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ORMAT Technologies Inc. (NYSE:ORA)

Q3 2009 Earnings

November 05, 2009 9:00 am ET

Executives

Todd Fromer- KCSA Worldwide - IR

Yoram Bronicki - President and COO

Joseph Tenne - CFO

Dita Bronicki - CEO

Participants:

Ben Kallo - Robert W. Baird & Co.

Michael Lapides - Goldman, Sachs & Co.

Elaine Kwei - Piper Jaffray & Co.

Emily Christy - RBC Capital Markets

Tim Arcuri - Citigroup Global Markets, Inc.

Dan Mannes - Avondale Partners, LLC

Noah Hauser - Barclays Capital

Paul Clegg - Jefferies & Company, Inc.

Steven Milunovich - Bank of America Merrill Lynch

Operator

Good morning. My name is Wes, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ormat Technologies third quarter 2009 earnings conference call. All lines have been placed on mute, to prevent any background noise. After the speakers' remarks, there will be a question and answer session.(Operator instructions.) Thank you. I'll now turn the conference over to Mr. Todd Fromer with KCSA. Please go ahead, sir.

Todd Fromer

Thank you, Wes.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 2nd, 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 EBITDA and 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 accessed on Ormat's web site at www.ormat.com under the Event Calendar link that's 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. 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 and updates on 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 online 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 solids from the geothermal brine and, based on the success of a 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 would 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 of 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 negotiation. 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 of 15 megawatt is expected to come online by the end of 2010; and the second phase is expected to follow approximately 12 months later.

Let me review our longer term projects 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. The power purchase agreement is still subject to various approvals, including PUCN approval. The field 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 exploration grant. Based on our current position, we plan to start the drilling activities 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 Greenfields 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 processes, as well as locating, dedicating, 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 due to 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 are currently negotiating several contracts that we believe will be finalized and will contribute to our 2010 revenues.

Moving to slide ten, 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 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 commercial entry into this market as a developer.

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

Joseph Tenne

Thank you, Yoram; and good morning, everybody. In addition to a review of the main issues impacting our financial results in my prepared remarks, we are also including certain financial highlights from the Company's 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 %

Most of the 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 30th, 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 same quarter a year ago, mainly due to the effect of lower oil prices on Puna's 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

30.0%, compared to 23.2% for the same quarter last year. This increase is attributable to a high volume of revenues, a 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 for 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 income 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 30th, 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, totaling $1 million and $900,000 for the third quarter of 2009 and 2008, respectively, related to the Company's unconsolidated 50% interest in the Mammoth complex in California.

The table in slide 27 reconciles net cash provided by operating activities to EBITDA and adjusted EBITDA for the three and nine-month periods ended September 30th, 2009, and 2008, and for the years ended December 31st, 2005, 2006, 2007, and 2008. We previously calculated EBITDA to exclude equity income of investees 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 would have 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.

Turning now to slide 18, as of September 30th, 2009, the Company had cash and cash equivalents of $20.3 million, compared to $34.4 million as of December 31st, 2008. We derived $77.7 million from operating activities during the first nine months of2009; and borrowing activities included the first disbursement in the amount of $105.0 million of the Orpower 4 Olkaria financing; $42.0 million from the Amatitlan financing; $40.0 million proceeds from long-term loan agreements with two groups of institutional investors; and $12.0 million from using revolving credit lines with commercial banks.

On the usage side, $212.3 million of cash was 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 Nevada, has acquired all of the Class B membership units of OPC held by Lehman Brothers pursuant to a right of first offer for a purchase price of $18.5 million. Lehman Brothers owned 30% of the Class B membership units.

As a result of this transaction, we recorded a gain of approximately $13 million in the fourth quarter of this year. Also, income from the sale of limited liability company interest in OPC to institutional equity investors for the third quarter of 2009 was $3.9 million, compared to $5.0 million for the third quarter of 2008. The decrease is a result of lower depreciation for tax purposes, as a result of declining depreciation rate when 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 19%.

As a result of the acquisition of the Lehman Brothers Class B membership units, this item will further decrease with a commensurate decrease in our tax expenses as a result of our utilization of the tax benefits of OPC.Our total outstanding long-term debt as of the end -- of 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 4th, 2009, Ormat's Board of Directors approved the 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 1st, 2009, to shareholders of record as of the close of business on November 18th, 2009.And now, let me turn the call over to Dita.

Dita Bronicki

Thank you, Joseph. There are several points I would like to cover today. The Department of Energy loan guarantee program, the recent Department of Energy exploration and development award, and an update -- sorry -- and an update on our financing activities. Let me start with the DOE loan guarantee program on slide 22. On October 7, this year, the DOE finally issued the regulations related to the Section 1705 DOE loan guarantee. As expected, the DOE is relying on the commercial lenders to do most of the due diligence work and, thus, enable 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, or an expected amount of $4 billion to $8 billion of guarantees. The renewable energy industry 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 applications 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 the direct funding under the Recovery Act, which includes funding for the exploration and development of new geothermal fields, and research into advanced geothermal technologies.

