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Executives

Rob Fink - IR, KCSA Strategic Communications

Smadar Lavi - VP of Corporate Finance and IR

Yehudit Bronicki - Chief Executive Officer, Director, Chairman of Compensation Committee, Chief Executive Officer of Ormat Industries, President of Ormat Systems, General Manager of Ormat Industries and Director of Ormat Industries

Joseph Tenne - Chief Financial Officer, Principal Accounting Officer and Chief Financial Officer of Ormat Industries Ltd

Yoram Bronicki - President, Chief Operating Officer, Director and Director of Ormat Industries

Analysts

Benjamin Kallo - Robert W. Baird & Co. Incorporated

Elaine Kwei - Jefferies & Company, Inc.

Carter Driscoll - Capstone Investments

Paul Clegg - Mizuho Securities USA Inc.

Mark Bennett

Matthew Farwell - Imperial Capital, LLC

Timothy Arcuri - Citigroup Inc

Thomas Daniels - Stifel, Nicolaus & Co., Inc.

Daniel Mannes - Avondale Partners, LLC

Unknown Analyst -

Ormat Technologies (ORA) Q1 2011 Earnings Call May 5, 2011 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn conference over to Rob Fink, with KCSA to begin.

Rob Fink

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

Before beginning, we would like to remind you the information provided during this call may contain forward-looking statements related 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, projections of future results or trends. Actual future results may differ materially from those projected as the 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 SEC on February 28, 2011. In addition, during this call, statements may include financial measures defined as non-GAAP financial measures by the Securities and Exchange Commission, such as EBITDA and adjusted EBITDA.

The presentation of financial information is not intended to be considered in isolation or as a substitute for financial information prepared and presented in accordance with GAAP.

Management of the Ormat Technologies believe that adjusted EBITDA may provide meaningful supplemental information regarding liquidity measurement that both management and investors benefit from referring to this non-GAAP financial measure in assessing Ormat Technologies' liquidity, and when planning and forecasting future periods. This non-GAAP financial measure may also facilitate management's internal comparison to the company's historical liquidity.

Before I turn over the call over to management, I would like to remind everyone that the slide presentation accompanying this call may be accessed on the company's website, www.ormat.com. Under the events calendar (sic) [IR and Presentations] link, as found in the Investor Relations tab.

With that, I would now like to turn the call over to Yoram.

Yoram Bronicki

Good morning, everyone, and thank you for joining us today for the presentation of our first quarter 2011 results and outlook for the near future. Before reviewing the results of the quarter, I would like first to address North Brawley. As has been the case for the past several quarters, operating expenses at North Brawley overshadowed the strong performance of most of all clients'. The unique operational challenges in North Brawley limit our ability to forecast operational progress and expected timeline. We plan to continue to update on a quarterly basis on our efforts and plans to reach operational balance. However, we will not guide on the expected timeline as long as uncertainty remains high. With that, I would like to begin with a review of the first quarter operational updates. Joseph will continue and provide financial review and Dita will conclude with business and regulatory updates.

Starting with Slide 5. The highlights of the quarter was an 18% increase in total revenue. The growth was driven by strong electricity generation across most of our portfolio as well as an increase in the Product segment. The total generation from our U.S. and international power plants increased 14% from approximately 918,000-megawatt hours in the first quarter of 2010 to over 1 million-megawatt hours in the first quarter of 2011.

Noteworthy contributors compared to last year were the OREG facilities, Puna operating at normal capacity and the full benefit of the Mammoth complex. We're continuing to work through the issues of North Brawley. The East Brawley injection fields has provided a relief but it's not sufficient to solve our injection needs. We spent substantial efforts in an improvement to our production pump and has applied this in most of the operating pumps. Further modifications will be needed over time but we think that this will allow a significant movement in the service life of the production pumps which are now the highest operating costs of the complex.

As we've been operating new wells, sand production has been fairly high but associated cost has been under control and we have been working on ways to further reduce sand separation costs. The injection in the eastern field is not as good as we had expected and we are drilling 1 more producer on the eastern side and hope for a better balance between east and west.

A capacity demonstration test was conducted with production at 33 megawatts and we have the ability to retest before April 2012. We plan to connect our new East Brawley well and rebalance cost. We will continue to target deeper injection and look for deeper production.

Jersey Valley, as previously described, we have completed the plant at the end of 2010 and has been generating power under pre-commercial arrangements. The well field development is not yet complete and we're still limited by the injection capacity. Our plan is to maintain the plant at pre-commercial conditions until we can reach at least 12 megawatts and more work is planned for this month. It should be noted that the operation of the plant is smooth and that it is not carrying the same operating expenses as North Brawley.

For an update on our future growth, please turn to Slide 6. In the table you can see the status and expected completion schedule for each project under construction. In Puna, we're waiting for the PUC to approve the 8-megawatt PPA and for help with the complete interconnection activities for the full benefit of the power plant to be realized. However, some power cells are expected in the third quarter of 2011. In light of the high impact of Puna on our portfolio, we plan to drill an additional production well to provide stair capacity.

We are in the advanced stage of equipment manufacturing in the 30-megawatt McGinness Hills project in Nevada. We have submitted documents to obtain the required construction permits and environmental assessment. We expect commercial operations of the project's first phase in 2012. Field development in Tuscarora, in Nevada, has been completed. We obtained most of the required construction permits. We have broken ground at the plant site and plan to start mechanical work towards the end of the second quarter.

The NEPA process which is required for a compliance under DOE 1705 loan guarantee program is in progress for both the McGinness Hills and Tuscarora. In DH Wells, in Nevada, we completed the drilling of 2 wells and we continued with the drilling activity. The final project under construction is Olkaria III - Phase 3. We amended and restated the 20-year PPA to purchase an additional 36-megawatt from the new power plant at the Olkaria III complex which is expected to come online in 2013. This important milestone enable us to move the project to construction status. There are no updates on Mammoth and Carson Lake.

