped back in some areas, but I think this is going to be the focus of the future and we’re excited to continue to capitalize on the things that we’ve done to participate in that.

Brent Cook

Yes, I – we remain very confident that the automobile industry has raised the approach and the platform and the architecture that we’re – have been headed off and we have done our best to adapt to the current times and try to reduce the – any cost that we have incurred with that.

With that, I’ll try to wrap up my comments and tell you we are very bullish about where we are at or excited about what’s going on. Now I think – Richard, let’s open it up for some questions and hear what everyone has to say.

Question-and-Answer Session

Richard Putnam

Great. We’ve got the ability to be able to take questions either through the Q&A box on this webcast or for those that want to have an opportunity to talk over the phone, you just need to – there is a little icon that says raise you hand, and we’ll try and bring you up as you do that. Just while we are waiting, there is a couple of questions that have already come in, Brent.

Brent Cook

You want me to just read them off of the box here or you want –?

Richard Putnam

Yes, you want.

Brent Cook

The first question is – the first question was about the audio difficulties early on. But the second question is RZ or Raser a buyout candidate and I think that goes to the question that was raised or the question that I attempted to answer with regards to the Calyon process. The Calyon process is not with regards to seeking to be bought out. The Calyon process is an invitation to others and there were so many interested parties and requests that we had with regards to the Thermo resource and people interested in funding or co-funding those projects, but we chose to engage Calyon and help them sort through that. We are in that process, I won’t make any comments about it other than that is an active process going on, and we are moving through multiple candidates. Next?

Richard Putnam

Brent, we’ve got Elaine Kwei on the phone, of Piper Jaffray.

Brent Cook

Okay.

Richard Putnam

Elaine, can you hear us? Hang on a second, we’re working through this. Elaine? She’s not there, Brent. Why don’t you take another call – let me see if I can – while I work through this audio, see if you can go and take another question.

Brent Cook

Next question that I read will is when will we hear that Anaheim is up to full power? And I think I tried to address that earlier. We expect to be selling power to Anaheim very soon, but as to far being up to full power, it won’t take place until we tie in the fourth or the additional wells, but that will take us a few weeks to do. But we’ll continue to work that. The – a lot of it depends upon on which wells we tie in versus the other, but I do expect that that will take – will begin to sell very, very soon and I expect that it will be a couple of weeks before we tie in the last well.

The next question I have is with regards to the final commissioning timeframe. We expect that we’ll begin power sales actually before we do the final commissioning. By that I mean there is a ten-day test that we expect to complete sometime after, but I can tell you that the plant is basically now run on a stable sustained basis for a long enough period of time, we are very comfortable with the plant operations. It’s just a matter of getting more hot water to the plant and that is a function of getting those wells piped in. You have anything to add to that, Steve? That’s good.

Okay. PHEV activity. I think Pat talked a little bit about what’s taking place on that. In order what are the – let’s see, in order the next three geothermal plants to be constructed is the next question and I guess I would make a couple of comments. You probably noticed in the filing of the K that there has been significant movement and progress with regards to Lightning Dock already. And so, certainly the New Mexico project will be one of the next projects quite well along, all the major equipment items have been delivered as Marty pointed out. In addition to that, because of the Thermo field with the prepaid agreements, we expect that the Thermo field will be – Thermo 2 and probably Thermo No. 4 are probably the next two after that or at the same time and they’ll probably be all roughly about the same time, Thermo 2, Thermo 4, and the next.

Next question is, do I believe that the two wells that have been abandoned represent something that you will deal with again in the future or were they more likely isolated problems? And I’m glad that was asked. I want to just kind of define a little about what took place. We chose to take an impairment on the Truckee well not because of – it’s – the main reason we took an accounting impairment on Truckee well was because it looked like it was something that we had not been working on for the last 12 months and it looked like the immediate funding and financing was not for the next projects in line. And so, we chose to take that impairment. That maybe a conservative approach, but we thought it was the prudent approach to be doing since the timing of that particular well. We also think it was the right idea to focus on the Thermo fields first rather than that particular field. And – so, that’s one comment. The other well that’s down at Thermo that was spoken of, we do have – it did twist off in the well and we had impaired it essentially when we had piping that was jammed into the well that we were unable to extract. We spent some time and effort trying to remove that and was unable to do that. So, we chose to step out a few feet and re-drill the well rather than continue to incur expenses with regards to the retrieval of that. And that is something that does in fact happen in the drilling industry and it was a very costly mistake. I think the only comment I would make is I would have abandoned my efforts to try to retrieve the pipe sooner rather than continue to try to rescue it, but essentially that is a risk that we take in the drilling industry that does occur. It’s not a frequent risk and we believe that the vendor that we are utilizing now has good, solid equipment and are certainly hopeful to avoid that. We certainly haven’t incurred anything like that since that time and we feel very comfortable with the drilling program in that regard.