We mentioned in our last call that we had submitted applications for exploration and EGS grants. Last weekend, 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 Glass Buttes in Oregon. The grants 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 $50.0 million with a commercial bank under favorable terms. The loan bears interest at six-month LIBOR plus 3.25%. And we have an option to fix the interest rate upon the drawing of the loan. We also entered into an additional $15 million committed line of credit with a commercial bank.

Regarding the North Brawley project, we are currently in the documentation phase of an approximately $100 million long-term loan with a financial institution. Together with the approximately $90 million ITC grants, this will finance approximately two-thirds of the project's cost. It is important to note that margins that we see today for long-term debt are more favorable 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 power plants, and development and construction of new projects. In addition, our capital expenditure budget for our maintenance activity is 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 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 revenues 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 additional $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 it has been a very unique year for 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 on investing for the long term, moving forward with our exploration activities, and continuing to add the lands and, when needed, the funding necessary to continue our growth.

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.)

Your first question comes from Ben Kallo of Baird.

Ben Kallo - Robert W. Baird & Co

Good morning. Can you hear me?

Dita Bronicki -

Good morning, Ben.

Ben Kallo - Robert W. Baird & Co.

Hi. For the McGinness Hill 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 any color there?

Yoram Bronicki -

Hi, Ben. This is Yoram.

It's very -- I think that 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 it's -- I don't think that, by itself, it's a good marker on what is yet to come.

Ben Kallo - Robert W. Baird & Co. - Analyst

You mentioned in the Product Segment that you're working on (technical difficulty) 2010 --

Dita Bronicki

Ben, we can't hear you.(Multiple speakers.)

Dita Bronicki

Operator, there is a problem. We can't -- there is kind of an echo. Can you do something to the sound?

Operator

Ma'am, your next question comes from Michael Lapides of Goldman Sachs.

Michael Lapides - Goldman, Sachs & Co.

Hi, Dita. Real quick question.

Given what's happened globally to the economic conditions over the last 6 to 12 -- 6 to 18 months, can you talk a little bit about what you're seeing in terms of your average cost of construction of the new geothermal facility here in the US?

Dita Bronicki

Costs went down at 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 costs from the peak of, say, the end of, say, 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 - Goldman, Sachs & Co.

Okay. And given that, is it -- when we think about 2010 and maybe even 2011 capital spending requirements, is -- 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 plans are on slides six and seven, are there any other drivers of capital spending above and beyond the specific plants mentioned on slides six and seven that we should incorporate in our capital spending estimates?

Dita Bronicki

No. We will give new -- a new update on all the projects that are scheduled for the next few years during our yearly call in February. And there are going to be more projects on that. But we think that it is more prudent to give it in an organized way at the next -- at our next call.

Michael Lapides - Goldman, Sachs & Co.

Okay. Meaning that -- you're implying that there are projects that you have not disclosed, but where you are in discussions with a counter-party 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 did not reach yet the resultsso we are not disclosing just yet the projects under the construction with the hope that the exploration results are going to be positive; they are going to be added

And there are discussions that have not yet matured to a project that may mature between now and in February.

Michael Lapides - Goldman, Sachs & Co.

Got it. Okay.

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

Dita Bronicki

No. We had the -- we had, probably, these discussions a year or two ago when we were at the $70 million a year product revenue.

And you probably asked us then, "What growth rate should we assume for the $70 million rate?"

Michael Lapides - Goldman, Sachs & Co.

Yes.

Dita Bronicki

And our answer then was, depending if you included Sarulla or you don't include Sarulla. If you include Sarulla or the likes of Sarulla the growth 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 growth 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 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 underestimated because of the additional business that will come from developers in the United States using the stimulus money. And maybe not.

Michael Lapides - Goldman, Sachs & Co.

Okay. Thank you, Dita. Much appreciated.

Operator

Your next question comes from Ben Kallo of Baird.

Ben Kallo - Robert W. Baird & Co.

Hi. 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 more details?

Dita Bronicki

We are bidding outside of the -- out of the United States, as well. And as in the past, in the Product Segment, it is very hard to say how much and when a contract will be finalized, until it is finalized.

So I can tell you -- 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.

Okay. 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 were 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.

Okay. And 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.

Ben Kallo - Robert W. Baird & Co.

Great. Thank you very much.

Dita Bronicki

You're welcome.

Operator

Your next question comes from Elaine Kwei of Piper Jaffray.

Elaine Kwei - Piper Jaffray & Co.