On Slide 7, you can see the detail [indiscernible] of projects under development. In Indonesia, we're still discussing amendments of the PPA with the off-taker, in parallel we are continuing with the financing process. We're in the very stage of construction and development of 10 projects that will end by the end of 2013, more than 220 megawatts to our portfolio. In addition, we have 78 megawatt that will come from the Sarulla project in Indonesia and Solar PV projects in Israel.

Turning to Slide 8. In addition to the projects under construction and development, we also have 31 geothermal leases waiting to begin exploration or in early exploration phase. In the U.S., we currently have 15 sites in various stages of exploration. Since the beginning of 2011, we have entered into new lease agreements covering approximately 8,000 acres of federal or private land in Nevada, Oregon and California. In total, our land position for future development increased to 351,000 acres.

In addition, we have entered into an agreement with Weyerhaeuser, granting us an option to enter into the geothermal lease covering approximately 264,000 acres of land in Oregon and Washington. Under this agreement, we have the exclusive right to explore the land for geothermal resources and may enter into one or more geothermal leases.

As we described before, this is a strategic move for the company to save for exploration on leases that have more favorable permitting timelines in projects.

Let us now turn to Slide 9 for an update on the Product segment. The first quarter of 2011 saw an increase in the Product segment orders with contracts for the supply of geothermal power plants and other power generating units outside of the United States. As of this month, we have a backlog of approximately $84 million, $11 million of which is subject to notice to proceed. The backlog excludes $15 million in revenues related to the REG LNG projects in Spain. Most of the revenue are expected to be recognized in the second quarter of 2011. We expect the activity in this segment will continue to grow with additional opportunities from international markets. However, as we discussed in the past, revenues are less predictable in the Product segment as a result of the lengthy sales cycle and customer financing that is required.

With the operational review complete, let me turn the call over to Joseph for the financial updates.

Joseph Tenne

Thank you, Yoram, and good morning, everyone. Beginning in Slide 11, total revenues for the quarter ended March 31, 2011, we're at $97.8 million, an 18.3% increase over the revenues of $82.7 million in the first quarter of 2010.

In our Electricity segment on Slide 12, revenues for the quarter were a $78.3 million, an 18.4% increase over revenue of $66.1 million in the same quarter of 2010. The increase in revenues is resulting from an almost 14.2% increase in total output and a slight increase in the average revenue rate of the company's Electricity portfolio from $72 per megawatt hour in the first quarter of 2010 to $75 per megawatt hour in the first quarter of 2011. Total electricity cost of revenues in the first quarter of 2011 was $65.9 million, compared to $54.5 million in the same quarter in 2010. This reflects higher costs associated with operating and maintaining the North Brawley power plant in the first quarter of 2011, which increased from $9.5 million in the first quarter of 2010 to $14.3 million in this quarter. This includes the cost of replacing pumps in the production well. As we've previously said, we expect a higher level of operating expenses to continue at least through the next few quarters.

In our Product segment, on Slide 13, revenues for the quarter were $19.6 million an 18.1% increase over revenues of $16.5 million in the same quarter of 2010. The increase in our products revenue is a result of increasing our Product segment customer order. Total products cost of revenues for the quarter were $16.9 million, compared to $12.4 million in the same quarter of 2010.

Moving now to the next slide, which we present combined gross margin and gross margin for each segment for the quarter. The company combined gross margin for this quarter was 15.3%, compared to 19% in the first quarter of 2010. The electricity gross margin in the quarter was 15.8%, compared to 17.5% in the first quarter last year. As you can see, excluding North Brawley, the Electricity segment gross margin would've been 30.5%, which is a typical margin considering first quarter seasonality input.

In the Product segment, gross margin was 13.6%, compared to 24.8% in the first quarter last year. Such decrease is attributable to different product mix and different margins in the said contract. We expect an improvement in the margins of this segment in the rest of the year.

Moving to Slide 15. Interest expense net for the quarter was $13.1 million, compared to $9.7 million in the first quarter of 2010. The $3.4 million increase was principally due to increase in the total amount of interest due to an increase in the level of debt which was partially offset by an increase of $700,000. In interest capitalize to project as a result of an increased aggregate investment in projects under construction, as well as a decrease in interest expense as a result of principal payments.

Now moving on to Slide 16. Net loss for the quarter was $9 million or $0.20 per share basic and diluted compared to a net income of $1.8 million for $0.04 per share basic and diluted for the same quarter in 2010. The decrease is principally attributable to the North Brawley power plant which had a pretax loss of approximately a $10.3 million or $0.23 per share for the quarter.

As shown on the following slide, Slide 17, adjusted EBITDA for the quarter to the first quarter of 2011 was $27.2 million, compared to $32.1 million in the same quarter of 2010. Adjusted EBITDA in the first quarter of 2010 included a onetime gain of $6.3 million as a result of the sale of GDL. Adjusted EBITDA includes consolidated EBITDA and the company's share in the interest, taxes, depreciation and amortization related to its unconsolidated 50% interest in the Mammoth complex in California in the first quarter of 2010. The reconciliation of GAAP to net cash provided by -- to adjusted EBITDA and additional cash flow information is set forth below. The reconciliation of GAAP cash flows for operations to EBITDA is set forth in Slide 27.

Moving onto the next slide. Cash and cash equivalents and marketable securities as of March 31, 2011, decreased to $64.8 million from $82.8 million as of December 31, 2010. The accompanying slide breakdown the use of cash during the first quarter. Liquidity came from the issuance of senior unsecured bonds, the sale of OPC Class B membership units to JP Morgan and cash derived from operating activities. Our long term debt as of the end of the first quarter 2011 and the payment schedule are presented in Slide 19 in the presentation.