Could you give some information regarding the contract with Anaheim? What are the expected revenues from this during 2009? Marty, I think the expected – anticipated annual revenues when it’s for a full year is about $7.6 million. Is that correct?

Marty Petersen

Yes.

Brent Cook

It’s about $7.6 million. It has been made public that it’s $78 per megawatt hour and it escalates on a 2% basis. Is that correct?

Marty Petersen

Yes, that’s correct.

Brent Cook

On a 2% basis. And so, that is public information that was made public at the Anaheim City Council.

Marty Petersen

Yes, it’s 2% per annum.

Brent Cook

So, each year increases from $78 a megawatt by a magnitude of 2% annually.

Next question I have is what is the cost of capital for the prepaid purchase agreements from the utilities? That’s a great question. Cost of capital, we view that the prepaids are essentially debt related and our anticipation is that we will utilize the Merrill Lynch instrument when it’s more favorable to do so and that debt instrument is basically LIBOR plus 5%. So, we anticipate that we will be using that as a benchmark and that the discounting will probably be at or near that number unless capital markets change dramatically and we are able to take advantage of better pricing. Certainly the – that will be in the form of a discount to revenue, meaning to the power purchase agreement rather than in interest expense, but it’s effectively treated that same way.

I think Marty addressed the next question, but when do the company starts on raising additional capital via the sale of stock. We do not believe that any of the project financing or any of our activities with regards to project financing will until [ph] sale of stock. It’s our intention to raise the money by way of debt financing and/or prepaid power purchase agreements, government-backed guaranteed loan, PTC grant, Stimulus money advance or the grant program under – as mentioned, under the new Stimulus package.

Marty Petersen

Or joint venture.

Brent Cook

Or joint – or joint venture financing. Thank you, Marty. And so, that’s the company’s intention at this stage of the ball game.

What are the – let’s see, the next question. I’ve referenced the JV of Thermo, the size of the property is 6,000 acres or 60,000 I guess. The comment I would make about the joint venture of the project, our joint venture through the Calyon process is for a party to purchase into 50% of the first 150 megawatts of the Thermo site and it’s not related to a geographical area, it’s related to the first 150 megawatts of the geothermal site. Just to remind it to everyone, the GeothermEx report had identified the most probable size of being about 238 megawatts. That study was done when we had 12,000 acres at that site.

What’s the status of this – other development sites and can you tell us how long it will be to develop? I think our – that’s a fairly long explanation, but I think our 10-K does a good job of outlining. I would come to reference you to those pages in the 10-K, encourage you to see those sites, we’ll – we’ve been quite explicit with regards to where we are at on the process and you probably note that there has been some cost incurred on some of the sites as well. Right now it’s our intention to keep the cost impairment minimal until we – and keep the projects moving along until we have the project financing in place.

And a couple – hold on just a moment, I think we’re trying to get a few questions here. Can I discuss the impairments of Thermo and how that – how this impacts projected capacity and how was the well damaged? I think what I addressed earlier was the pipe twisting off. We were – we did twist off a pipe, ended up not being able to extract it, which significantly reduced the flow on the well. Rather than take the well and use it as a partial production well we believe that the production area was significant. And so, we stepped out recently about 60 feet – 50 feet and drilled a new well and that was the well we just completed. So – it was a pretty significant benefit for us to do that. So –

Next question I’ll ask – this is an easy one for me. Has Brent recently suffered from a heart attack? And the answer is no, I am not. And – and I am in good health with regards to that. I did have – I have had heart attacks in the past with regards to – well, that’s blockages, not heart attacks and I have had the opportunity to remove those, so – without any significant damage. So – let’s see.

