Ormat Technologies Inc (ORA) 2010 Q3 法說會逐字稿

Good morning. My name is Wes, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ormat Technologies third-quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. I will now turn the conference over to Marybeth Csaby of KCSA Strategic Communications.

Yes, good morning, and thank you, Wes. Hosting the call today are Dita Bronicki, Chief Executive Officer; Yoram Bronicki, Chief Operation Officer; and Joseph Tenne, Chief Financial Officer; and Smadar Lavi, Vice President, Corporate Finance and Investor Relations.

Before beginning, we would like to remind you that information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward-looking, 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 Company's annual report on Form 10-K, filed with the Securities and Exchange Commission on March 8, 2010.

In addition, during this call, statements may be made that include financial measures as 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 believe that adjusted EBITDA may provide meaningful supplemental information regarding liquidity measurements that both management and investors benefit from 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 open the call to management, I would like to remind everyone that a slide presentation accompanies this call and can be accessed on the Company's website at Ormat.com, under the Webcast and Presentation link, as found in the Investor Relations tab.

With that said, I would like to turn the call over to Dita for her opening remarks. Dita, the call is yours.

Thank you, Marybeth. Good morning, everyone, and thank you for joining us. The highlight of the quarter is the electricity segment. Revenues are up 23%. Production is up 20%. And more importantly, progress in projects that moved to start of construction under the ITC cash grant is substantial. We are planning to place in service approximately 120 megawatts by the end of 2013 in the United States. We will elaborate on this and other developments during the call.

I will turn the call over to Joseph for a review of the quarter financials. Yoram will then update the status of operations, and following my remarks, we will open the call to questions. Joseph, the floor is yours.

Thank you, Dita, and good morning, everybody. We've included certain financial highlights from our company statements of operations and balance sheet in our earnings release and in the accompanying slides. Please note that some of the comparative figures have been revised to give effect to the right of costs associated with a project which we determined in the third quarter of 2009 would not support commercial operations.

I would like now to review the main issues that affected our financial results this quarter, starting with slide four. This quarter, the electricity segment had revenues of $83.4 million, a $15.5 million increase from the third quarter of 2009. The 22.7% increase in the results is a result of additional generation and capacity with Puna, North Brawley and the Mammoth complex being the major contributors.

The increase in the electricity segment revenues is also positively reflected by an increase in the average revenue rate of our electricity portfolio, from $87 per megawatt hour in the third quarter of 2009 to $89 per megawatt hours in the third quarter of 2010.

In the product segment, on the next slide, this quarter, revenues were $18.1 million compared to $51.1 million in the same quarter last year. We expect revenues and corresponding margins to be down from last year's highs, and expect this will continue throughout the year due to the decline in product order backlog from last year's record levels.

For the third quarter of 2010, total revenues were $101.5 million compared to $119 million in the third quarter of 2009, as shown in slide six. Depreciation in the quarter amounted to $23.4 million.

Moving to slide seven, the Company's total gross margin was 24.8% compared to 32.9% in the same period last year. Gross margin for the electricity segment was 26.2% compared to 35.1% in the same quarter last year. As anticipated, the decrease in gross margin derived from the high costs related to the North Brawley power plant, which increased the cost per megawatt hour in the current quarter compared to the third quarter of last year.

In the product segment, gross margin was 18.5% compared to 30% for the same quarter last year. The decrease is mainly attributed to the lower volume of revenues in comparison to 2009 record highs.

Moving to slide eight, interest expense, net, for the third quarter of 2010 was $11 million compared to $4.4 million in the same quarter last year. The $6.6 million increase was principally due to a $4.8 million decrease in interest capitalized to projects under construction, due to a lower aggregate investment in projects under construction during 2010 and an increase in interest expense due to increased debt.

Moving now to slide nine, income from continuing operations for the third quarter of 2010 was $32.4 million compared to $20.7 million, as revised, in the same quarter last year. The increase in income from continuing operations was principally due to a pretax gain of $36.9 million, $22.6 million after tax, which is equal to the difference between the acquisition-date fair value of the previously-held [50%] investment in Mammoth Pacific and the acquisition-based carrying value of such investment.

The increase was partially offset by a decrease in operating income, increased interest expense and increase in income tax provision, mainly related to the capital gains.