Slide 20 reflects our dividend policy and recent dividend declaration. On May 4, 2011, Ormat's Board of Directors approved the payment of a quarterly dividend of $0.04 per share to send to the company's dividend policy which targets an annual payout ratio of at least 20% of the company's net income. The dividend will be paid on May 25, to shoulder the freight cost as of the close of business on May 18. The company expects to pay a dividend of $0.04 per share in the next 2 quarters. That concludes my financial overview. I would like now to turn the call to Dita for closing remarks.

Yehudit Bronicki

Thank you, Joseph. In my remarks, I will cover recent business updates for a few of our capital progression and conclude with revenue guidance for 2011.

Let me start on Slide 22 with some recent regulation and business updates. In California [indiscernible], Governor Jerry Brown signed Senate Bill 2X (SB 2X) to increase California's RPS to 33% by 2020, among the most aggressive renewable energy goals in the United States. We see this increased demand and in particular the influx of the increase in California RPS as one of the most significant opportunities for us to expand existing projects and to raise new projects.

In February 2011, we signed 2 PPAs. First, we signed a 20-year PPA with NV Energy to sell 30 megawatts of clean, renewable energy generated from the Dixie Meadows geothermal project located in Churchill County, Nevada. We are currently in the exploration phase of Dixie Meadows project that would be eligible for the cash grant under the American Recovery and Reinvestment Act of 2009 if the project is completed by the end of 2013.

Second, we signed a PPA with Hawaii Electric Light Company to sell at lower price 8 megawatt of energy to be generated from the Puna power plant. The supply, which is subject to any escalation is independent of oil prices. And as we mentioned, we signed a 20-year PPA amendment with Kenya Power and Lighting Co., the offtaker of the Olkaria III complex located in Naivasha, Kenya which moved to construction immediately after.

You can see our CapEx requirements for 2011 on Slide 23. In the remainder of 2011, we plan to invest approximately $226 million in projects currently under construction and in addition $186 million for development, exploration and other developments as written in the slide. The funding of this program will come from cash on hand at the end of the first quarter, cash from operations and new corporate lines of credit, project baked under the U.S. DOE loan guarantee program for 2011 for Jersey Valley in agreement with COA and cash grant for Jersey Valley and Puna. Going forward, we intend to finance our projects under construction with long-term project finance debts and ITC cash grants.

Now please turn to Slide 24 for our outlook for the remainder of 2011. We continue to expect 2011 Electricity segment revenue to be between the $315 million and $325 million, while we narrow the range for our guidance for the Product segment revenue to be between $80 million and $85 million. As we said in the last earnings call in February, we may report a loss in the second quarter of the year but we expect to be positively in the remainder of 2011 and in the full year.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ben Kallo with Baird.

Benjamin Kallo - Robert W. Baird & Co. Incorporated

I want to start on the Product segment and congrats on some new business there. Could you just kind of walk us through what the mix issue was on the margin side? And then maybe give us a little more detail about what you're seeing both in the U.S. and then you mention that there's some opportunity in the international side of the business, could you just give us some more detail on that?

Yehudit Bronicki

The mix between geothermal and remote power unit in our Product segment, the margin doesn't really depend on the nature of the control system. Specific negotiated plants for specific contracts. The next generated a little lower margin and then the mix of the first year 2010. But we don't see it as change in the gross margin number only longer-term basis for the full year. And so the U.S. market, as I'm sure most of our people know, we did not get the 2 of 3 orders for a unit that are -- that have been ordered for geothermal fleet with our program and ready to go forward because at least with respect to one project, it will subject to a deal longer under the innovative program. And another supplier won't eligibly turn program the program technology and did not require it. The other order that we'll announce – major order that we'll announce, is not for and we didn't get it. We are not aware of any other program fee that is eligible for this time.

Benjamin Kallo - Robert W. Baird & Co. Incorporated

Okay, good. And now moving on to Electricity segment. For Brawley and then Jersey Valley first on Brawley. Can you just guys can just update us again on when, if, and if you expect to get to that 50-megawatt level? And then how much of your CapEx have you outlined on Page 23. Okay, you have that less of $17 million there but -- so could you just tell us when and if you could get to that 50-megawatt number? And then on Jersey Valley, how much time do you think that'll take to get to commercial operation? And at that time, what are your ideas around ITC cash grant? Will you apply for that or will you wait till you get to the full 50 megawatts?

Yoram Bronicki

Really what I said in the beginning of our call is that what we would like to do is we'll continue an update on Brawley, but I want to say a date just because there is an amount of uncertainty and so we would like to avoid that. And in terms of Jersey, we don't think that it's a very long process. There's some more well [ph] field work that we need to do, the well is certainly, part of it is going to the ITC cash grant. So it'll be a shame to apply before we've completed all that work. But clearly, the ITC cash rent is planned for that as well.

Benjamin Kallo - Robert W. Baird & Co. Incorporated

Okay. Then just finally on your CapEx versus your liquidity. Can you give us an update on the loan guarantee process, when do you expect to have that finalized? I know it's taking longer than anyone had hoped for. And then, how much shifting are you doing in your development in spending on new projects because of any type of liquidity restraints if any, just update us there.

Yehudit Bronicki

Okay. On the loan guarantee program, firstly, we are thinking very close to a conditional commitment. But until we have it we cannot say it, we cannot say we have it like any other closing but we are close. When we are going to get the loan knowing the royalty it's probably going to be at the very end of very last month of the availability of the program, which is September of this year. At least that's our working assumption if it's only happened many months earlier, we can get it much more than the month earlier. What was the other question? Did you have another question, Ben? I remember now, you're asking if our development is constrained by resources, like natural resources, the answer is no. If we have no projects ready for development, for exploration, we would have done more. It's the activity that takes to grow responsibly exploration is not financing.

