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

Executives

Dita Bronicki – Chief Executive Officer

Yoram Bronicki – President & Chief Operating Officer

Joseph Tenne – Chief Financial Officer

Smadar Lavi – Vice President of Corporate Finance & Investor Relations

Todd Fromer – KCSA

Analysts

Michael Lapides – Goldman Sachs

Ben Kallo – Robert W. Baird & Co.

[Elaine Clay] – Piper Jaffray

Emily Christy – RBC Capital Markets

Timothy Arcuri – Citi

Daniel Mannes – Avondale Partners

Noah Houser – Barclays Capital

Paul Clegg – Jefferies & Co.

Steven Milunovich – Merrill Lynch

Ormat Technologies Inc. (ORA) Q3 2009 Earnings Call November 5, 2009 9:00 AM ET

Operator

At this time I would like to welcome everyone to the Ormat Technologies third quarter 2009 earnings conference call. (Operator Instructions). I'll now turn the conference over to Mr. Todd Fromer with KCSA. Please go ahead, sir.

Todd Fromer

Hosting the call today are Dita Bronicki, Chief Executive Officer, Yoram Bronicki, President and Chief Operating Officer, Joseph Tenne, Chief Financial Officer and Smadar Lavi, Vice President of Corporate Finance and Investor Relations.

Before beginning we would like to remind you that information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward-looking 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 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 2, 2009.

In addition, during this call statements that may be made include financial measures 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 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 measurements 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 access on Ormat's website at www.ormat.com under the Events Calendar link as found in the Investor Relations tab.

With that said, I would like to turn the call over to Yoram, who will provide an update on operations. Then Joseph will review the quarter's financials and following Dita's remarks we will open the call to questions. Yoram, the floor is yours.

Yoram Bronicki

Good morning everyone and thank you for taking the time once again to listen to our call. We are pleased with the very good results of this quarter. We delivered earning growth of 48% with a net income of $23.4 million. Joseph will elaborate on our quarterly results following my review of net [base] and operations.

I would like to start on slide four with the operational highlights for this quarter. Our total generation for the quarter was up 19% to about 800,000 megawatt hours and for the first nine months of the year total generation was up 18% to about 2.5 million megawatt hours. In the slide you can see the constant growth in our actual generation over the last four years. The year-over-year increase in our generation is a result of new plants that came on line and improved performance in some of our existing power plants.

Moving to slide five, the previously described enhancement and repair of the geothermal field in Puna lasted all quarter and curtailed generation to approximately 50%. The work on the production wells is now complete and the plant is almost at full power.

Since our last call we have continued to manage the injection challenges in North Brawley. As we described in our last call, we have tested different methods to remove the large quantities of [silage] from the geothermal brine and based on the success of the one-month test of a single well, we ordered equipment to replicate these measures on multiple wells.

If successful, the equipment that we currently have on order will allow us to treat about 70% of the total flow by year end, and based on the current delivery schedule we anticipate to have the equipment to control all the flow during the first quarter of 2010.

Turning to an update on our projects under construction and development on slide six, with respect to our construction activity we completed the construction of the third unit of the OREG 2 project and it has been synchronized to the grid. The remaining units of OREG 2 and the GRE unit are expected to be completed by the end of 2009.

With regard to the additional 8 megawatt in Puna, we have signed an MOU with Hawaii Electric Light Company and the PPA is currently under negotiations. We expect this project to be online in 2010.

In East Brawley we haven't made the progress we were hoping for yet. Our permit application is still affected by the water allocation disputes in the Imperial Valley. Last month we entered into an MOU with the city of Brawley that would provide us with an alternative source to the water that is currently being contested, and we anticipate that this will allow us to progress with the project.

Further delays in getting the permit will postpone the completion of the project to 2011. On the project side, we are continuing in the manufacturing of the equipment along with drilling of wells, and have improved our land position in the area.

In the Jersey Valley project we completed the drilling of five wells and had good results from the long-term flow test. We plan to build the project in two phases. The first phase, a 50-megawatt, is expected to come online by the end of 2010 and the second phase is expected to flow approximately 12 months later.

Let we review our long return project on slide seven. In our McGinness Hills project we signed yesterday a 20-year power purchase agreement with the Nevada Power Company for a 30-megawatt power plant. Power purchase agreement is still subject to various approvals including [P] use and approval.

