Ormat Technologies Inc (ORA) 2008 Q2 法說會逐字稿

Good day. My name is Jackie and I will be your conference operator today. 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 speaker's remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS.)

It is now my pleasure to turn the floor over to Marybeth Csaby of KCSA Strategic Communications. Ma'am, you may begin your conference.

Thank you, Jackie and thank you all for joining us today. This is Marybeth Csaby with KCSA Strategic Communications, investor relations consultant to Ormat Technologies.

At this point, you should have all received the second quarter 2008 earnings press release. If you have not received the release, please refer to Ormat's corporate web site at www.ormat.com. Hosting the call today are Dita Bronicki, Chief Executive Officer; Yoram Bronicki, President and Chief Operating Officer; Joseph Tenne, Ormat's Chief Financial Officer; and Smadar Lavi, Vice President of Corporate Finance and Investor Relations.

Before we began we would like to remind you that information provided during this 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 5th, 2008.

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 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 future forecasting 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 under the events link as 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 would be glad to answer any questions that you may have.

Dita, the call is yours.

Thank you, Marybeth and good morning, everyone. Thank you for joining us today. Let us begin on slide four. The quarter and half year points were characterized by good results coupled with construction and exploration programs that continue on track. We had another strong performance in our liquidity segment during both periods despite our performing maintenance on several projects.

The second quarter in particular had substantial maintenance work and the project shutdown for enhancement cutbacks. The strong growth that we were able to achieve was the result of the additional capacity we had added over the last two years, which outgrow these expenses. We achieved 11.6% growth in electricity revenues on a year over year basis, and 22.5% when comparing the electricity segment revenues from the first half of 2008 to the same period in 2007.

Turning to slide five another important achievement is that we had built a strong backlog in our products segment. Since the beginning of the year, we received purchase orders of approximately $176 million for supply and construction of recovered energy generation and geothermal power plants, including $66 million that is still subject to a noticeable fee. These product orders are globally diverse with new grids in New Zealand, Turkey and the United States, which shows that the need for clean energy is a growing and global concern.

On construction activities, we remain on schedule for the quarter and we expect to have 101 new megawatts online by the end of the year. The projects for 2009 and beyond also remain on schedule.

We continue to secure our growth. We acquired leases on federal land in Nevada and private land in California during the quarter. In the auction for federal land that took place yesterday, we acquired two small parcels. Our experts were not excited about the quality of the [total piece] which were offered in this auction.

As you will see, our construction program, which Yoram will talk about in more detail in just a bit, and our exploration activities remain robust. We also added to our capital position, which is an important component of our growth strategy.

As presented on slide six, we closed the second branch of tax monetization deal that we entered into last year, from which we received $64 million. We also received approximately $150 million [net] from the sale of 3.1 million shares of common stock in [block play] to Lehman Brothers. This gave us additional funds that delayed our need to tap into our corporate line of credit. This additional capital created [from deal] so that we are well insulated for possible issues in the financing market should they [interrupt] our access to capital. We have no capital constraints to move forward with existing construction programs and our ability to secure funding to help us initiate future programs remains strong. Let's move to slide seven.

Looking at the regulatory environment, while we are optimistic that the production tax credit will be extended, the question still remains to when. The tax credit is set to expire at year end unless Congress votes to extend it; however, given that it is an election year, we may not see such until after the November election. As we have previously stated if the PTC does not pass, we will have the ITC [an accelerant] negotiation and mitigating measures along with better prices on some of our [total] agreements.

The recent interest in renewable energy by mainstream corporations and more importantly by both presidential candidates, as well as the continued effort of the renewable energy industry followed by a remarkable amount of support for the passage of climate change legislation, such as PTC and the carbon cap and trade.

With that, I'll turn the call over to Yoram for review of operations. Yoram?

Thank you, Dita, and good morning, everyone.

I would like to begin with slide nine. We had a good quarter and a first half in terms of energy production. In the US our generation was up 3.6% quarterly and 16.1% on a semiannual basis excluding the Mammoth generation.

Main factors that had an adverse effect on our generation this quarter were low utilization factor of the compression station affecting our OREG I project, the plant shutdown of the Steamboat 2 and Steamboat 3 plants that was done in support of the re-powering of the complex, and a generator failure in Ormesa I. But for the impact of these challenges, we believe that the low loads in the OREG I compressor stations is likely to continue during the next 18 months, but the impact on total revenue is not material.