Operator

Your next question comes from the line of Paul Clegg with Mizuho.

Paul Clegg - Mizuho Securities USA Inc.

At what point do you make a determination about impairment on North Brawley? And what key factors do you have to take into consideration to take that decision? And have you looked at how much impairment could be on that?

Yehudit Bronicki

We are looking at impairment every quarter, Paul. It's not something that we've done at a certain point and then north. And then I think we've talked in length about EP in our February earning call, where we provided maybe a little bit more information. We believe that we can get to the output of deposit without requiring impairment. And this is a combination of operating cost and output. And we've looked at it now again and still don't think it is necessary. As you know, our reference did take an impairment because they are already talking the closing to IFRS and continues IFRS so under GAAP. Public information looks at this and see the analysis down there.

Paul Clegg - Mizuho Securities USA Inc.

Okay. And can you talk a little bit about competition in the Products business? Have you seen any new serious competitors emerge? Given maybe a relative lack of activity there, are you seeing some of our competitors become more aggressive?

Yehudit Bronicki

I alluded to it when I spoke to the prior question. Yes, we do see one competitor exiting the U.S. market. I think that they are taking more risks than we are willing to take. And I still think that our performance technology, enhancement technology is the winning technology.

Paul Clegg - Mizuho Securities USA Inc.

Okay. And you may have run through this, I apologize if you did, I didn't catch it, but the fact that you were a taxpayer during the quarter would you mind just running through that again if you did?

Joseph Tenne

We are not a taxpayer in the States. We are taxpayer in Israel and Nicaragua, this quarter. We will not pay taxes in Kenya and in the Guatemala we have tax rebates. So, but the tax amount that we pay Israel have been reduced dramatically from 25% to 15% in this year. Very important to know.

Paul Clegg - Mizuho Securities USA Inc.

Alright actually one more question, I'm sorry. Did you say how much depreciation was on North Brawley this quarter?

Yehudit Bronicki

Smadar, you have the number?

Smadar Lavi

It's about $2.6 million, sorry, $2.1 million.

Joseph Tenne

Around $2 million.

Operator

Your next question comes from that of Elaine Kwei with Jefferies.

Elaine Kwei - Jefferies & Company, Inc.

Does your current guidance for electricity revenue assume that oil stays at current levels and [indiscernible] revenue stays at current rates?

Yehudit Bronicki

The assumption is that oil prices are slightly lower than what they are at current level. Not as low as last year but lower than what they at the current level.

Elaine Kwei - Jefferies & Company, Inc.

And just at this point, with North Brawley, is it just, is it that the problem is identified and contained and it's a matter of going through all the repairs that are necessary or are new things also coming up in the process?

Yoram Bronicki

It's probably more the former than the latter. We have, I would say that there are 3 factors. It somewhat of a repeat of the previous call, but 3 factors: one, is having enough injections; second, is having enough production; and the third is increasing the service life of the production pumps because it is such a high expense item. And I would say that reaching on operational balance is a compromise between those 3 factors. So for any injection capability there's a production capability and the cost of operating the production pumps. The cost of operating the plant that will strike a new balancing or balance point. And this is really what we're focusing on. In this quarter, we spent a lot of effort in improving the production pumps. We don't think that we're there, but we think that we'll see. Through the rest of the year, we'll see lower cost in that sector. And we've improved our injection situation with the East Brawley wells but it's lining up and we need to continue and improve this. And this will continue ramp up production, which has been ramping up every quarter. When exactly will we get there and what would be the operating expense is associated with it, this is the part that is a little hard to predict.

Elaine Kwei - Jefferies & Company, Inc.

And then just one last quick one, were commodity costs at all a factor in the product list margins this quarter?

Yehudit Bronicki

Slightly, yes, because as you know, commodity prices did go up in the last 6 months. And it certainly in fact in exactly in the same way as in 2009 some of the increased gross margin was due to reduction of commodity prices. It is not a major item but it is to a certain extent, yes.

Operator

Your next question comes from the line of Sam Arcuri with Citi.

Timothy Arcuri - Citigroup Inc

Guys, it's Sam. I was wondering if you can just talk in general in terms of some of the it seems fairly regular operational issues with one side or another, is this kind of endemic to geothermal plants? Or is it perhaps, a different technology that might be used to make some of these disruptions less frequent? I was just wondered if you could comment on that.

Yoram Bronicki

Were you asking if, can you start the question again? What was the first part that you were saying?

Timothy Arcuri - Citigroup Inc

On a fairly regular basis here, quarterly, there's either an issue with North Brawley or Puna or any variety of your plants. Is this specific to geothermal plants in general? Or do you think this is a perhaps an issue related to technology or personnel? I was just curious if you could comment on that.

Yoram Bronicki

We didn't report any issues in the operating plants this quarter, so we didn't have any substantial issue. But if you I think a detailed look into our power plants will basically show that this is what the operating plants is all about. It's about performing maintenance whenever you can predict a failure before it happens and you're ready with it. Then of course, you're at the advantage. But sometimes, you can't. Things happen either weather-related or just wariness, that's a history of power plants or the reality of power plants. And the difference between regulated utilities and IPPs, that the regulated utilities being allowed to put most maintenance into their rate base are actually paid for super high reliability. And so they actually have a very, typically a very generous philosophy and a very generous schedule maintenance activity. And IPP needs to maximize profit because nothing is rate based. And therefore, IPPs have to try and find out how much schedule maintenance and preventive maintenance is required and makes a lot of sense. Theoretically with enough spares and enough sparing, you could have no downtime to troubles if you don't have can justify that economically. And so, our major events in operating plants are unplanned outages or planned outages. And this is why we work on them but there's nothing, that's just the reality of operating plants and what's specific about the geothermal industry is that you have very little control over your geothermal field on the production side. And again, it's not so much related to technology, it's just the reality of geothermal. It's just like you can't exactly predict or control how the wind blows or installation when it comes to the wind industry or the solar industry.