The sales and development activity continues and based on our activity to date, we believe that the reservoir can support the expected 30-megawatt capacity. We have continued the land acquisition in the Wister project, previously known as the Imperial Valley project, and have been awarded a DOE expiration grant. Based on our current position we plan to start the drilling activity soon.

Carson Lake, based on our recent drilling activities, we believe that the reservoir can only support a 20-megawatt project. However, since an EIS is required, the permit for the project will take an additional 15 to 18 months.

Moving to slide eight, we secured new leases for future exploration activity covering approximately 2,300 acres in Nevada and California. While we had success in our Greenfield exploration activity this year, permit acquisition continues to be the biggest obstacle in the execution of our planned exploration activity.

Despite strong legislative support through the stimulus package, the responsible agencies, state and federal, lagged in permit execution, thus slowing the development process. We remain hopeful that the responsible agencies will continue to streamline their processes as well as locating dedicated and retaining more resources to focus on the development of renewable projects.

Let me now move to slide nine with an update on the product segment. We continued to see very high revenues resulting from our record backlog at the beginning of 2009. Given where we are today we do not expect to see this volume in 2010. Revenues attributable to our product segment are generally less predictable, mainly because of the long sales cycle and the impact that the events of 2008 had on construction starts.

Our backlog as of September 30, 2009 was approximately $70 million. Having said that, we're currently negotiating several contracts that we believe will be finalized and will contribute to our 2010 revenues.

Moving to slide 10, we recently disclosed our entry as a developer into the photovoltaic solar market. Solar is not new to Ormat and it was our development effort in the solar thermal field that paved the way for our geothermal technology. However, we believe that photovoltaic is a better fit to the type of project development that we would like to do in the near future.

In terms of project returns, given the expected feed-in tariffs of approximately $400 per megawatt hour, solar projects in Israel are very attractive, and this has created a good opportunity for a commercial entry into this market as a developer.

Thank you and I would now like to turn the call over to Joseph.

Joseph Tenne

Good morning, everybody. In a [bid] to review the main issues impacting our financial results in my prepared remarks, we are also including certain financial highlights from the company's second statement of operations and balance sheet in our earnings release and in the accompanying slides.

Starting with slide 12, for the third quarter of 2009 total revenues were $119.8 million, a 20.2% increase from revenues of $99.7 million in the third quarter of 2008. As you can see on slide 13, in the third quarter of 2009 the product segment again had a significant contribution with record quarterly revenues of $51.1 million compared to $30.9 million for the third quarter of 2008, representing an increase of 65.5%. Multiple [product] increase in revenues was derived from EPC contracts for the construction of three large binary geothermal projects in Nevada, New Zealand and Costa Rica.

With regard to our electricity segment on slide 14, revenues for the electricity segment were $68.7 million compared to $68.8 million for the three months ended September 30, 2008. While we had substantial growth in total generation, the average tariff rate for electricity for the third quarter declined to $86 per megawatt hour from $103 per megawatt hour in the third quarter a year ago, mainly due to the effect of low oil prices on Puna energy rates.

Moving to slide 15, the company's gross margin was 33.1% compared to 31.3% in the same quarter last year. Gross margin for the electricity segment was 35.4% compared to 35% in the same quarter last year. In the product segment gross margin was 30% compared to 23.2% for the same quarter last year. This increase is attributable to a high volume of revenues and different product mix and this year's global decrease in commodity prices.

And on slide 16, net income for the third quarter was $23.4 million or $0.52 per share basic and diluted compared to $15.8 million or $0.35 per share basic and diluted from the third quarter of 2008. The increase in net income was principally attributable to a $6.8 million increase in operating income, a $2.3 million increase in other non-operating income and $2.3 million increase in foreign currency translation gains. This was partially offset by a $1.2 million increase in the tax provision, a $1.1 million decrease in income attributable to a sale of equity interest and a $1.8 million increase in net interest expense.

During the quarter and the nine-month period ended September 30, 2009, capitalized $7.3 million and $19.5 million respectively in interest related to projects under construction. We expect this amount to decrease significantly in 2010 due to a lower volume of projects under construction and the [upcoming] commercial operation of our North Brawley power plant towards the end of 2009 or early 2010.