The steamboat re-powering project is progressing very well. We have already placed half of the turbines in service and expect completion before the end of the quarter. And the Ormesa generator failure will have a more pronounced impact on the third quarter generation, but we expect to complete the repairs still this month.

Moving to slide 10, our major capital projects are on track to add an additional 174 megawatts by the end of 2009 or in early 2010. Throughout the rest of 2008, we expect to add approximately 101 megawatts. Projects coming on line in the second half of this year or early 2009 are 50 megawatts from the North Brawley project and 35 megawatts from the Phase II of the Olkaria project in Kenya.

In addition, we expect 11 megawatts from OREG 2 and 5 megawatts from the GDL project in New Zealand. In 2009 and in early 2010 we expect additional 73 megawatts of capacity in the following projects 50 megawatts at East Brawley, 11 megawatts from the remaining OREG 2 facility, 8 megawatts from the Puna expansion and 4 megawatts from the Peetz Recovered Energy Project.

Now, onto the next slide.

Our projects beyond 2009 are mostly in exploration and development stages and include work to develop between 18 and 30 megawatt a plant from our Buffalo and Grass Valley project. We also expect to develop a 30 to 40 megawatts project in Carson Lakes, Nevada, of which we will retain 50% ownership. Last week the Nevada PUC approved our joint venture with Nevada Power relating to this project.

Additionally, we have signed a PPA in California for an Imperial Valley Project that we expect will be between 30 and 100 megawatts and is expected to be completed by 2012. We also plan to increase the generation capacity of the Mammoth Plant by 20 to 30 megawatts where our share will be 50%.

An update on our Sarulla project is on slide 12. Our interest in the consortium was formally reduced to 12.75% when in July, PLN, the state owned Indonesian Power Company, approved the entry of Kyushu Electric Power Company to the consortium. With the current progress in the financing activities we expect construction to start only in the second half of 2009.

Our CapEx requirements are explained on slide 13. We plan to invest $211 million for the projects that I previously mentioned throughout the remainder of 2008. In addition, our operating projects of capital expenditure budget is approximately $24 million for the remainder of the year. We have updated our budget for exploration as we expect to invest $22 million through 2008 and an additional $35 million in 2009. Approximately $15 million is budgeted for machinery and equipment through the balance of 2008. Including in this investment are two additional rigs, one production and one workover rig that are due to be delivered in the third of quarter 2008.

Looking ahead, our products segment is on the next slide. We have had a good deal of interest in both our geothermal and recovered energy solutions. In July we entered into an engineering procurement and construction contract valued at approximately $42 million for the construction of the geothermal power plant in New Zealand. We have previously worked with the owner of the plant, Contact Energy Limited, which is New Zealand's largest geothermal power plant owner and operator.

We are also the equipment supplier for a new geothermal power plant in Turkey. The contract value for this project is approximately $60 million.

And to recap, since the beginning of the year we entered into four EPC contracts, which are listed in the presentation and include a $76 million EPC contract with Nevada Geothermal Power for a geothermal project, a 6 megawatt REG power plant for Nevada Power, a 5.3 megawatt REG power plant in Minnesota and the New Zealand contract mentioned earlier. Also, these contracts bring our products segment backlog to approximately $189 million as of the end of July 2008, out of which $66 million is subject to a notice of proceeding.

Thank you and I will now turn the call to our CFO, Joseph Tenne. Joseph?

Thank you, Yoram, and good morning everyone.

Starting with slide 16, for the second quarter of 2008 total revenues were $80.2 million, a 4.6% decrease from revenues of $84.1 million in the same quarter of 2007.

Total cost of revenues was $57.2 million, compared to $59.5 million in the same quarter of 2007.

Changing to slide 17, total electricity revenues for the second quarter of 2008 were $61.8 million, up 11.6% from $55.4 million experienced in the second quarter of 2007. Revenues were impacted positively this quarter as a result of $4 million from additional revenue generated in the United States resulting from new plants coming on line and increasing the energy rate in the Puna Project due to higher point prices and a net increase of $2.4 million in revenues from the Amatitlan Project in Guatemala and from our Momotombo Project in Nicaragua.

Revenues were offset by decrease in generation of the Steamboat 2 and 3 Project as a result of the replacement of turbines, which required a shutdown of the project for a period of time and a decrease in the duration of OREG I project as Yoram mentioned before.