Hi, Dita. 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 more smaller projects which are currently under negotiation. It doesn't mean that it can't come, but as we speak now, I think I can tell you that we do not negotiate any contracts of that size.

Can you repeat the question on the solar, please?

Elaine Kwei - Piper Jaffray & Co.

Right. Just will there -- what kind of potential impact would there be to the Product Segment and solar. And would that – should we expect that to come ahead of any actual -- of any project development?

Dita Bronicki

We don't expect the solar activity to go into the Product Segment at all. As far as we have decided up to now, we are entering the solar segment as developers, not in the Product Segment.

Elaine Kwei - Piper Jaffray & Co.

Okay.

Dita Bronicki - Ormat Technologies, Inc. - CEO

Now, it is true that we might, under the joint venture agreement -- now that I think about it, and maybe I misspoke when I said no. Because we have a joint venture of 70/30 with Sunday, 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 Kwei - Piper Jaffray & Co.

Sure. And I appreciate the clarification there.

And then have -- 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 ENEL that they received -- not by -- they didn't make the disclosure, somebody else did – that they have actually cashed the ITC grant. I am not familiar with anybody else.

Elaine Kwei - Piper Jaffray & Co.

Okay. Great. And could you just also talk a little bit about the potential renew -- recovered energy generation 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. It's one challenge of the REG activity.

The other challenge is that, currently, it is not eligible for investment tax credit. Certainly not production tax credit, but not even a 10% investment tax credit. And because the renewable energy market is driven quite a lot by the regulatory incentives, the REG is a little suffering. It's not that we are not pursuing the right projects, but they are suffering from this.

Elaine Kwei - Piper Jaffray & Co.

Okay. Thank you so much for that clarification, Dita.

Dita Bronicki

Thank you.

Operator

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

Emily Christy - RBC Capital Markets

Good morning. A 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

It's probably premature to give a comprehensive thought process on it. We are looking at this as an attractive opportunity in the Israeli market, because of the feed in tariff in the Israeli market. We think that PV, is an attractive opportunity as a developer also outside of Israel. And we look at it. But it's just too early for us to give you numbers or quantities.

Emily Christy - RBC Capital Markets

Okay. 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 -- the concession solicitation in Chile, if we had to pick an example. A country that has a huge potential of geothermal, all untapped, undeveloped, or almost all untapped, undeveloped. They started development in Chile today. And they have issued a very large concession bid late this summer. So that's one area where we see activity towards action or towards activity not yet activity.

We see in Indonesia a substantial activity. They have issued a 10,000 megawatt plan in which geothermal has a substantial part. But I hate to say. We have our own Indonesian projects, which is getting delayed and delayed and delayed for such a long time. Will it happen, also, to the new development, or are we at the verge of change in the Indonesian attitude towards geothermal?

There's 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 towards a change.

Emily Christy - RBC Capital Markets

Okay. Thanks very much, Dita.

Operator

Your next question comes from Tim Arcuri of Citi.

Tim Arcuri - Citigroup Global Markets, Inc.

I was just wondering if you could give us any color on if there are 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 - Ormat Technologies, Inc. - President and COO

Don't have anything to report. No.

Tim Arcuri - Citigroup Global Markets, Inc.

All right. Thanks.

Operator

Your next question comes from Dan Mannes of Avondale.

Dan Mannes - Avondale Partners, LLC

Morning. A couple 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 and development, when you look at the domestic market and given all the capital that's out there, what's a realistic time frame that you would sort of see bid activity take -- coming up?

I mean, I think we all, as the analyst community, see this as a big opportunity at some point. But given your experience – and you've done more development in the US 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.

Dan Mannes - Avondale Partners, LLC

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 look -- this is the opportunity on construction, is it's there and it's just a question of the time frame. Is that a fair way to look at it?

Dita Bronicki

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

And then, of course, you have the challenges that we have -- that we are struggling with. And I cannot stress that we have technical difficulty of permitting. A permit 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 instruction to accelerate solar permitting to enable the solar -- the big players in the solar industry, to take advantage of the stimulus money,because it's a concern that, because of permitting, they might lose the opportunity to take advantage of the stimulus money.

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

Dan Mannes - Avondale Partners, LLC

Okay. Just switching gears real quick to solar. Looking at what your plans are in Israel, is the feed in tariff for sort of these larger 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.

Dan Mannes - Avondale Partners, LLC

And I think you noted, I think, about 36 megawatts. Relative to the expected 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, take a big chunk of the market, and then be looking to other markets for solar?

Dita Bronicki

We are not going to be the first mover. There are going to be others who will compete against the first assignment. I don't remember how many -- oh, Smadar helps me. 300 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.