As shown in slide 17, adjusted EBITDA in the third quarter of 2009 increased 30.8% to $50.3 million compared to $38.5 million in the same quarter last year. Adjusted EBITDA includes consolidated EBITDA and the company's share in the interest, taxes and depreciation and amortization total $1 million and $900,000 for the third quarter of 2009 and 2008, respectively, related to the company's unconsolidated 50% interest in the [Mumbes] Complex in California.

The table in slide 27 reconciles net cash provided by operating activity to EBITDA and adjusted EBITDA for the three and nine-month periods ended September 30, 2009 and 2008, and for the years ended December 31, 2005, 2006, 2007 and 2008.

We previously calculated EBITDA to exclude equity income of [industry] and other non-operating expense income and adjusted EBITDA to exclude other non-operating expense income. The change in the way we now calculate EBITDA and adjusted EBITDA results in higher EBITDA and adjusted EBITDA for the reported periods shown in Appendix slide 28, which we will net reported using our prior method of calculating EBITDA and adjusted EBITDA.

The table shows for each reported period the differences in our reported EBITDA and adjusted EBITDA resulting from the change in our method of computing these amounts.

Coming now to slide 18, as of September 30, 2009, the company had cash and cash equivalents of $20.3 million compared to $34.4 million as of December 31, 2008. We derived $77.7 million from operating activity during the first nine months of 2009 and borrowing activity, included the first disbursement in the amount of $105 million of the offer of [Olikaria] financing, $42 million from the Amatilien financing, $40 million proceeds from long-term agreement with two group of institutional investors and $12 million from using the revolving credit lines with commercial banks.

On the user side, $212.3 million of cash used to fund capital expenditures and $29.6 million to repay long term debt to our parent and to third parties. We also want to mention two items related to the [OPC] tax equity transaction.

The first is that in October 2009, our subsidiary [Ormat and other] has acquired all of the Class B membership units of OPC held by Lehman Brothers pursuant to a right of first offer for a purse price of $18.5 million. Lehman Brothers owns 30% of the Class B membership units.

As a result of this transaction, we recorded a gain of approximately $30 million in the first quarter of this year. Also, income from the sale of [OPC] freed our ability company interest in OPC to institution equity investors for the third quarter of 2009 was $3.9 million compared to $5 million for the third quarter of 2008.

The increase was a result in regard to lower – is a result of lower depreciation for tax purposes as a result of declining depreciation rate, utilizing the modified accelerated cost recovery system known as MACRS.

This line item will further decline in the second half of next year as depreciation rates decrease from 32% to 90%. As a result of the acquisition of the Lehman Brothers Class B membership unit, this item will further decrease with a commensurate decrease in our tax stance as a result of our utilization of the time benefit of OPC.

Our total outstanding long-term debt as of the end of the second – no, the third quarter of 2009, was $582 million and it will be repaid as presented in slide 19. Moving on to slide 20, on November 4, 2009, Ormat's board of directors approved a payment of a quarterly dividend of $0.06 per share pursuant to the Company's dividend policy, which starts at 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 1, 2009 to shareholders of record of the close of business on November 18, 2009.

And now, let me turn to the call over to Dita.

Dita Bronicki

Thank you, Joseph. There are several points that we'll make to cover today, the Department of Energy loan guarantee program, the recent Department of Energy Exploration and Development award and an update on our financing activity.

Let me start with the DOE loan guarantee program on slide 22. On October 7 this year, the DOE finally issued their regulation related to the Section 1705 DOE loan guarantee. As expected, the DOE's relying on the commercial lender to do most of the due diligence work, and that's enabled the program to cope with the large number of applications expected to be submitted.

Less expected is the reduction in the budget available for the subsidy cost of the guarantee to $750 million of an expected amount of $4 billion to $8 billion of guarantees. Renewable energy in this [space] still expects the replenishment of the DOE budget. If not replenished, the available funding will be substantially lower than initially expected.

We have not yet submitted any application under this program because we have submitted applications under the 1703 program and are awaiting the results of the first screening of these applications.

Another important development is related to direct funding under the Recovery Act, which includes funding for the exploration and development of not only geothermal field and research into advanced geothermal technology.