Cost of revenues in our electricity segment was $41.5 million compared to $35.3 million in the second quarter last year. The increase in cost of electricity segments revenues resulted mainly from project timing issues, whereas a portion of our scheduled project maintenance costs that would otherwise have been incurred during the first quarter of 2008 were incurred in the rest of the year. Costs relating to new projects placed in service and an increasing labor and material cost in existing plants.

And in our products segments, the segment on slide 18, total revenues for the second quarter of 2008 were $18.4 million, a 35.7% decrease over total revenues of $28.7 million in the same quarter last year. As we have often said, our products segment revenue is unpredictable and this quarter reflects last year's lower backlog due to volatility and timing of our receipt of purchase order and the timing of revenue recognitions in accordance with the percentage of completion method.

Cost of products segment revenues were $15.7 million, down 35.1% from $24.2 million in the same period last year.

Now, to slide 19.

Combined gross margins were 28.7% in the second quarter of 2008 compared to 29.2% in the second quarter of 2007. Gross margin for the electricity segment was 32.8% for this quarter compared to 36.2% for the same quarter last year. Products segment gross margin was 14.9% in this quarter of 2008 compared to 15.6% in the same quarter last year.

Moving to slide 20, for the second quarter of 2008 we reported net income of $12.2 million or $0.28 per share as compared to net income of $8.5 million or $0.22 per share for the second quarter of 2008. Such increase in net income was principally attributable to $4.2 million decrease in our interest expense, a $2.6 million increase in minority interest. This was partially offset by an increase of $600,000 in income tax provisions, a $600,000 decrease in interest income and a $1.4 million increase in foreign currency translation and transaction losses, and $800,000 decrease in equity in income of investees. Net income for the second quarter of 2008 and 2007 both include stock-based compensation related to stock options of $1 million.

On slide 21, adjusted EBITDA for the quarter was $29.2 million as compared with $30.6 million for the same quarter in 2007. Adjusted EBITDA includes consolidated EBITDA and the Company's share in operating income and depreciation and amortization totaling $1.3 million and $4 million for the quarters ended June 30, 2008 and 2007 respectively, related to the Company's 50% interest in the Mammoth Project in California. Additionally, the 2007 period includes our consolidated interest in the Leyte Project in the Philippines, which transitions back to the Philippines government in September 2007.

Turning to slide 22, as of June 30th, 2008 the Company had cash, cash equivalents and marketable securities of $137.8 million compared to $60.7 million as of December 31st, 2007. This increased cash and cash equivalent assets is principally due to $150 million in net proceeds from the sale of 3.1 million shares of common stock in a block trade last May, $63.1 million net proceeds from the second closing of the OPC tax monetization transactions last April, $33.3 million in net proceeds from our unregistered sale of 693,000 shares to our parent in January 2008, and the $49.6 million derived from operating activities in the first half of 2008.

These were partially offset by our use during the first half of 2008 of $178 million of cash resources to fund capital expenditure and $34 million to repay long term debt to our parent and to third parties.

In addition, we have $3.1 million and $2.8 million of marketable securities as of June 30th, 2008 and December 31st, 2007 respectively, classified as non current assets. This classification is due to [failed] auction in the first quarter of 2007 of certain auction rate securities in our portfolio.

In the next accompanying slide, we will present our total long term debt as of the end of the second quarter of 2008 and the payment schedule.

Moving to slide 24, on August 5th, 2008 Ormat's Board of Directors approved a payment of quarterly dividend of $0.05 per share pursuant to the Company's dividend policy, which totals an annual payout ratio of at least 20% of the Company's net income subject to Board approval. The dividend will be paid on August 29th, 2008 to shareholders of record as of the close of business on August 19, 2008. The Company expects to pay a dividend of $0.05 per share next quarter as well.

Thank you all and I would like to turn the call back to Dita for final remarks before we go on to Q&A.

If you will turn to the last slide regarding our revenue guidance for 2008. We increased our guidance for the electricity segment and expect our electricity segment revenue to be $250 million. We also expect an additional $9 million of revenue from our [shared] facility revenue generated by [figuring], which is accounted for under the equity method.

We will stick to our products segment. We maintain our expected revenues of between $70 million to $80 million for 2008.

I would like to thank you for your continued support of Ormat. These results, we believe, serve as validation of our vision of our business and our continued dedication to building our future.