And on slide 10, net income for the third quarter of 2010 was $32.4 million, or $0.71 per share, basic and diluted, compared to net income of $21.9 million, or $0.48 per share, basic and diluted, for the third quarter of 2009, as revised.

The after-tax impact of North Brawley on the net income in the third quarter of 2010 was approximately $4 million or $0.09 per share. The after-tax impact of the gain on acquisition of controlling interest was $22.6 million or $0.50 per share.

As shown in slide 11, adjusted EBITDA for the third quarter of 2010 was $78.8 million compared to $48 million, as revised, for the same quarter last year. Adjusted EBITDA includes consolidated EBITDA and the Company's share in the interest, taxes, depreciation and amortization related to the Company's unconsolidated investment interest in its 50% interest in the Mammoth complex in California through August 1, 2010.

Cash flows from operating activities for the third quarter was $20.7 million compared to $22.4 million from the same quarter last year.

Turning now to slide 12, as of September 30, 2010, the Company had cash and cash equivalents of $49.2 million compared to $46.3 million as of December 31, 2009. The accompanying slide breaks down the use of cash during the quarter. Liquidity came from utilization of revolving credit lines with commercial banks, the proceeds from the issuance of senior unsecured bonds and from the North Brawley cash grant, as well as cash derived from operating activities that we use to fund capital expenditures and repay long-term debt.

Our total outstanding debt as of the end of the third quarter of 2010 was approximately $721 million and will be repaid as presented in slide number 13. Although we present in the table that the revolving bank credit will be repaid in 2011, we expect to extend those lines of credit and have them available for general corporate use, so there will be no actual repayment in 2011.

I would like now to provide more details about the OPC payment distribution that will begin in the fourth quarter. In 2007, we entered into a transaction through Ormat Nevada, our subsidiary, to monetize production tax credit of Desert Peak 2, Steamboat Hills, Galena 2 and 3, (inaudible) [geothermal projects] in Nevada with affiliates of Morgan Stanley and Lehman Brothers as institutional equity investors in the subsidiary OPC LLC.

Last year, Ormat Nevada purchased the membership interest held by Lehman Brothers for $18.5 million. Since a substantial portion of this sale was accounted for as financing, the repurchases at a discount resulted in a pretax gain of approximately [$13] million. Now that we have received our return of capital covering our initial investment, the distributable cash flow is now available to the OPC investors.

70% of the cash will be distributed to the third-party equity investors until they will reach a target after-tax yield under investment, expected in 2016. 30% of the cash will be paid to Ormat Nevada.

Moving on to slide 14, 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 November 30, 2010 to shareholders of record as of the close of business on November 17, 2010.

And now, let me turn the call over to Yoram.

Thank you, Joseph, and good morning, everyone. I would like to begin with slide 16, with an update on our operational activity. Total generation from our US and international plant increased by roughly 20% to about 940,000 MWH. Such factors as Joe just described, the generally good performance of our existing plants, the strong performance of the REG fleet and the addition of one more REG plant, all contributed to the increase.

The generation in North Brawley was steady, with the average net output in September being a little over 25 megawatts. This improvement has been achieved in part by the improvement in solids removal, which allowed safeguarding the operating injection wells, and partially by rebalancing the flow in the western field, which was done by converting production to (technical difficulty). Our next essential step will be opening up a new injection area to the east of the existing field.

Although we started work on this in the third quarter, the bulk of the construction is taking place in the fourth quarter. As of today, we have completed most of the pipeline and expect to commission the injection lines in the second half of December. We anticipate that this will improve our injection capability and allow a further increase in generation. The next step will be to complete additional production. We expect this program to improve the financial performance of North Brawley and the whole electricity segment.

We would like to move to slide 17 for an update on our projects under construction, all of which may qualify for an ITC cash grant. The 8-megawatt expansion of Puna is in advanced site construction. We have also made progress in the business aspect of the expansion and believe that we can see some benefit from the new equipment by the end of this year or in early 2011. Full commercial operation will require system upgrades by HELCO and will occur later in 2011.

The construction of Jersey Valley is also in full swing, and we expect mechanical completion by the end of (technical difficulty), and if the permit to operate is available, to place the plant in service by year-end or early next year.

In McGinness Hills, four production wells and two injection wells have been drilled successfully, and we have secured most of the required production. Given the elevation of the site, we will stop drilling for the winter and resume in the spring.

As for the surface equipment, we have made progress in equipment fabrication and are waiting for permits to allow field construction, that we hope to begin next spring.