We mentioned in our last call that we have submitted applications for exploration in [NAGS] grants. Last weekend's DOE announcement included the news that we were awarded grants for three projects for a total of $13.76 million that accounts for approximately 62% of the total exploration budget for these projects. The projects are Wister in California, Maui in Hawaii and Grass Buttes in Oregon. The grant for exploration will enable us to accelerate implementation of new exploration methods.

Looking at our financing activity on slide 23, we entered into a five-year loan agreement of $50 million with the commercial bank under federal [determents]. The loan built into a six-month LIBOR plus 4.25% and we have an option to fix the interest rate on the drawing of the loan.

We also entered into an additional $15 million committed line of credit with the commercial bank.

Regarding the North Brawley project, we are currently in the documentation phase of approximately $100 million long term loan with a financial institution. Together with approximately $90 million ITC grant, this will refinance approximately 2/3 of the project's cost. It is important to note that margins that we seek today for long term dates are more favorably than what we have seen in the first half of the year.

Looking at our capital expenditure requirements on slide 24, we plan to invest $40 million during the rest of 2009 for the enhancement of existing [filed] claims and the development and construction of new projects.

In addition, our capital expenditure budget for our maintenance activities are approximately $5 million for the rest of 2009. We also expect to invest $6 million in exploration during the rest of 2009. We have in place the capital resources more than necessary to fund our CapEx requirements.

If you'll turn to the final slide, slide 25, I'll provide you with our revenue update guidance for 2009. This quarter we are increasing our overall revenue guidance due to faster progress in our product segment. For 2009, we are increasing our guidance for our product segment and expect revenue for this segment to be approximately $150 million.

In our electricity segment, we are narrowing the range as we currently expect our electricity segment revenues to be between $254 million and $258 million. We also expect an addition $9 million of revenue from our share of electricity revenue generated by a subsidiary, which is accounted for under the equity method.

I just want to say that this has been a very unique year for all Ormat thus far. We have weathered the economic uncertainty with sound results and we are encouraged by our position over the long term. Our priority remains from investing for the long term, moving forward with our exploration activities and continuing to wait delays and, when needed, the funding necessary to continue our goals.

Thank you again for your support and I would now like to open the call for our investors. Operator, please?

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Ben Kallo – Robert W. Baird & Co.

Ben Kallo – Robert W. Baird & Co.

For the [beginner] sales PPA, can you guys – I know you probably can't give us exact pricing but can you give us some kind of sense of where pricing is with electricity prices outside of the green sector down, can you just give us some color there?

Yoram Bronicki

Hi Ben, this is Yoram. It's a very – I think that's it's a good price for us and it's a good price for the customer. But bear in mind that this is a solicitation from 2008 and so I don't think that's it's – I don't think that by itself it is a good marker on what is yet to come.

Ben Kallo – Robert W. Baird & Co.

You mentioned in the product segment that you're working on [inaudible] that could affect 2010. Could you give us [inaudible] –

Dita Bronicki

Ben, we can't hear you.

Ben Kallo – Robert W. Baird & Co.

Okay –

Dita Bronicki

Operator, there is a problem. There is kind of an echo. Can you do something to the sound?

Operator

Our next question comes from Michael Lapides – Goldman Sachs.

Michael Lapides – Goldman Sachs

Hi Dita, real quick question, given what's happened globally to the economy, economic conditions over the last six to 12, six to 18 months, can you talk a little bit about what you're seeing in terms of your average cost of construction of a new geothermal facility here in the U.S.?

Dita Bronicki

Costs went down the beginning of 2009. Part of the costs went up again, but certainly not to the level before the crisis. We still expect a decrease in the cost from the peak of the end of 2007, 2008 and we are typically using for planning purposes the $4,000 per megawatt installed, a little more in California, a little less in Nevada, but that's what we are using internally.

Michael Lapides

And given that is it – when we think about 2010 and maybe even 2011 capital spending requirements, are there other – if we were to use that $4,000 a kilowatt kind of as a construction matrix and we see kind of what your growth points are on slide six and seven, are there any other drivers of capital spending beyond the specific plants mentioned on slide six and seven that we should incorporate in our capital spending estimates?

