Ormat Technologies Inc (ORA) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Natasha and I will be your conference operator today. At this time, I would like to welcome everyone to the Ormat Technologies first quarter earnings conference call. All lines have been placed to mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS). Thank you. It is now my pleasure to turn the floor over to your host, Todd Fromer. Sir, you may begin.

Thank you, and thank you all for joining us today. This is Todd Fromer, Managing Partner with KCSA Worldwide, investor relations consultant to Ormat Technologies. At this point, you should have all received the first quarter 2007 earnings press release. If you have received the release, please refer to Ormat's corporate web site at www.Ormat.com.

Hosting the call today are Dita Bronicki, President and Chief Executive Officer; Joseph Tenne, Ormat's Chief Financial Officer; Yoram Bronicki, Chief Operating Officer and [Smadar Levy], Senior Financial Analyst and Manager of Business Development. Before beginning, we would like to remind you that information provided during this conference call may contain statements relating to current expectations, estimates, forecasts and projections about future events that are forward-looking statements 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 12, 2007.

In addition, during this call, statements may be made that include a financial measure defined as non-GAAP financial measures by the Securities and Exchange Commission, such as adjusted EBITDA. This measure may be different from non-GAAP financial measures used by other companies. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

Management of Ormat Technologies believes that adjusted EBITDA may provide meaningful supplemental information regarding liquidity 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.

With that said, I would like to now turn the call over to Dita and Joseph who would like to make some formal remarks and review the financials. Following these remarks, management will be glad to answer any questions you may have. Dita, the call is yours.

Thank you, Todd. Good morning everyone and thank you for your participation. It was a challenging quarter for Ormat and the quarter with disappointing results. However, many of the issues that led to this shortfall were extraordinary issues and have since been resolved or close to being resolved. I know that many of you are eager for more information, so we will turn the call over to Joseph to review and analyze the numbers, following which I will put the financials into context and provide an update of our activity. As usual, we will open the call to questions following our (inaudible). Joseph?

Thank you, Dita, and good morning. For the first quarter of 2007, total revenues were $61.7 million, a 2.4% increase from revenues of $60.3 million in the same quarter of 2006. In our Electricity segment, total revenues for the first quarter were $43.7 million, which remained unchanged from the same quarter in 2006.

Our Electricity segment revenues for the first quarter of 2007 include $3.2 million of revenues generated from the Zunil project in Guatemala which was consolidated as of March 13, 2006 and $400,000 generated from the (inaudible) project in Guatemala which started generating electricity in March 2007 but has not declared commercial operation. Revenue was impacted this quarter primarily by certain operational issues, some of which contributed to decreasing our overall generating capacity in the United States.

During the first quarter of 2007, total U.S. energy production was a total of [437,126] megawatt hours, down from 456,859 megawatt hours in the same quarter in 2006. Electricity revenues in the United States decreased by approximately $4 million. This decrease is primarily attributable to the following effects -- total (inaudible) sales at the Steamboat II and III projects which reduced revenues of the Steamboat [per] complex by approximately $2 million compared to the same period last year; planned shutdown of the Heber 1 project for a period of 25 days in order to perform a schedule overhaul representing a reduction of approximately $1 million in revenues; permitting delays in the Steamboat Hills and the Galena 2 project which extended the shutdown of the Steamboat Hills and caused a loss of revenues of more than $1 million. Construction of the Galena 2 is complete and the project has been in commercial operations since last week. The project will supply electricity under the Galena 2 power purchase agreement. Steamboat Hills is also now operating at a generating capacity of approximately 10 megawatts.

A decrease in revenues in our Puna project as a result of lower energy rates. This decrease was partially offset by additional revenues generated by the Gould 1 and OREG-1 power plants which were placed in service in the second and third quarters of 2006.