Our market leadership position, strong balance sheet and vertical integration will allow us to continue to capitalize on the opportunities we see in the market and the same vision and strategy that allows us to produce these results.

We look to take the Company to achieving its growth goals. Thank you again for joining us on this call and we'd be happy to take your questions now. Jackie, please?

Thank you. (OPERATOR INSTRUCTIONS.) Your first question is from Ben Kallo with the Stanford Group. Please go ahead.

Good morning.

Good morning.

Could you give us some detail on what affected the products segment gross margin this quarter? And then I know we talked in the past, you kind of gave some rough guidance about where that margin should trend towards. Could you update us on that?

Well, I think that the products segment margins behaved as we expected them to behave and our expectations for the whole year remain unchanged. I think we called it the level of 2005 or in the order of 20% or a little more and has not changed there. The volume and the mix is what creates the result.

Okay. On the electricity segment, how should we -- it looks like margins kind of jump around a lot there. How should we think about it going forward? I know Q3 tends to be strong, and maybe you can update us on Steamboat how that will affect margin. And then Q4 I think and then maybe in Q4 an update on what those margins typically are on the electricity side.

Are we doing more maintenance maybe in Q4? I know there's some shut down maybe of Puna there.

Overall, we expect the gross margin in the electricity segment to be as we said I don't remember if it was in the first quarter or second or year end reaching the order of 35%, 36% gross margin. We don't expect to deviate from it because the shutdown of Steamboat 2 and 3 was expected. It's not an unexpected event.

It is true that the third quarter is way stronger than certainly the first quarter but also the second quarter and this is coming from the fact that we do have a substantial amount of [standard number four] contracts which have a much higher revenue in the summer months than in the winter months. But all in all we expect to be on line with our expectations.

Okay. Good. And then on the Steamboat, the decision to replace four turbines I know on the last call you talked about replacing two turbines. What made you replace four turbines instead of two?

I don't think this is Yoram I don't think we said we replaced two. There are four turbines on the Steamboat 2 and 3 Complex and we're gutting them out and putting new equipment in.

Okay.

Maybe the confusion is the two projects, Steamboat 2 and Steamboat 3, but maybe this caused the confusion -- but it's four turbines in total -- two in each project.

Okay. And that construction affecting Steamboat 3 and 4 that started in early July or did it start within Q2?

No, it started in Q2. Actually towards the end of May, I think, is when we started taking equipment down.

Okay. And then as far as the update on the electricity segment revenue how much of that $5 million is related to higher revenue at Puna?

A big part.

So, you're gaining benefit from higher oil prices here. Could you remind me how often that resets, the electricity portion.

Once a quarter.

Okay. Once a quarter. Okay. I'll jump back in the queue. Thank you.

Thank you.

Thank you. Your next question is from Michael Lapides with Goldman Sachs. Please go ahead.

Hey, guys. Congratulations on the good quarter. I just want to go back and look at slides 11 and 12, I think, the projects under development. Can you walk us through which ones are incremental to the same slides you presented at first quarter?

I don't remember what we had in the third quarter, but I believe that Mammoth was not included in the prior quarter. I don't know about the Imperial. [Smadar], can you help with that?

As to the projects on this slide, Imperial Valley is the project that we signed for in the contract for 2012 and the other one as well.

Got it. Okay. Other question. When you think about Sarulla, what is the time frame for the different stages or different legs of Sarulla to come on line?

The first milestone is to get to financial close. This is what will start the project and in order to count the deadline for financial close is to get all the government approvals for the project agreement. As we speak now, we are still missing one approval. All of the project agreements are signed, but we are still missing one approval. It doesn't mean that we have not started to work on the financing, but you cannot really work aggressively and effectively until you have all approvals in place.

Then once the financial close occurs and some work will be done before financial closing in order to support financial close, but once it occurs it's going to be built over a four year period with the first batch or phase expected to come on line about 20 months from financial close and then every eight to 10 months, an additional batch.

Got it. Thank you.

Thank you. Your next question is from Emily Christy with RBC Capital Markets.

Good morning. I just have a couple questions for you. I was wondering if you could talk a little bit about the competitive landscape in the US. With yesterday's auction you mentioned the land parcels weren't to your liking for the most part, yet the prices were almost double the year before. If you could talk a little bit about that.

Well, there is clearly a bigger interest as new developers are entering the market. I am surprised by the prices that others have paid for these parcels. We have done a very serious analysis of the geology and the potential of these parcels and have a hard time to understand why it was overpaid the way it was overpaid. That's the only thing I can say.

