Raser Technologies, Inc. (RZ)
Q1 2008 Earnings Call
May 13, 2008 11:30 am ET
Richard Putnam – Investor Relations
Marty Petersen – Chief Financial Officer
Brent Cook – Chief Executive Officer
Ladies and gentlemen, welcome to the Raser Technologies incorporated conference call. At this time you are in conference with Mr. Richard Putnam, please go ahead sir.
Good morning ladies and gentlemen, we welcome you to the Raser Technologies webcast for Raser Technologies’ first quarter 2008 earnings report. This webcast is designed to be interactive.
You will note there is a place where you can submit questions throughout the discussion. We would encourage you to participate and submit any questions that you wish to have answers. We will try to answer as many as we can in the time that we have this morning.
Before we begin I would note that this webcast is being recorded, we will try to archive this and make it available on our website as soon as we have it on the RaserTech.com website. I would also note that this discussion may contain forward-looking statements as defined by the SEC.
You’ll see a slide in one of our slides that talks a little bit about these forward-looking statements. They are based upon information that is currently available to management and may be subject to certain risks and uncertainties. We would encourage you to become familiar with these risks and uncertainties that are discussed in the company’s filings with the SEC. These filings can be accessed on our website at RaserTech.com.
I’d like to introduce to you those that are going to be participating on this webcast, Brent Cook our Chief Executive Officer and Marty Petersen our Chief Financial Officer. You’ll see a number of slides that we’ll be discussing this afternoon, we’d ask that you follow along. I’ll turn the time over now to Marty Peterson.
Thank you Richard. I’m going to go through the first two slides after the forward-looking statements slide, which basically is the P&L and the balance sheet. These are from the 10-Q that was filed last night with the SEC. If you’re having trouble seeing them online you can go to Edgar and pull the 10-Q and see them there.
Turning to the P&L, I’m not going to go through everything, I’m just going to highlight a few of the items of note. You’ll note that we had $130,000 of revenue. This is revenue that’s primarily generated from our contract with our development contract relating to our military Humvee project.
The other two items I’d like to highlight are just in the general and administrative, there was a decrease in G&A of $625,000. This is both not cash and non-cash. If you split those two out, there was an actual decrease in non-cash items of $1.4 million. Those non-cash items are essentially equity compensation related items.
On a cash standpoint, it increased $740,000 from 2007 to 2008 period and that increase is primarily due to professional services, mostly related to the geothermal business. The other line item just of note is a power project development line that increased $1.5 million. Those are just expenses relating to geothermal activities that are not capitalized over the quarter.
Turning to the balance sheet, again I’ll just highlight some of the items of note here. We ended the quarter with a little over $21 million in cash. On the assets side, there are two new items in this Q that you haven’t seen in previous financials and there are two line items, they’re essentially the same thing.
One is in the current assets where it says restricted short term marketable securities and one is long term assets, restricted long term marketable securities, you combine those two lines, that’s essentially $8 million. That is the two year’s worth of coupon payments for the convertible notes offering that we did that is escrowed to support those payments.
The next line item that I’d like to highlight is geothermal well field development. You see that’s just over $9 million, that’s an increase of $4.3 million since December. That is basically capitalized well field development costs, both tangible and intangible drilling costs.
Power project equipment of just over $8 million, that’s an increase of $7.6 million. That reflects the delivery of our United Technologies turbans and related to that, further down in the asset column is power project development deposits. You can see that that is zero at the end of the quarter, a reduction of $3.5 million, that’s because those deposits essentially turned into the equipment assets as we took delivery.
On the liabilities side, the point of note is you can see that our long term liabilities increased by $50 million over the quarter due to our issuance of the 8% convertible senior notes. In the stockholder’s equity section, our additional paid in capital was reduced by $18 million.
That is a combination of the $15 million forward stock repurchase contract that we entered into in connection with our convertible notes offering as well as the $5.9 million call spreads that we entered into also in relation to the convertible notes offering. That was offset by some warrants and options exercises.
I think those are the main points I wanted to highlight, Brent do you want to take it from here?
Thanks Martin. I wanted to also note that Patrick Schwartz our President who typically addresses the transportation and industrial segment is not with us today, he has meetings, I wanted to excuse him, but I’ll go ahead and address a little bit both about the geothermal as well as transportation and industrial.
I’ll pick it up on slide 6, basically to recap a little bit about this first quarter 2008, our geothermal construction financing was put in place with Merrill Lynch during this first quarter. We’re very pleased with this relationship and believe that both parties will benefit greatly from this. Now as we’ve mentioned in the past, the financing and funding relationship is not only a non-recourse debt relationship with Merrill at the project level, but it’s also a tax equity agreement.