In our Product segment, tot revenues for the first quarter of 2007 were $18.1 million, a 9% increase over the revenues of $16.6 million in the same quarter last year. The increase in our Product segment is mainly attributable to increased sales of our geothermal products. For the quarter ended March 31, 2007, we reported a net loss of a $5.8 million, or $0.15 per share of common stock as compared to net income of $7.9 million, or $0.25 per share of common stock basic and diluted for the quarter ended March 31, 2006. The net loss for the quarter was primarily the result of the lower revenues in our Electricity segment and higher costs that included $1.9 million remaining cost relating to the completion of the repair of the wells in the Puna project in Hawaii, $2 million relating to the scheduled overhaul in the Heber 1 project, an increase of $2.5 million in costs related to the Ormesa project as a result of accelerating well field maintenance cost to avoid a decrease in availability during the summer months when electricity rates are higher; and $800,000 was attributable to settlement expense not previously accrued for of an outstanding dispute regarding royalty payments claimed in respect of the Steamboat 1 project.

In our Product segment, a different product mix which is less profitable as well as an increase in labor, material and construction costs also impacted the gross margin -- the gross margins and net income. Net loss for the first quarter of 2007 reflects stock-based compensation related to stock options of $600,000 as compared with $200,000 for the same quarter last year. Adjusted EBITDA for the quarter ended March 31, 2007 was $13.4 million as compared with $28.5 million for the quarter ended March 31, 2006. Adjusted EBITDA includes consolidated EBITDA and the Company's share in the operating income and depreciation and amortization totaling $4.1 million for the quarters ended March 31, 2007 and 2006 related to the Company's unconsolidated investment interest in the Leyte project in the Philippines and a 50% interest in the Mammoth project in California.

For the quarter ended March 31, 2007, the Company's gross margin was 9.9% compared to 38% for the quarter ended March 31, 2006. Gross margin for the Electricity segment was 9% for the quarter ended March 31, 2007 compared to 38.6% for the quarter ended March 31, 2006. Most of the operational issues which impacted the gross margin in the first quarter were resolved and we expect that in the following three quarters, the gross margin in our Electricity segment will be in line with the gross margin experienced in 2006.

In the Product segment, gross margin for the first quarter of 2007 was 12% compared to 36.5% for the same quarter in 2006. The decrease was mainly the result of cost increases primarily in raw materials and construction cost. The low gross margin of the Product segment in the quarter actually started in the first quarter of 2006 as we reported on our last call. The decrease is mainly the result of two large orders which have been under construction since the fourth quarter of 2006. A weak dollar was another reason for our increased costs in this quarter.

We expect gross margin improvement in our Product segment in the upcoming quarters, but gross margin will remain lower than in 2005. The reason for this is that we have provided firm proposals with a long [validity] for this project. The proposals did not have an escalation formula. This will protect us from cost increases. We're now building escalation protection in new proposals but our old orders will not reflect this change.

As of March 31, 2007, the Company had cash, cash equivalents and marketable securities of $74.7 million compared to $116.7 million as of December 31, 2006. This increase is principally due to a combination of the funding of capital expenditures in the amount of $31.2 million and to repayment of long-term debt to our (inaudible) into third parties in the amount of $23.8 million offset by $8.4 million of cash flows from operation activities.

Finally, on May 8, 2007, Ormat's Board of Directors approved the payment of a quarterly dividend of $0.05 per share pursuant to the Company's dividend policy which targets an annual payout ratio of at least 20%. Of the Company's net income subject to Board approval, the dividend will be paid on May 29, 2007 to shareholders of record as of the close of the business on May 22, 2007. The Company expects to pay a dividend of $0.05 per share in the next two quarters.

Thank you all and I would now like to turn the call back to Dita.

Thank you Joseph. Joseph mentioned a number of extraordinary operational issues Ormat experienced during the quarter that contributed to decreasing our revenue while at the same time increasing [our costs]. I want to first address the issue of timing and why we announced when we did why some of this work can be strategically planned for as was the case in (inaudible) other issue like the turbine failure of Steamboat a2 and 3 are less predictable.

[Two turbines were failed] at Steamboat 2 and 3 and our analysis showed that it was due to a marginal design that led to material fatigue. The delivery time of the placement wheels from the current supplier was over a year and it is very high cost. Since our analysis shows that the wheels' failure are inherent to the marginal design, we've decided to retrofit the plant with units of our own design which will be available in 2008. In the meantime, we have been working on a two-state bridging solution that will address loss generation. Implementation of the temporary fix took longer than we expected as the first (inaudible) obtained were not successful. As of the month, one of the turbines is operating with a temporary turbine wheel and the second temporary wheel is expected by the end of June. However, we are uncertain if the temporary wheels will hold until the higher-grade wheels are available in September or November.

We did mention that we expect an impact from work done on the Heber 1 and 2 (inaudible) on the last quarter's call. Also during the quarter, we experienced several unexpected delays in some projects where the full impact was not made known to us until recently. In addition, we made a strategic decision during the quarter to accelerate maintenance at Ormesa. The maintenance could normally have been spread out during the year, and therefore the impact of the approximately $2.5 million in cost would have been spread out as well.

We also settled a legal dispute regarding our Steamboat complex, which of course was unpredictable. The settlement came at the end of the third quarter.

Finally, changing our accounting system to a more modern global one, coupled with the combined effect of these issues made it difficult to determine the full impact of everything until after the quarter's close.

In anticipation of the completion of the construction of Ormesa 2 [gen] project, the Ormesa complex was operating below its 47 megawatt generating capacity. We've completed the drilling of additional [rails] at the Ormesa project and the installation of additional [OC unit] which resulted in an increase of 10 megawatts in generating capacity of the project. The project is now operating at its planned 57 megawatt generating capacity, the additional energy sold and the current energy rate of the Ormesa power project agreement.

In early March, we (inaudible) with (inaudible) [power] an arrangement related to the delay in commercial operation of (inaudible) 2. We reduced the sale under the Brady power purchase agreement by 6 megawatts to 13 megawatts and declared commercial operation on (inaudible) 2 at 11 megawatts. Brady is expected to remain at the 30 megawatt level for most of 2007, is drilling for additional resources being performed. There is of course no assurance that the drilling will support the additional 6 megawatts and if it will not, the reduction of the generating capacity of Brady will continue for a longer period.

While (inaudible) material, let me say that the [heat availability] of OREG-1 project was lower than expected due to operation of the compressor station at a lower than expected load. The impact of this is lower-than-expected revenue in this project.

All the issues we had are technical issues and with our technical expertise and skill, we believe that we are well positioned to deal with them efficiently and professionally and overcome them promptly. Currently, our only outstanding issues are the turbine replacement at Steamboat 2 and 3, (inaudible) drilling at Brady and the environmental issue with the construction of (inaudible).

[Filling] this aside, we did continue to execute on our growth plans and other than immaterial changes to this plan, we're generally on track in this implementation. We completed the construction of the 20 megawatt (inaudible) projects to which we expect to declare commercial operation in the second quarter of 2007. In the interim, we are (inaudible) the energy to the project generation on a (inaudible) basis which mains we are not getting here the capacity payment, only the energy payment.

The 45 megawatt Phase 2 (inaudible) project for which the drilling of the wells was completed has recently commenced construction. We also commenced construction of the Heber South project, a 10 megawatt power plant which will be located in the Heber [non-geothermal] (inaudible) area. The construction activity is expected to include the drilling of production and injection well and the construction of an [OIC] unit. We expect the construction to be completed by the beginning of 2008. The drilling at Heber [the south side] is now performed by our newly acquired drilling rig.

We are currently constructing the Galena 3 project which will deliver 17 megawatts of power generation under a 20-year (inaudible) purchase agreement with (inaudible) Power Company. We expect the construction to be completed by the end of 2007 or the beginning of 2008. We're also currently constructing the [Boly] Phase I project which is expected to deliver approximately 50 megawatts of power generation. We expect the construction to be completed by the end of 2008.

An important development not for its size but because it is the first of its kind in New Zealand is a [notice to proceed recently received] from -- for a $21 million New Zealand, which is approximately US$15.5 million from a company called Geothermal Development Limited, a company which we are a 49% shareholder. The other costs are (inaudible) power plant in (inaudible) New Zealand. We also hold an option to acquire the remaining 51% in GBA upon completion of construction. This is the first ownership position in New Zealand, an important geothermal country where (inaudible) we have 11 projects including this one.

Our CapEx budget for the project that will be completed by the end of 2008 and will be invested for the end of 2008 is approximately $400 million divided between the two [yields]. We will talk about financing part of this for a new financing [rig] in a few minutes. All this has been made in preparing the Company for growth by setting up systems and (inaudible). This is going to be an ongoing effort.

Some other updates. The (inaudible) [solicitation] on which we will (inaudible). On some, like Idaho, we will not [select] it. Others like Southern California Edison are in discussion and on one [PPA], in Nevada we have completed the negotiations with Nevada Power.

So (inaudible) Indonesia. Focus has been made on this. The energy sales contract is almost fully negotiated, but its signature may take until the third quarter. We have finalized the ownership part of the consortium and our ownership in the project is going to be 12.5%.

We have announced three events related to the recovered energy generation since the beginning of the year -- the option agreement for 27.5 megawatts of power purchase agreement, the $9 million supply (inaudible) customer in Canada, and in order for a new application of (inaudible) from Energas in Spain. We are adopting, and it's an important announcement, because we're adopting our recovered energy generation technology to the LNG terminal application. We are viewing the gasification process of the LNG, we are using the sea water and the temperature difference between it and the LNG is a heating source to generate electricity without burning any additional fuel.

With the number of LNG projects under construction and in planning, we believe that this is an important opportunity for recovered energy generation in the Product segment. We're investing in R&D and marketing of this opportunity.

And finally, financing. We have engaged Scottsdale Partners Capital and BNP Paribas Securities to structure and place a transaction to raise cost-efficient capital for the [Vasopict] 2, Galena 2, Steamboat Hills and Galena 3 projects by bringing in an institutional equity investor with an existing tax base to own these projects in partnership with us. This will allow us to monetize the production tax credit and depreciation to reach the owner of these projects [that are entitled] in an efficient manner recognizing the limited ability to use a substantial portion of such tax benefit on a current basis. We expect to receive between $100 million to approximately $120 million for institutional equity investors that were selected for the transaction following a bidding process and we are currently negotiating the terms and conditions of the bid provided by them.

Under the contemplated transaction structure, [OPC LEC], a newly established entity, will be co-owned by us and the (inaudible) [in Brazil] and will in turn own the [reference] projects. We will continue to operate and maintain the project and will initially receive all the distributable cash flow generated by the project until we [get] the capital that we have invested in the project while the institutional equity investor will receive substantially all of the tax credit and deductions and the distributable cash flow after we have been returned our capital. Once the institutional equity investor reaches a negotiated after-tax yield on its investment in OPC, we will have the option to buy out its remaining interest in OPC which is expected to be 5% at the same current fair market value, or if greater [the invest of] capital account balance in OPC. Should the Company exercise this purchase option, it will build on (inaudible) to being the sole owner of the project.

The regulatory environment continues to be favorable. Another state has been (inaudible) discussion continue on the federal (inaudible) and on CO2, SOX or (inaudible). The renewable energy or clean [stack] industry is continuing to get a lot of interest.

Let me now update on our revenue guidance. Following our first quarter earning results, we expect our 2007 Electricity segment revenues to decrease by $6 million to approximately $214 million based on today's [oil] price. We also expect an additional $80 million of revenues from our (inaudible) electricity revenues generated by Mammoth and [Leyte] which are accounted for under the equity method. With regard to our Product segment, we currently expect that our 2007 revenue will be in line with the guidance previously provided, between $65 million and $72 million.

With this, I will now open the call to questions. Operator, please?

(OPERATOR INSTRUCTIONS). Lasan Johong, RBC Capital Markets.

Good morning. A few questions. On the revenue guidance, the $6 million decrease, how much of the first quarter revenue lost is being recovered over the second, third and fourth quarters? And in other words, was the first quarter revenue loss more than $6 million?

Unfortunately, none in the Electricity segment can be recovered because electricity that (inaudible) generates you cannot recover. On the Product segment, there might be [16] between one quarter to another, but the electricity that you did not generate is lost. So we're not talking about change in projection for the following quarters, but whatever we didn't do in the first quarter is gone unfortunately.

In terms of the joint venture, I just want to make sure I understand this properly. When you said that the institutional ownership will be a partner or a co-investor, how much of the project are they going to be buying initially -- 50% or 90% or --?

I think it's hard to say how much they will be buying because the partnership is disproportionate to location. They're going to be allocated.

What's the initial allocation?

That's what I'm trying going to say. They're going to be allocated initially most of the tax credit, most of the depreciation and [occasionally] a little different arrangement in the beginning, but also most of the cash and until they reach a certain (inaudible) on their money. And then it's going to approximately 95.5, it's not fully negotiated yet, but a [minority] and it's expected to take about 10 years.

I understand, and it's a fair market buyout at the end of that [IRR] return period, correct?

Correct.

I think that what's going on then. In terms of the energy recovery project, if I'm understanding this correctly, my guess is what you're doing is you're using the temperature difference between the sea water and LNG to create additional energy or recovered energy from that temperature difference. I'm assuming you're doing something with ammonia or something that has a very low boiling point or propane and you're capturing the difference in the neat to try and generate electricity. Is that correct?

Yes. I'm not responding to which [working] fluid we are using, but yes.

Okay. But, are there any environmental concerns because there's the open loop system for LNG has been severely criticized and the use of it has been pretty much wiped off the face of the earth in the United States. So I'm wondering how you can make this a business with all of the environmental concerns over cooling of the seawater.

It's not an open loop system, it's a closed system, so we are not -- what they will -- the criticism is and (inaudible) we have something in Europe, not in the United States, the first application that we have is in Spain, and there it is very welcome by everybody, environmentalists and the LNG terminal owners alike. We are not harming the environment at all.

So you're not pumping the cold sea water back into the ocean or back into the sea?

The use of the seawater is done by the LNG terminal, not buy us. We are not increasing any warming of the sea or cooling of the sea, if you want. By the way, the applications, some of them are with seawater, some of them are with normal water or hot and we have a solution for both.

I understand now. Okay, so you're using the residual from the LNG operation and so you're not affecting the environment?

Absolutely.

I understand, great, thank you very much.

Scott Thomas, Lehman Brothers.

Just a couple of questions. I missed what you said about the Brady project. It was originally scheduled for 19 megawatts and you scaled back to 13 and you're trying to drill an extra 6 megawatts but we should expect 13 this year -- is that the takeaway?

Yes.

Okay. The marginal design you talked about that led to the failure in Steamboat 2 and 3 turbine blades, can you tell us which other projects have the same design characteristics as those?

The Steamboat 2 and 3 turbines are unique. As far as we know, they were four of a kind, so it's the only project that has this size of turbines. The Mammoth project has similar turbines but at a smaller size that experience the same issues early on, and that would have been in the late '80s or early '90s, but there the manufacturer was able to solve it in a sustainable way. On the Steamboat sized turbines, it was never really solved. So they are unique. As far as I know, no other turbines were built to that size.

You would not anticipate a similar kind of problem developing with other turbine blades, particularly in plants that you guys have bought, rather than built yourself? You have not seen some other kind of problems develop?

No, the only project at risk, if you like, is the Mammoth project. This is the only one that has a comparable insulation. But there, as far as we know, there is no issue. Once the turbine is running for a couple of years, you can actually rule out fatigue issues. It's a problem that develops fairly quickly in the life of the wheel, and if it does not, then it's not there.

Okay, thank you. One last question involving the tax partnership swap. You talked about the deal, and if I heard you correctly, it sounds like you're getting $100 million or $120 million in equity up front in exchange for the depreciation, a lot of the depreciation and production tax credit savings. You said about 10 years worth of tax credits. That would be the duration of their ownership for the portfolio of that, essentially meaning that you're sacrificing all of the PTC unit exchange for that up-front payment over the course of the facilities?

That's right. We are monetizing the PTC in a way.

Gotcha. Thank you. That's all I have.

Michael Lapides, Goldman Sachs.

First of all, Dita, congratulations on the financing structure. We've seen other companies in the geothermal space implement similar ones. Question for you regarding on transmission build that is being debated by the Southern California by both Southern California Edison and San Diego Gas and Electric, both of which are talking about major transmission projects, multi-billion type projects. Just curious for how these types of projects may impact your potential for tapping additional geothermal resources and getting it to market.

I don't know if you know, but the majority of the potential for new geothermal development in California is in the Imperial Valley, and the Imperial Valley is very restrained by transmission to ship all of its power to California. So we are welcoming the projects to aid the additional transmission from the Imperial Valley to California because this will open up additional opportunities from the Imperial Valley for additional projects.

Do you still have additional untapped acreage in the Imperial Valley?

We believe so.

Is that quantifiable?

No, it's very difficult to quantify before [you bring].

Okay, thank you.

Michael Horwitz, Pacific Growth.

Just to review so I have it clear in my head, in terms of anticipated capacity through '08, in your analyst day slide, you have 141 megawatts, but given maybe some of the things you said today, is that still the same number?

It's substantially the same number. If we are going to get a new power purchase agreement, the one that I said that we have complete negotiation, it's for later on, it's for 2010, not for 2008. There are -- we have added maybe 24 for the same period of time, but they might be delaying [sooner], so substantially the same number.

Great. How do I look at your -- as those projects come online, how do I look at how that may affect margins in any given quarter? Obviously, delays would effect it, but how does that play out? Because as you have all of these projects really going on at the same time, forget delays or anything that may be unforeseen, but how would it play out normally?

On the Electricity segment, there is really no impact of construction of power plants, but it's only the question when the power plants are coming online. And if a power plant is expected to come online, both revenue [will be expected] to increase and costs are expected to increase, so the percentage [of course] doesn't change. The dollars, the absolute amount may increase with additional projects coming online. Did I answer the question?

Yes. And then just lastly, on the partnership flip, can you remind me, how many projects are being tucked into that? Maybe I missed that.

I need to count them with my fingers, but --.

Smadar, you have (inaudible) maybe?

Can you repeat question please?

Total megawatts for the OPC deal?

OPC deal?

How many megawatts? If Galena 3 was (MULTIPLE SPEAKERS)

Approximately 50.

Approximately 50?

No, it's 41 -- it's 42, sorry, 41 megawatts, including the 70 megawatts of Galena 3.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) Dan Mannes, Avondale Partners.

A couple of follow-up questions on some of the plant-level items. It was a bit of a laundry list and obviously you guys have a lot going on. Maybe if you could just explain real quick, I think it sounded like you may have had some reductions in output from Steamboat Hills, the existing project, from the expansion work you were doing. Did I understand that correctly, number one? And number two, is that indicative of things that could occur in other expansion type projects?

To answer the question on Steamboat Hills, our Galena 2 and Steamboat Hills expansion project is one that added two additional turbines to the existing unit up on the [hill] and we optimized the use of the well field. And that actually required a shutdown of the original plant and major modification to the gathering system that supplies the produced fluids and then takes the cooled inject take-back into injection. And so we had a schedule to shut down Steamboat Hills for about a month while the tie-in work was to happen. And once the tie-in work was done, it was not possible to continue and run the steam turbine in its old configuration. And so this is why for that specific project because it was so involved the addition of additional units really changed the complete operating scheme of the old units. This is why the fact that we could not restart because of permitting held us back. This is not typical, and as was previously mentioned, this is now over and all three units are operating.

And that includes the Steamboat Hills expansion is now operating as well?

Correct.

Is that similar at all to what happened at Desert Peak 2 in terms of the tie-in?

The issue in Desert Peak 2, it's somewhat similar because Desert Peak 2 involved shutting one plant but then bringing on a modern plant. But -- and this, in that sense, it is similar, but the difficulties in Desert Peak 2 are mostly related to the fact that the resource is not available there and this is what kept us undergenerating for a longer period of time. And we clearly don't have that magnitude of an issue on the Steamboat Hills and Galena 2 project. Initially, we're generating per the performance, you can never tell. With resource, you always have changes, but it's completely different than what we have seen last year.

And on Desert Peak 2, the original Desert Peak 2 plant standalone should have added 15 megawatts, and now you're estimating close to 11, and the same time is sounds like you're bringing down your expectations on Brady which was an existing plant from 19 to 13, but you're looking to hopefully be able to reinvigorate that by drilling more. Am I hearing that part correctly as well?

Yes, and the real answer there is that the gap between the sum of your numbers and what we have now is really the deficiency of the resource compared to our expectation in Desert Peak 2.

Okay. Lastly, just to touch on the Steamboat 2-3. It sounds like you guys are working through this bridge. When you guys reduce your revenue estimates for the year, is that because you're anticipating further reductions in power out of Steamboat, or are you assuming that bridge is sort of going to hold for the balance of this year?

The reduction is mainly the result of what we didn't do in Q1 because initially, we had estimated that there was going to be a delay in putting Steamboat 2 and 3 to full production. So it was part of the initial estimate, so -- and as we have today one turbine already operating, we don't think we need to cut it back more.

I appreciate certainly all the detail you've given on all these plants, it's really helpful. I don't know if in the future maybe you can, rather than wait for the transcript, if any of this could have been released in the press release. It would certainly have helped me out a lot, I could speak for anyone else. But thank you very much for the information.

Alright.

Darren Shaw, UBS.

I have two or three questions if I may. The first question is on gross margins in the Product segment. Obviously they were disappointing in the first quarter Dita and I just wondered whether we could see [that] they're going to go to back to a more normalized level as to the remainder of the year. The second question is just on the joint venture which you've announced today. I wonder if you can comment, even though it's not signed on any accounting issues on the JV. For example, if there are any, does it impact on the guidance that you have given today? And finally, in terms of the resolving of the problems in the first quarter, can you sort of comment that you haven't seen any other unforeseen issues arising since this time in April? Thank you very much.

The tax monetization and the guidance, even though we did not finish to analyze the exact impact on the numbers, on the revenues it's not going to impact, so we don't think it's going to impact. On the product gross margins, we have said I think in the past that gross margin of 2006 in the Product segment was not difficult. It was higher than typical, and that the 2005 gross margin in the Product segment is more typical and what we're estimating today is for the next three quarters we're going to go back to 2005 gross margin [leverage] in the Product [sales] segment. Was there another question that I missed.

Yes, just if there have been any other unforeseen issues which had arisen in April?

No, not anything that we didn't mention.

Great, thank you very much.

Lasan Johong, RBC Capital Markets.

Quick question on the OPC deal again. Last time we spoke, you said that there was some potential IRS issues. Did you obtain a private letter ruling or how are you getting comfortable with the tax issue from the IRS perspective?

I don't remember that I said that the IRS are [auditing our accounts]. I think that the IRS [has stopped issuing a (inaudible) and they will not (inaudible) it. [Where are we going to (inaudible) from the legal opinion that we're going to get on it.

Understood. And on Indonesia, 12.5% interest in the ownership. How much is that going to cost, what's the CapEx involved?

We don't have updated numbers for the CapEx. When we announced it last [summer], we said in excess of $600 million. So I don't know where it is going to end up, and depending also on escalation and on the timing, but that's the order of magnitude.

I see.

And it's of course going to be leveraged and that's a project that is going to be constructed with construction loans, it's not going to be financed with equity.

Right. And then lastly on that same project, why the two-quarter delay or almost a two-quarter delay in the signing of the contract?

Because it's Indonesia.

Thank you.

Michael Lapides, Goldman Sachs.

A follow-up on the JV transaction. Are there other opportunities that you are actively considering for similar transactions and is there a way for investors or analysts to think about which type of plants are most viable for this type of transaction?

We're currently not actively working on more than one production. We're (inaudible) the first production and then if things (inaudible) further, but theoretically any [PTC], any project which was (inaudible) placed in service or will be placed in service currently until the end of 2008 is a potential candidate for a monetization of the PTC.

Thank you, Dita.

Should I conclude, operator?

There are no further questions.

Let me thank all of you for joining us today for listening to us for being with us for a more difficult quarter and for sharing with us the strength and the potential of the Company in the quarters to come. Thank you very much.

Thank you. This concludes today's conference call. You may now disconnect.