Dita Bronicki

Well, we will give a new update on all the projects that are scheduled for the next few years. You'll know. On our call in February there are going to be more projects on there, but we think that it is not prudent to give it in an organized way until our next call.

Michael Lapides

Meaning that you're implying that there are projects that you have not disclosed but where you are in discussions with a counterparty in one of your core regions to do development of a new asset?

Dita Bronicki

It's a combination of both. It's exploration that didn't reach yet the results so we are not disclosing it yet as opposed to standard construction, but with the hope that the exploration results are going to be positive. They are going to be aided and there are discussions that technology has matured to afford the [main issue] between now and February.

Michael Lapides – Goldman Sachs

And what do you think of as your normal run rate on the product side for kind of an annual revenue strength? Like is there a year we can look back at and say that year represents, because I mean you've had a great year there this year. We can look back at our historical year and say that historical year looks more like a normal year?

Dita Bronicki

No, we had probably these discussions a year or two ago when we were the $70 million a year positive revenue and you probably asked us then what go-forward rate should we assume to the $70 million rate? And our answer then was depending if you include solar or you don't include solar. If you include solar or the likes of solar the goal is going to be higher; if not then assume a normal 10% growth per year or something like that.

If we need to try to estimate today what the goals could be it's a little more complicated to do because what we don't know is how much of the stimulus money we really believe will be translated into third party development in the United States. And even though the regulations of the DOE loan guarantee are out, we still don't know whether the smaller developers in geothermal in the United States are already at the point that they can really release additional projects.

So maybe the numbers that we are quoting are way understated because of the additional business that will come from developers in the United States using the stimulus money, and maybe not.

Operator

Our next question comes from Ben Kallo – Robert W. Baird & Co.

Ben Kallo – Robert W. Baird & Co.

I just wanted to follow-up on the product segment. What about outside of the United States? Yoram mentioned that you're bidding on some other projects. Could you give us some more details?

Dita Bronicki

We are bidding outside of the United States as well and as in the past in the product segment it's very hard to say how much and when a contract will be finalized until it is finalized. So I can tell – I can confirm that we are negotiating outside of the United States, even this year the majority of the revenues came from outside of the United States not from within the United States. Unfortunately, until we have a signed contract we cannot say how much it's going to be or when it is going to be.

Ben Kallo – Robert W. Baird & Co.

And then on Brawley, have you applied for the ITC yet?

Dita Bronicki

Not yet. We can apply for the ITC only once it is placed in service. We have not reached yet the point that it is.

Ben Kallo – Robert W. Baird & Co.

And you're saying that still by the end of the 2009 that you think it'll be placed in service?

Dita Bronicki

That's our expectation, yes.

Ben Kallo – Robert W. Baird & Co.

As far as the DOE grant for drilling, do you think that that will expedite the permitting process in those three areas?

Dita Bronicki

I wish I could say yes, but I think it's unrelated.

Operator

Our next question comes from [Elaine Clay] – Piper Jaffray.

[Elaine Clay] – Piper Jaffray

Just another follow-up on the product segment, in terms of the pipeline that you are talking with is there anyone – are there projects, big projects that would be on the scale of the Nevada and New Zealand type of projects or do you see sort of more smaller projects coming on? And is there a potential to be able to replace that kind of revenue?

And then also just finally, I don't know if you could talk a little bit about the potential impact of solar on the product segment?

Dita Bronicki

The first question the answer is that currently we are not in negotiation of projects which are as large as the Nevada geothermal and the others. It's smaller projects which are currently under negotiation. It doesn't mean that it can't come, though. As we speak now I can tell you that we do not negotiate any contract of that size.

Can you repeat the question on the solar, please?

[Elaine Clay] – Piper Jaffray

Just what kind of potential impact would there be to the product segment in solar and would that – should we expect that to come ahead of any project development?

Dita Bronicki

We don't expect the solar activity to go into the product segment at all in the – as far as we have decided up to now we are entering the solar segment as a developer, not in the product segment. Now, it is true that we might under the joint venture agreement, now that I think about it and maybe I misspoke when I say no because we have a joint venture of 70/30 with [Sanday], 30% of the construction will go into the product segment. So I take my words back. You are right. But it's not really a product as product the way you think about it.