In addition to that we announced two power purchase agreements that was being signed and those, besides the two power purchase agreements I think we have announced there’s 40 megawatts of additional agreement in final regulatory approval stage and as well as 80 additional megawatts that are at various stages of negotiation phases that we’ve been either short listed on or we have bilateral negotiations taking place.
Also you’ll notice the next point, the convertible debt financing for the well field development and that was the corporation’s or our company’s portion was put in place and we’re pleased to have completed that and we completed that at a very difficult time, but nonetheless it was very successful and we are appreciative of all those that participated with us on it.
We initiated three additional projects during this first quarter, bringing to a total of eight projects under development for a net generation of between 80-85 megawatts of power output.
The well field development has been progressing well and the groundbreaking for the geothermal plant, we actually held a formal ceremony this past Friday which major media coverage was provided both written press as well as television and radio coverage. And we’re appreciative of the press that we received on that. We see more and more people recognizing the significance of our business approach as well as the technology advantages that we have when working in conjunction with United Technologies.
Speaking of United Technologies, their generation units or as some people would call them, turbines, they’re actually more involved than just the turbines because besides being the turbine they’re also all of the other major pieces and components of the major generation unit.
Those have been delivered, we’ve been receiving delivery of those along the way. We’ve now received 36 generating units from United Technologies and that we receive weekly several more. I believe that we’re almost on track, I think there’s only a couple of machines that were behind on our delivery schedule that we anticipated and I think we believe we’ll be caught up before the end of [inaudible].
And so things are going very well from the fabrication standpoint. We also increased significantly and continue to increase our portfolio interest across the six states and have begun steps expanding into a seventh state, although we have not taken land positions yet there, we have been studying the state, geothermal interests and so we’ll continue to operate, increase our portfolio as it makes sense.
In fact on slide 7 if you’ll note, our geothermal resource portfolio in the states that we are operating in, also many of you have asked the question where exactly are these eight plants. You’ll note that we have one in Oregon, we have three in Nevada, we have three in Utah and we have one in New Mexico that we have under development. And we will keep you posted.
One thing I might state is these eight plants comprise what we call our first wave of development. Meaning in April of 2007 I announced that we would be working towards 100 megawatts or approximate per year annually. These eight projects completed our first wave. From here forward any announced projects will be in what we consider our second wave. So our goal is to smooth those out so there’s not any time lapse going between those leading into the second wave and on into the third and so forth.
On slide 8, it’s actually a photo that many of you have asked a little bit about what these units look. This is a generation unit that’s being offloaded, shipped out to us and we’re offloading it, doing some pressure tests and validation tests with regards to the unit. And then they’re prepared for the site and they’ll be shipped to the site and installed as soon as the site is ready for the process of doing earth excavation and concrete work this week out at the site, I’m referring to the Utah thermal site.
I might comment and invite any who would be interested, we have an annual shareholder’s meeting that’s taking place May 28 near the Thanksgiving point location here in Utah and our website will have that location for where to go. But I would invite anyone that would like to see one of these generation units, it’s our intention to have a generation unit on display at our annual shareholder meeting. You’ll be able to have a much closer look as to how it operates and we’ll have people there to explain some of the operational aspects of the.
Slide number 10 has a little bit showing groundbreaking ceremony, I believe we’re going to actually have on our webpage if not already comments that Senator [inaudible] portion of our groundbreaking ceremony that took place. His comments will be posted on our website as well as several pictures with regards to the groundbreaking ceremony, should be able to see that.
Moving on into slide 11, I wanted to give a little bit of a comment regarding a legislative update because I’ve received a lot of questions with regard to the production tax credit expansion. It’s our belief and things have been told to us that the production tax credit extension is inevitable, it will take place through both the House and Senate.
Currently there are different versions, but the House and Senate are currently negotiating on how best to fund and finance the production tax credits for section 45 which address the geothermal tax credit. One of the difficulties that they have been caught up on was with regards to reduction of oil tax benefits. That’s now been taken off the table by way of compromise with the parties.
And the Democrats have announced here recently that they will be pushing for resolution of passage before Memorial Day. We’re hopeful that that will receive the support from both sides of the isle and are confident in any case that the passage will take place. We look forward to that. However, in the meantime, our operations are pressing forward regardless of the production tax credits.
Just make a few comments about transportation and industrial. We have made great progress in the transportation and industrial area. The one comment I would make is we recently participated in the SAE World Congress, that’s the Society of Automotive Engineers that took place in Detroit and found that our display was a major success. FEV had invited us and had acquired prime location at the show.