Although a quick build, Thermo took longer than anticipated. What is the anticipation for timing on future builds and what is the time estimate for electricity production from the additional Thermo and Lightning Dock? I would make a couple of comments that I would share with you. The first is I have the – I have recently and have repeatedly reminded people that our original statements with regards to construction at Thermo is that it would take 12 to 18 months to construct. Steve was good enough to be able to deliver that in a much shorter timeframe. I think the ramp-up time period, we still feel pretty comfortable on what’s that the case is. After having constructed it now, I think we would guide people to the construction process as more like an eight to ten-month time period and we do think the ramp-up period will go faster for most of these other projects, but there will still be some ramp-up period similar to what we’ve been experiencing. A lot of that depends on who we are interconnecting with and details with regards to that. So, anything to add to that?

Steve Brown

Well, I think that’s a pretty good assessment, Brent. I think we’ll get better at our construction part of it, we’ve learned a lot through the commissioning process what we’ll be able to streamline the startup going forward and we’ve got a good operations team that we are putting together that will help us troubleshoot any issues we have.

Brent Cook

We clearly have learned from this experience and we can clearly build faster and have the ability to build faster, but we don’t anticipate that we would be utilizing some of the overtime that we did on this builds. I think I would guide you to the eight to ten months mark. It’s a good way of thinking about these projects. We will send out and announce as we – it’s my intention, we’ll announce when we begin the formal building process and have all things in our hand. It’s our policy to not announce projects prior to having all of the – having all of the permits in hand and everything necessary. So –

With regards to – the question with regards to guidance, I think there has been previous discussions with regards to what – how the revenue comes in. It’s our intention and we’ve not updated anything and it’s our intention to not to do so until the Calyon process has been completed.

Next question is could you please discuss Raser’s relationship with Salt Lake City on the proposed shovel-ready project and are you currently working on similar projects? And I think what’s being referred to is an announcement that took place regarding Salt Lake City, Salt Lake County in the State of Utah inviting Raser to participate. And the answer is we are working with them on a project that’s certainly in the early stage and too preliminary to make much comment with regards to it. But the responsibility of the government or those government agencies was if they were to able to do the financing and utilize Stimulus money and we would in turn would work with them on identifying the resources and constructing a power plant and that’s certainly our intention to do so. And we are – the answer is we are working on other projects with other communities. We happen to enjoy the vision that the Governor of the State of Utah has had. Recently, the Governor has been very instrumental in working with and passing legislation in the Utah Legislature that has been very instrumental in making this a pro green area and pro green growth area.

Richard Putnam

Brent, I think we’ve found the problem. Sorry for stepping in and out, but I think there was an attendee ID that you needed to type in. Elaine has done that. I think we can bring her up now. Elaine, are you with us?

Elaine Kwei – Piper Jaffray

I am. Hi. Can you hear me?

Richard Putnam

Yes.

Brent Cook

Yes.

Elaine Kwei – Piper Jaffray

Okay, great. It’s working, very good to speak with you guys again. I was just curious with the Thermo, you mentioned that it’s producing about 3 to 4 megawatts now. Is that from – I’m just wondering how the well impairment will affect the overall capacity there. I mean, is that 3 to 4 megawatts when – is the goal still to get to 10 or how does that correlate to the number of wells?

Brent Cook

Okay, that’s a great question. We do anticipate – the goal is to actually get to in excess of 10, but we anticipate that it will be a 10.5, 11 megawatt project. Right now, we have six production wells that have been drilled in the area. That is not accounting the impairment well and there is two reinjection wells that are currently connected for reinjection purposes. It’s our anticipation that as – after we finalize the testing on this last well, we’ll make the decisions on which ones to connect up to the plant and we will connect up to sufficient temperature and flow in order to operate the plant at full capacity.

Elaine Kwei – Piper Jaffray

So, right now that 3 to 4 megawatts is coming from how many wells?

Brent Cook

It’s coming from two wells, partial production out of two wells.

Elaine Kwei – Piper Jaffray

Okay.

Brent Cook

And as mentioned, the third well was just barely connected up and I don’t believe Steve has increased or done any production yet off of that, we are still cleaning the well of.

Elaine Kwei – Piper Jaffray

Okay.

Steve Brown

Brent, we haven’t brought that into the plant yet, but we anticipate within the next week we’ll do that.

Brent Cook

Okay.

Elaine Kwei – Piper Jaffray

Okay.