Yehudit Bronicki

But let me add to it in a bigger sense, if you look at the availability of the capacity sector of various technologies, geothermal, including Ormat, are on the highest front. We are still and I don't know if Smadar has a number but we are still about 95% of if we exclude boarding. Boarding is a specific issue, a specific problem that is not typical, not to our portfolio of projects and not to geothermal in general. But if you exclude boarding and you look at our performance numbers, they're one of the highest in any technology not only in geothermal compare it to combined cycle, compare it to call, compare it to any traditional technology, we are selling very high on availability.

Timothy Arcuri - Citigroup Inc

Okay. If I could maybe ask one last question, can you give any perspective on your end on the outlook for the loan guarantee program in terms of whether weather it continues past the September deadline?

Yehudit Bronicki

We, of course, don't know, but the assumption is that it will not be -- the outlook and assumption is that it will not be extended, that we are going to have this one loan guarantee project financing for a portfolio projects. And the rest is going to be in the market and I must say that the market today is very open and very attractive for projects finance.

Operator

Your next question comes from the line of Dan Mannes with Avondale Partners.

Daniel Mannes - Avondale Partners, LLC

A couple of follow-up questions. First on North Brawley, I think your loss for the quarter was a little over $10 million and if I check back to what happened in Q4, it looked like it was closer to $4 million or $4.5 million. And I was wondering what sort of happened over this period of time that's maybe worsened its performance or do I have the last quarter's numbers wrong?

Joseph Tenne

No, I think you're about right to what we did in the first quarter and it continues into the second quarter is really the upgrade to all of our production pumps, and that's a very high-ticket item. In return of course it provides geothermal fluid and ultimately, megawatt hours and we set a new generation as a result of that work. But the impact on the first quarter operating expenses has been substantial. We've gone through almost all of them.

Daniel Mannes - Avondale Partners, LLC

Just so I understand. So the operating costs of the pump is incrementally high but you're not yet seeing the benefit through increased output? Or you're still taking lower than PPA pricing? I guess I'm trying to understand why if the output is going higher and why are you're not seeing that on the revenue line?

Yoram Bronicki

Because the revenues were -- revenues were higher other than the fact that it's a time use of contract. So there is same generation in the first quarter is not as valuable as second and especially third quarter. So there's an element there but no, the generation was way higher than previously. However, it is not and just to clarify, it's not operating cost of the pump, it's replacing the pump upgrading it and putting it back into the well. So the issue is very high expenses, while you upgrade the pump of course you don't enjoy the flow from that well. And we've been working on a number of wells and concurrently actually. So this is -- the impact, it's a high expense and the results are something that we will get mostly in the future quarters.

Daniel Mannes - Avondale Partners, LLC

Okay. So just so I understand, this is the expense of the pump replacement some which is capital and some which are OpEx. But you’re still not done that it will be done at some point in second quarter, in terms of...

Joseph Tenne

All of this was -- all of it was expensed. None of it was capital.

Daniel Mannes - Avondale Partners, LLC

Okay. But there will still be some of the incremental expenses going to the second quarter on the pump replacement?

Joseph Tenne

Correct.

Daniel Mannes - Avondale Partners, LLC

Okay. Real briefly, we have gotten some indications that on the cash grant program, that maybe it wasn't done to the extent you had continuing cost, you may be able to go back and sort of reopen the cash grant for a project. Is that the case from your understanding and is that a meaningful opportunity on North Brawley?

Yehudit Bronicki

It is. it is the case and we know that you can submit another application on North Brawley. Yes.

Daniel Mannes - Avondale Partners, LLC

Any thoughts on that or obviously you want to see how much more work you need to get done before you go there?

Yehudit Bronicki

We want to decide what is the right time to submit it but, yes, we are planning to submit based on these new...

Daniel Mannes - Avondale Partners, LLC

Okay. The last issue on North Brawley just so I understand is, have you seen any -- on existing wells, that have been running for, I don't know, a year now or a year plus, have you seen any reduction in sand content? And has there been any deminuation as you sort of gotten more of maturity on these wells or has it remained at stubborn high levels over time?

Joseph Tenne

No, you're right Dan. It's a - mature wells, actually all mature wells, have seen -- we've seen a reduction in sand content than reduction in sand production. And then within the wells, we have some that are more sandy, as we call them, and less sandy, But the sand production diminishes in all wells. What we have done as part of the well field work that was completed in December, December, January what we have done is we started up I think 5 new wells. Not all of them are new, but some of them just were not operated until this point because of the layout of the piping. And therefore, in terms of sand production we still have high sand production because the mix is some new wells, some old wells. But all of them diminishes over time.

Daniel Mannes - Avondale Partners, LLC

I guess what I'm trying to get to, is there some prospect that even just naturally you could see some improvement just as you have less new wells and more mature wells in the mix and that might help you out a little bit in terms of either reduce separation or reduced disposable management cost?

Yoram Bronicki

The answer is, yes. And to be a little more technical, what I would say is that really, this will be very helpful for us. The highest impact is really on life of production pumps. And there are upgrades that we have done that handle brine chemistry and brine conditions, but the sand itself, it's just an erosive, erosive material because the pumping reduces pump life. And what we know we will get to, or fully expect to get to is a point where there is less sand in the brine and therefore, it's 2-year run life or service life of the pump, 1.5 year to a 2-year service life is feasible. And in many ways, this would be the biggest impact in making this project similar to all other fields. And there, the indications of the drop in sand content on wells is being matured is a very positive trend and will have very high positive impact from us.