They invited us to be part of their demonstration and of their booth and we did participate with them, but we displayed the plug in hybrid electric vehicle chassis along with our equipment, how it fits together, so we’re going to have that in great demonstration, we’re hoping to have that same chassis display out at the annual shareholder meeting. So beside the generation unit for the geothermal side, you’ll have the opportunity to see the chassis and see how plug in the series hybrid.
Also, mentioned the FEV and global OEM agreements were a major success for us during this quarter as well as the Tech Star second stage manufacturing from [RU]. So we also announced that Pacific Gas and Electric would be purchasing two PHEV for their fleet. So we’re very pleased with that and we expect that those will be completed in third quarter of this year.
Our initial vehicle, our first demonstration with the OEMs will be completed prior to the PG&E one. The PG&E ones will be delivered in the third quarter. In addition we are continuing to make great progress with [HA10 they heavy industries] HHI in both their HVAC applications as well as geothermal. Primary focus currently is for industrial applications. We see that expanding beyond that into the transportation area for Hyundai as well, but we’re very pleased with that relationship and how it’s going.
In slide 14 I’ve been asked many times what is it exactly Raser is doing on the PHEV. And here you see a small diagram of the power train and Raser’s power train solutions. I just wanted to point out there’s three major components that Raser is providing into the consortium effort here.
First we’re providing the traction motor. You’re seeing a 200 kilowatt traction motor that we’re providing. It is a very significant portion of what’s taking place here. But in addition to that, we’re providing a 100 kilowatt permanent magnet generator which we’re applying out technology to a PM generator, following it into this. And perhaps the most significant is the Raser Symetron drive and control system which is also essentially controlling the entire PHEV platform.
That gives you a little bit of an idea of what our focus is. The batteries are highlighted for purposes of demonstration, we do not, I would like to clarify, we do not provide batteries. We are working with consortium members to provide the batteries, that’s not what part of what our company does.
With that, I believe I’ve gone through most of the materials and slides as I had hope to cover. I would like to take a few moments now and let Richard Putnam, if he would field some of these questions for us Richard and feed them to us. Either Marty or myself will attempt to answer them.
We would just remind you, on the left hand side of the presentation there is a place in which you can click and ask a question. We have just a couple of questions in so far. First question is, congratulations on the groundbreaking and how many wells are completed at thermal and how many are needed?
We are pleased with the groundbreaking as mentioned. There are four wells that have been begun at thermal and they’re in various stages of development. The first well, 21-34 has been finished and completed and we have the second well approaching that same state. And another well that is having casing set today on it. So we’re in the process I guess of finishing up somewhere between two and three, would probably be the status of where they’re at.
And we expect that we’ll have three production wells and two reinjection wells based on what we’ve seen so far. That may move one way or the other depending on the flow, meaning when we finish all of the flow testing, we will balance that for the plant. That would be maybe an additional well or more likely that will be all the wells that will be required. Those are high enough [inaudible].
Next question is, is when will the next groundbreaking ceremony take place?
We did the groundbreaking ceremony primarily so that we could have the opportunity to have some exposure for some key legislatures. But we may or may not have groundbreaking ceremonies on various plants depending on the state where we’re at, development process.
And so we’ll announce those publicly and invite people to go to them. The primary purpose is to gain press coverage and so they’ll probably be more regional in nature, meaning it’s more likely that those in other states will probably receive additional attention by way of a groundbreaking. Phase two at thermal may or may not have a groundbreaking.
The next one is in connection with the press coverage of that groundbreaking, I noticed in the newspaper last week that you have a corporate plane. Do you have a policy in place that restricts the number of owners and officers, executives you have on any given flight?
Well I wish we had a corporate plane but no we do not have a corporate plane. As part of this groundbreaking ceremony, in order to move Senator Orrin Hatch from the US Senate there, the state of Utah made available the governor’s plane and we flew down to the site in the governor’s plane.
But we generally speaking have a policy that we don’t have all of our officers travelling on the same plane, whether it’s commercial or private. I think by necessity we very seldom are all going to the same place anyway. But that’s a good question. We do not have a corporate plane.
Next question says yesterday’s Bloomberg report stated in an interview that the company would be profitable in the first quarter of 2009, explain this and confirm his statement.
I appreciate that. I think the actual statement was when did we expect to achieve profitability and my statement was we expect to have achieved profitability after these first plants are placed in service and online. And then I reiterated, the next follow up question was when do we expect that to happen and I reiterated what we’ve stated before and that is we expect these first units to be coming online early fourth quarter of this year with some of the projects and plants sliding into the early part of 2009.
