Ormat Technologies Inc (ORA) 2008 Q3 法說會逐字稿

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ormat Technologies third quarter 2008 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 session. (Operator Instructions). Thank you.

Ms. Csaby, you may begin your conference.

Thank you, Kelly, 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 third 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, President of Corporate Finance and Investor Relations.

Before beginning, we would 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 and 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 as filed with the Securities and Exchange Commission on March 5th, 2008, and on the Form 10-Q filed with the Securities and Exchange Commission on November 5th, 2008

GAAP financial measures by the Securities and Exchange Commission -- 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.

Before I turn the call over to management, I would like to remind everyone that a slide presentation accompanies this call, and it can be accessed on Ormat's website at www.ormat.com under the events link as found in the investor relations tab.

With that said, I would now like to 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, the call is yours.

Thank you, Marybeth. And thank all of you for taking the time one again to listen to our call. I am pleased to be with you today and talk about another important quarter for Ormat.

It was a good quarter for our operations and it was a busy quarter with several exciting developments. Let me begin with some general information about of our business and at the end I would like to discuss the current credit crisis and why we believe it will have minimal, if any, impact on our immediate growth plan. Following my comments, Yoram will review operations and then Joseph will review the quarter financial and as usual Q&A session will follow our remarks.

Starting with slide 4, total revenue for the third quarter was strong, up 25.5% from the third quarter of last year. Electricity segment revenues were up 12.1% and our products segment was particularly strong, growing 71%. Despite the significant decrease in revenue, net income remained at a level similar to last year, primarily due to two factors; the weakening of the US dollar impacting activities outside of the United States, and $1.5 million non-recurring consulting and legal expenses related to an acquisition, which did not materialize.

Moving to slide 5. We completed our first owned small project in New Zealand and are moving closer for commercial operations of the Olkaria and North Brawley power plants. This will bring our portfolio to approximately 500 megawatt by the end of the year, an increase of approximately 100 megawatts from last year.

While not itself a quarter event, I would like to mention the recent OFC note holder approval for the following activities. We received approval to replace one existing Mammoth plant with the more efficient and larger plants, that would increase current capacity at Mammoth by up to 30 megawatt.

We can also, at some point, explore an experimental solar project that would help enhance the capacity at Ormesa and may be also for Brady projects. And finally, we have the consent to monetize the production tax credits for Ormesa and Burdette projects. Let's emphasize that this is not a release of this activity, it is only a bond holder approval to do it once we decide to do so.

On the foundation for future growth, we completed several transactions related to our land position, and secured approximately 20,000 acres of federal land in Nevada and California. And we will -- this was already mentioned in our previous call, we secured geothermal rights for approximately 35,000 acres of land to explore geothermal resources in Mount Spurr in the vicinity of Anchorage, Alaska (inaudible).

We believe Alaska holds great potential for geothermal. We are confident that our technology and knowledge-base is well up to the task of meeting some of the challenges that -- that are unique to this region.

And on slide 6, beyond the quarter we continue to demonstrate that Ormat is the leader in technology innovation. We have several projects, in particular, this quarter, that we have made some (inaudible). The first is the joint [venture] project with the Department of Energy to test a small geothermal power unit at a producing oil well. We have begun to generate power from these wells -- from this well, this fuel for energy is intended to increase productivity and extend the longevity of oil wells.

The second project relates EGS. The DOE has chosen Ormat to demonstrate the viability of EGS with a grant of $3.4 million to improve growth non-commercial way at the Brady facility using EGS technology.

The third project to create energy using the temperature differential during the vaporization process of a liquefied natural gas regasification was initially announced back in 2006 with ENAGAS of Spain.

We have recently received the notice to proceed from ENAGAS. The project has long been under development, and we are pleased to finally be able to begin manufacturing in parallel to continued R&D activity.

Before I talk about how the current market impact Ormat, I would like first to turn the call over to Yoram for a review of operation. Yoram?

Thank you, Dita, and good morning, everyone. I would like to begin with slide 8. Generation for the quarter was up 1.3% to about 508,000 megawatt hours. For the first nine months, it is up 10.9% to about 1.62 million megawatt hours. The increases in our overall US generation resulted from both new equipment that was put in service and improved performance from existing power plants.