Brent Cook

But the piping is completed to do that. We are just making sure that everything is cleaned out on it.

Elaine Kwei – Piper Jaffray

Okay.

Brent Cook

Sorry, did I miss the second part of your questions?

Elaine Kwei – Piper Jaffray

No, that was that part of the question. My next question just had to do with a little bit of – just trying to get a sense of sort of what your ramp looks like for the rest of the – just even for ’09 in terms of how megawatt goals and has that been revised?

Brent Cook

Okay. The – first, let me just make one more clarifying statement. The impairment that we took is – was one of an accounting impairment, a financial impairment. It has really nothing to do with the utilization of the wells. It was our best look at what we anticipated to be the utilization of the wells and that’s why we took the impairment. It’s not that that well can’t be used or wouldn’t be used if needed to be. And so, we’re not – at this stage of the ball game, we are not planning on pudding or adventing [ph] any of those. So, it’s just that we don’t think we’ll have to use that well that we impaired. With regards to the ramp, we expect that – as I mentioned, we expect that this third well would give us an increase in production and then we’ll begin tying in wells, which will probably take a few weeks, couple of more weeks to go ahead and finish this last well that we just finished drilling.

Elaine Kwei – Piper Jaffray

I guess I meant sort of by the end of the year how many megawatts of total generating capacity could you see yourself at potentially.

Brent Cook

This is all contingent upon financing. So, I would tell you that it’s our plan whether the exact dates are at the end of the year or near there too. It’s our plan to move forward with the Lightning Dock project and Thermo 2 and Thermo 4. I don’t believe any of the other projects could be done before the end of the year. But we’ll certainly be doing all we can.

Elaine Kwei – Piper Jaffray

And how big or similar 2 and 4? Are they also on the 10 to 11 megawatt size each?

Brent Cook

They – if we go with a bottom-cycling unit, this is contingent, it’s – they could be as large as 15 to 17 megawatts in size or they could be the 10 to 11 if there is no bottoming-cycle and that’s true of Lightning Dock as well. Both Lightning Dock and Thermo resources are candidates for bottom-cycling and we – the bottom-cycling decision is not yet been made. We are – that’s one of the things we are studying as we are operating the plant.

Elaine Kwei – Piper Jaffray

Okay, great. I’ll get back in queue here. Thank you so much.

Brent Cook

Okay. Thank you, Elaine.

Could I comment on Raser’s continued access to adequate capital on acceptable terms going forward to the breakeven? Yes, I would be happy to comment with regards to that. Marty, maybe you could even elaborate. But I personally am very, very pleased at our options that we have with regards to prepaids. Our prepaid power purchase agreements we’re actually working with more than one utility on and it’s clearly a solid option. We’re in advanced stages of moving that forward and I think that is something that’s very nice to have at our fingertips in this particular industry. Most industries don’t have that ability to do that and we are very pleased to have that. That coupled with the ability to draw up on the PTCs by way of the grant selection option really gives us a lot of control on to our destiny. And the JV equity process that we are going through in Thermo is yet another opportunity because we expect that that will significantly help the company with regards to capitalizing and benefiting us. Marty?

Marty Petersen

Yes. And there are other things that we are working on that are creative in nature and I think that Brent’s comment about us being in the right sector is – rings true here, because we’ve seen that a number of parties are amenable to discussions about these things whereas other companies that we talked to and or familiar with, aren’t able to get that the ere [ph] and the attention of these kind of investors or other creative options. So, I think that we feel very fortunate to be in the right place.

Brent Cook

The – another question was does those current lack of those tax equity appetite affect previous financing deals with Merrill? And I think the answer is our conversations with both Merrill and Banc of America is we expect them and anticipate that they will continue to honor their position with regards to that. The nice thing is that the Stimulus Package and the election of the 30% grant doesn’t necessarily put that pressure on us or Merrill with regards to it because if there is a lack of tax appetite, we’ll nearly select a different option.

I – the question was if I already had four production wells drilled and tested months ago, which were enough to power the plant, why are you still tying in wells I think, I can’t see the bottom – trying to tie-in additional wells now? And I think it’s important for everybody to understand the well field and geothermal development. Most of these wells and the profile of our well field is we’ve encountered as much as a 42 to 45-degree increase in temperature from the wells. Is that correct, Steve?

Steve Brown

Yes.