We have secured both production and injection for the first phase of Tuscarora and released the power plant design. Field construction is only expected to begin in early 2011.

In Mammoth, we have started the equipment fabrication for the replacement of the old generating equipment with modern units. The new equipment will increase the annual output and reduce the operating costs from the old PPAs. In parallel, we have started the field development of the expansion facility, which we have formally designated CD4, and to date, completed one successful production well.

We expect to bring total generation of this complex to up to 70 megawatts, and the final split between the current PPAs and the expansion will be determined by the business deals that we reach.

On slide 18, you can see the detailed status of projects under development. In Wister, we have conducted a 3D seismic survey as part of our joint exploration program with the DOE and are using the result in the production well that we are currently drilling.

As we have updated in previous calls, we have the rights for the development of eight ground-mount solar photovoltaic projects in Israel. Because their permitting process includes change of zoning from agricultural land to land approved for solar development, the process is expected to take a very long time, because it is impossible to assign an expectation date.

Yesterday, we signed another agreement with our partner in the PV projects for the development of 22 additional megawatts of rooftop installation. The advantage of this opportunity is it does not require zoning changes, and therefore, could be placed in service faster. Our share of this development will be [51%].

Slide 19. In addition to approximately 300 megawatts under construction and development, we have rights to a total of 30 leases, 15 of which are already in exploration. Those leases include the Crump Geyser area that, as announced this week, we will develop, construct and operate together with Nevada Geothermal Power. Our objective is to move quickly and drill this quarter so that we can complete the first phase before the end of 2013.

On slide 20, you can see a recap on the product segment, where our backlog approximately $37 million. I would now like to turn the call back to Dita.

Thank you, Yoram. Starting with slide 22, let me turn to some of the financing activities. (inaudible) requires, in addition to the geothermal resources, the adequate capital resources. We plan to qualify to the maximum extent we can for the federal legislation available to (inaudible) developed there. We plan to utilize the available local DOE Loan Guarantee Program and the ITC cash grant program.

In September 2010, a portion of equity invested in North Brawley power plant was refinanced with the $108 million cash grant we received under the ARRA. Our application for $350 million of senior secured construction and term loans with the DOE to finance three projects in Nevada, McGinness Hills, Jersey Valley and Tuscarora, advanced to the second stage.

John Hancock is acting as the lender applicant. Part one of the application was submitted in July and part two in October. The next stage is due diligence and negotiation of the conditional commitment for loan guarantee. Under the program, the DOE can provide a loan guarantee for up to 80% of the project, which will be subsequently [reviewed] by a portion of the ITC cash grant.

As Yoram discussed earlier, the construction of the first phase of all three projects (inaudible). After completion of phase one, we will assess the feasibility of the second phase, which we believe could increase the size of this project up to a total of 120 megawatts. Each of the projects has a 20-year power purchase agreement with Nevada Power Company.

Separate from the DOE and the cash grant, we (inaudible) $142 million for senior unsecured bond offerings announced in August. Profits from the offering are utilized to fund growth and have temporarily reduced our corporate credit lines.

If you turn to slide 23, you can see we have an outlook for the final quarter of 2010. We are updating our guidance to reflect the development of the past quarter and are raising the lower end of the expected 2010 electricity segment revenue to now be between $290 million and $295 million.

This number does not include our share in the revenue of the Mammoth complex of approximately $6 million for the first seven months of 2010 that was accounted for under the equity method.

As to the product segment revenue, we expect revenues of approximately $80 million.

In slide 24, you can see the CapEx requirements for the remaining of 2010. Our estimated capital needs for the rest of 2010 includes approximately $136 million for capital expenditures, on new projects in development or construction, exploration activity, operating projects and machinery and equipment. Our financial resources total approximately $272 million. Going forward, we intend to refinance the North Brawley investment with long-term debt of up to $100 million.

I want to close by saying that the first nine months of 2010 has had its fair share of challenges, but we have weathered the unexpected and complicated and we are a stronger organization because of it. We are encouraged by the results and developments of the third quarter and remain focused on our long-term growth initiatives.

Thank you again for your support. I would now like to open the call for our investors. Operator?

(Operator Instructions) [Ben Callow], Baird.

Starting on Brawley, should we see continued improvements in Q4, or do we really have to wait until the additional injection wells are drilled to see cost improvements there?