[Elaine Clay] – Piper Jaffray

Sure. And then do you know if Ormat or any other geothermal developers have successfully received any cash grants under the ITC program yet? I know we've seen some of that in the wind industry and I'm just trying to get a sense of whether geothermal is there yet or if it's still taking some additional time?

Dita Bronicki

I think I read a disclosure by [Anneld] they received – not by them, they didn't make the disclosure. Somebody else did, that they actually cashed the ITC grant. I'm not familiar with anybody else.

[Elaine Clay] – Piper Jaffray

And could you just also talk a little bit about the potential renewable recovered energy opportunities there and whether you see – are you actively pursuing additional projects there and especially after everyone's gotten some clarification on stimulus funding?

Dita Bronicki

The recovered energy generation business is challenging because it is not exactly a renewable energy in the same level as geothermal. In some states it is considered renewable and counts against the renewable portfolio standard obligations of the utility. In other states it is not. That's one challenge of the renewable activity. The other challenge is that currently it is not eligible to investment tax credit, certainly for production tax credit, but not even a 10% investment tax credit.

And because the renewable energy amount is even quite below by the regulatory incentives, the reg is a little [fast flowing]. It's not that we are not performing the right projects, but they are suffering from this.

Operator

Our next question comes from Emily Christy – RBC Capital Markets.

Emily Christy – RBC Capital Markets

Question on the PV solar, I'm just kind of wondering where you see this business fitting into the overall Ormat picture in three, five years? Is this something that you're going to aggressively pursue, maybe not as many permitting obstacles in the way? How are you thinking about that at this time?

Dita Bronicki

Well, it's probably pretty much ought to be the comprehensive [photovoltaic] on it. We are looking at – we are looking at this as an attractive opportunity in the Israeli market because they fit entirely in the Israeli market. We think that the PV, even as part of the opportunity as a developer also outside the photovoltaic, and we look at it, but it's just too early for us to give you numbers or quantities.

Emily Christy – RBC Capital Markets

In terms of the international picture for geothermal energy, are you starting to see things move forward where, I mean, a while ago a bunch of countries announced they wanted to get geothermal but nothing really happened. Do you see that kind of turning the tide and moving to action at this point?

Dita Bronicki

We see movement towards action. I'm not sure that we can say that we have seen actual action. Movement towards action is clearly the big concession solicitation in Chile, if we have to pick an example, a country that has a huge potential of geothermal [answer] and developed almost all [answered] and developed. We started the development in Chile today and they have issues of very large concessions being [laid] to standards. So that's one area where we see activity towards action or towards activity, not yet activity.

We see in Indonesia potential activity. They have issued a 10,000 megawatt plant in which geothermal has a potential part, but no. I hate to say we have our own Indonesian projects which is getting delayed and delayed and delayed for such a long time.

We turned over to the new development or are we [deferred] of the change in Indonesian attitude toward geothermal. There have been a lot of, at least, press in the last few weeks since the new government in Indonesia came into office supporting geothermal in general, solar in particular. So maybe we are too [old] to change.

Operator

Our next question comes from Timothy Arcuri – Citi.

Timothy Arcuri – Citi

I was just wondering if you could give us any color on is there any operational issues at any of these plants this quarter, anything that might decrease output temporarily or affect this quarter or future quarters?

Yoram Bronicki

We don't have anything on that to report. No.

Operator

Our next question comes from Dan Mannes – Avondale Partners.

Daniel Mannes – Avondale Partners

A couple of follow-up questions, first on the product side and given the grant money and stimulus money, but then sort of aligning that with your experience in terms of exploration, development, when you look at the domestic market and given all the capital that's out there, what's a realistic timeframe that you would sort of see bid activity coming up?

I mean I think we all, as the analyst community, see as a big opportunity at some point, but given your experience and you've done more development in the U.S. than anybody. When would these guys realistically be ready to come to market and actually be purchasing equipment and building plants?

Dita Bronicki

It's a very good question because you know the answer. It's not tomorrow. I think that from all the development that we are aware of in the United States, there are less than a handful of projects which are ready to start construction. All the rest are in very early exploration stage and some are even before exploration stage. So it's a long shot.