And so I still think that’s correct, that’s a correct statement and I leave it. As we announce each plant it will be clear to people why we believe that we’ll be reaching profitability as a corporation after these [inaudible].
Next question is asking about competition, thoughts about buying recycled power units with [inaudible].
You know that’s probably a question that’s best asked of United Technologies but generally speaking I would make this statement, I think this probably answers the intent of that question and that is, Raser Technologies is clearly has a preferential business relationship with United Technologies that extends far beyond just the purchase of equipment.
Meaning United Technologies is involved with us in a performance guarantee warranty as well as an uptime guarantee, while other types of participation of their project. Our relationship, we’re confident we’ll always have access to the equipment that we need and have been assured by the United Technologies people that that will always be available to us.
With regards to others that are purchasing it, I don’t know of any large scale participants that are placing large orders. I do know of a handful of smaller ones, we’re conscious of smaller orders, but nothing on the same scale that we have with regards to [inaudible].
Next question asks, when will the power plant that you did the groundbreaking ceremony for be turned on?
Right now we’d expect this to take place in the first week of October. Possibilities of the last week of September or the first week of October is what we believe that the plant will be placed in service [inaudible].
Next question asks the status of the $15 million stock buyback.
My understanding is essentially the relationship we have on the $15 million stock buyback is a contract relationship between us and Merrill Lynch and that they will be providing us the stock at the appointed time as per the contract. And as to their buying in the marketplace or how they cover those shares, we really don’t know the timing.
Just to clarify, this is a forward stock repurchase, and so it was a five year repurchase and so in March of 2013 Merrill Lynch is required to deliver to us 1.59 million shares. And to Brent’s point, exactly when and how they purchase that or hedge their position so that they can assure themselves that they can deliver that at that point in time, we’re not privy to that. But the shares will be delivered to us in five years.
So just to reiterate, we are not sure how many shares they have repurchased and we’re not sure what their plans are with regards to when they will repurchase it.
Next question asks about the Merrill Lynch financing, when will you start to receive funds for this?
I’m not sure I said financing, I think it’s probably referring to the debt financing on the project, at least that’s how I’ll answer this question. And we expect that the debt financing is right around the corner here. We’re in the process of finishing up a couple of housekeeping items with regards to BPs or conditions precedent that were required. We expect the final report that we’re waiting for to be forthcoming very soon. We’ll announce that when it.
Next question states that the thermo site we saw an incredible amount of steam coming from the well, what is the approximate temperature of this well?
I think our press release after we completed the first well stated that we were in excess of 260 degrees if I remember right. But we expect the well to be approaching 300 degrees. I would just reaffirm that statement. The upper temperature of approximately 300 degrees has been registered and recorded and so we have seen temperatures slightly in excess of 300.
The blending of all of the wells and what the temperature is after they’re all blended is still not known. I would tell you that the plant design that we’ve begun the construction on is designed for an optimal output at 285 degrees. So we expect it will be at least 285 degrees and probably [inaudible].
Next question asks, could you please discuss the performance guarantees on the [UTC] plant.
First of all, there’s what you would expect, normal warranty and equipment guarantees with regards to faulty workmanship and so forth. But in addition to that there is what’s referred to as an uptime guarantee where the actual performance of the plant and how it performs for us is guaranteed by United Technologies. And the United Technologies guarantee essentially calls for a 92% performance of the units.
So each of the units are guaranteed to be up and running 92% of the time. So as we model this plant, we’ve modeled this plant basically the 96.5% and so 92% is guaranteed, up to 96%, after, essentially guaranteed as of performance. And so there’s very little question in our mind with regards to the performance of the equipment and where we think we’ll be operating.
Next question asks, in the 10-Q there is a mention of additional financing. Talk a little bit about that, what are your plans?
Let me go back and add a little bit to the previous question if I could for just a moment. I was just going to say not only is that guarantee been significant for us but more importantly it’s been very significant for the financial players who’ve evaluated and looked at us because it gives them a high degree of confidence with regards to what they think the revenue is going to be.
With regards to the financing, in the Q as indicated and I think you’ll always see this, we’re a very aggressive growth company and one that is going to have a building program going and we’re going to seize opportunities and build and move along as quickly as we can. So with regards to the financing, you’ll always see an open option if you would with regards to our financings because we will be growing and we will be from time to time seeking various funding needs.
But I would state that I believe the vast majority of the funding of the projects will be provided for by non-recourse debt down at the project level. That will continue to be the case. So I believe that first and foremost you’ll see typically non-recourse debt at the project levels. That’s the first thing you’ll see.
The second thing you’ll see is there will be some degree of financing and funding required by the company over time for early development or well field development type of activities. And I think you’ll see us pursuing a lot of different options. One of the reasons that I’ve kept it open is we have at our disposal the option of doing what I’ll call prepaid monetization. And we also have the option of doing prepaid power purchase agreements which may well fund much of our early activities here.
And then of course we have debt at the corporate level as well as equity at the corporate level. The only thing I would assure our shareholders is regardless of what financing we choose, we will do so with the idea of building value for our shareholders and being accretive and increasing the value to our shareholders.
But there’s lots of different options that I believe will take place and you’ll probably actually see some of each, you’ll see prepaid power purchase agreement and you’ll probably see prepaid monetizations take place in conjunction with.
Next question is what is the meaning of the S3 withdrawals?
I’m sure what this is referring to is what an S3 is, is it’s a form registration statement for registering securities with the SEC. As part of the overall Merrill Lynch commitment, we agreed to issue to Merrill Lynch up to 3.7 million shares in warrants. And that’s dependent upon their funding of 100 megawatts.
This is disclosed in our filings related to that. And there are a number of those warrants associated with the funding of each of the 100 megawatts worth of capacity that they financed. And so they were awarded but they didn’t vest and in other words they haven’t earned those at that point. They earn the various pieces of that 3.7 million warrants as they fund the various projects.
When we filed the S3 with the SEC, the SEC came back and said that they would rather see us issue the warrants as those vesting or as Merrill Lynch earned them. In other words, as Merrill Lynch funds a project, the warrants associated with that particular project would have a separate registration statement associated with that.
So in conformity with what the SEC wanted to do, we withdrew the original registration statement and you will see us file an S3 registration statement at the point in time when Merrill Lynch earns those warrants when the funding takes place.
Next question, when will we see the next PPA?
The next PPA or power purchase agreement, as mentioned we have four of them in final stages of approval or final regulatory approval depending on which one we’re referring to. So that basically means there’s four 10 megawatt or approximately 10 megawatt contracts in the queue there that we expect to have approval and in final stages. And so those are very soon, I think you’ll see those spread over the next few weeks.
Basically you’ll see some type of public with regards to that. Our policy on power purchase agreements is to not announce them until after final regulatory approval, or final approval has been received. And so that’s one reason why we’ve given you an indication they exist but we haven’t talked about them yet.
How much water, gallons per minute, is needed to operate each unit?
The units, probably the best way for me is to not answer on a per unit basis but as a plant and I guess the answer that I would tell you is it varies significantly depending upon the temperature. You may see as much as 10,000 gallons per minute for example at certain temperatures or you may see higher if the temperatures are lower, or higher temperatures you’ll see less.
Basically it is a heat exchange process and so a certain amount of heat has to pass through the plant and that’s where you’re thinking about that. So there’s a fair amount of water that passes through the plant but not anything significant in comparison to some of the larger power plants.
The last question that we have that’s been submitted and so unless there’s any more submitted this will be it, what do you expect to, when do you expect to see revenues?
I think my comment that I had made was with regards to when the plants come online which we expect to be primarily fourth quarter of 2008, first part of 2009, meaning there’s several plants coming online during that time period and that’s what we continue to expect, that’s our expectation. The significant revenue flows will begin at that point. It’s been noted and I don’t want to pass over this, we have small revenue flows that take place, that probably take place before that time, such as Marty recognized on the army contract.
So we do expect some smaller revenues that way, but as far as significant revenue flows, I would look to the placed in service date of a plant, as we announced what we think those completion dates are for commercial operation dates. I think that will give you a good indication of when to expect the revenue flow.
We don’t have any additional questions that came in, so maybe we’ll just summarize and end at this point.
I very much appreciate our shareholders and their interest levels. We will endeavor to communicate, as I mentioned, the shareholder meeting on May 28, we’re very pleased and hope that it will be very informative to our shareholders and would invite all those, particularly those locally but also those nationally if they would have the opportunity to participate.
Also, our plan and intention that in a few weeks following the shareholder meeting that we will have an analyst day where we will invite analysts and others to be able to come out and ask detailed questions and view some of the sites, so that will probably be announced in the earlier part to mid part of June.
And we’ll make that announcement out to the public. I think right now our intention to invite as many [funds] as possible and analysts as possible to be able to address in specific the details of these plants and the economics related to those. So we’ll be providing that to the public as well as you’ll be able to see any of that I’m sure on a [inaudible] basis, website.
Again, thank you, we appreciate it and we look forward to the next call.
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