I can also say that this does not prevent us during the quarter to acquire additional leases from private landowners at competitive prices or at reasonable economic prices. I think we are in a position where we do not have to overpay.

Okay. And then turning to the International scene. In a number of countries recently [Petro] claims higher interest in geothermal energy as a bigger portion of their country's electricity. What kind of opportunities do you see there as opposed to a year ago? Do you see a project portfolio shift toward international versus US? How do you look at that?

We definitely see increased activity on the International scene as well. We see New Zealand to be very, very active. We hear Indonesia to be very active. We don't see it, but we hear it. Talking about it, they are not there yet. I think it will supplement the US market. It's not going to be a shift from the US market to the international market. It's going to be a supplement.

Okay. Thank you very much.

Thank you. Your next question is from Charles Fishman with Piper Jaffray.

Good morning. On OREG 1, you indicated that you were experiencing lower heat availability. And if that's coming off a pipeline, I would think that resource was pretty well defined. I guess, why would that occur and do you expect it on the other three facilities? If you could address that.

And I guess why is it not material to revenue? Were you able to just overcome it or is it just because it's so small?

I'll start with the end. It is because the revenues compared to the rest or the contribution of the OREG facilities to our revenue mix is not high. And so, this is why the impact is not huge.

And to answer your first question there are historical numbers for pipeline gas flow, but these numbers change and there are two things that two main factors that can change them. One is additional competition from other or new pipelines and the other is really the local climate where the gasses ship to, which is mostly the Chicago area. And the combination of the two, competition and general gas consumption, created a dip in the utilization of the specific pipeline that we're on.

We think that this will improve in the foreseeable future, but at this time of course, the weather we cannot predict, but the competition is a little more [known]. And it will affect the other just like it affects OREG 1 it will affect OREG 2. The pipeline itself is not shut down the way that the OREG 1 facilities are placed. Today, they actually may be affected where an OREG 2 facility would not have been affected, but, yes.

This really doesn't change your outlook on these recoverable energy generation units. You still think that's a very viable market?

Yes, I think that there are many, many reasons to push towards additional uses of natural gas. It is viewed as a short term way to address greenhouse emissions. So, natural gas will be consumed. This is a way to significantly reduce the amount of emission that power generation is making. So, it certainly works hand in hand with anything else that happens and trying to deal with the greenhouse gasses.

But there was no problems with technology? It was strictly a little difference in the resource than you were expecting?

Correct.

Thank you.

Thank you. The next question is from Angie Storozynski with Macquarie. Please go ahead.

Thank you. I have two questions. First of all, given that you continue buying geothermal acreage and I understand that you have to have some geological studies of the acreage to assess the geothermal potential of the land you're buying, would it be possible for you guys to disclose what is the geothermal potential of the land that you're holding? That's one.

And secondly, how about your growth strategy? I didn't hear you say anything about the 100 megawatts per annum long term growth as we heard in the past. Looking at your projects under the development, it seems like you may reach this goal over the next maybe two years longer term. We don't have much of a visibility.

Should we infer that the acreage that you're buying is going to allow you to grow at 100 megawatts per annum? Or should we instead assume that you need to simply acquire some other players or potential existing assets to get to this 100 megawatts per annum? Any comments on that?

When we say 100 megawatts per year we are talking organic growth. We're not talking acquisitions. We're talking organic growth. If you look even at this year and next, we will add, according to our plan, 180 or 190 megawatts in two years. So, a little over 100 this year. A little less than 100 next year, but that's the range. But if you look at our development portfolio for the next few years it's also today is stronger between 140 to 250 megawatts for additional three years. So, we are today close to that amount.

The request to disclose what is the potential of each site that we have is something that we cannot do and I think that [every some] developer who does it is speculating and not giving facts, because in the geothermal development, until you have the extra (inaudible) two wells or three or two wells and a slim hole and tested them, you cannot really estimate what the potential of the results in every information which is given out is a guess, or an assumption, but not an estimate.

We are trying to select sites that have a good potential of success, but we have to know that not all of the sites will be successful. Some will succeed better than we expect and some will succeed less than we expect or even fail. But we expect to get enough resources to support our growth in the years to come as well.

Okay. And one more. Given that it seems to be many, many megawatts to be added by the end of the year, Yoram mentioned that some of the developments may stretch until the first quarter of 2009 and we have the expiration of the PTC by the end of the year. And then even though, as you mentioned the ITC is there, it reverts back to 10% only. How likely is it that some of the projects will not be eligible for those subsidies? And if so, do you have any clauses in your signed PPAs that would help your margins in case the projects do not qualify for the subsidies?

The answer is yes in some of the contracts, not in all of the contracts. From the contracts that we have in 2008 there is only one which is sensitive to PTC. Clearly, the Olkaria project has nothing to do with PTC because it is in Kenya. The GDL project has nothing to do with PTC because it is in New Zealand. It is only the North Brawley project which is subject to PTC. We currently have all expectations in the progress on site proceeds. That it will be placed in service before the end of the year and we hope it will.

We also believe the PTC will be extended in one form or another either this year or next year, but that's a different story. As to some of the purchase agreements which are scheduled for 2009 and 2010, some of the US contracts do have a higher power rate in case PTC will not be available.

So there is a mitigation above the ITC which I agree with you is lower than the PTC, but the higher tariff is another mitigating factor which will make these projects economical. I must admit the PTC is more economical than those mitigating factors, but it will still make them economical.

Thank you.

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

Good morning.

Good morning, Dan.

A couple follow up questions. First on Steamboat on the turbine replacement. Can you give us an idea of the timeframe of the outage? Are you talking two weeks? Are you talking a month? Just to give us an idea of the potential impact in the quarter.

It's roughly a three month outage, though it is not 100% of the plant. We ran for the majority of the three months at least half of the complex was running. So, we have done a staggered we're doing a staggered outage of the units.

So, just so I understand when you say half the complex, it's two sets of two turbines at 2 and 3? For instance, you took Unit 2 off, which is like 23 megs for three months and you'll do the same thing for Unit 3?

Yeah, we started with Steamboat 3. In summer conditions I think that the impact of taking Steamboat 3 down is close to 10 megawatts net.

Because of the air cooling?

Yeah, so we started with Steamboat 3 and we're now doing Steamboat 2.

Okay. Briefly, just on the FX. Just so I understand where the FX kicks in. Is that because of the cost of construction on your product side with Israeli employees or is there some other FX through the system?

It's mainly the Israeli circle in the US, but not only. We have some procurements in Europe which have an impact. We have activity in New Zealand which is impacted. We have activity in Canada which is impacted, but the majority is Israeli content.

Okay. And last question on the power purchase agreements and on the mitigation through the higher rates. Is that really state driven? I guess the following question there, I assume, since they're bilateral contracts in Nevada you have more flexibility in that kind of negotiation. But can you build those in in the California contracts or is that not really an option?

Until now, the California (CVT) refused to do it.

You said until now. Does that mean its changing?

I don't know.

Okay. Great. Thank you very much.

Thank you. Your next question is from Brian Yerger with Jesup and Lamont.

Good afternoon. Thanks for taking my call. I just have two questions on the International side. First, could you give us any visibility on the financing announcement for the Sarulla project? Do you have any timing there or when that will be completed?

Up to a year is our expectation. I think we have said that the lead lender is going to be JB, the Japanese Exporting Bank.

Okay. The second question would be what is your competitive positioning in Kenya? I know that the President had announced a very favorable towards more development of geothermal in Kenya. Do you have a lot of competition there? Do you expect over the next couple years to secure some more projects in Kenya? What is your positioning there?

I think we are well positioned in Kenya because we have built a power plant in Kenya on our balance sheet six or seven years ago when no one was willing to do investment in Kenya. I think the question is will Kenya develop its geothermal as ITP or for their own utility? I think this has not been decided yet.

Okay. Thank you.

Thank you. Your next question is from Vijay Singh with Janco Partners.

Good morning.

Good morning.

My question is on OPC-like transactions, if you're looking to monetize tax credit. With the current PTC uncertainty and the financial conditions of some of your prospective investors who are probably taking write offs of their own. Is that impede in any way to do more OPC types of transactions going forward?

The motive is still there for tax monetization transactions we are actually talking now about monetizing the value of not [barely, barely]. The market is there.

Okay. Great. Thanks. That's all I have.

Thank you. Your next question is from Ben Kallo with the Stanford Group.

Hey, guys. I have one follow up question. Or actually two follow up questions. Sales and marketing seemed to tick down quite a bit in this quarter. Is that something we should expect going forward?