There will be just minor improvement, a better handle on cost and slight increase in generation. But the big step, the big next step is really connecting the injection wells.

The automation filters that you were putting in, the automated filters, is that finished now, or do you still have more work to do there?

On the solids removal?

Right.

Yes, so the simple answer to this is that there is more work to do. Currently, we have cyclones installed in all of our injections, so all of the injection is treated. But as part of the additional work, we actually will move the cyclones into production so that we can get rid of the solids before they even entered the plant.

But this is not a -- this is something that happens, if you like, behind the scenes. There are -- it does require some additional work. It is a slightly different service (inaudible). There is more work, but it is not terribly costly, and should not affect injectivity.

What do we need for Brawley to be at, what level of production do we need to actually secure a project (inaudible) for the plant?

I think the answer is that we want it to be as high as possible, because it has a big impact on the carrying capacity, if you'd like, for the deck. And so we would like to finance it at a rate that is as close to the 50 megawatt that we believe the project could provide long-term. And we really want -- we really don't want to finance it at a lower capacity.

Okay. And then moving on to the product segment, I've heard some things about some projects out there that have RFPs out. Can you give us any update on what you see, specifically in North America coming up in 2011, if you expect any project wins within North America?

You know, we did disclose the -- or actually Raser disclosed that we are working together on Lightning Dock, which could be a very interesting project in New Mexico. Other developers have disclosed some of their RFPs.

But I have to say that I am uncomfortable -- I am not quite sure what has been in the public domain and what has not, and I am uncomfortable adding more on this without their permission. But there is a -- there is some pickup. It is likely for substantial projects to be released in 2011, and of course, we need to be competitive and secure at least some of them.

Okay, perfect. I'll jump back in queue.

Gregg Orrill, Barclays Capital.

I was wondering if you could come back to the average price for the quarter, which I think you said was 89 versus 87 in the quarter last year, just kind of what is driving that? And then also, if -- can you confirm whether the capital gain was in the adjusted EBITDA? Thank you.

I'll answer on the average price. The average price is really a result of, for the most part, which contracts contributed what to our generation. Because -- and so some of it changes with seasonality, like some of our old SO4 contracts. Some of it, like the Puna contract, that does change with HELCO's [voided] comp.

But most of them, it is really just the mix. And so if we have stronger generation out of a certain plant, it somewhat offsets or changes the blended rate compared to other facilities. And so it is a -- I think that it is an actual number that is somewhat interesting, but by itself, I don't think that it tells much.

As to the second question, the amount of the capital gain is $36.9 million, and it is included in EBITDA.

Okay.

And that is the (inaudible).

Okay. Thank you.

[Elaine Quay], Jefferies.

Thanks so much for taking my question. A quick question on the PPA environment. We've actually -- we've heard a lot that it has been very challenging in the wind sector. And I was wondering if you could give an update on just what you are seeing for the geothermal space, if there is any impact there.

So far, we have not felt such an impact. I think that there is -- you have to look at this, maybe not by utility, but certainly by state. And I think that the public utility commissions in each of the states that have the RPS continuously learn from both the success and less successful projects.

And so there are some changes. For instance, in California, there is a project viability matrix that was developed not very recently, but I would say about a year and a half ago, if memory serves.

And this means that each project, beyond the price that is offered, is also measured on what would its value be to the grid. In most cases, we fare -- or we rank very, very well because we are baseload, and also because we are small. And I think this is where the difference between geothermal and the intermittent forms of renewable energy, I would say this is one of the areas where it comes into play.

There is, of course, the price that can be secured for the PPAs, which is driven by either the MPR or separate factors that are being used. But again, for projects that are located with good access to transmission and that we can develop under commercially favorable terms, we haven't had a problem.

Great. Thanks so much. And just following on the joint development agreement with Nevada Geothermal, as well as the other investment in Mammoth, do you see this as being part of a more important part of the strategy going forward, in terms of doing JVs and other potential acquisitions to build out the portfolio?

It is certainly an alternative that we will not shy of. And I think, again, everything has to be -- there is the general answer and then there is a specific answer, and specific is site-specific, partner-specific.

And what I can say about the agreement with Nevada Geothermal is that this is actually a very good place. It has a lot of good elements for a successful partnership, because they have a site that we really believe in. We have a good working relationship that was developed on the Blue Mountain project. And we could bring to that partnership our ability to educate and build a plant in a very friendly way, and with longtime collaboration in our mind.

And they really needed somebody to help them move that project forward, and they would need both somebody that could quickly execute the exploration, but especially somebody that can provide this with a power plant that will operate long-term in a very reliable way. And so you have very good -- you have the ingredients for a successful partnership. We need to work at it, but we have the ingredients. And therefore, this is an option that we would not shy on.

And whenever there is likewise a project or prospect or a likewise partner, we are certainly open to it.

Great. Thanks so much.

Michael Lapides, Goldman Sachs.

Can you just provide, if we were looking at the projects on page 17 and 18, which ones of these are not under contract or not under PPA right now?

Puna is -- we haven't finalized PPA yet. Mammoth, we have not finalized PPA yet. Everything else has a PPA with the utility. That's on page 17.

And on page 18, Okaria, we need to complete the PPA discussions. Sarulla, we need to amend the PPA. And then the PV installations are -- they are a bit in tariff, so it is not exactly PPA, but it is a slightly different structure.

(Inaudible)

Okay. I was mentioning the ones that don't have. So Wister has a PPA and East Brawley is somewhere in between. So I hope it answers your question.

No, no, no. Very, very helpful. Second, what are you seeing in instruction cost trends, like last six, last nine months, in terms of just directional movements and what it costs to actually build a new facility?

There were fluctuations along the year in the cost of materials, but we don't see -- I would say generally flat.

Okay, so still in the roughly $4000 a kw range, or something kind of directionally in that ballpark?

Yes, with the -- I guess the qualification that we generally put on the difference between Northern Nevada and Southern California and so on, but yes.

Okay. Thank you. Much appreciated.

Lasan Johong, RBC Capital Markets.

Any chance you can give us a rough timeline of when you might start shipping equipment for Sarulla?

I can tell you what is the earliest. Doesn't mean that that is when we are going to start shipping.

During the quarter, there was a slight progress in the negotiations in order to finalize the PPA in the sense that the state audit agency has approved the tariff that we announced almost six months ago. At that time, we were hoping to finalize the PPA in 90 days. It took six months to get the state audit agency to approve the tariff. And maybe it is now going to be a smoother process to finalize the PPA.

After the PPA is finalized, we always estimated a year to close financing. Assuming that we will start shipping equipment about nine months after closing financing, we are talking about two years, more or less.

To start shipping equipment?

You asked about shipping equipment, right?

Yes, so it will take another 3.5 years to start shipping equipment.

Yes, but this doesn't mean that we will not recognize real revenues under construction sooner, because the way we recognize revenues in projects under construction is on a progress basis. So revenue, we will possibly start to recognize six months earlier.

Understood. Generally speaking, how much slippage in Carson and Mammoth can you tolerate before the ITC tax grant money is out of reach? Because those are the projects that are due in 2013, right?

We plan to qualify Mammoth for ITC by the end of the year. As you know, there are two methods to qualify for the ITC cash grant. One method is the safe harbor incurs 5% of the project cost, and the other one is they do substantial construction at the site. And in Mammoth, we plan to apply both methodologies, and we don't expect not to comply with them in time.

You need to complete the project by end of 2013 and demonstrate commercial viability before you can actually get the money, correct?

That's correct. We have to complete the construction -- by tax definition, to place the project in service by December 31, 2013. But this doesn't seem to be an issue with the time that is available to us. It is three years from today.

Understood, understood. But it says -- on your project sheet, it says [costs] in Mammoth are due in 2013. Maybe I can ask the question a slightly different way. When do you expect to put those in operation -- in the beginning of the year, middle of the year, end of the year?

Probably the 50% at the beginning of the year and 50% throughout the end of the year.

I see (multiple speakers). Go ahead, please.

It's actually -- it won't be a multiyear process. The modernization of the old -- not the old plant, but putting in the new plants in lieu of the old plants is something that will start earlier. And so a lot of this will actually happen before 2013.

(Multiple speakers) So we don't have to worry about whether there is going to be a slippage on costs in Mammoth that would create the tax grant being -- not qualifying for the tax cash grant?

We always worry, but we think that in Mammoth we are in good position.

Okay. You mentioned that Lightning Dock at Raser is a good project, and I agree. But are you confident that they can pay for it? And if they can't pay for it, do you have recourse, i.e. do you take control and ownership of the entire project?