Daniel Mannes – Avondale Partners

It's a long shot today but given the funding, I mean, this is sort of what you guys have been – when you guys started this business this is what you were looking – this is the opportunity on construction. Is it there? It's just a question of the timeframe. Is that a fair way to look at it?

Dita Bronicki

We generally say that the exploration process is a two-year process. Now, when we say two-year process in some projects it may be 2.5 years and in other projects it may be a year, 1.5 years, but not less than that. So I think that's what we should think of assuming that exploration really starts in all those projects.

And then of course you have the challenges we have where because we are struggling with, I cannot say that we have overcome, of permitting. Permitting is a challenge and as much as the administration is trying to find solutions to accelerate the permitting, we don't see it. I mean I've read that there was an [impaction] to accelerate solar permitting to enable the solar, the big players in the solar industry to take advantage of the stimulus money because of the concern that because of permitting they might lose the opportunity to take advantage of the stimulus money.

I didn't read or I didn't hear about any news similar in [nature] for geothermal. I think we should all be cognizant of the fact that permitting may delay very substantially development in geothermal in the next few years.

Daniel Mannes – Avondale Partners

Just switching gears real quick to solar, looking at what your plans are in Israel, is the feed-in tariff for sort of these large installations in place and is this – is there a risk of sort of the ultimate resolution here or are you guys sort of ready to move very quickly on this?

Dita Bronicki

The answer to the first question is no. The regulation is not in place yet. It is expected by the end of the year, but it is not in place yet. Once the regulation is in place we are ready to move quickly.

Daniel Mannes – Avondale Partners

And I think you noted, I think about 36 megawatts, relative to the respective size of the feed-in tariff, how material a piece of the market is and can that market grow from there under the expected feed-in tariff or are you sort of going to be the first mover and take a big chunk of the market and then be looking to other markets for solar?

Dita Bronicki

They are not going to be for the first movers. They are going to be others who will compete against the first assignment. I don't remember how many others – it's [Midal Hills]. Three hundred megawatts is the total capacity that is currently expected to be released. So we expect to take a piece of it certainly to share it with other developers as well.

Daniel Mannes – Avondale Partners

And then last question on Jersey, this is the first time you've noted this would be split into sort of two phases. Is that decision being driven by the resource or is that being driven by your cycle of equipment sales? What's sort of driving that specific development process?

Dita Bronicki

It's resource-driven. The development of the Jersey resource was a little peculiar. It had its ups and downs and our reasonable belief that it is better to develop it in phases, develop phase one, observe the behavior of the resources and then determine what size [freight] can be supported by the [idea] also.

Daniel Mannes – Avondale Partners

One last one, on the grants you receive, the drilling grants, and I hadn't really heard you mention Maui before, would you refer to these, I mean, were these projects you would have pursued without the grants or are these grants sort of enabling you to look at projects that wouldn't otherwise have hit your radar screen or would have been farther down the list?

Dita Bronicki

No, the projects would have been pursued with or without the grant, but the grants will enable us to do a more scientific or R&D type activity and not only develop the project itself but also learn from it for exploration in other projects and future projects. Tests, technologies or methodologies that we would otherwise not expected and that's the main advantage of them, not their release of a project. The project would have been released without the grant in place, but the activity, the exploration activity would be have been different. The scope of the exploration activity would have been different.

Operator

Our next question comes from Noah Houser – Barclays Capital

Noah Houser – Barclays Capital

I just wanted to follow-up on California and some policy stuff. In light of the increased renewable energy standard there have you seen an increase in appetite from the utilities and other players for either like on the product side or on the project side of your business?

Dita Bronicki

I can't see that we have seen a change, at least in recent weeks or recent months. The interest of the controlling interest utility has been there for a year or two years and I can't say that we have seen a change but the interest is definitely there.

Operator

Our next question comes from Paul Clegg – Jefferies & Co.

Paul Clegg – Jefferies & Co.

I joined the call a little late so I'm sorry if you already addressed some of these issues, but I heard you refer before to Indonesia and I was wondering if you could give any more detailed update on [Surula]? What's the next step or maybe the first step in essence and any update on sort of timing there?

Dita Bronicki

The next step is the operation of the [power] purchase agreement with respect to [inaudible] and with respect to some other contractual issues with the government. The whole progress, that I'm almost embarrassed to say it's the whole progress because the progress is so slow that it's embarrassing to state the progress, but a team has been formed to negotiate that, the progress of the day.