I would like to mention a few events which offset our overall US power generation. Generation out of the Steamboat 2/3 plants was low this past quarter as we were in the midst of the plants upgrade. The upgrade was successfully completed in early October and included the replacement of the four original rudder flow expenders with the direct drive, gearless, 11 megawatt turbines each designed and manufactured by Ormat specifically for geothermal use.

With the completion of this project and the installation of our field-proven turbines, we are seeing significant improvement in both the performance and availability of the two plants which have been plagued by high operating expenses and low run-time for a long time.

Further -- in addition, we experienced decreased output from the Ormesa complex as a result of a generator failure. Repair work was completed, and the Ormesa complex is now back to its full capacity.

Also the mild summer in the Mid West caused lower compressor loads and resulted in a lower than expected generation out of the OREG 1 facilities.

I also want to mention a change in the energy rates for the -- for two of our plants, Heber II and Puna. In Heber II, the Adder which is an additional energy rate paid under the project's PPA has expired, and as of August this year, the energy rate for the Heber II is similar to the energy rate paid for all our [SO4] contracts, approximately $6.2 per kilowatt hour.

Puna is our only plant that does not have a fixed energy rate. Instead, the rates were calculated on a quarterly basis on a short ground [awarded] cost formula that is tied to the price of oil with a certain floor. However, PUC has changed their rate adjustment from quarterly to monthly calculation. This change will slightly increase the volatility of the Puna revenue.

Furthermore, I want to point that while we have had the benefit of higher rates from Puna due to exceptionally high oil prices through the summer of this year, this trend has been reversed and the prices have dropped to the levels of early 2007.

Slide 9 addresses the development in construction. We finished the construction of an 8.3 megawatt net power plant located in Kawerau, New Zealand. A transmission line is still needed to be completed for the power plant to sell its full output.

As of right now we own 49% of the project, and we expect to exercise our option to purchase the remaining 51%. We have completed the construction of phase II of the Olkaria III 35 megawatt project. The project has begun the start-up phase, which we expect to complete in this current quarter. In addition, the 50 megawatt North Brawley project is in final stages of construction. Construction and drilling activities are proceeding in parallel with the process start-up phase. We expect to complete these activities by the end of 2008 as well.

Turning now to an update of our -- on our exploration activity on slide 10. In the two years that we have been doing greenfield exploration work in Nevada and California, we succeeded in developing some of the resources, the most notable one is the Brawley.

However, as is the case with exploration activity, not all resource development turns into a commercial project. Several of our resources in Nevada are in various stages of exploration, but at this time we cannot say how many of them will support commercial power plants.

If these resources are not being commercially viable, our plans for future growth will have to be modified. We have started to develop the East Brawley field which is adjacent to North Brawley. North Brawley is an example where exploration and development will carry at -- carried out in parallel with the power plant construction.

Based on the preliminary testing of the East Brawley wells, which shows a conservative site of the power plant, which we will rebuild with an initial capacity of 30 megawatt. Once the East and North of Brawley well field are operated simultaneously, we will determine how much more capacity can be added East Brawley.

Looking at slide 11. These are exploration project that we currently have underway to support growth beyond 2009. In the Nevada exploration work Jersey Valley appears to be a successful development. We completed the drilling of three wells and are now in the process of load testing them to determine the well field site.

In Carson Lake, following an unsuccessful first well, we are now drilling a second well. The data received on the temperature of the second well is encouraging, but it is too early to determine the potential of the resource.

Two more sites in Nevada are in earlier stages of development, and we do not have yet data to determine the potential of these two sites.

Our original plan was to complete three projects in Nevada in 2010, but it seems like the resource confirm to-date in conjunction with permitting the process can support only one or two projects.

Additional capacity in California for late 2010 or early 2011 is also already under development. An exciting development in this area that occurred this last quarter is taking the ownership of our third drilling rig that operates on the mainland.

Slide 12 summarizes our growth plans. We plan to add approximately 70 megawatt in generating capacity by the end of 2009. 22 megawatts will be added for more -- to recovered energy projects. We are in advance construction of two 5.5 megawatt plant, which will be completed by the end of 2008 or early 2009 and are at early stages of activity of the remaining two plants.

Also in 2009, we plan on -- we plan for the enhancement program to our Puna plant which we expect to be complete by the end of 2009 and 4 megawatt from the Peetz recovered energy project which is scheduled to be commissioned in early 2009.

Also, as we already mentioned, 30 megawatts will be added from the East Brawley project. Additional 4 megawatt will be added from exercising our option to acquire the remaining 51% interest of the GDL project in New Zealand.

5.3 megawatts from the GRE rig project in Minnesota which is expected to be commissioned in late 2009 or early 2010.

Based on the exploration results, an update we provided today, we plan to complete in 2010 and 2011, projects with a potential capacity of between 150 and 200 megawatts.

Slide 13 describes the products side of our business. This quarter, we increased our product backlog which stands at $165 million, out of which $19 million is subject to a notice to proceed. Thank you, and I will now turn the call to our CFO, Joseph Tenne.

Thank you, Yoram, and good morning everyone. Starting with slide 15; for the third quarter of 2008, total revenues were $99.7 million, a 25.5% increase from revenues of $79.5 million in the same quarter of 2007, consisting of a 12.1% increase in revenues from the electricity segment, and 71% increase in the products segment. Total cost of revenues was $68.5 million, compared to $50.5 million in the same quarter of 2007.

Turning to slide 16, total electricity revenues for the third quarter of 2008 was $68.8 million, up 12.1% from $61.4 million in the third quarter of 2007. This increase is primarily attributable to $3.4 million from additional revenues generated in United States as a result of an increase in our generation capacity, an increase in the energy rate in the Puna project due to high oil prices, and then a net increase of $4 million in revenues from our international plants, a -- the Amatitlan project in Guatemala, and from the Momotombo project in Nicaragua.

Revenue were offset by a decrease in generation of the Steamboat 2/3 project is a result of the replacement of its turbine. And a decrease in the generation of the Ormesa and OREG 1 project, as Yoram mentioned earlier.

Cost of revenue in our electricity segment was $44.7 million, as compared to $35.5 million in the third quarter of 2007. The increase in cost of electricity segment revenue resulted mainly from costs relating to new project placement service, and the write-off of the old Steamboat 2/3 turbines.

And in our product segment, on slide 17, total revenues for the third quarter of 2008 were $30.9 million, a 71% increase over total revenues of $18.1 million in the same quarter of last year.

Revenue from the products segment in the third quarter increased inline with our expectation for the whole year. Total cost of revenues attributable to our products segment for the third quarter of 2008 was $23.7 million, as compared to $15 million for the same quarter last year. This increase is attributable to an increase in our products revenue as well as to a different product mix.

Now to slide 18, combined gross margins were 31.3% in the third quarter of 2008, compared to 36.5% in the third quarter of 2007. Gross margin for the electricity segment was 35% for the third quarter of 2008, compared to 42.3% for the same quarter last year. Products segment gross margin was 23.2% in the third quarter of 2008, compared to 16.7% in the same period last year.

Moving to slide 19, in the third quarter this year, we reported a net income of $15.9 million, or $0.35 per share, basic and diluted, as compared to net income of $15.8 million or $0.41 per share of basic and diluted for the third quarter of 2007.

Such increase in net income was principally attributable to a $6.1 million decrease in interest expense, and $1.6 million increase in minority interest. This was partially offset by a $2 million payment of auction rate securities, and this amount is including $1.4 million, which was previously classified in other comprehensive income.

A $1.9 million decrease in operating income, $900,000 increase in income tax provision, $500 million decrease in interest income, $900,000 increase in foreign currency translation and transaction losses, and $1.1 million increase in equity in income of investees.

Net income for the quarter -- this quarter, in 2008 includes stock-based compensation related to stock option of $1.1 million, as compared with $1 million for the same quarter last year.

On slide 20, adjusted EBITDA for the quarter was $36.6 million, as compared with $38 million for the third quarter of 2007. Adjusted EBITDA includes consolidated EBITDA in the Company's share in the operating income and depreciation and amortization, totaling $1.3 million and the $4.5 million for the third quarter of 2008 and 2007 respectively, related to the Company's unconsolidated subsidiaries.

Turning now to slide 21, as of September 30th, 2008, the Company had cash and cash equivalents, and also marketable securities of $38.1 million, compared to $60.7 million as of December 31st, 2007. During the year, most of our cash was used to fund capital expenditure, and to repay long-term debts to our parent, and to third party.

In the next accompanying slide, slide 22, we present our total long-term debt as of the end of the third quarter of 2008, and the payment schedule.

Moving now into slide 23, on November 5th, 2008, 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 December 2nd, 2008 to shareholders of record as of the close of business of November 19th, 2008. Thank you, all. And I would like now, to turn the call back to Dita for her final remarks.

Thank you Joseph. Let's turn now to slide 25. The global financial system is without doubt in turbulent times. Where and when the financial markets will settle seems to be a matter of much debate, yet for Ormat, we are the same Company today as we were before.

The fundamentals of our business are strong, and we believe are likely to remain so. And giving that, there are four points I would like to make to support this statement.

The first point is that we are an established Company that generates operating cash flow that we use to fund [growth]. This cash flow is secured by long-term power purchase agreements, most of them with fixed rate, and some of them with a built-in escalation factor.

Second, we have several committed lines of credit totaling $310 million from various commercial banks located around the world. Third, we have a healthy balance sheet. Our long-term debt is amortized over the life of the loan. So no refinancing is needed, and there are no balloon payments. And we also have the ability to raise debt financing, as our projects are strong projects, using proven technology and have the strong structure.

We believe that some projects will continue to have access to debt financing. We are now negotiating the financing of Olkaria, Amatitlan, and Brawley, all according to our original plan. Between financing policies and line of -- lines of credit, we have enough cash to proceed with our investment plans.

And let me finish the discussion on debt financing by saying that while we are expecting to see an increase in financing costs, we have already started to experience a decrease in material prices which may offset what is happening in the credit market.

And finally, the fourth point. The recent extension of the PTC for geothermal for 2 years, which was a last minute addition to the revised bailout bill, that was passed in early October.

Ormat has been able to successfully monetize this tax credit to our advantage. And now, we will have the ability to continue to do so for another 2 years or longer if it is further extended.

While there is a smaller pool of players involved in these types of transactions, due to the steep market decline and failure of several banks and brokerage firms, there are still a number of entities which are more than willing to participate in this type of financing.

In general, the need for renewable energy is strong. Climate change is still an issue, and will be for quite some time, continuing to provide us with growth opportunities.

To summarize, please turn to the next slide in which you will see that the sources of cash that I mentioned will be sufficient to support our CapEx requirement for the reminder of 2009 and the full year -- sorry for the reminder of 2008 and the full year of 2009. We plan to invest $80 million for projects that I previously mentioned, throughout the reminder of 2008, an additional $286 million for 2009.

In addition, our operating projects have capital expenditure budgets of approximately $64 million for the rest of 2008 and 2009. We expect to invest $49 million for the rest of 2008 and 2009 in exploration. Approximately $5 million are budgeted to invest in machinery and equipment for the same period till the end of the 2009.

To recap, our capital sources to support $484 million of CapEx requirement are approximately $650 million, which means they exceed our [yield].

If you will turn to the guidance on slide 27, we expect our electricity segment revenue for 2008 to be $260 million. We also expect an additional $9 million of revenue from our self electricity revenue generated by subsidiary which is accounted for under the equity mix total.

With respect to our product segment, we are narrowing the range, and the currently expected 2008 product revenue will be between $78 million and $80 million.

I would like to thank you for your participation on today's call and your continued support of Ormat. We are extremely encouraged by the prospects afforded to us by the industry, as well as confidence in our ability to execute our business strategy. We look forward to future communication.

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

Thank you. (Operator Instructions). Your first question comes from Ben Kallo with Stanford Group.

Hello, good morning.

Good morning, Ben.

So you talked about financing through the tax monetization. I assume that's probably you are working on Brawley because that's the only US project yet you have to complete in the rest of the year. What type of entities have expressed interest, are they banks or other types of companies out there that need these tax credits?

Banks and insurance companies.

Okay. And then with the improvements at Steamboat and the notice to proceed, I saw that there was also talk of tax monetization there. Can you get tax credits as you improve some of these plans? Are you eligible because of the improvements?

Yes, the law enabled to get -- that PTC when you do a repowering of the plants, and the rule is that if you -- if the improvement is, I believe, 80% of the value, than it will be eligible through PTC.

And so how -- can you answer me how many megawatts you have available for that?

For PTC?

Right, outside of the new plants coming online, so Steamboat upgrade--

There is nothing that we can talk about, if you are referring to the consensual reputation and what are the PTC which are not -- which are available. It's mainly the Burdette plant, what used to be Galena I, and Steamboat, and the Ormesa project, which was completed in 2000 May 7th, and this is -- and there you have new equipments and you have repowering, that's where you have a combination of new equipment and repowering, Steamboat to increase, not eligible to PTC.

Okay. And then because of the current environment, how is the market for acquisitions, how are you doing that with some of the smaller players they have been stalled out now in their development efforts?

It's a good question, and I'm not sure I know exactly how to answer it. I think that opportunities will come for acquisition. I cannot pinpoint which one of them. But I think that it will open up opportunities for acquisition.

Okay, thank you.

Your next question comes from [Noah Howler] with Barclays Capital.

Thanks for taking my question. My first one is with regards to financing, and I saw that you got an additional $150 million in credit lines bringing your total to $310 million. Just to clarify, these are untapped, that you haven't tried anything on them yet?

Actually we draw $25 million.

Okay. So you have drawn 25. And the -- can you give us some additional color in terms of the terms of when it expires, is it based out off of LIBOR, can you just give us some additional details?

It's medium-term loan for longer than one year. They are -- some are LIBOR plus margin, some are modified LIBOR plus less than margin, but it's on very commercial terms. No, we didn't see any major change.

Okay. Thank you. But my second question is with regards to the CapEx. At the end of Q2, you forecasted that for the rest of 2008 you are going to spend around $272 million. When I backed out of CapEx spending for this most recent quarter came to about $120 and then you disclosed that you forecast spending was about $100 million for the rest of the year.

I was wondering what happened, I guess, to that $50 million difference, is that being deferred to '09, is that it's being cut out entirely. Could you just articulate a little bit more on what's going -- can happen with that?

It's probably a timing difference, so some of the actual payment will be deferred by a quarter.

In terms of the actual expenditures on your part?

Pardon me?

In terms of the actual expenditures on your part, they are going to be until just later point?

Well, I'd say the total -- they are two things; number one, and I couldn't follow you the number that you quoted, so I'm not sure, and I'm answering exactly to your question but -- when we estimate a CapEx, we estimate also the timing of the expenditure also. Sometimes it happens when we expect it, sometimes it will because of terms of payment or because of timing of doing the expenditure. It may shift from a quarter to quarter and sometimes from year-over-year.

There is also a small change in our projected (inaudible) of 2009. I don't know if you noticed it, but once you analyze our numbers, you will see that is -- Brawley has been slightly reduced in size. The reduction in size also reduces the capital expenses, which are required for '08. So it's probably a combination of all of these factors.

Okay. Cool, thank you very much.

You're welcome.

Your next question comes from Emily Christy with RBC Capital Markets.

Good morning.

Hi, Emily.

Some of my questions have been asked, but just if you could give a little more color on the potential M&A in terms of what Ormat would be looking for, geothermal rights or producing assets or any more color as to how you are looking at that?

We're looking at it with open eyes so as to say, which means we are -- our appetite for growth has not diminished. And we are interested in operating power plants, as well as in assets that can still be developed the same way as we have acquired in Alaska, I would say, from the state. If there is a developer with good assets for sale, we will be very interested in it. So it's really the entire range.

Okay. Thank you very much.

Thank you.

Next question comes from Ted Durbin with Goldman Sachs.

Hi, thanks for taking my question. Just a question on utility request for proposals, what specific RFPs for renewables are outstanding right now in Nevada and Southern California, and could you talk about when those results might be done?

In the energy, the Nevada utility has an RFP which needs to be submitted next week. We have no idea when results are going to come out. I'm not familiar about anything else.

And how big is the -- and the energy one?

And the energy, yes,

Yes, I'm sorry, how big is the request?

I mean, it's unlimited, I mean you can -- I don't -- they -- how many proposals are they going to get and how many are they going to issue is not something that was disclosed to my knowledge.

Okay, great. I guess that's all my questions, thanks.

Thank you.

Your next question comes from Dan Mannes with Avondale.

A couple of follow-up questions. First, on the products segments based on our estimates this is probably the best gross margin quarter you've seen in products probably in a year and a half since, I guess, you started to see some margin compression there. Was there anything unique this quarter, was this better pricing maybe on some prior deals or was this just a lumpiness related to the better revenue in the quarter?

It's all of the above Dan. We predicted that in the next -- in last two quarters of the year, the gross margin is going to be a little higher than in the first two quarters. But it was a little higher than the normal output. So you have both of them in the -- in my answer, so to be able to be more specific.

And -- but you mentioned also at the end of your comments you were starting to see, maybe, some softening on material prices. I don't know that you saw that in Q3, but did that give you a little bit of a better outlook on the gross margin for both that business as well as the capital side of the power business?

Yes, but not immediately. First of all, in Q3 we didn't see it. On the contrary, Q3 was a crazy quarter with respect to material costs. And we are seeing now some softening of material costs, but its impact on our either products segment or construction is going to take, say, I don't know, at least six months, if not more, because for the immediate projects, we have already acquired the material. Dan, we've acquired them at the high prices.

Understood. And then on just on a similar topic on FX, obviously had a little bit of pain there about $1 million. Is that $1 million related to transaction or is that a translational issue? And can you just walk me through a little bit where that comes from and should we be looking for that to turnaround since the dollar strengthened moving into Q4?

It's -- translation is different, but this is the term we are using in accounting, but it includes exchange differences also results from hedging transaction that we are doing.

But, I mean, given that most of your manufacturing or equipment is occurring in Israel and the dollar is strengthening versus the shekel, should we be assuming both your relative cost of goods for both construction for the products segment and for the power segment should improve just from currency alone?

The answer for that -- yes, the answer is yes. If we are buying shekels but part of it is both in dollar. Whatever is bought in shekel and the cost of labor, the answer is, yes.

Okay. And then just going back to the credit line side, you mentioned on the credit lines these were normal commercial terms but on -- first of all, the $25 million; was that drawn down in Q3 or in Q4?

In Q4.

Okay. So at the end of Q3 it was still un-drawn?

Correct. And the $310 million, part of it we received in Q4 as well. The $150 million we got in October and in November as well.

Okay. And then are there any financial covenants on this that we should be aware of?

Yes, there are, but relatively normal covenants not -- light covenants, not something very firm [up here].

Okay. And then just one final question we saw an up-tick in your R&D expense in the quarter. Is this related to some of the EGS projects or is this some other work you guys are doing?

It's EGS energy I think, and we've explained also in the 10-Q.

Which will be filed --

It was filed already.

Okay, great, thank you.

Your next question comes from Brian Yerger with Jesup & Lamont.

Good afternoon, thanks for taking my questions. Just a follow-up on the last question on the R&D related to EGS. Do you see that as a ongoing charge or we significantly looking at higher R&D expenses going forward?

The higher annual R&D expenses are not really coming from EGS. EGS is a small part of it because we have a substantial participation by the Department of Energy in these expenses. And what we are showing in our financial statements is only the net amount. We -- but running two EGS projects in parallel will slightly increase the R&D expenses. And $3.4 million, which is the grant that we -- that was proposed to us on the second EGS project, our own costs are going to be in the order of -- I don't know $800 million or so. And they are going to be incurred over a year and a half, I believe, in all of the multi periods, probably a year and a half or two.

Okay, so it's more of a significant pump one time and then just small raise on going forward?

Related to EGS?

Right, okay. You may or may not be able to answer this question, but on the failed acquisition, could you give us any color as to what you were looking for? Was it a resource, was it a plant, or was it an actual company?

Unfortunately we are confidentiality and we cannot disclose it.

Okay, that's what I thought. Okay, thank you.

(Operator instructions). Your next question comes from Ben Kallo with Stanford Group.

Couple of follow ups. On the GDL, could you walk us through the terms or how the acquisition will happen to the remaining 49% and the price of that?

There is a nominal payment for the auction which is immaterial. All the cost of this power plant are already included in our financial statements because we have financed the construction of the entire project. And because of that we included, maybe Joseph can explain more of the accounting for you. But it won't have an impact on a go-forward basis.

What we've done, we've consolidated, it seems, all reef curves off and under FIN46R. Even though we held formally only 49% we consolidated it. We financed the construction so we had all the risks and we had the auction. And we are -- as we said we are going to exercise it. So the amount that we pay for that is very minimal.

Okay, great, thank you.

You're welcome.

At this time there are no further questions. Are there any closing remarks?

Other than thank you all and let's continue to contemplate on renewable energy all of us together. Thank you very much.

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