Daniel Mannes - Avondale Partners, LLC

Got it. Two other, one is a question I want to get into. One is, you mentioned in your 10-K some details about potential contract repricing or I guess, contract changes on some of your California plants, maybe over about 1 million-megawatt hours fairly sizable. Any update on what the progress is on -- I guess you refer to it as a global settlement. Any potential for improving realization as we move into '12 and beyond?

Yoram Bronicki

It's a, we're in the process itself, so really, it would be a, it's hard for us get priority because it's not done. We’re hopeful that the results outcome will be good. There is different interpretation of what the global settlement really means. Not the IPPs in general, but renewable energy IPPs and we're discussing with our off-takers.

Daniel Mannes - Avondale Partners, LLC

So this is something we should keep our eye on but it's too early to say if there's going to be a pricing uplift?

Yoram Bronicki

Correct.

Daniel Mannes - Avondale Partners, LLC

Okay. And then the last thing on the bank lines, I know I think at year end you did have -- some of your bank lines that were maturing in 2011. Can you give us an update first of all on the maturities because when I looked at the schedule you had on your powerpoint, it looked like you had pushed those forward? And then secondly, can you give us an update on any covenants that are involved in some of those credit agreements?

Joseph Tenne

First of all, we are renewing each of the matured. The only change, the cost will be higher than in the past, and we are also negotiating new lines of credit. Actually the covenants, we have one set of covenants that is similar to all lines lot of credits, including the bond that we issued in August and February. And we proved that the covenants in that negotiation and the debt to EBITDA ratio level is set for 7.

Daniel Mannes - Avondale Partners, LLC

And do you have any way on that debt to EBITDA covenants, carve out, North Brawley, or do you still think you have adequate room even with some of the loss in North Brawley?

Joseph Tenne

At this point, we do not.

Daniel Mannes - Avondale Partners, LLC

At this point, you don't need to carve out North Brawley?

Joseph Tenne

No.

Operator

Your next question comes from the line of Tom Daniels with Stifel, Nicolaus.

Thomas Daniels - Stifel, Nicolaus & Co., Inc.

Thanks for taking my question. Just want to go back to the nice improvement, products backlog and I'm not sure if you had answer this or not on the first question, but was that primarily driven by international projects or U.S. projects? And maybe you can give us a sense of internationally where you see things picking up? Is it Latin America, South America or Asia Pacific?

Yoram Bronicki

So the answer is yes, it was mostly from international projects and I think -- I think I don't know that I can give you an exact answer but I can give you a good directionally answer I think and this also goes back to previous question on what is happening the U.S. And really, the biggest -- the most important factor in the development of geothermal project is developing the field and developing field [ph] to the point where it is -- we you have good clarity on what your geothermal fluid is and what it can do and what production conditions are and injection conditions are. In many ways, this is what we're dealing with in Brawley is a result of not knowing a few things when the plant was built. Most geothermal development is done in stages where as good develops to the point where there's enough clarity on what it can actually do. And then power plant is built on it. And if you go around the international, some of the international markets, you'll see that there are prospects or say fields in different countries that have been brought to this point and to the point where the owner of the plant could actually go ahead and bid on a power plant, not on expected fuel conditions but on somewhat proven field conditions. In that sense, for the immediate future, say for 2011 business and greatly to 2012 business, you need to look at who is really at such an advanced stage. And can truthfully release a project and potentially ask for bidders to bid up our plan on that project. Unfortunately, some countries are could be -- can have a large base for instance, or there are great expectations from Chile, but if you look at the status of the field there, the field has not been developed yet and therefore, Chile is very attractive but Chile is a place that could mean business only later in the decade and not right now. If you look at the Pacific Rim in the Pacific Rim, there are fields that are mature. Of course, Indonesia has a lot of discoveries. New Zealand has substantial discoveries and these are areas that one should look for, for substantial business at this point. And as people take or developers take more time to explore countries that are emerging for the as far as the geothermal industry is concerned, maybe there will be fields there that can be -- that we can sell a plant or an equipment to. And really, in a way in the United States that type of work, we are doing that work for ourselves and we're losing projects. But if you look at on the new industry level, there are not too many fields that have brought to a condition where the true relationship between the supplier, contractor and owner can be successful.

Thomas Daniels - Stifel, Nicolaus & Co., Inc.

Understood, thank you very much for that detail. How about Kenya? We've seen, you guys obviously operated there for a long time. And I think geothermal development co is looking to build new a plants about a 800 megawatts. You guys participating there at all? Are you optimistic on Kenya?

Yehudit Bronicki

We have the, which is 36 megawatts under construction it's only we sign PPA, we remit and deposit this under construction. We are also participating in the expansion of the additional potential for Kenya, but this is the longer term. There is no extension. So let's say, part of the -- I mean, in any of our disclosures because it's a fully development frame

Thomas Daniels - Stifel, Nicolaus & Co., Inc.

Okay, great. And then just one more question. Within the backlog, I know that you have won the contract with Raser Technologies and Lightning Dock in light of their obvious filing. Is at that backlog in risk in terms of Raser?

Yehudit Bronicki

The Lightning Dock is not -- so the numbers that we are resuming through the release contractors one which is still subject to the -- previously subject to -- but the lightning doc is not south of this number.

Operator

Your next question comes from the line of Matt Farwell with Imperial Capital.

Matthew Farwell - Imperial Capital, LLC

You mentioned the RPS in California, do you see any specs in PPS pricing near-term? And will we see any projects in California move up in priority given this development?

Yehudit Bronicki

The consuming industries have issued our deposit of issuing us the so more or less now so I don't know what we will feel prices. I think this process is continue to the end of the year or I don't know if we can continue to take them. I think that it will definitely mitigate the low gas price in Brawley. But it's just in that something that we see it's what I think. Clearly, demand has an impact on prices.

Matthew Farwell - Imperial Capital, LLC

Okay. And on the discussion of leverage, you have over $400 million of CapEx from the last over this year and then perhaps the next year. How are you thinking about your capital structure as the leverage moves up?

Yehudit Bronicki

We think that with additional projects coming online, and relative to finance them at least for the next 2.5 years with a 30% cash grant, the level of debt that company can afford can capital all the needs.

Operator

Your next question comes from the line of Carter Driscoll with Capstone Investments.

Carter Driscoll - Capstone Investments

Thanks for taking my questions. My first question is if you can talk maybe about the acquisition cost for the leases that you acquired at least in relation to what you may have paid for the federal leases over time? And whether that was a factor and/or really it was to avoid the very long permitting delays in the federal lands? And then the second part is whether this might be an ongoing strategy to look at the private land opportunities in the western parts of the U.S. versus the constraints that's seemingly aren't going away. And then have a follow-up.

Yoram Bronicki

So the acquisition costs were not substantial. The issue is really -- I mean we need to look for resource and we're looking for resource wherever the resource is. But in the past, development on the federal lines was actually easy path and we've created a large inventory of land on federal leases. It has become clear in the past 2 years that the lands maybe attractive and there is a process to develop on federal lands. But it is slow and therefore, we are prioritizing private lands. It is highly geography-specific, right? And that's fundamentally we're looking to where resources and can be developed. But our priority to private lands is certainly a strategic move.

Carter Driscoll - Capstone Investments

Does your pilot top with Nevada Geothermal? Are there other opportunities like that since it's seemingly a number of your competitors certainly don't have financing opportunities you do or the exactly the case about ground? Are you looking at further joint ventures, may be because of relatively poor performance and some of your competitors recently like free up or slow? Slow down the exploration risk for you guys?

Yoram Bronicki

So we are open to working with other players in industry. The first requisite is really having good resource. And if somebody has good resource, we'll be happy to find a way to work together. We'll be very interested in fighting over to work together, whether it's necessary the structure was Nevada Geothermal or a different structure. It's hard to tell, but the basis is finding the good resource and we've been following our work. We have gone through many fields in the past 5 years. And we know that there's a big -- there's a substantial filtration between prospects and fields that should be developed. And maybe I'm getting myself that's really -- it's all about the good resource and is it good and how you differentiate in value between a prospect and a proven field. Sometimes, that distinction in the industry was not made and maybe as reality or experience as the rest of the industry, maybe this will change.

Carter Driscoll - Capstone Investments

Let me just ask it, may be a little bit different way. Given your expensive resources in terms of exploration the way you approach it, really differently than your competitors, have you done extensive work of your competitor’s lands to look for those opportunities? Or is that just part of parcel the way it conduct your exploration that you happen to pass over all those resource opportunities?

Yoram Bronicki

I'm not sure that I understand, do you ask whether we've analyzed our competitors' lands? Probably some of them and some of them we may like, and some of them we don't like. So obviously, Crump Geyser is the land that we like.

Operator

Your next question comes from the line of JinMing Liu with Ardour Capital.

Unknown Analyst -

This is Andrew for JinMing. I'm sorry if this question got asked already but in the Equipment segment, I just want some additional detail. Where did the sales come from geographically? And where you see a potential market on that side?

Yehudit Bronicki

The sales of Asia, and Europe, I don't think that we had Latin America this quarter only we have Africa so its Asia and Europe. I don't think it's so important the geographic location. It's only information whether there are rare opportunities of developing [indiscernible].

Unknown Analyst -

And also, is the revenue being recognized this year for the sales? I mean going forward?

Yehudit Bronicki

For the most of our things. There are some exceptions but for most of our things, recognize revenues on the percentage of completion [indiscernible].

Unknown Analyst -

Okay. And just I also back on the last question on North Brawley. I do feel these costs are pretty much peaked in your own opinion. I know that you already answer this a few times, but just to get an idea, do you feel that the number you put up there as far as CapEx is pretty much going to be, it's a more optimistic number?

Yehudit Bronicki

I think what we put up what we internally but it is the same. No certainties on that being the case.

Operator

Your next question comes from the line of Philip Tamara with Pax World Fund.

Unknown Analyst -

I'm sorry if I missed this. What were your CapEx for this quarter? Was it $55 million?

Joseph Tenne

It was cash, $55 million.

Unknown Analyst -

Cash of $55 million okay. And I'm just looking at -- it looks like you're -- as someone mentioned before, leverage is going up, free cash flow is going down. Would you really be comfortable with leverage at 7x? I mean I think that's what you said your covenant was. Would you really be comfortable taking leverage up to that level? And then also, is it sensible to continue to pay a dividend with leverage that high?

Yehudit Bronicki

Some are probably not fundamental. Cash going to down. We have availability of lines of credit and so I don't think cash is actually going down number 7x- the covenant that we are not at 7x it be that we are way lower. Having to hedge as much projects say by 2013 in order to get as much operation cash fund as long as a something which we reported and even if temporarily, we reach that goal, will be around at 7x. I think EBITDA will be pickup once -- and come down to normal levels [indiscernible]. It's not an issue. Given the -- most of our products there is an amortizing based over the life of the project. I mean we do have the life of credit which are sort of down, but utilization, portion of these land of credit is not full. And the more important portion of our debt is the portion of finance debt [indiscernible]. Badly over the life of the PPA. So typically, the majority of the typically between 10 and 18 years -- capital debt for close to 20 years. So -- we can that business principal a higher leverage.