Brent Cook

From the time that we first take the test to what we now have out of the production wells that are tied in the plant. And this is one of the challenging aspects of it. It’s typical in the geothermal world to maybe take as much as six months to a year to just allow a well to stabilize and what we’ve done in the rapid deployment is kind of push Mother Nature. And so, I think that that is one of the reasons why the testing program continues. And so of course, we continued drilling because we knew the resource was large enough that if we drilled too many wells we even merrily use them on future phases in projects. I think that that’s – that would be the comment and then as we’ve been able to do that, we tried to drill in locations that were promising from a geological standpoint and that we are also at the option to be utilized broadly across the power plant – across many power plants. And so, that is a very good question and I appreciate that being asked and I don’t know if that was a confusing answer or if I haven’t actually got to it.

Richard is giving me a signal that we’ve been going for about an hour. Are you –

Richard Putnam

We are at the end of the hour and I know that there are some other things that we got to do, but I don’t know if there is one or two more questions that you want to take or if you –

Brent Cook

Yes, let me do maybe a couple more and then – and I’ll go ahead and go through this. Sorry. What is the status and prospects regarding waste heat recovery product line? We – as mentioned previously, we do have a waste heat recovery group that is looking at waste heat. We are currently going through a numerous host sites trying to decide if this is the line of business that we want to pursue. We believe and have pursued the geothermal area because we saw the lucrative options and benefits available with regards to green power and the demand that’s being created for it. So, that was – we think it’s something that we’ll move into, but it’s not an immediate thing for us. We feel like we have to get our feet under us in the geothermal world first.

Next question is can I discuss plans for bottoming cycle at Thermo 1? And the quick comment I would make is what bottom-cycling is that we run through the plant as built and designed and then we take the reinject water and instead of reinjecting it into the ground, we cascade it or run it through some additional units to get – to pull out the additional heat from those units and there are three cased units that are being – that have been built and constructed for different temperature ranges and what we do is we line up which of those are the best with regards to United Technologies. So, if it’s a case one unit, a case two unit, a case three unit, it’s dependent upon the reinject water out of the first plant. And essentially, Steve is trying to summarize that exact question and how the best design is the bottom-cycling. If we are able to bottom-cycle at Thermo 1 we anticipate the same would probably be true throughout the entire field and likewise, similar first to Lightning Dock. This would give us – without drilling any additional wells, this would give us anywhere from 5 to 7 more megawatts.

Richard Putnam

Brent, let’s take the last question about Indonesia.

Brent Cook

Okay. What – and I think the question I’m seeing is do I have any plans for plant development in Indonesia during 2009? Our Indonesian plants – just to remind everybody what that was, is we have a joint venture with Indonesia Power, it’s a 50%-50% joint venture and we have a concession of as much as 100,000 acres that’s available to us for development and it’s identified to somewhere between 200 to 300 megawatts of resource in that area. We – our obligations in that relationship were to help and assist them from a technical evaluation standpoint, which we’ve done so with the assistance of the Energy & Geoscience Institute and we’ll continue on. I do expect that we’ll have activity levels in Indonesia. I don’t expect that there will be large expenditures and if they are, they’ll be through the Indonesian approach or the JV. Right now it’s too early to put a timeframe on Indonesia.

Richard Putnam

Well, Brent, I think we’ve gone through looks like almost all the questions. There is a few others that I think are very similar to the ones that we’ve already talked about and I apologize for those that weren’t able to – that wanted to talk on the phone and were unable too. I guess in the future, you’ll need to put in your attendee ID number in order to be able to talk like we aligned [ph] it.

So, we appreciate those that have joined us and Brent and I guess will just thank everybody at this point.

Brent Cook

Yes. Thank you very much. We appreciate your interest and I do see that there is more questions. Feel free to send those to Richard. He’ll forward them on to the appropriate people here in the company to answer via e-mail. And we do appreciate your interest and we are excited, once again I’m thrilled with where we are at. I’m very, very pleased with the ramp-up. I know that people are a little impatient with it and I apologize that I may not have communicated it properly. It certainly has taken a little longer than I thought, but there is nothing that’s of concern to us and we’re very pleased to where that – we think that places us as a company strategically and you probably noticed that there has been some significant press surrounding it too.

So, again, thank you and I appreciate your interest.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Raser Technologies, Inc Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts