Ormat Technologies Inc (ORA) 2007 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Ormat Technologies second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer period. (OPERATOR INSTRUCTIONS) Thank you.

It is now my pleasure to turn the floor over to your host, Mr. Todd Fromer. Sir, you may begin your call.

Thank you. And thank you everyone 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 second quarter 2007 earnings press release. If you have not received the release, please refer to the Ormat's corporate website 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; [Simadal Leahy], Senior Financial Analyst and Manager of Business Development.

Before beginning, we'd like to remind you that information provided during this call may contain statements related 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 the 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 a non-GAAP financial measure 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 to this non-GAAP financial measure in assessing Ormat Technologies liquidity or in planning and forecasting future periods. This non-GAAP financial measure may also facilitate management's internal comparison to the Company's historical liquidity.

Before I turn the call over to management, I would like to mention that a slide presentation accompanies this call and can be accessed on Ormat's website www.ormat.com under the events link found in the investor relations tab. With that said, I would like to now turn the call over to Dita, Yoram, 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, I'd like to turn the floor over to you.

Thank you, Todd, and good morning, everyone. Thank you for joining us today.

For those of you who will be following the presentation during today's call, I'd like to begin on slide number 4. The second quarter was a strong quarter in which we experienced robust revenue growth, return towards profitability, and made important progress in our growth plans. Total revenues increased to a rate of $84.1 million, which is equivalent to a 31% increase year-over-year and a 36.1% increase quarter-over-quarter. Both our (inaudible - highly accented language) and product segments turned in a solid performance with gold driven primarily by an increase of 91,368 megawatt hours in our geothermal and recovered energy focus in the U.S. and increasing income recognition for both of geothermal and recovered energy segment.

While it was an exceptionally strong quarter in our products segment, we do not expect revenue in that segment to continue at this quarterly level for the foreseeable future. And like the liquidity segment, revenues in the product segment can vary from period to period and are more difficult to predict because of various factors including timing of orders and execution of the project. The increasing revenues in our electricity segment, however, is the result of additional products online, higher availability of (inaudible) projects, and higher energy rate in our standard number four contract and is therefore expected to be sustainable. Revenues in our electricity segment grew [13.5%] to $55.4 million year-over-year, while revenues in our products segment grow 87.3% to $28.7 million in the same period. As anticipated, the 36.2% gross margin in our electricity segment was higher this quarter and returning to normal levels.

In our product segment, the 15.6% gross margin was higher than it was in the first quarter, but it remains lower than the margins we've seen last year, and we continue to work for order contracts and did not contain an escalation -- that did not contain an escalation sector in this, a cost increase environment. And as we discussed before the comparison to last year margins is irrelevant because last year was exceptionally high. We expect the product segment in the next two quarters to remain at the same level of the second quarter this year.

Turning now to slide 5. As the chart show, the issues that led to (inaudible), for last quarter were in fact an extraordinary accumulation of issues and many of them are reserved. During the second quarter, we continued to see the benefit from the focus on our growth strategy which is moving along according to plan and is about to achieve several important milestones. We added 24 megawatts to our product portfolio bringing it to 409 megawatts of on generating capacity, assuming the products will be back to operating (inaudible) capacity. (Inaudible) capacity will be reduced by 6 megawatts to a level of 403 megawatts. The additional megawatts that we added in the second quarter consisted of the Ormat Construction tha included construction of additional Ormat (inaudible) or OEC to increase the project capacity by 10 megawatts to 57 megawatts. Also, construction of an additional OEC project (inaudible) was completed and increased the generating capacity of the project by 4 megawatts. During the second quarter, we (inaudible) operation of the 10 megawatt (inaudible) and the 11 megawatt (inaudible) which was completed in 2006.

Now to slide 6. You will see we have signed three new process agreements. One, which is our recent announcement with Highland Electrical Association (inaudible) demonstrates the (inaudible) recovered energy is taking amongst the environmentally friendly Power Generation Alternative. This (inaudible) agreement for the sale of 4 megawatts generated from a (inaudible) facility, is for the fixed power plan that we have received during the past 6 months. This new facility is to be constructed along (inaudible). We expect the project to be commissioned in mid 2009. Momentum for recovery (inaudible) generation is continuing and we have confidence in its long-term potential for Ormat.

In May '07, we signed a 20-year power sources agreement with (inaudible) power company for the sale of between 18 to 30 megawatts of energy to be produced from the (inaudible) power plant which we plan to build in (inaudible) in northern Nevada. The total of this agreement is still subject to approval of the (inaudible) PUC. Because when the project is expected to come online in late 2010. It encourages our visibility of (inaudible). In June, we signed another 20-year power source agreement with our long-term customer, southern California (inaudible) for the sale of [50] megawatt (inaudible) from the geothermal (inaudible).

(Inaudible) is currently under construction in Ventura County, California. The power sources agreement includes an option to increase capacity to 100 megawatts at our discretion, and is still subject to regulatory approval. We expect the (inaudible) project to come online by the end of 2008 and the additional 60 megawatt is the resource is determined to support it in 2009 or early 2010.

With respect to the 340 megawatt (inaudible) project in Indonesia, while it is moving slowly progress is being made. Ormat will have (inaudible) minority interest in the Indonesian entity, this (inaudible) and we supply the equipment for the power plant. It is currently expected that the power sources agreement will be signed in Q3 (inaudible) we proceed to negotiate the financing arrangement for the construction and term phases of the project. And only then will construction start.

Moving to slide 7. I would like you to -- I would like now to talk about the important financing transaction completed in the second quarter. Since our last call, we concluded a deed to (inaudible) cost-efficient for the Galena 2 and Galena 3 projects. (Inaudible) which has an existing stock base to own this projects in partnership with us. Joseph will provide you with a more detailed explanation in his remarks. However, simply put, what we have done is to effectively reduce need for future debt financing for this project by allowing Ormat to monitor the (inaudible) and other tax benefits accelerated depreciations generated by the projects included in the transaction earlier than we could use them ourself. And even earlier than they are generated as we have received a large cash payment upfront.

Now into slide 8. Let me update you all on our construction development activity. Ormat consistently states we are committed to investing in our long-term goals, which means not only making sure we have the best people in place, but to also make sure that we have the necessary infrastructure in development planned. At start of this commitment we acquired (inaudible) since the beginning of 2007. One of the way it is currently being used for the construction of the (inaudible) project. The second way is expected to start drilling in our exploration projects by the end of this month. By owning our own wakes, we are able to more effectively control time and costs as we can avoid some of the issues resulting from the competition from oil companies for such equipment.

To ensure we have sufficient resources from which we could bid for new projects and secure pipeline of projects for future growth, we signed new geothermal lease agreement for approximately 7,200 acres in Nevada and California. This adds to our latest (inaudible) portfolio development beyond the next two years.

On slide 9, you will see our project update. We are in various stages of construction of sales team projects with the potential capacity of between 256 and 261 out of which we expect to complete [143 to 148] megawatts by the end of 2008. An additional [113] megawatts in 2009 and early 2010. We already secured the power source agreement between [18 and 40] megawatts for 2010. We expect the 20 megawatts (inaudible) project in Guatemala to undergrow commercial exploration in moving to commercial operation in Q3.

(Inaudible) in 2008, or our completion in 2008 includes the 17 megawatt Galena 3 and 10 megawatt (inaudible) which are in advance construction and expect it to be completed in Q1 2008. The 35 megawatt of (inaudible) in Kenya and the 50 megawatt (inaudible) in California are both under construction and scheduled for completion by the end of 2008. The (inaudible) project is full developed. The (inaudible) field is part of our current construction activity. 11 megawatts of (inaudible) are also expected to be completed by the end of 2008. And for 2009 we expect the remaining 11 megawatt (inaudible) and the 4 megawatt of the (inaudible) project, we saw in early stages of construction and scheduled for completion in the second half of 2009. Let me add that the 5 megawatt (inaudible) project is suspended and may be canceled. We are also actively pursuing our exploration activity in (inaudible) to confirm the resource for the projects between 18 and 30 megawatt each. Which are scheduled for completion in 2009 and the (inaudible). There is a sales total agreement in Nevada, (inaudible) for which we still expect to see approval and is scheduled for 2010.

We are currently working on an enhancement program to add (inaudible) to increase the project's output by an additional 8 megawatt. We expect this enhancement will be completed in 2009 on the basis of a new power sources agreement for this energy that we are still negotiating. As previously mentioned, in addition to 50 megawatt in the (inaudible) area are likely to come online by the end of 2009 or early 2010. If the resource in this area is confirmed to support the additional products.

Turning now to slide 10. We estimate that the CapEx requirement for the construction activity is approximately $400 million. This amount excludes the CapEx required for Carson Lake, (inaudible) as the construction budget is not yet finalized.

Let's go to slide 11. Regarding our products segment, I would like to mention the agreement we announced last week, which is a $5.7 million agreement with the (inaudible) group in Italy for a supply of 1 OEC of a new recovered MLG generations plant in a cement plant. The plant is to be installed in a (inaudible) in Virginia. A plant which belongs to the Italian company. This is the third contract for recovered energy power plant in cement industry and shows the interesting data industry for the MLG savings (inaudible) unit.

And finally on slide 12, the regulatory environment continues to be favorable. (Inaudible) legislative resource in the U.S. House of Representatives and the Senate have resulted in different proposals regarding the (inaudible) for resulting portfolio standout and extension of products (inaudible) beyond the service date of December 31, 2008. It is still unclear how the national newly portfolio stand out is controlled by the congress and signed into law may affect different states or new portfolio standout but there are assumptions how we create and the assumptions are (inaudible). Those states which have the higher standards, we maintain the higher standards and those states, which do not have it, will go with the federal standard. It is also unclear for how long the production tax credit will be extended and whether there will be a limit imposed on the amount of credit that can be claimed on the ability to access the credit and wireless for inflation. With that, I would like to turn the call over to Yoram for review of operations in the quarter. Yoram, please.

Thank you, Dita. And good morning, everyone. I would like to begin on slide 14. As you recall, the first quarter we had an unusual accumulation of issues which are most are behind us that affected our profitability During the second quarter, we demonstrated our ability to leverage these assets and skills to deliver sales performance. The U.S. plants, including our 50% share in the Mammoth facility generated close to 550,000 megawatt hours, up from 443,000 megawatt hours in the same quarter in 2006.

In this quarter we have seen very high availability and production number out of our three key plants, (inaudible). Which has a lot to do with the successful major maintenance work and preemptive maintenance in Q4 of '06 and in the first quarter of '07. And also the completion of the 10 megawatts construction in the (Ormesa) complex in the middle of April 2007. This allowed for record generation out of the Imperial Valley in time for the summer months when additional capacity is needed by the off takers. And high rates are paid. The consolidation of all the file for disagreements in the Ormesa complex under one agreement has added to the simplicity of the (inaudible) operation and reduced the internal inefficiencies.

In our Nevada project, we have declared commercial operation in both Desert Peak 2 and Galena 2. The essential completion of Galena 2 and Steamboat Hills project allowed for an increase of about 35% in the energy sold from the complex compared to our numbers in the second quarter of 2006, even with the complex being in ramp-up mode.

Moving into slide 15, we're happy to report that the interim solution in our Steamboat 2 and 3 turbines has been working successfully in one of them since May and in the second turbine since early July and allowed to substantially reduce the generation shortfall in that facility. In parallel, work has continued on a longer term solutions for these turbines. The Brady project is operating and contributing to revenue generation, however sales remain reduced by 6 megawatts to about 13 megawatts. The [Monotombo] project in Nicaragua experienced turbine failure. It's a turbine that's not manufactured by Ormat, but was acquired with the original asset. We expect failure to have minimal -- we've seen minimal impact in the second quarter and believe that the power plant will return to full operation in the fourth quarter of 2007.

In our recovered energy project, we have noted last quarter that there has been a fairly low demand out of the power plant that affected our generated in these facilities. We have seen slightly better numbers this quarter. And higher availability numbers out of these units. All in all, we are pleased with the overall progress during this quarter in our plants. We will continue to work towards improving the operation of our facilities and prepare the organization for the growth in years ahead of us in accepting the new facilities coming online. I will now turn the call to our CFO Joseph Tenne. Joseph?

Thank you, and good morning, everyone. Starting with slide 17. For the second quarter of 2007, total revenues were a record of $84.1 million, a 31.2% increased from revenues of 64.1 million in the same quarter of 2006. Total cost of revenues was $59.5 million, a 47% increase from the $40.5 million in the same quarter of 2006.

Changing now to slide 18, total liquidity revenues for the second quarter of 2007 were $55.4 million, up 13.5% from the $48.8 million experienced in the second quarter of 2006. Revenues are impacted positively this quarter as a result of new projects coming online at the end of the second and third quarter of 2006. An additional 24 megawatts in the second quarter of 2007 from the Ormesa, Galena 2, and Steamboat Hills projects, higher energy rates for the electricity sold under the standard of a number four contract in California. Those resulted in an increase of $6.4 million in our U.S. revenues and completion of the (inaudible) project in Guatemala also note is being declared commercial operation which increased our revenues by $1.4 million. These increases were partially offset by $900,000 due to a turbine failure in the (inaudible) project as Yoram mentioned before.

Cost of electricity segments revenues was $35.3 million, up 14.2% from the $30.9 million in the same quarter last year. The increasing cost of electricity segments revenues resulted mainly from the cost related to new project which started operations. And increasing labor and material costs in existing plants.

On to our product segment on slide 19, total revenues for the second quarter of 2007 were $28.7 million an 87.3% increase of the total revenues of $15.3 million in the same quarter last year. The increase in our product segment is mainly attributable to the timing of revenue recognition in accordance with the percentage of completion of each of our geothermal and recovered energy generation products. Cost of product segment revenue were $24.2 million, up 152.8% from $9.6 million in the same period last year. The increasing cost of products revenue segment resulted from increasing revenues over the same period in 2006 and increasing labor and material construction and transportation costs, which affected our margins in this segment.

Now to slide 20. Combined gross margin was 29.2% in the second quarter of 2007 compared to 36.8% in the second quarter of 2006. Gross margin for the electricity segment was 36.2% for the quarter ended June 30, 2007 similar to the 36.6% for the quarter ended June 30, 2006. For that segment gross margin was 15.6% in the second quarter of 2007 compared to 37.5% in the same period last year. We expect gross margin in our product segment in the next two quarters to remain at the same second quarter level. As mentioned in our first quarter earnings call, we are now building escalation protection into new proposals, but our old orders will not reflect this change.

Moving to slide 21. For the quarter ended June 30, 2007, we reported net income of $8.5 million or $0.22 per share of common stock basic and dilutive as compared to net income of $8.4 million or $0.24 per share of common stock basic and diluted for the quarter ended June 30, 2006. The weighted average number of shares used in computation of earnings per share for the second quarter of 2007 was 38.3 million shares, 3 million shares more than in the second quarter of 2006. While our revenues from the product segment increased by 87.3%, the operating income in this segment decreased by $2.8 million as a result of lower margins as previously discussed.

In the electricity segment, the operating income increased by $1.8 million. Netting for the quarter ended June 30, 2007 included stock based compensation related to stock options of $1 million as compared with $300,000 for the quarter ended June 30, 2006. On slide 22, adjusted EBITDA for the quarter ended June 30, 2007 was $30.6 million as compared with $29.1 million for the quarter ended June 30, 2006. Adjusted EBITDA includes consolidated EBITDA and the quarterly sharing operating income and depreciation and amortization totaling $4 million and $3.4 million for the quarters ended June 30, 2007 and 2006 respectively. Related to the Company's consolidated investment interest and related project in the Philippines and it's 50% in the (inaudible) project in California.

Turning now to slide 23. As of June 30, 2007, we had cash, cash equivalents, and marketable securities of $73 million compared to close to $170 million as of December 31, 2006. This includes primarily due to the filing of capital expenditures in the amount of [$69.4] million, the repayment of long-term debt (inaudible) in the amount of $36.5 million. And the payment of $4.6 million in dividend. This was offset by $14.7 million of cash flows from operating activities, [$69.6] million net proceeds from the OPC transaction, and a net increase of $17.9 million in restrictive cash, a capital increase related to the principal payment due under our (inaudible) secured note, which was done on July 2, 2007, to June 30, 2007 was not a business day.

Moving now to slide 24. On August 8, 2007, Ormat's Board of Directors approved the payment of a quarterly dividend of $0.05 per share, the Company's dividend policy which started an annual payout ratio of 20% over the Company's net income, subject to Board approval. The dividend will be paid on August 29, 2007 to shareholders of record as of the close of business on August 22, 2007. The Company expects to pay dividend of $0.05 per share next quarter, as well. Finally, Dita Bronicki mentioned that we closed that (inaudible) transaction during the quarter. Affiliates of Morgan Stanley and Lehman Brothers became sufficient equity investors in a newly formed subsidiary of (inaudible) called OBC. Under the transaction, all of Nevada transferred ability to Galena 2 and (inaudible) in Nevada to OPC. (Inaudible) Limited Liability Company interest in OPC to the institutional equity investor for $71.8 million. The transaction provides for a second closing, whereby Ormat Nevada will contribute the Galena 3 project in Nevada which is currently under construction and receives an additional amount of $46.6 million with possible sales and adjustments. We expect the closing to occur by April 2008 subject to certain conditions.

Specifics of the deal are on slide 25. Ormat Nevada will contribute to -- sorry, Ormat Nevada will continue to operate and maintain the project. In the first few years Ormat Nevada will receive all of the distributable cash flow generated by this project, until it recovers the (inaudible) has invested in the project. In that period, the institutional equity investors will receive substantially all of the production tax credit and taxable income or loss. Once Ormat Nevada has recovered its capital, the investor will receive from the projects both the distributable cash flows and the tax benefit. Once the investors reach a target of the tax under investment in OPC, it will occur. And Ormat Nevada will receive 95% of both distributable cash flows and taxable income and the investors will receive 5% of gross distributable cash flows and taxable income on a going forward basis. Ormat Nevada also has the option to buyout the investors remaining interest in OPC. At the then current market value or its greater. Or, if greater, the investors the current balance in OPC.

As for the accounting treatment for this transaction, as seen in slide 26. Ormat Nevada retains the controlling vote interest in OPC and therefore continues to consolidate it. The transaction has been accounted for as a financing transaction with the payments received for the equity interest recorded in minority interest on our consolidated balance sheet. As a tax benefit equity investor, investors, they are recognized by us as income from the sale of the benefits. In minority interests on our consolidated balance sheets. As the current benefits (inaudible) the institutional equity investors, they are recognized by us as income from the sale of the benefit in minority interest on our consolidated balance sheets and in our consolidated statement of operation. Interest expense representing the institutional nonequity investors targeted yield on the balance of the amount paid by investors is charged to minority interest and is deducted from the income from the sales of the tax benefits. Thank you all, and I would now like to turn the call back to Dita.

If you turn to slide 27, I will now update our revenue guidance. Following our second quarter earning result, we expect our 2007 reported segment revenues to be in line with our presently provided guidance, approximately [$230] million based on today's oil prices. We also expect an additional [$80] million of revenue from our (inaudible) revenue generated by the Mammoth and (inaudible) projects which are accounted for under the equity method. With regard to our product segment, we currently expect that our 2007 revenues will be on the high side of the guidance previously provided, which is between 70 million and $72 million.

Let me conclude by saying that over the first several years, we have worked prudently to build a strong foundation for our goals and to capture the significant opportunities that lie ahead. We totally believe that we are in a great position to achieve sustainable goals, well into the future, and we are excited about the opportunities before us. With that, I will now open the call for questions.

(OPERATOR INSTRUCTIONS) Our first question is coming from Michael Horwitz with Pacific Growth. Please go ahead.

Good morning.

Good morning, Michael.

I'm going to maybe go through the products business a little bit. In terms of competition and how you see your ability to capture market share as the geothermal industry is growing pretty dramatically in the U.S. and a lot of these companies are being financed and they're going to be coming to you for equipment. How do you view that over the next three years? And two, would be your competitors in that area?

I think that the answer is that we may see an increase in the product segment. But it is not an increase that we can really plan for. So -- but we are ready for that increase if it happens because we do have an ability to subcontract a big portion of the manufacturing, which enables us to extend and shrink the production capability without the major impact on people in the management. As to a competition, I think it depends on the quality of the resource.

On the lower temperature resources, there isn't really a very serious competition. There are other technologies that are being promoted, but they're not proven technologies, and we don't think that they can deliver what is required.

On the higher temperature areas, especially low pressure resources, there is the competition from the traditional steam turbine manufacturer and actually there are a certain level of resources where (inaudible) are not suitable solution than our solution. And we may not even compete for that. So we need to divide the resources into three categories. Lower temperature resources where our advantage is clear. In the middle, we believe that both a solution combined with a steam turbine or a result a steam turbine is a cost-competitive solution. And a very high-end where we may not be the best solution.

Okay. And then if I could just ask one question, my other question. I think you might have mentioned it and I'm sorry if I missed it earlier. But with regards to legislation there was certainly some good wording in the bill from last weekend about waste energy recovery programs and about a $10 per megawatt hour subsidy, let's call it. Can you comment on that and how that might move your recovered energy business? And then also what the competition's going to look like in that segment?

the energy efficiency legislation, which is the support of our recovered energy generation is certainly very encouraging. And we definitely support a more recovered energy. Even without it, today there are eight states, and I didn't mention it, which are already including recovered energy generation as illegible for a new portfolio standard. Not in all states recovered energy will be eligible for (inaudible), but there are today eight states where it has happened. Yes, we are seeing a regulatory support recovered energy and expect it to help with that part of the business, as well.

Okay. Great. Thanks, Dita.

Thank you.

Thank you. Our next question is coming from Scott Thomas with Lehman Brothers. Please go ahead.

Good morning, folks.

Good morning.

Just had a follow-up question on the product segment, really just zooming in on the margins there. I guess what I recall from the first quarter conference call is you guys cited some inter period cost allocation issues. It sounds like now that the story is more that there's a sort of fixed price contracts that are involved in terms of delivery and we're no longer expecting sort of average margins of the prior couple years, rather something closer, at least this year to the 15 or 16% level you guys had in this quarter? Is that the right way to think about it? And when should we expect the margins there to return to sort of more normalized levels? Or will they?

Just a correction. I think that the main reason that we quoted also in the first quarter was really the fact that the contracts were all contracts with no escalation (inaudible) will even up by cost increases before we were able to deliver on them and that we have changed the policy in the new contracts, which will come to execution in the months to come will not suffer from (inaudible). But I don't think that we said that we expect the margins to be the average. What we said is that 2006 average margin was higher than expected and it is more the 2005 margin that we should look at the target. And we have expected that to happen in the fourth quarter of 2010, and it may happen only in 2008.

Okay. So just so we're clear, the 25.4% you guys had in '05 would be the sort of the '08 and afterwards target? And in the meantime in '07, you guys are thinking more like the margins you saw in this quarter of 15 or 16%?

Right. That's the target. But speaking about targets, if we cannot predict the world economy and if the cost environment and the pressure on labor and construction costs environment is going to change in the very direction for us, we may not reach it. We just need to be very careful what we say. That's what we are targeting when we are performing new orders.

I understand. Just another quick follow-up, make for Yoram. The Steamboat 2 and 3 turbine replacements. Sounds like those went okay. Can you comment at all about when you expect those to last until the permanent replacements get in? And what you might expect in terms of cost or papal expense in terms of solving that problem permanently?

Yes. We think that there's very good chance or very good place for optimism as far as having interim solution in place until the replacement longer term. And really the bulk of the expenditures unless we'll see some unexpected failure, the bulk of the expenditures is also behind us in terms of working on these turbines. And your question is how much would the upgrade project cost?

Just is there an incremental expense when you get the permanent turbines delivered? And how much is that likely to be order of magnitude?

The answer is yes, there is an incremental expense. And we're looking at the 3 million to $4 million project. But that would include a significant portion that is really upgrading the capability of the plant. So it's not for a replacement in kind, if you'd like. But for enhanced performance.

I understand. Thank you very much.

Thank you, our next question is coming from Michael Lapides with Goldman Sachs. Please go ahead.

Hey, guys, congratulations on a good quarter. Dita, a question for you. The Israeli parent company has had someone come in and take a pretty sizable stake in the equity of it. Just looking for any re-across format technologies and how that may or may not impact you down the road?

Michael, I don't think it has any impact on our technologies. That's really the bottom line. The Israeli parent controls 64% of Ormat Technologies. And there shouldn't be any change there.

And then kind of a forward-looking question regarding potential new projects. Can you give a little bit of an update on which request for proposal processes offered by regulated utilities are underway and which ones you're either participating in or looking to participate in?

We participated in a southern California request for a proposal. And we expect a developer to issue a new one, probably sometime in the fall, which is what they've been doing so far.

And can you -- is there a little more detail you can give on the southern Cal Edison, when that will take place when results will be announced?

Well, we have been short-listed on that. But you know, you can never know how long the process takes with the facility and not always when you are short listed you are a winner. But we have been short-listed.

And at a specific site or a site to be determined at a later date?

No, from a specific site. And we have one site in southern California and one site in northern California.

Got it. Okay. Thank you, Dita.

Thank you.

Thank you, our next question is coming from Brian Chin with Citigroup. Please go ahead.

Hi, Dita.

Hi, Brian.

I've actually got a question for Joseph on slide 9. The project update slide. Could you give us -- could you tell us which of these projects have you already secured financing?

Let me answer this because it's very simple. We do not as a policy, we do not secure financing during the construction phase. And we because it is much easier to build the project on balance sheet and only then finance them. And then it enables us to bundle a few projects together and do more efficient financing.

I see.

So out of this project, it is only the Galena 3, which is included in the tax monetization transaction. And we have not -- we are not using it financing. We are (inaudible) on our balance sheet, but once complete, it will be rolled into the OPC financing. Everything else is balance sheet.

Okay. Is there any impact from the revised credit market environment towards whether you can secure financing for projects that you've already financed on your balance sheet? Can you comment on that a little bit?

I don't know -- I don't expect it. First of all, I hope that the credit market situation is a temporary situation and will not last for a long time. And this is the expectation of people we are talking to. Second is the fact that at least for (inaudible) which is a 2008 completion target and eligible to production tax credit, I don't think that the tax appetite will go away so the ability to monetize the tax credit so broadly and finance it that way, more attractive than the capital in our take. The (inaudible) financing is done by institutional. It's in the process, it's not done, but it's contemplated to be done by institutional government agencies. So they're not impacted by the credit market. And on top of it, we have secured credit lines from banks, from commercial banks, which are again not subject to the capital market. So we're not concerned.

Thank you very much.

Thank you. Our next question is coming from Dan Mannes with Avondale. Please go ahead.

Morning, everybody.

Good morning, Dan.

A couple quick questions. One, a follow-up on Steamboat 2, 3. Yoram, in your part of the answer you noted this was an operational enhancement, in either removing the old turbines and putting in OECs. Can you note would this actually add anything to capacity? Or would this just give more flexibility or lower costs or anything like that?

We expect it to add to our up time more than anything else. The old turbines are very slow to start up the -- o0ur plants in this area have periods where we need to shut them down or they're shut down due to thunderstorms and similar issues. Up time is -- or the ramp-up time is a very big issue. There are also big consumers of auxiliary. So we will see, I expect -- do not expect a change in the name plate capacity if you would like, but I expect a change in the number of megawatt hours produced over the year.

Great. Thanks for that color. Dita, briefly, on (inaudible) you had mentioned you're still working on the TPA and then financing would likely follow that. I guess the reports that have come to market that this could start construction in a month would seem fairly aggressive. Would that be a fair characterization?

(Inaudible), I don't know the price, the Indonesian price. But after signing the (inaudible) agreement. It is very imminent, the signature of the (inaudible) agreement (inaudible) really imminent, but we still have to go forward financing so construction can start.

Has that already begun? Just given the nature of the size of this project. I imagine it's something every bank in Indonesia wants to be a part of.

Yes. The process has begun, but you cannot go to the execution phase until you have the basic agreement signed and those are not signed yet.

Okay. And then the impact of that on your product sales segment. Just briefly, should we assume that, I think the estimates are in the ballpark of 200 million over four to five years. Is that going to be relatively evenly split? Or do you think that will be front-end loaded.

I think the best assumption now is evenly split. But because we don't have yet any detailed cash flow, analysis, or timing analysis. So I think we should assume evenly split. (Inaudible) would you agree?

Yes.

Great. Thank you. Lastly, just wanted to bring up (inaudible) real quickly. You said that project was currently suspended. If I remember right there was some environmental issues at the specific site. Is that something you've encountered on any of the other reg projects you've looked at? And do you see that as being an a constraint at all on the reg business?

No. It is a -- I think it is a one-off, it is not related to the regulatory (inaudible) that we worked with down on the site before, so I think it's a one-off.

Great. Thanks for the color.

Thank you. Our next question is coming from [Emily Christie] with RBC Capital. Please go ahead.

Morning. Just a couple of quick questions. First, relating to your growing infrastructure. Of the drilling rigs that you mentioned, the one dedicated towards exploration, is that exploration of existing projects? Or would that for new project possibilities?

No, the exploration is for new projects. But some of the new projects that we are still doing the exploration are already on the list that we showed on slide 9. And you can see a -- you can see (inaudible) for example, which says exploration. Or Carson Lake and Buffalo Valley, which are still in exploration. And then, of course, explorations for projects beyond the identified projects in the list -- on the list.

Okay. And secondly, at this time are you considering any strategic alternatives like selling the Company?

Two things. Number one, we are not commenting on those types of things. Number two, no.

Okay. All right. Thanks very much.

Thank you. Our next question is coming from Darren Shaw with UBS. Please go ahead.

Hi, good morning, guys. Hope you're well. I had a few questions. The first one was on the recovered industry contract that you announced with (inaudible), Dita. I think you said it was your third contract with a cement company. Do any of your competitors do recovered energy with the cement industry? Or is there an extremely sort of great opportunity out there for you with hundreds of cement plants in the U.S. and thousands in the world? And the second and third question, which I apologize I'm actually on vacation next week for the Ormat Industry's conference call. So there's slightly more relevant for that. I just wondered if you could comment on whether there has been any contact between Ormat and [Guzzard Inc.] and any idea what their intentions are? Thanks.

Let me respond to the cement. The big competition on installing recovered energy generation on cement plant is not to do anything. The do nothing alternative. That's the big competition. We are not familiar with any serious competitor. But the penetration into this industry is not easy. And because you are bringing into a process a machine which is a stranger to the process. So I don't see hundreds of machines to be sold to the hundreds of the cement plants that are in the industry. I think we will see an increase in orders, but I don't think it's going to be handled (inaudible).

But surely just on that issue, Dita, as a former cement analyst myself, the actual industry is controlled only by a few players. (Inaudible) is happy. They may be interested in the other 60 odd plants in the world, whatever?

We certainly hope so. We certainly hope so.

Okay.

Okay. On the (inaudible) shareholder format industries, I prefer not to respond. We have all read in the press what he said about his position. And that is that he believes in the industry and trusts management. And that's what we expect to happen.

Okay. Thanks very much.

Thank you. Our next question is coming from [Jacob Strumweizel] with [Kazma] Capital. Please go ahead.

Hi, Dita and team. Congratulations on a great quarter. I've just been wondering if you might be able to give any color regarding strategic investments in the solar or other alternative energy spaces in which you may look to diversify some of your holdings in?

It's hard to give color before the specific project to talk about. But what I can say is that we are looking at the possibility and looking for an appropriate opportunity for Ormat in that area. We are looking into it.

Okay. Good. And so there's always opportunity for you to continue to diversify some of your energy holdings?

Yes.

Very good. Thank you for your time.

Thank you.

Thank you. Our next question is coming from [Ella Freed] with [Prisma]. Please go ahead.

Hi, and good afternoon to everybody. I'm calling from Israel. And my question is to Dita. Are we going to see more contracts in the future that are tied to the energy prices? And are you interest by the gasoline prices recently?

The answer to the first question is probably no. We do not think that the current available power purchase agreement are going to link to energy prices. They're more going to be fixed prices. Once you establish the price, you may have an escalation, you may not have an escalation. But they are not going to -- I don't expect them to be linked to energy prices. Of course, every new contracts, will be in a business environment. And (inaudible) and therefore energy prices may have an impact on the ability to charge a different price for the energy. To the second question, no, we're not involved in actual guidance. Unless I didn't understand what you--?

No, you understood right. And one more short question. The LNG sector we spoke about it the last time. Do you see any substantial developments as to opportunities in the product sector?

Absolutely, yes. This a great opportunity. We see a lot of positive response to it, but of course it takes time, the product is still not complete. We are manufacturing the first order and certainly expect to follow on orders in this sector, yes.

How long does it take the industry to react and to translate it into orders? A yar? Half year?

Definitely not half a year. The time delays in our industry are long. But I cannot really tell you.

Okay. Thank you very much.

Thank you.

Thank you, at this time I'm showing that there are no further questions. I would now like to turn the call back over to Dita Bronicki. Please go ahead.

Just a short thank you to all of you for your support in the difficult quarter and for continued support in our (inaudible) opportunity. Thank you, all.

Thank you. This does conclude today's conference call. You may all disconnect and have a great day.