Unknown Analyst -

Yes, cash flow was what I meant, and cash flow has been negative because of CapEx and basically, you've been, you borrowed money to like the $100 million I think that just got done which is probably one of the reasons that cash, you still have cash on the balance sheet. But if you believe that leverage once it's basically project finance and once the leverage or once the projects get down, leverage will come back to a normal level, what do you think a normal level for leverage would be?

Yehudit Bronicki

I don't know what you mean by [indiscernible]but let me say this, that in most companies which we are, typically have a cash outlay if you have CapEx higher than operating cash flow. That's the nature of the most companies and we definitely plan to be those companies for a number of years looking forward. I can't tell you until when, but certainly for a number of years. And as long as you get finance debt amortizing long term, I think this does not impact the financial health of the company.

Operator

Your next question comes from the line of Mark Bennett with MorningStar.

Mark Bennett

I don't mean to go over this crown [ph] again but on the international side, you had not too long ago signed a deal with JFE in Japan. And I was wondering what you see the opportunity there given that some of the largest manufacturing of geyser-mode equipment manufacturers in the world are Japanese companies and sort of how you're going to approach development?

Yehudit Bronicki

The reality is that there's no geothermal development was done in Japan for the last number of years and supply equipment out of Japan but not in Japan. Whether this will change is the attitude to nuclear power is a question we are not sure that we have exactly it may occur -- who knows? But We do not see the Japanese market as open yet for additional geothermal development. The agreement with JFE has been upheld to penetrate into that market for which technology and we have to see whether that will come.

Operator

Your next question comes from the line of Ben Kallo with Baird.

Benjamin Kallo - Robert W. Baird & Co. Incorporated

Just 2 quick follow-up questions. First, I saw in your presentation, that I think maybe this is the first time maybe you said last time that Sarulla, you're moving forward with the financing concurrently with finalizing the PPA. What's the earliest that you could start the product revenue. Let's say if it's signed in the next couple of weeks on that side? And when will financing be closed?

Yehudit Bronicki

I better question is, when does financing stop. The 2 financing efforts that we stopped when the couples disagreement between EFC and JFE are going to be done. Probably repeating myself but we think it's imminent in the financing out. The first for a financing consortium means that not we are optimistic about the project, but also optimistic about the project. Let's say on our shareholders first to wait for the opportunity to take the [indiscernible] -- after at least it's been signed

Benjamin Kallo - Robert W. Baird & Co. Incorporated

And so are we still looking at a year after signing?

Yehudit Bronicki

Yes.

Benjamin Kallo - Robert W. Baird & Co. Incorporated

And then secondly, back to -- not to beat this too much, but your CapEx versus your resources here, if I look at $4 million and $12 million CapEx and $465,000 to $8 million of capital resources, but within that $468 million is a $108 million of deal that we're not really sure whether they're closed I think you said probably towards the back half of the year. Is there some timing risk here for having the capital for your CapEx? Is there any way that you can bridge over that until you get the deal of your loan guarantee?

Yehudit Bronicki

The resources don't show that I think for more fuel it's shown there. It's really up to us to the OE a long term. And that certainly mitigated. If we will see if not closed by September, we can always reach to the private market and this is going to be -- projects. And then in the first is the same private partner loan guarantee. Other elements that are not shown on that of course is the operating cash flow. So we do have a question.

Operator

Your next question comes from the line of Paul Clegg with Mizuho.

Paul Clegg - Mizuho Securities USA Inc.

Not to again beat the dead horse here but one more probably question on North Brawley. If not for the pump replacement during the quarter, what would capacity have been? I guess what I'm trying to get to is you said you eventually get to 1.5 to 2 years of service life on the pumps but how often will you have to do the pump upgrades? And in the meantime is this sort of an interval lengthening from here or is it an ongoing process? Or do we see sort of a break in those expenses for a quarter or 2, and then you get hit with another big expense in production loss a couple of quarters from now? How should we think about that?

Yoram Bronicki

So it's a highly forward-looking statement. If you would accept that but I think that if, first, if we were not -- of we didn't have to upgrade the pumps, we probably would have averaged during the quarter in the min-30s, somewhere in the mid-30s in terms of generation. It could be a little higher, could be a little lower. We hope that the current fix that we implemented will give us on average, 12 months. We already have -- we had a few wells where we're very close to 12 months already upon maturity and that's really our hope. And if the health materializes than we should not see too many pumper placements during the balance of 2011. And then yes, the, or I should say, the -- your next question of whether we will get to what we need to do in order to get to 1.5 or 2 years on service life then really, our plan is to be ready with a new and improved design, of course, as we learn more. And so that once this batch of pumps reach their expected 12 months of service life, we would put a pump that is, the pump that is better and hopefully will take us to 1.5 years or more than that, and especially if spend production continues to diminish then should be easier to do. Will this happen? We don't know. These are typically big decisions in terms of that's the money goes into the well a lot of the money goes into the well in the form of pulling the old pump and putting in a new pump. And over a period of 3 to 7 days. And then you just need to hope that the decision was, the decision was right and that the quality control the whole chain was the right quality control and that you actually get what we are hoping for.

Paul Clegg - Mizuho Securities USA Inc.

Did you say mid-30s capacity more or less? Just for the record where were you on average for the quarter for North Brawley?

Yoram Bronicki

I think that for the quarter we were a little under 30 close to 30 but a little under.

Operator

There are no further questions at this time. I'll now turn the floor back to management for any closing remarks.

Yehudit Bronicki

Thank you for the interesting conversation. Hopefully we were able to convey the main message and that is other than Brawley our operation was good during the quarter. Our progress was good during the quarter in both the development, construction, backlog and we hope to -- the Brawley issue and continue with our plans and actually regardless of the Brawley issue. Thank you all for your interest in the company.

Operator

Thank you for joining today's conference call. You may now disconnect.

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