Paul Clegg – Jefferies & Co.

And once you are actually – if you actually got a contract signed what would be sort of the conversion timeline before you could start producing revenues? Is that sort of a two-year period or is that –

Dita Bronicki

The general schedule of the [Surula] project has not changed. It's just that the [self informed] has not started yet. Once we have a contract that we are comfortable moving forward, we plan to go to project financing of this project and say last project is out to release such a big project without financing, especially since we will developing a control [some] and not just buying our space.

The expectation is that the financing will take about a year and then the implementation of the project is a four-year cycle with a four-year phase in, we think coming online in, I don't know, 18 months or 16 months possibly financial close and we have the [statement] following.

Paul Clegg – Jefferies & Co.

So even in terms of if you were to get some product revenues out of that would it take – are we looking at more than a year from the time of the contract signing?

Dita Bronicki

Oh yes. We are thinking about a four-year cycle.

Paul Clegg – Jefferies & Co.

And on the issue of product revenues, again, I knew you addressed this quite a bit in the Q&A, but you did talk in the press release about returning to previous levels and corresponding margins declines with that and I just wanted to hit you again with what is really previous in your minds? Are we talking about 2008 levels, early 2009 levels? And then what should we think about as the more typical long-term margins in the product business?

Dita Bronicki

I think it was 2008 was the low margin and I think by 2007 was the low and 2008 is the normal, so 2008.

Paul Clegg – Jefferies & Co.

And then on the margins, what would you consider reasonable long-term margins in this sector?

Dita Bronicki

That's what we refer to.

Paul Clegg – Jefferies & Co.

Oh, so 2008-type margin level. I think you had a lot of movement in margins in 2008, though, so are we talking about sort of 25% or?

Dita Bronicki

Pick an average. Pick an average because there is always going to be movement between quarter and quarter. I think you should take the annual average.

Paul Clegg – Jefferies & Co.

And then on the repurchase of the Lehman OPC ownership, I'm just trying to figure out how you look at the economic benefit of that and whether or not we should expect to see any other similar uses of cash come up like this? I guess what was the impetus for the repurchase and should we expect any more of these?

Dita Bronicki

We all know why Lehman had to fail. They didn't have any appetite for tax benefits. Tax, equity market was almost dry during most of 2009 and as a result of it we, people who were willing to buy they were demanding very, very high yields. With those yields it made sense for us to hold it because we get credit terms which is justified in and of itself and on top of it we have the tax benefit. So even though we cannot use the tax benefit [specifically], we saved something that can be carried forward until we could do it. It made economic sense to do it. I think we should look at it as a one time.

Operator

We do have time for one more question. Our final question comes from Steven Milunovich – Merrill Lynch.

Steven Milunovich – Merrill Lynch

Thank you. First of all, what do you expect the tax rate to be going forward?

Joseph Tenne

I think the current tax rate will also continuing going forward, taking into account that we still use the tax benefit of the [PPC] I mean. So it should be at the same level as the tax rates went down, are going down some in Israel, so it will be – it should be more or less the same levels of 2009.

Steven Milunovich – Merrill Lynch

And I believe the Philippines department of energy is planning to auction off eight steam field assets towards the end of this year. Are you planning to potentially be involved in that?

Dita Bronicki

I'm not sure. I don't know that we have an answer.

Steven Milunovich – Merrill Lynch

And just curious, although it sounds like it's taking some time, as there's more geothermal activity occurring and there's more companies in this space, are you running into any sort of employee retainment issues or attracting the people that you want?

Dita Bronicki

No. I must say there is always some mobility, but not any major thing that we should mention, no.

Operator

Ladies and gentlemen, that does conclude our Q&A session for today. I'll turn the conference to Dita for any closing remarks.

Dita Bronicki

My closing remarks as always is, thank you all for your support of the company, your confidence in the company and we hope to continue to be the number one geothermal in the industry. Thank you.

Operator

And ladies and gentlemen, that concludes the Ormat Technologies third quarter 2009 earnings conference call. We appreciate your time and attention. You may now disconnect.

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: Ormat Technologies Inc. Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts