Ormat Technologies Inc (ORA) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2011 earnings 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'll now turn the conference over to Rob Fink with KCSA to begin.

Thank you. Hosting the call today are Dita Bronicki, Chief Executive Officer; Yoram Bronicki, President and Chief Operating Officer; Joseph Tenne, Chief Financial Officer; and Smadar Lavi, Vice President of 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 annual report on Form 10-K, filed with the SEC on February 28, 2011.

In addition, during this call, statements may include financial measures as defined as non-GAAP financial measures by the Securities and Exchange Commission, such as EBITDA and adjusted EBITDA. The presentation of 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 and forecasting future periods. This non-GAAP financial measure may also facilitate management's internal comparisons to the Company's historical liquidity.

Before I turn the call over to management, I would like to remind everyone that the slide presentation accompanying this call may be accessed on the Company's website at www.ormat.com under the Event Calendar link that's found in the Investor Relations tab. With that said, I would like to turn the call over to Yoram.

Good morning, everyone, and thank you for joining us today for the presentation of our first quarter 2011 results and outlook for the near future. Before reviewing the results of the quarter, I would like first to address North Brawley.

As has been the case for the past several quarters, operating expenses at North Brawley have overshadowed the strong performance of most of our plants. The unique operational challenges of North Brawley limit our ability to forecast operational progress and expected timelines. We plan to continue to update on a quarterly basis on our efforts and plans to reach operational balance. However, we will not guide on the expected timeline as long as uncertainty remains high.

With that, I would like to begin with a review of the first quarter operational updates. Joseph will continue and provide a financial review and Dita will conclude with business and regulatory updates.

Starting with slide 5. The highlights of the quarter was an 18% increase in total revenues. The growth was driven by strong electricity generation across most of our portfolio as well as an increase in the product segment. The total generation from our US and international power plants increased 14% from approximately 918,000 megawatt hours in the first quarter of 2010 to over 1 million megawatt hours in the first quarter of 2011.

Noteworthy contributors compared to last year were the OREG facilities; Puna operating at normal capacity and the full benefit of Mammoth complex.

We're continuing to work through the issues of North Brawley. The East Brawley injection field has provided a relief, but it is not sufficient to solve our injection needs. We spent substantial efforts in an improvement to our production pumps and have applied this in most of the operating pumps.

Further modifications will be needed over time, but we think that this will allow a significant improvement in the service life of the production pumps which are now the highest operating costs of the complex.

As we've been operating new wells, sand production has been fairly high, but associated costs have been under control and we have been working on ways to further reduce sand separation costs. The injection of the Eastern field is not as good as we had expected and we are drilling one more producer on the Eastern side and hope for a better balance between east and west.

A capacity demonstration test was conducted with production at 33 megawatt and we have the ability to retest before April 2012. We're trying to connect our new East Brawley well and rebalance cost. We will continue to target deeper injection and look for deeper production.

Jersey Valley. As previously described, we have completed the plant at the end of 2010 and have been generating power under pre-commercial arrangements. The well field development is not yet complete and we're still limited by the injection capacity. Our plan is to maintain the plant at pre-commercial conditions until we can reach at least 12 megawatts and more work is up line position on. It should be noted that the operation of the plant is smooth and that it is not carrying the same operating expenses as North Brawley.

For an update on our future growth now, please turn to Slide 6. In the table you can see the status and expected completion schedule for each project under construction. In Puna, we're waiting for the PUC to approve the 8 megawatt PPA and for HELCO to the complete interconnection activities for the full benefit of the power plant to be realized.

However, some power sales are expected in the third quarter of 2011. In light of the impact of Puna on our portfolio, we plan to drill an additional production well to provide spare capacity.

We are in an advanced stage of equipment manufacturing in the 30 megawatt McGinness Hills project in Nevada. We have submitted documents to obtain the required construction permits and environmental assessment. We expect commercial operations of the project's first phase in 2012.

Field development in Tuscarora, Nevada has been completed. We've obtained most of the required construction permits. We have broken ground at the plant site and plan to start mechanical work towards the end of the second quarter.

The NEPA process which is required for compliance under DOE 1705 loan guarantee program is in progress for both McGinness Hills and Tuscarora.

In DI-Wells in Nevada, we completed the drilling of two wells and we continue with the drilling activity. The final project under construction is Olkaria III, phase three. We amended and restated a twenty-year PPA to purchase an additional 36 megawatt from a new power plant at the Olkaria III complex, which is expected to come online in 2013. This important milestone enabled us to move the project to construction status.

There are no updates on Mammoth and Carson Lake.

On Slide 7, you can see the detailed list of projects under development. In Indonesia, we're still discussing amendments to the PPA with the off-taker. In parallel, we are continuing with the financing process. We're in various stages of construction and development of ten projects that we will end by the end of 2013 more than 220 megawatts for our portfolio. In addition, we have 78 megawatt that will come from the Sarulla project in Indonesia and Solar PV projects in Israel.

Turning to Slide 8. In addition to the projects under construction and development, we also have 31 geothermal leases waiting to begin exploration or in the early exploration phase. In the US, we currently have 15 sites in various stages of exploration. Since the beginning of 2011, we have entered into new lease agreement covering approximately 8,000 acres of Federal or private land in Nevada, Oregon and California. In total, our land position for future development increased to 351,000 acres.

In addition, we have entered into an agreement with Weyerhaeuser granting us an option to enter into the geothermal lease covering approximately 264,000 acres of land in Oregon and Washington. Under this agreement, we have the exclusive right to explore the land for geothermal resources and may enter into one or more geothermal leases.

As we described before, this is a strategic move for the Company to favor exploration on leases that have more favorable permitting timelines being plotted.

Let us now turn to Slide 9 for an update on the product segment. The first quarter of 2011 saw an increase in the product segment orders for contracts -- with contracts for the supply of geothermal power plants and other power generating units outside of the United States. As of this month, we have a backlog of approximately $84 million, $11 million of which is subject to notice to proceed. The backlog excludes $15 million in revenues related to the REG LNG projects in Spain. Most of the revenue are expected to be recognized in the second quarter of 2011.

We expect the activity in this segment will continue to grow with additional opportunities from international markets. However, as we've discussed in the past, revenues are less predictable in the product segment as a result of the lengthy sales cycle and customer financing that is required.

With the operational review complete, let me turn the call over to Joseph for the financial updates.

Thank you, Yoram, and good morning everyone. Beginning at Slide 11, total revenues for the quarter ended in March 31, 2011 were at $97.8 million, an 18.3% increase over revenues of $82.7 million in the first quarter of 2010. In our electricity segment on Slide 12, revenues for the quarter were $78.3 million an 18.4% increase over revenue of $66.1 million in that same quarter of 2010. The increase in revenues is resulting from an almost 14.2% increase in total output and a slight increase in the average revenue rate of the company electricity portfolio from $72 per megawatt hour in the first quarter of 2010, to $75 per megawatt hour in the first quarter of 2011.

Total electricity cost of revenues in the first quarter of 2011 was $65.9 million compared to $54.5 million in the same quarter in 2010. This reflects higher costs associated with operating and maintaining the North Brawley power plant in the first quarter of 2011 which increased from $9.5 million in the first quarter of 2010 to $14.3 million in the this quarter. This includes the cost of replacing pumps in the production wells. As we previously said, we expect a higher level of operating expenses to continue at least through the next few quarters in our product segment.

On Slide 13, revenues for the quarter were $19.6 million an 18.1% increase over revenue of $16.5 million in the same quarter of 2010. The increase in our product revenue is a result of an increase in our product segment customer orders. Total product cost of revenues for the quarter was $16.9 million compared to $12.4 million in the same quarter of 2010.

Moving to the next slide, which represent combined gross margin and gross margin for each segment for the quarter. The Company combined gross margin for this quarter was 15.3% compared to 19% in the first quarter of 2010. The electricity gross margin in the quarter was 15.8% compared to 17.5% in the first quarter last year. As you can see, excluding North Brawley, the electricity segment gross margin would have been 30.5%, which is a typical margin considering first quarter's seasonality impact.

In the product segment, gross margin was 13.6% compared to 24.8% in the first quarter last year. Such decrease is attributable to a different product mix and different margins in the sales contracts. We expect an improvement in the margins for this segment in the rest of the year.

Moving to Slide 15, interest expense net for the quarter was $13.1 million compared to $9.7 million in the first quarter of 2010. The $3.4 million increase was principally due to increase in the total amount of interest due to an increase in the level of debt, which was partially offset by an increase of $700,000 in interest calculated to the project as a result of an increased aggregate investment in projects under construction, as well as a decreasing interest expense, as a result of principal payments.

Now, moving on to Slide 16. Net loss for the quarter was $9 million or $.20 per share basic and diluted, compared to net income of $1.8 million or $.04 per share for the same quarter in 2010. The decrease is principally attributable to the North Brawley power plant which had a pre-tax loss of approximately $10.3 million or $.23 per share for the quarter.

As shown in the following slide, Slide 17, adjusted EBITDA for the quarter -- for the first quarter of 2011 was $27.2 million compared to $32.1 million in the same quarter of 2010. Adjusted EBITDA in the first quarter of 2010 included a one-time gain of $6.3 million as a result of the sale of GDL. Adjusted EBITDA includes consolidated EBITDA and the Company's share in the interest and taxes, depreciation and amortization related to its unconsolidated 50% interest in the Mammoth complex in California in the first quarter of 2010.

The reconciliation of GAAP to net cash provided by operating activities to adjusted EBITDA in additional cash flow information is set forth below. Reconciliation of GAAP cash flows from operations to EBITDA is set forth in Slide 27.

Moving on to the next slide, cash and cash equivalents and marketable securities as of March 31, 2011 decreased to $64.8 million from $82.8 million as of December 31, 2010. The accompanying slides breakdown the use of cash during the first quarter. Liquidity came from the issuance of senior unsecured bonds, the sale of OPC Class B membership units to JP Morgan and to cash derived from operating activities.

Our long term debt as of the end of the first quarter 2011 and the payment schedule are presented in Slide 19 in the presentation. Slide 20 reflects our dividend policy and recent dividend declaration. On May 4, 2011, Ormat's Board of Directors approved a payment of a quarterly dividend of $.04 per share pursuant to the Company's dividend policy which targets an annual payoff ratio of at least 20% of the Company's net income. The dividend will be paid on May 25 to shareholders of record as of the business -- as of the closing of business on May 18. The Company expects to pay a dividend of $.04 per share in the next two quarters.

That concludes my financial overview. I would like now to turn the call to Dita for closing remarks.

Thank you, Joseph. In my remarks, I will cover recent business updates, review our capital position and conclude with revenue guidance for 2011.

Let me start on Slide 22 with some recent regulation and business updates. In California, on April 12, Governor Jerry Brown signed Senate Bill 2X -- SB 2X -- to increase California's RPS to 33% by 2020, and that's among the most aggressive renewable energy goals in the United States.

We see this increased demand and in particular the impact of the increase in California RPA as one of the most significant opportunities for us to extend existing projects and to build new power plants.

In February 2011, we signed two PPAs. First we signed a 20-year PPA with NV Energy to sell 30 megawatts of clean, renewable energy generated from the Dixie Meadows geothermal project located in Churchill County in Nevada. We are currently in the exploration phase of the Dixie Meadows project but will be eligible for the cash grant under the American Recovery and Investment Act of 2009 if this is completed by the end of 2013.

Second we signed a PPA with Hawaii Electric Light Company to sell, at a fixed price, 8 megawatts of energy to be generated from the Puna power plant. The fixed price, which is subject to escalations, is independent of oil prices.

And the, as Yoram mentioned, we signed a 20-year PPA amendment with Kenya Power and Light Company, the off taker of the Olkaria III complex located in Naivasha Kenya, which moved to construction a little thereafter.

We can see our CapEx requirements for 2011 on Slide 23. In the remainder of 2011, we plan to invest approximately $226 million in projects currently under construction. And an additional $186 million for development, exploration and other uses as detailed in the slide. The funding of this program will come from cash on hand at the end of the first quarter, cash from operations, unused corporate lines of credit, projects debt under the DOE loan guarantee program for Jersey Valley, McGinness and Tuscarora and cash grants for Jersey Valley and Puna.

Going forward, we intend to finance our projects under construction with long term project finance debt and ITC cash grants.

Now, we turn to Slide 24 for our outlook for the remainder of 2011. We continue to expect 2011 electricity segment revenue to be between $315 million and $325 million. While we narrow the range for guidance for the product segment revenue to be between $80 million and $85 million.

As we said in the last earnings call in February, we may report a loss in the second quarter as well. But we expect to be profitable in the remainder of 2011 and in the full year.

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

(Operator Instructions). Your first question comes from the line of Ben Kallo with Baird.

Thanks for taking my question. I want to start on the product segment, and congrats on some new business there. Could you just kind of walk us through what the mix issue was on the margin side and then maybe give us a little more detail about what you're seeing with -- both in the US and then you mentioned that there's some opportunity in the international side of the business. Could you just give us some more detail on that?

Hi Ben, good morning. The mix was a mix between a geothermal and remote power unit. But in our product statement, the amount doesn't really depend on the nature of the construction. We specifically negotiated a price for a specific contract. The mix this quarter generated a little lower margin than mix of the first quarter of 2010. But we don't see it as a change in the gross margin number on a longer term basis or the full year. As for the US market, as I am sure most of the people know, we will not get the two or three orders for units that are a -- that have been ordered for geothermal field that are proven and ready to go forward, because at least with respect to one project, it was subject to a DOE loan guarantee under the innovative program and another supplier was eligible to an innovative program. Ours is a proven technology and did not clearly require it.

The other orders that were announced are not for a proven field and we didn't get it. We are not aware of any other proven field that is available for release at this time.

Okay. Good. And now moving on to the Electricity segment, for Brawley and then Jersey Valley -- first on Brawley, can you guys just update us again on when and if you expect to get to that 50 megawatt level? And then, how much of your CapEx that you outlined on page 23 -- okay, you have that listed at $17 million there, but, so could you just tell us when and if you can get to that 50 megawatt number? And then on Jersey Valley, how much time do you think that'll take to get to commercial operation? And at that are your ideas around the ITC cash grant? Will you apply for it then or will you wait until you get to the full 15 megawatts?

So, Ben it's Yoram. Really what I said in the beginning of our call is that what we would like to do is we'll continue an update on Brawley, but I don't want to say a date just because there's an element of uncertainty and so we'd like to avoid that.

And in terms of Jersey, we don't think that it's a very long process. There's some more well/field work that we need to do. The well/field and certainly part is eligible to the ITC cash grant. So it would be a shame to apply before we completed all that work, but clearly the ITC cash grant is planned for that plant as well.

Just finally on your CapEx versus your liquidity. Can you give us an update on the loan guarantee process? When do you expect to have that finalized? I know those are taking longer than anyone had hoped for. And then, how much shifting are you doing in your development in spending on new projects because of any type of liquidity restraints if any? Just update us there. And, thank you, very much. I'll jump back in queue.

Okay. On the loan guaranty process, we are, I think, very close for a conditional commitment. But until we have it we cannot say -- we cannot say we have it like any other closing. But we are close. When we are going to get the loan knowing how those things work, it is probably going to be at the very last month of the availability of the program which is September of this year, at least that's our working assumption if it will really happen a month earlier, can't happen much more than a month earlier.

What was the other question? Did you have another question Ben? Oh, I remember now. You asked if development is constrained by resources, like financial resources? The answer is no. If we had more projects ready for development for exploration, we would have done more. It's the time that it takes to do a responsible exploration. It's not financing.

Your next question comes from the line of Paul Clegg with Mizuho.

Hi, good afternoon, thanks for taking my question. At what point do you make a determination about impairment on North Brawley and what key factors did you have to take into consideration to take that decision and have you looked at how much impairment could be on that?

We have -- we are looking at impairment every quarter, Paul, it's not something that is done at a certain point and then not.

And I think we spoke less about it in our February earning call in which we provided maybe a little more information. We believe that we can get to the output of the project without requiring impairment and with -- this is a combination of operating costs and output. And we've looked at it now again and still don't think it is necessary. As you know, our Israeli parent did take an impairment, because they are reporting according to IFRS and the accounting rules under IFRS are different than they are under GAAP. It's public information, so you could look and see the analysis that was done there.

Could you talk a little bit about the competition in the products business? Have you seen any new serious competitors emerge given maybe a relative lack of activity there? Are you seeing some of your competitors become more aggressive?

I alluded to it when I was talking to the prior question. Yes, we do see one competitor active in the US market. I think that they are taking more risk than we are willing to take. I still think that ours is the proven technology, bankable technology, and the -- and the winning technology.

And you may have run through this and I apologize if you did. I didn't catch it. But the fact that you were a tax payer during the quarter, would you mind just running through that again if you did?

We are not a taxpayer in the States. We are a taxpayer in Israel and Nicaragua this quarter. We do pay taxes in Kenya and in Guatemala, we are -- and we have a tax holiday so, but the tax amount that you pay in Israel have been reduced dramatically from 25%, 15%, and this is very important to know.

Actually one more question. I'm sorry. Did you say how much depreciation was on North Brawley this quarter?

Smadar, it's about--

Smadar, can you get the number?

It's about $2.6 million. Sorry. $2.1 million. Sorry.

Alright, thank you--

About $2 million--

Your next question comes from the line of Elaine Kwei with Jefferies.

Hi, thanks so much. Does your current guidance for electricity revenue assume that oil stays at current levels and then hence Puna revenues stays at current rates?

I -- the assumption is that oil prices are slightly lower than what they are at current levels, not as low as last year, but they're lower than what they are at the current levels, Elaine.

Oh, thank you, Dita. And just at this point with North Brawley, is it just -- is it that the problem is identified and contained and it's a matter of going through all the repairs that are necessary or are new things also coming up in the process?

It's probably more the former than the latter. We have -- I would say that there are three factors, and it's somewhat of a repeat of the previous call, but three factors. One is having enough injection. The second is having enough production and the third is increasing the service life of the production pumps because it is such a high expense item. And I would say that reaching an operational balance is a -- it's a compromise on between those three factors.

So for any injection capability, there's a production capability and the cost of operating the production plants, the cost of operating the plant will strike a new balancing or balance point. And this is really what we're focusing on in this quarter. We spent a lot of effort in improving the production pumps where we don't think that we're there, but we think that we'll see through the rest of the year, we'll see lower cost in that sector.

And we've improved our injection situation with the East Brawley wells, but it's still not enough and we need to continue and improve this and in this way continue on our ramp up production which has been ramping up every quarter. When exactly will we get there and what would be the operating expenses association with it? This is the part that is a little harder to predict.

And just one last quick one. Were commodity costs at all a factor in the product gross margins this quarter and I'll jump back in the queue? Thank you.

Slightly, yes. Because as you know a commodity prices did go up in the last six months and it does have a certain impact exactly as in the same way as in 2009, some of the increase in the gross margin was due to a reduction of commodity prices.

It's not a major item, but it is -- it does make sense, yes.

The next question comes from the line of next Tim Acuri with Citi.

I was wondering if you could just talk in general in terms of some of the, seems fairly regular operational issues with one site or another. Is this kind of endemic to geothermal plants or is it perhaps differing technology that might be used to make some of these disruptions less frequent? I just wondered if you could comment on that.

Were you asking if -- can you start the question again? What was the first part that you were saying?

On a fairly regular basis here quarterly, there's either an issue with North Brawley or Puna or any variety of your plants. Is this specific to geothermal plants in general, or do you think this is perhaps an issue related to technology or personnel? I was just curious if you could comment on that.

We didn't report any issues in the operating plants this quarter, so we didn't have any substantial issue, but if you -- I think that a detailed look into power plants will basically show that this is what operating plants is all about. It's about performing maintenance whenever you can predict failure before it happens and you're ready with it. Then, of course, you are at the advantage. But sometimes you can't. Things happen, either weather related or just wear, and that's the history of power plants or the reality of power plants.

And the difference between regulated utilities and IPPs is that regulated utilities, being allowed to all -- most maintenance they took their rate base, are actually paid for super high reliability. And so they actually have a very -- typically a very generous, sparing philosophy and a very generous scheduled maintenance activity. And IPP needs to maximize profit because the -- because nothing is rate based.

And therefore, IPP have to try and then find out how much scheduled maintenance and preventive maintenance is required and makes a lot of sense. You theoretically, with enough spares and enough sparing, you could have no down time.

The trouble is that you don't have -- you can't justify that economically. And so our major events in operating plants are unplanned outages or planned outages. And this is why I report on them, but there's nothing, that's just the reality of operating plants, and more specific about the geothermal industry is that you have very little control over your geothermal field on the production side. And again, it's not -- it's not so much related to technology, it's just the reality of geothermal just like you can't exactly predict or control how the wind blows or insulation when it comes to the wind industry or the solar industry.

But let me add to it in a bigger sense. If you look at the availability or the capacity factor of various technologies, geothermal, including Ormat, are on the highest point. We are still, I mean -- I don't know if Smadar has these numbers, but we are still about 95% of average if we exclude Brawley. Brawley is a specific issue. It's a specific problem that is not typical, not to our portfolio folder and not to geothermal in general. But if you exclude Brawley, and you look at our performance numbers, they are one of the highest in any technology, not only geothermal. Compare it to combined cycle, compare it to coal, compare it to any traditional technology. We are faring very high on the availability.

One last question. Can you give any perspective from your end on the outlook for the loan guarantee program in terms of whether it continues past the September deadline?

We of course don't know. But the assumption is, our working assumption is that it will not be extended, that we are going to have this one loan guarantee for the financing for a portfolio of three projects. And the rest, it's going to be in the market, and I must say that the markets will be very open and very, very attractive for project finance.

Okay thanks.

Your next question comes from the line of Dan Mannes with Avondale Partners.

A couple of follow up questions. First on North Brawley, I think your loss for the quarter was a little over $10 million and if I check back to what happened in Q4, it looked like it was close to $4 million or $4.5 million. And I was wondering what sort of happened over this period of time that maybe worsened its performance? Or do I have last quarter's numbers wrong?

I think you're about right what we did in the first quarter, and it continues into the second quarter as really the upgrade to all of our production pumps. And that's a very high ticket item. In return, of course, it provides geothermal fluid and ultimately megawatt hours and we set the new generation [work] as a result of that work. But the impact on first quarter operating expenses has been substantial on almost all of them.

Just so I understand. So the operating costs from the pump is incrementally high, but you're not yet seeing the benefits through increased output? Or are you still taking lower than PPA pricing? I guess I'm trying to understand why if the output is going higher why you're not seeing that on the revenue line.

Because it's -- the revenues were higher other than the fact that it's a time of use contract. So there's same generation in the first quarter is not as valuable as second and especially third quarter. So there's an element there. But, no, the generation was higher than previously. However, it is not -- and just to clarify, it's not operating costs on the pump. It's replacing the pump, upgrading it and putting it back into -- in the well. So this issue is very high expenses while you upgrade the pump, of course, you don't enjoy the flow from that well and we've been working on a number of wells concurrently actually. So this is the impact. It's a high expense and the results are something that we will get mostly in the future quarters.

So just so I understand. You're -- this is the expense of the pump replacement, some of which is capital and some of which is OpEx. But you're still not done with that and that won't be done until some point in the second quarter (multiple speakers).

All of this was -- all of it was expensed. None of it was capital.

But there will still be some of these incremental expenses going to the second quarter on the pump replacement?

Correct.

Real briefly, you know, we had gotten some indications that on the cash grant program that maybe it wasn't a one-and-done and to the extent you had continuing costs you may be able to go back and sort of reopen the cash grant for a project. Is that the case from your understanding and is that a meaningful opportunity on North Brawley?

It is. It is the case and we know that you can submit another application on North Brawley.

Any thoughts on that? Or obviously you want to see how much more work you need to get done before you got there?

We want to decide what is the right time to submit it. But yet we are planning to submit [some of these] new.

The last issue on North Brawley, just so I understand is have you seen any -- on existing wells that have been running for I don't know a year now or a year plus, have you seen any reduction in sand content, and is it really -- has there been any diminution as you've sort of gotten more maturity on these wells, or has it remained at stubbornly high levels over time?

No, you're right, Dan. It's the mature wells most -- actually all mature wells have seen -- we've seen a reduction in sand content and reduction in sand production, and then within the wells we have some that are more sandy as we call them and less sandy. But the sand production diminishes in all wells.

What we have done as part of the well field work that was completed in December, January, what we have done is that we started up I think five new wells, not all of them are new, but some of them just were not -- that were not operated until this point because of the layout of the piping, and therefore in terms of sand production we still have high sand production, because the mix is some of the wells, some old wells, but all of them diminishes over time.

So I guess what I'm trying to get to is there some prospect that even just naturally you could see some improvement just as you have less new wells and more mature wells in the mix, and that might help you out a little bit in terms of either reduced separation or reduced disposal and management costs?

The answer is yes. And to be a little more technical, what I would say is that really where this will be very helpful for us, the highest impact is really on the life of production parts. And there are operating upgrades that we have done that handle brine chemistry and brine conditions, but the sand itself is just -- it's just an erosive material that goes through the pump and reduces pump life.

And what we know we will get to or fully expect to get to is a point where there is less sand in the brine and therefore a two-year run life or service life of the pump, even after two-year service life is feasible, and in many ways this would be the biggest impact in making this project similar to all other fields. And there the indications of the drop in sand content on wells as they mature is a very positive trend and will have a very high positive impact on us.

Got it. A few other -- one question I want to get into. One is you mentioned in your 10K some details about schedule contract repricing or I guess contract changes on some of your California plants with maybe over about a million megawatt hours, I mean it's fairly sizable. Any update on what the progress is on, I guess you refer to it as the global settlement, and any potential for improving realization as we move into '12 and beyond?

It's -- we're in the process itself. So really it will be -- it's hard for us to give clarity because it's not done. We're hopeful that the results, the outcome will be good. There's different interpretation as to what the global settlement really means. On the -- not the IPPs in general, but the renewable energy IPPs. And we're discussing with our off takers.

Okay. So this is something we should keep our eye on but it's too early to say if there's going to be a pricing uplift?

Correct.

And then the last thing on the bank lines, I know, I think at year end you did have some of the bank lines that were maturing in 2011. Can you give us an update first of all on the maturities? Because when I looked the schedule you had in your PowerPoint, it looked like you had pushed this forward. And then, secondly, can you give us an update on any covenants that are involved in some of those credit agreements?

Hi, Dan. Just before we are renewing each of them which matured early -- the only change is that will be -- the cost will be higher than if we had in the past. And we are negotiating also new lines of credit. As to the covenants, we have one set of covenants that are -- is similar to all lines of credit including the bonds that we issued in August and February. And we proved to the covenants in that negotiation and debt to EBITDA ratio now is set for 7.

And do you have any way on that debt to EBITDA covenant to carve out North Brawley or anything like that or do you still think you have adequate room even with some of the loss in North Brawley?

At this point, we do not.

At this point, you don't need to carve out North Brawley?

No.

Okay, great. Thank you.

Your next question comes from the line of Tom Daniels with Stifel Nicholas.

Hi, thanks for taking my question. I just want to go back to the nice improvement in products backlog and I'm not sure if you said -- answered this on the first question, but was that primarily driven by international projects? Or US projects and maybe could you give a sense of internationally where you see things picking up. Is it Latin America, South America, or Asia Pacific?

And so the answer is yes, it was mostly from international projects. And I think -- I don't know that I can give you an exact answer, but I can give you a good directional answer and think -- and this also goes back to a previous question on what is happening in the US and that sense.

And really the biggest -- the most important factor in the development of geothermal projects is developing the field and developing a field to the point where it is where you have good clarity on what your geothermal fluid is and what it can do and what production conditions are and injection conditions are. And in many ways this is what we're dealing with in Brawley is the results of not knowing a few things when the plant was built. Most geothermal development is done in stages where a field is developed to the point where there's enough clarity on what it can actually do. And then a power plant is built on it.

And if you go around international, some of the international markets, you'll see that there are prospects or I should say fields in different countries that have been brought to this point and to the point where the owner of the plant could actually go ahead and bid a power plant, not on expected field conditions, but on somewhat proven field conditions.

In that sense, it's -- for the immediate future -- say for 2011 business and greatly to 2012 business, you need to look at who is really at such an advanced -- that stage and then can truthfully release a project and potentially bid -- ask for bidders to bid a power plant on that project. Unfortunately, some countries, there -- some countries are -- could be in -- could have a large base, for instance, there are great expectations from Chile. But if you look at the status of the fields there, the fields have not been developed yet and therefore Chile is very attractive, but Chile is a place that could mean big business only later in the decade and not right now.

If you look at the Pacific Rim, in the Pacific Rim, there are fields that are mature. Of course, Indonesia has a lot of discoveries. New Zealand has substantial discoveries and these are areas that one should look for substantial business at this point. And as people take -- or developers take more time to explore countries that are emerging for the -- as far as the geothermal industry is concerned, maybe there will be fields there that can be -- that we can sell a plant or equipment to.

And really in a way in the United States that yet type of work, we were doing that work for ourselves and releasing projects. But if you look on an industry level, there are not too many fields that have been brought to a condition where the true relationship between a supplier, contractor, and an owner can be successful.

Understood. Thank you very much for that detail. How about Kenya? We've seen you guys, obviously, operating there for a long time, and I think the geothermal development co. is looking to build eight new plants, about 800 megawatts. Are you guys participating there at all? Are you optimistic on Kenya?

First of all, we have the real asset, which is a 36 megawatt under construction. As soon as we signed the PPA, we released it and the project is under construction. We are also participating in the expansion of the additional potential for Kenya, but this is a longer term, there is no proven field, or developed field for these extensions. So that's a part of the -- it doesn't appear in any of our disclosures because it is a predevelopment phase.

Okay, great. One more question. Within the backlog, I know you guys had won the contract with Razer Technologies and Lightning Dock and in light of their obvious filing, is any of that backlog at risk in terms of Razer?

The Lightning Dock is not part of our backlog, so because the numbers that we are -- we have issued include released contract except one small contract subject to a -- notice to proceed but the Lightning Dock is not part of that number.

Great. Thank you. I'll get back in the queue.

Your next question comes from the line of Matt Farwell with Imperial Capital.

You mentioned the RPS in California. Do you see any effects on PPA pricing near term, and will we see any projects in California move up in priority given this development?

The California utilities have issued or are in the process of issuing RFPs this week or more or less now, so I don't know what we would see as prices until this process is completed towards the end of the year or how long it's going to take them. I think that it will definitely mitigate the long run price environment, but it's not something that we see, it's what we think. Clearly, demand has impact on prices.

Okay. And on the discussion of leverage, you have over $400 million in CapEx over the last -- over this year and then perhaps the next year. How are you thinking about your capital structure as the leverage moves up?

We think that with additional projects coming online, and the ability to finance them at least for the next two -- two and a half years with a 30% cash grants. The level of debt which the company can absorb, can cover our capital needs.

Okay. Well thank you very much.

Your next question comes from the line of Carter Driscoll with CapStone Investments.

Thanks for taking my questions. My first question is if you could talk maybe about the acquisition costs for the leases that you acquired at least in relation to what you may have paid for the federal leases over time and whether that was a factor in it or really was to a point the very long permitting delays on the federal lands? And then, the second part is whether this might be -- if so, if this might be an ongoing strategy to look at the private land opportunities in the Western parts of the US versus the constraints that seemingly aren't going away. And then I have a follow up.

The acquisition costs were not substantial. The issue is really -- I mean we need to look for a resource and we're looking for resource wherever the resource is, but if in the past development on the federal lands was actually the easy path, and we've created a large inventory of land that is on federal leases. It has become clear in the past few years that the lines may be attractive and there was a process to develop on federal lands, but it is slow and therefore we are prioritizing private lands.

There's -- it is highly geography specific, right, and that's fundamentally we're looking to where resources is and can be developed. But a priority to private lands is certainly a strategic move.

Does your tie ad tie up with Nevada geothermal -- are there other opportunities like that since it seemingly a number of your competitors certainly don't have the financing opportunities you do or the expertise above ground. Are you looking at further joint ventures, maybe because of the relatively poor performance of some of your competitors recently might free up or slowdown that exploration risk for you guys?

So we are open to working with other players in the industry. The first prerequisite is really having good resource. And if somebody has good resource, we'll be happy to find a way to work together. We'd be very interested in finding a way to work together, whether it's necessarily the structure with Nevada Geothermal or a different structure, it's hard to tell. But the basis is finding the good resource and we've be filing our work. We have gone through many fields in the past five years and we know that there is a big -- that there's a substantial filtration between prospects and fields that should be developed and -- and maybe I'm repeating myself, but that's really -- it's all about the good resource and is it good and how you differentiate in value between a prospect and a proven field. And sometimes that distinction in the industry was not made, and maybe as reality or more experience is gathered by the rest of the industry maybe this will change.

Let me just ask that maybe a little different way. Given your expensive resources in terms of exploration and the way you approach it really differently than you competitors, have you done extensive work of your competitors' lands to look for those opportunities, or is that just part of the parcel that the way you conduct your exploration that you happened to pass over all those resource opportunities?

I'm not sure that I understand. Did you ask whether we've analyzed our competitors' lands? Yes.

Yes, that's correct.

Probably some of them, and then some of them we may like and some of them we don't like. So obviously [Crum Geyser] is land that we like.

Understood. Thank you very much.

Your next question comes from the line of JinMing Liu with Ardour Capital.

Yes, good morning. This is Andrew for JinMing. I'm sorry if this question got asked already but in the equipment segment just from some additional detail, where did the sales come from geographically and where do you see a potential market on that side?

The sales are Asia and Europe. I don't think that it had been in Latin America this quarter, or Africa so it is Asia and Europe. I don't think it's so important, the geographic location. It's all international where there were opportunities for development.

Okay. And also is the revenue being recognized this year for these sales going forward?

We -- for most of our sales there are some exceptions, but for most of our sales we recognize revenues on percentage of completion basis.

Okay. I'm just -- I also back on the last question on North Brawley, do you feel these costs have pretty much peaked in your own opinion? I know it's -- you're already answered this a few times, but just to get an idea, did you feel that the number you put up there as far as CapEx is pretty much going to be -- it's a more optimistic number?

I think one more Brawley question... What we put out is what sincerely believe today is the case. No certainty of that being the case.

Okay. Thank you very much.

Your next question comes from the line of Phyllis Camara, Pax World Funds

And I'm sorry if I missed this, what were you CapEx for this quarter? Was it $55 million?

It was cash of $55 million.

Cash of $55 million, okay. And I'm just looking at -- it looks like you're and someone mentioned before leverage is going up, free cash flow is going down. Are you -- would you really be comfortable with leverage at 7 times? I mean I know that's -- I think that's what you said your covenant was, would you really be comfortable taking leverage up to the level and then also is it sensible to continue to pay a dividend with leverage that high?

I know some of your reservations are probably not fundamental, cash is not going down. We have the availability of lines of credit and it's so I don't think that cash is going down. Seven times EBITDA is the covenant, it doesn't mean we are there, we are way lower. We are covered seven times to be tell we already owe it.

Right.

Having an aggressive plan to get as much projects placed in service by 2013 in order to get as much utilization out of the ITC cash grant as long as it is available. And even if temporarily, we will touch or really be around at seven times, it's going to be for a short period of time because EBITDA will immediately pick up -once the projects are in service and come down to normal levels and for short periods of time it's not an issue given the fact that most of our product debt is an amortizing debt over the life of the project. I mean we do have the lines of credit which are short term, but the utilization a portion of these lines of credit is not full and the more important portion of our debt is project finance debt, non-recourse, payable over the life of the PPA, so it's typically the majority of the debt is typically between 10 and 18 years, the DOE loan guarantee is expected to cover a debt, close to 20 years. So with this amortization schedule and the the type of business we are can support higher leverage.

Okay. Yes, I was just -- cash flow was what I meant and cash flow has been negative because of CapEx and basically you've been -- you've borrowed money to the likes of $100 million I think that just got done which is probably one of the reasons that cash -- that you still have cash on the balance sheet. But if you believe that the leverage is basically project finance and once the projects get done leverage will come back to a normal level, what do you think a normal level for leverage would be for the Company?

I don't know what you mean -- I don't know what you meant by normal leverage, but let me say that a growth company, typically and aggressive growth company, which we are, typically has a cash outlay if you choose to include CapEx higher than the operating cash flow. That's the nature of the growth company and we plan to be a growth company for a number of years looking forward. I can't tell you until when but certainly for a number of years. And as long as you can get project finance debt amortizing long term, I think that does not impact the financial health of the company.

Your next question comes from the line of Mark Bennett with Morningstar.

I don't mean to go over this ground again, but on the international side you had not too long ago signed a deal with JFE in Japan. And I was wondering what you see the opportunity there given that some of the largest manufacturing -- geothermal equipment manufacturers in the world are Japanese companies and sort of how you were going to approach development?

The reality is that no geothermal available in Japan, so they -- so for the last a number of years and always can even (inaudible) with the light equipment outside of Japan, but not in Japan. When the recent changes are evaluated in different attitude toward nuclear power is the question. We are not sure that we have seen that change occurring. It may occur. Who knows?

We do not see the Japanese market is open for additional geothermal development. The agreement with JFE is an attempt to get into that market for organic like and (inaudible) technology in which we excel. Then have to see whether the rest will come.

Okay. Thank you.

Your next question comes from the line of Ben Kallo with Baird.

Hi. Just two quick follow up questions. First, I saw in your presentation that I think maybe this is the first time that you -- maybe you said it last time that Sarulla, you're moving forward with the financing concurrently with finalizing PPA. What's the earliest that you could start getting product revenue lets' say if it was signed in the next couple of weeks on that side and when would financing be closed?

A better question might be, when will financing start? And the true financing process will start when the amendments to the Power purchase agreement - resource agreement, it's called ESC and JOC - is going to be signed. I'm probably repeating myself, but we think it is imminent and then the financings process will start. The fact that we have a very strong financing consortium means that not only are we optimistic about this project, the lenders are also optimistic about this project with all of our shareholders, I am the to wait for the opportunity to tell and share with you, that agreements have been signed.

And so are we still looking at a year after signing?

Yes.

And then secondly, back to -- not to beat this too much but your CapEx versus your resources here. If I look at it I got $412 million of CapEx in the quarter and $468 million of capital resources, but within that $468 million is a $180 million the DOE loaned guarantees that we're not really sure when they're going to close and I think you said probably towards the back half of the year. Is there some timing risk here for having the capital for your CapEx and is there any way that you can bridge over that until you get the DOE loan guaranty? And thank you very much.

First of all, the sources don't show ITC cash grant, so the sources are a little higher than what is shown there and it is really up to us when we will submit the applications to get the ITC cash grant. That is a mitigating factor if we will see that the DOE LGP is not going to close by September, we can always switch to the private market and this is going to be a fast project and the most natural person to do it is the same John Hancock who is a private partner on the DOE loan guarantee.

Other elements that are not shown in the schedule are of course the operation cash flow. So we do have the cushion.

Your next question comes from the line of Paul Clegg with Mizuho.

Hi, thanks for taking the follow up. Not to again to beat a dead horse here, but one more probably unwelcome question on North Brawley. If not for the pump replacement during the quarter, what would capacity have been and can you -- I guess what I'm trying to get to is you said that you'll eventually get to one and a half to two years of service life on the pump, but how often will you have to do the pump upgrades in the meantime? Is this sort of an interval lengthening from here or is it an ongoing process or do we see sort of a break in those expenses for a quarter or two and then you get hit with another big expense and production loss a couple quarters from now. How should we think about that?

Okay. So it's a forward, it's a highly forward looking statement, as long as you accept that. But I think that if as far as if we were not -- if we didn't have to upgrade the pumps, we probably would have averaged during the quarter and in the mid 30s, somewhere in the mid 30s in terms of generation. It could be a little higher, could be a little lower. We hope that the current fix that we implemented will give us on average 12-months run pumps. We already have -- we have a few wells where we're very close to 12 months already and that's really our hope and if the hope materializes then we should not see too many pump replacements during the balance of 2011.

And then, yes, or I should say then your next question of whether we will get to what we would need to do in order to get to a year and a half or two years on service life, then really our plan is to be ready with a new -- with a new and improved design, of course as we learn more. And so that once this batch of pumps reach their expected 12 months of service life, we would put a pump that is better and hopefully will take us to a year and a half or more than that. And especially if sand production continues to diminish then that should be easier to do. Will this happen? We don't know. These are -- typically big decisions in terms of the money goes into the well, a lot of money goes into the well in the form of pulling the old pump and putting a new pump in over a period of three to seven days and then you just need to hope that the decision was right in the quality control on the whole chain was the right quality control and that we watch and get what we are hoping for.

You said middle 30s capacity, more or less. Just for the record, where were you on average for the quarter for North Brawley?

I think for the quarter we were a little under 30, close to 30 but a little under.

Okay, great. Thanks very much.

There are no further questions at this time. I'll now turn the floor back to management for any closing remarks.

Thank you for the interesting conversation, hope we were able to convey the main message and that is that other than Brawley, our operation was good during the quarter. Our progress was good during the quarter both in development construction and backlog. And we hope to get over the Brawley issue and continue with our plan regardless of the Brawley issue. Thank you all for your interest in the Company.

Thank you for joining today's conference call. You may now disconnect.