It is mainly related, we said in the 10-Q, which is already [Edgar-ized]. It's mainly related to the products segment because most of marketing and selling expenses are related to that. Since it went down this quarter, the expenses are also down. It's something that usually will be straight forward in the next quarter.

Okay. And then I guess a broader question is you talked earlier about competition getting a little stiffer in securing land. How are you seeing your investment returns look with that, and then also with the higher prices for electricity prices and I guess higher costs for raw materials, too? How does all that stuff offset each other as far as your project returns go?

It's a mixed bag, of course. What we are seeing in the market and we can see very clearly since the beginning of the [LPS part] of this agreement. That costs are going up and parts of the agreement -- price is going up. The question is which one is going up faster. And sometimes they match and sometimes they lag.

We have done various things in order to mitigate those increased costs. For example, our increase in the number of drilling rigs that we own will potentially reduce our drilling costs as a result of owning rigs. As Yoram said, another production rig is expected to be delivered this quarter.

On the other hand, we are seeing increased cost of material, of compensation, of labor, which work in the opposite direction. The land auction is a small part of it. It's not a big part of it. All in all, I think if we balance it will balance out.

So, as far as project returns go, I think, mid teens is what we've talked about before. Is that similar to what you guys are seeing now?

Well, I don't remember that we said mid teens. I think what we said it that our [hurdle] in the United States is 12% all around. Sometimes it's higher, but the hurdle is 12%.

Okay. Great. Thank you.

Thank you.

Thank you. Your next question is from Charles Fishman with Piper Jaffray.

A follow up on the leases. Dita, you said the consultants and your own management was not excited about the quality of the leases. Is that the depth, the temperature, was it all of the above? Or was it in relation to the prices that they went for? Can you give us a little more color on that?

No, it's even before the prices if you get leases, which have restrictions on surface occupancy for example, it's a different quality than a lease which is unrestricted. The level of prior work which was done on the leases. Where do we think is the center of the anomaly and which lease was put out for bid? All these factors establish our assessment of the quality of the leases.

You still have enough backlog of property, though, to keep these additional rigs that you have recently purchased busy for quite some time?

Absolutely.

Thank you.

Thank you. Your next question is from Angie Storozynski with Macquarie.

Just one more question. I was just wondering we had a recent change in interpretation of the in terms of revenue code which basically clarified the participation of utilities in renewable power partnerships. Do you feel that because of that you will be more inclined to co-invest with utilities in your geothermal plans, or is it possible that they will eliminate potential tax equity partners given the fact that they do have large taxable incomes and they have large taxable bases to offset your production tax credit? Could you comment on that?

How the development really shape out, but we are the first geothermal company to do a joint venture with the utility. This is a [electro] project that was announced earlier this year and just recently got PUC approval. This is clearly the first partnership with the utility. How much of it will be done in the marketplace, I cannot predict.

But do you think that we should assume that for instance your electric margins may in a way come down because having a utility as a partner there is a potential transfer of risks and thus the margins could compress? Is that possible?

I don't see any relationship between the two, no.

Okay. Thank you.

Thank you. There is time left for one last question from Michael Lapides with Goldman Sachs.

Hi, Dita. Quick question. I'm going to stay away a little bit from some of operational items and revenue margin stuff, but I want to come back financing.

Can you talk a little bit about your financing plans back end of '08 through '09? You're sitting on a decent amount of cash. While your free cash flow levels aren't so amazing, your debt to cap is relatively low compared to historical for you guys. Just kind of curious in terms of how you plan on balancing debt equity et cetera to financial growth?

Absolutely. I think we have a substantial amount of equity and certainly a low level of debt, but it's temporary. We are in the process of financing, debt financing on a project bank level to project the Guatemala Project in Amatitlan and the Kenya Project. We expect both of them to close in the fourth quarter or maybe Kenya may slip another quarter.

We expect to do tax monetization transactions. They are not shown as debt, but it's additional financing. So, we see a good match between our CapEx needs in the near term, the financing which are on the table, and the corporate lines of [debt] we have are just a backup to all of that.

Got it. Thank you.

Thank you. I would like to turn the floor over to management for closing remarks.

I would like to thank you for your interest on this call. I think that it was a pleasure to have a high level discussion with all of you and thank you for your continued support in the company. Thank you all.

Thank you. This does conclude today's teleconference. You may now disconnect your line and have a wonderful day.