I don't know -- I said that it is very exciting, because it will be the first geothermal power plant in New Mexico that has a favorable -- it's a favorable place for removal.

Beyond that, fundamental, you have two elements that are important in a geothermal power plant. One is good surface equipment, good power plant design. And the other, and really the most basic one, is the availability of the field.

And I think that is the first area that needs to be proven, and this is not our job to do. But if you have a good power plant and if you have a reasonable PPA or a good PPA and if you have a good field, then there is no way that a power plant [can] pay for itself one way or the other.

So really, the first -- I'll go back -- the first two elements being the PPA and the field, these are questions that you should ask Raser. We know that we can deliver a good plant, and with those two elements, no doubt that it can pay for itself.

Okay. So bottom line is you don't think you're going to have problems collecting. You'll collect one way or another if something untowards happens to Raser?

Yes. We are not -- yes, we are not concerned.

Okay. Does the M&A picture look any better now that kind of the long-term outlook has improved, but stock prices have generally still languished?

M&A of --?

Of other geothermal companies.

I'm not sure that there are good M&A opportunities that I am aware of.

Okay. PPAs, do you see acceleration of signings of PPAs going forward?

As Yoram answered to a little different question, but still we have not encountered difficulties in getting PPAs for projects that were ready to get the PPA. We have been in the (inaudible) a little later in the process to try to get the PPA, because we wanted to have more certainty before we commit to a PPA. And we did not have difficulties to get PPA.

Certainly, the fact that Proposition 24 in California didn't pass makes the (inaudible) risk -- we didn't share that risk, but some did -- of less appetite for PPAs in California go away.

Makes sense. Last question for me. BLM permitting issues and debottlenecking, are you seeing that really start to clear up? Because I think you had mentioned last quarter that it is starting to clear up. Are you seeing good progress there?

I don't recall saying this. I hope it wasn't me. But we don't see any real change there.

Thank you very much.

Steve Milunovich, Bank of America Merrill Lynch.

Could you comment on a couple of the expense line items. Particularly R&D and G&A were down quite a bit sequentially. What was that due to and where do you see those going in the next quarter or two?

On an annual basis, I think our G&A expenses are (inaudible). In some cases, there are changes because of (inaudible) things seemed bad. But on some amounts to pay to advisors, for example, cost of acquisitions, that are now part of the cost. But other than that, no material changes.

How about R&D? That was down over $2 million.

The R&D is, the decrease in R&D is -- and we will explain it in the 10-Q -- is because we completed most of the production on the LNG project. So this quarter, we had lower expenses.

Is that likely to stay at this level or is that going to move back up to previous levels?

It will not be at the levels of 2010 going forward. It will go down in 2011.

Okay.

It was a unique project with a lot of cost. And by the way, as we said in the past, once we get the acceptance of the client, we will be able to (inaudible) revenues of about $50 million. So there is no cost associated with it.

Okay, that's great. In the press release, you talk about North Brawley having a negative impact on gross margin expected through 2011. Could you quantify that at all or discuss -- is that going to be particularly in the first half of the year and then we see significant improvement, or how should we think about that?

Clearly, the comment was that it negatively affected us this quarter. The same would be for next quarter. And as we previously said, our expectation was to reach breakeven somewhere in 2011, which is still -- would still be hurtful throughout the year.

So we are not -- we cannot commit at this point to when exactly that breakeven will occur. But even if you assume that it happens in midyear, then the impact will be noticeable throughout the year.

Okay. And then finally, can you talk a bit about the competition with your binary products in terms of what do you consider to be your competitive advantages, and which competitors do you see most?

The competitive advantage is that we make the best equipment. We have -- we offer to our customers years of experience, years of continuous improvement, including breakthrough. And a lot of what our competitors do today are things that we have done 20 years ago, and decided that there is a better way to do it.

And so if you want a real -- an operating, organic rankine cycle power plant, there is really one company to go to, and this is us.

Now of course, you can explain many choices and people can make different choices. And some actually made both 25 years ago on plants that do not exist anymore and also recently. But that is -- I know a story about somebody telling his son that he is not rich enough to buy inexpensive things. Because a power plant is measured by its lifecycle cost and not -- and this is for a normal power plant, driven by normal reasons. And this is what we offer.

Now, there is a very long list of people that say that they offer organic rankine cycle solutions or that they would offer organic rankine cycle solutions. I think that none of them is really bankable. Many of them are really at irrelevant sizes for geothermal. You just can't operate -- you can't operate -- or it makes no sense to operate a 20-megawatt power plant with 50, 100 or 300 modules. And competition is always an issue, but we are clearly the best of breed.

Okay. Thank you.

Brian Shore, Avondale Partners.

Thanks for taking my call. Just a quick follow-up on the Nevada Geothermal and Crump deal. Can you kind of talk a little bit more about what is so attractive about that, particularly given you guys have quite a bit of capital needs coming up. And does this impact any other projects in your development pipeline, and does it say anything about the development pipeline that you are moving forward with this?

It is true that we have capital -- some substantial capital needs. But it is also true that capital was not the limiting factor in our development. And if we could bring more projects to a stage of start of construction, we could have done more. And what was limiting us was the speed at which we can bring a project to enough of an advanced stage of exploration so that we can start construction.

The Crump Geyser project has not completed exploration yet. I mean, this work was not done. But there is -- there was a discovery well or there is a discovery well that will bring [deals and grow] on that site that is very promising for that resource.

And to bring another project to what we believe could be an impressive development portfolio that we have is always a good thing. And it doesn't help or doesn't impact the rest of our development -- construction and development plans. It is one more of a project which is expected to be a good project.

Okay, great. That's helpful. And then my next question, you guys obviously have several projects that you intend to qualify for the ITC cash grant. Is there a risk that you are going to have to accelerate some of your capital spending to qualify on some of these projects that may not turn out viable, and you are accelerating the capital spending because of the cash grant?

You know, the way we have done it is in a careful and responsible way. We believe that's the way we have run our business all along. The fact that there is one project that turned out to be not as planned and that's the North Brawley project doesn't tell us that all the others were not done responsibly. I believe they have been. And we are doing it also for the confirmation of the start of construction on the ITC cash grant.

We have not taken a shortcut in rest of development, and we have not started to spend money before we know that we have a use for the equipment.

Okay, great. That's what I want to hear. Thank you, guys.

Paul Clegg, Mizuho.

Thanks for taking my question. Backlog is down again this quarter, and you talked a little bit on the call about some activity in the US market, alluding to some RFPs that may or may not have been disclosed.

I'm just curious if you have enough visibility into the end market at this point to say whether or not you expect your backlog has kind of bottomed out here. Should we expect it to start rising again next quarter, maybe in a couple of quarters? And if you could also talk about the direction of product gross margins next quarter, in the fourth quarter.

You know, you are right. The backlog is down. And even if some of the projects that are in various proposal stages, RFP stages, etc., will materialize, it will create a gap in the product segment. Because with the backlog today, (inaudible) is in the $30 million range, and some of it will still be delivered by the end of the year, and it takes some time from the time you get an order until you can recognize revenue, we will see a reduction in product segment revenue for the next few quarters. And this will, of course, impact (inaudible) in the product segment.

From an operational point of view, it doesn't have an impact on the Company, because we have our hands full with the construction of projects for ourselves and manufacturing equipment for ourselves. So there is going to be some shifting from item to item in our financial reporting. So it is not going to be product segment activity; it will be a buildup of property, plant and equipment. But the product segment itself will show a decline.

Okay. And specifically, on the fourth quarter, directionally with the product gross margin, it has been pretty variable in the past. It has been tough to predict. But I was hoping you might be able to give us directionally whether or not you expect it to be up or down in the fourth quarter.

For the year, the product segment is going to average around what we call normal for the segment margin, which is not the [2010 -- 2009] margin, but the prior year's.

Okay. And then looking for a little bit of a clarification on the payout at OPC and the flip there and the structure, can you -- I missed a little bit of that commentary. Can you characterize the rough dollar amount impact on cash flows in 2011 versus 2010, and then can you just repeat when the flip actually happens?

There are two flips, flip of the cash distribution and flip of the ownership. The important flip is the flip of the ownership, which occurs when the investors got their return on the investment, and I think that this is expected in 2016. The cash flip has already occurred. I think that's what Joe has said.

Right.

(Technical difficulty) and we still get 30% of it, and it goes (inaudible).

And -- I'm sorry -- what is the overall number then? I'm just trying to estimate cash flow impact going forward relative to the --

I would say it is a couple of million a month.

Couple of million a month, with the flip to you only getting 30%.

Yes.

And the flip occurred during the third quarter.

Fourth.

Fourth quarter.

In the fourth quarter, sorry. And then one final question. I may have missed this, but what was the level of megawatt production at North Brawley that equates to gross margin breakeven?

I don't have this in front of me.

Okay. We can follow up off-line then.

It's -- we have to prepare this for our next call.

Very good. Okay, thanks very much.

Dilip Warrier, Stifel Nicolaus.

So your interest expense has seen a little bit of a step change this year with North Brawley coming on line. I was wondering, when is the next sort of step change in interest expense? Would that be in 2011, when Jersey Valley comes on line? And what would the impact be? Should we -- should I pencil in perhaps $3 million to $4 million in additional interest expenses annually?

When Jersey is coming online, other projects are to be progressing, and we have a lot of -- we will have a lot of projects under construction in 2011. So all in all, in 2011, we will not see a decrease in income (inaudible) interest, if that's the question.

Okay, got it. And then (multiple speakers) on your agreement with Nevada Geothermal, is this a project where you will recognize revenue on the product side, or is this going to be more sort of a build and operate?

By the end of the day, when they become a 50% partner, we will recognize revenues on the product side for 50% of the sale, and 50% will be property, plant and equipment.

I see. Got it. Thank you very much.

Jinming Liu, Ardour Capital.

Thanks for taking my questions. Just given the outcome from the midterm election and your heavy dependency on the ITC grants, and also a PTC, protection tax credit, what do you see the chance of the ITC cash grant maybe got reduced or eliminated in the near future. And also for the PTC, which will be renewed -- which will be renewed in two years, what the chance we will see that tax credit will go away?

You know, I don't know if there is anybody who can answer that question with knowledge today. Our operating assumption is that the loans that are available today will be honored until their expiry date. And we are not assuming an extension for our internal plans of the tax credit beyond what is available today. We are more relying on the RPS, on the State RPS, which will continue to create demand for renewable energy.

Okay. And the next question relates to your projects. If I remember correctly, it looks like you have pushed the startup date for both the Puna enhancement project and the Jersey Valley project by a quarter, to early next year instead of fourth quarter this year. Am I right on that front?

We are working hard to start up this year. And since we haven't started up and they is less than two months left, things can happen. It may slip to the next quarter. I don't think that it will slip by a quarter, but we may be a few days off.

All right, thanks.

Carter Driscoll, Capstone Investments.

[Ben Callow], Baird.

I had two follow-up questions. First off, Joseph mentioned something about recognizing revenue on the R&D, you'd been working for the LNG facility. Could you explain that a little more and the timing on that?

On the LNG?

Yes.

Yes, it is an R&D project, so we incur all the costs as R&D expenses. But if at the end of the process the project will be accepted by the customer, then we will recognize the revenue. And since it didn't occur yet, we (inaudible) recognize revenues going -- on an ongoing basis. So once it is accepted, then the customer is satisfied, then we will be paid and can recognize the revenue.

Is the revenue completely offsetting the R&D that you did in the project? And then what is the timing on when you expect to sell (inaudible)?

(Inaudible) during 2011, the first or second quarter. Depends when we complete it and get accepted.

Okay, great. And then in the deal with Nevada Geothermal, you are doing a lot of the financing of the initial project costs. As you look forward and there are some projects out there that you are bidding on, are you offering financing on the product side of the business? And if so, how are you going to do that with your balance sheet? Are you going to work with a third party, or how do you foresee that?

I think the right answer to this is that this is not a typical thing that we do, that this would be the exception and not the rule. The project has to be very, very specific.

And I think that if I try to look at this from the other party's -- through the other party's eyes, for such a thing to happen, they actually need to develop a relationship with us that is similar to the relationship with the lender. It requires a lot of -- supplying a lot of internal information to the company, and things that sometime could work with a supplier, but oftentimes would not.

And so I think that in most cases and most projects, that is not what is going to happen. But when there are the elements of real partnerships, certainly with Nevada Geothermal, or very unique circumstances of a project that we really like, it may happen.

Okay, great. Thanks.

Angie Storozynski, Macquarie Capital.

As I said, my questions have been asked and answered. Thank you.

At this time, I am showing no further questions.

Thank you all. I think it was an interesting conversation. Looking forward to continue the dialogue with you all. Thank you very much.

Ladies and gentlemen, that concludes the Ormat Technologies third-quarter conference call. We appreciate your time. You may now disconnect.