Dan Mannes - Avondale Partners, LLC

Okay. And the last question, on Jersey. This is the first time you've noted that 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 resource group believe that it is better to develop it in phases, develop phase one, observe the behavior of the resource, and then determine what size phase two can be supported by the available resource.

Dan Mannes - Avondale Partners, LLC

I'm sorry. One last one. On the grants you received, 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 on the list?

Dita Bronicki

No. The projects would have been pursued with or without the grants. 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, in future projects, test technologies or methodologies that we would otherwise not have tested. And that's the main advantage of them. Not the release of the project. The projects would have been released without the grant, as well. But the activity, the exploration activity, would have been different. The scope of the exploration activity would have been different.

Operator

Your next question comes from Noah Hauser of Barclays.

Noah Hauser - Barclays Capital

Hey, everyone. 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 say that we have seen a change in recent weeks or recent months. The interest of the California utility has been there for

a year or two years. I can't say that we have seen a change, but the interest is definitely there.

Noah Hauser - Barclays Capital

Okay. Thank you.

Operator

Your next question comes from Paul Clegg of Jefferies.

Paul Clegg - Jefferies & Company, Inc.

Hi. Thanks for taking my question. I joined the call a little late, so I'm sorry if you already dressed some of these issues.

But I heard you refer before to Indonesia. I was wondering if you could give any more detailed update on Sarulla. 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 a revision of the power purchase agreement with respect to power tariff and with respect to some other contractual issues with the government. There was progress, but I'm almost embarrassed to say that there was progress, because the progress is so slow that it's embarrassing to say it's a progress. But a team has been formed to negotiateXXX? That's the progress of the day.

Paul Clegg - Jefferies & Company, Inc.

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

Dita Bronicki

The general schedule of the solar projects has not changed, just as the starting point 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. It's a large project. And it's hard to release such a big project without financing, especially that is developed in a consortium and not just by ourselves. The expectation is that the financing will take about a year. And then the implementation of the project is a four-year cycle, with three phases, the first one coming online 18 months or 16 months after the financial closeand the other phases following.

Paul Clegg - Jefferies & Company, Inc.

So even in terms, 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.

Paul Clegg - Jefferies & Company, Inc.

Okay.

Dita Bronicki

We are talking about a four-year cycle.

Paul Clegg - Jefferies & Company, Inc.

Okay, okay. And on the issue of product revenues again -- I know you've addressed this quite a bit in Q&A -- but you did talk in the press release about returning to previous levels and corresponding margin declines along with that. And I just want to hit you again with what is, really, "previous" in your minds? Are we talking about 2008 levels? Early 2009 levels?

And then what are -- what should we think about as the more typical long-term margins in the product business?

Dita Bronicki

I think, it was -- 2008 was a very low level of margins 2007 was the low?, and 2008 is the normal? So 2008.

Paul Clegg - Jefferies & Company, Inc.

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

Dita Bronicki

That's what we referred to.

Paul Clegg - Jefferies & Company, Inc.

Oh, so a 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

Take an average. Take an average.

Paul Clegg - Jefferies & Company, Inc.

Okay, okay.

Dita Bronicki - Ormat Technologies, Inc. - CEO

Because there is always going to be movement between quarter and quarter.

Paul Clegg - Jefferies & Company, Inc.

Okay.

Dita Bronicki

Take the annual average.

Paul Clegg - Jefferies & Company, Inc.

Okay. Very good.

And then on the repurchase of the Lehman OPC ownership. I'm just trying to figure out how you looked 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

The -- I mean, we all know why Lehman had to sell. They didn't have any appetite for tax benefits. The tax equity market was almost dry during most of 2009. And as a result of it, people who were willing to buy it were demanding very, very high yields.

At those yields, it made sense for us to hold it, because we get a cash return 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 benefits immediately, it is still something that can be carried forward until we could use it. So it made economic sense to do it. I think we should look at it as a one-time.

Operator

And ladies and gentlemen, we do have time for one more question. Your final question comes from Steve Milunovich of Merrill

Lynch.

Steve Milunovich - Bank of America Merrill Lynch

Thank you.

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

Joseph Tenne

The -- I think, the current tax rate will also continue in -- going forward, taking into account that we still utilize the tax benefit of the PTC I mean. So it should be at the same level as the tax rates went down -- are going down, for example, in Israel. So it should be, more or less, the same levels of 2008.

Steve Milunovich - Bank of America Merrill Lynch

Okay. And I believe the Philippine Department of Energy is planning to auction off eight steam field assets toward 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.

Steve Milunovich - Bank of America Merrill Lynch

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

Dita Bronicki

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

Steve Milunovich - Bank of America Merrill Lynch

Okay. Thank you very much.

Dita Bronicki

Thank you.

Operator

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

Dita Bronicki

My closing remarks is always this. 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 company 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.

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