Feb 25, 2009
Executives
Marybeth Csaby – IR, KCSA Strategic Communications Dita Bronicki – CEO Yoram Bronicki – President and COO Joseph Tenne – CFO
Analysts
Ben Kallo – Stanford Group Gregg Orrill – Barclays Capital Dan Mannes – Avondale Emily Christy – RBC Capital Markets Pratish Mongi [ph] – Piper Jaffray Angie Storozynski – Macquarie Capital Paul Clegg – Jefferies
Operator
Good morning. My name is Nicole and I will be your conference operator today.
At this time, I would like to welcome everyone to the Q4 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks there will be question-and-answer session. (Operator instructions) Thank you.
I would now like to turn the call over to Ms. Marybeth Csaby with KCSA Strategic Communications.
Ma’am, please go ahead.
Marybeth Csaby
Thank you, Nicole. 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 Securities and Exchange Commission on March 5, 2008, and on the Form 10-Q filed with the Securities and Exchange Commission on November 6, 2008.
In addition, during this call, statements that maybe made that include financial measured defined as non-GAAP financial measure by the Securities and Exchange Commission, such as adjusted EBITDA. This measure may be different from non-GAAP financial measures used by other companies.
The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Management of Ormat Technologies believes that adjusted EBITDA may provide meaningful supplemental information regarding liquidity measurement that both management and investors benefit from referring to this non-GAAP financial measure in assessing Ormat Technologies' liquidity, and when planning and forecasting future periods.
This non-GAAP financial measure may also facilitate management’s internal comparison to the Company’s historical liquidity. Before I turn the call over to management, I would like to remind everyone that a slide presentation accompanies this call and can be accessed on Ormat’s website at www.ormat.com under the events link as found in the Investor Relations tab.
With that said, I would now like to turn the call over to Dita. Dita, the floor is yours.
Dita Bronicki
Thank you, Marybeth and thank you all for joining us this morning. Following my comments, Yoram will review operation, and then Joseph will review the financials and as usually a Q&A session will follow our remarks.
In time that some or even many industries struggled as a result of economic crisis, we had a very good quarter and year. I am happy to report strong revenue growth and an increase in our bottom line.
We secured additional leases to support our exploration activity and built-up a sizable backlog in our product segment, and we expect to recognize a substantial part of it in 2009. We are also very happy with the (inaudible) bill which we believe will have positive effect on the industry in the future.
Starting with slide 4, let me begin with our financial result. In the fourth quarter and the full-year 2008, we exceeded our revenue guidance.
Revenues in our Electricity Segment were up 11.8% for the quarter and 16.8% for the entire year. And in our Product Segment we did exceptionally well with the fourth quarter and full-year up 120.9% ad 15.8% respectively.
Turning to slide 5, we have met our projection in terms of organic growth by completing construction of more than 100 megawatts during the year, this includes completion of Phase II of Olkaria III power plant in Kenya, and the GDL power plant in New Zealand, which we now fully own. In the United States, we completed the Heber South project in California and by the end of 2008 the 5.5 megawatt unit in North Dakota out of the four units of OREG 2 projects.
We also substantially completed the construction of the 50 megawatts North Brawley and expect a gradual ramp up of the project with full capacity in the second quarter of 2009. The slow ramp up is driven most by larger than expected quantities present within the geothermal reserve we are on.
Experience shows that (inaudible) production gradually declined over the life of the well, however during the initial operations the removal required more care in order to safeguard the injection well. In our Production Segment, we are entering 2009 with a record backlog of $194 million based on a number of contracts that we successfully secured in 2008 and in early 2009 for geothermal power plant in the United States, Turkey, New Zealand, and recently Costa Rica.
Moving to slide number 6, in terms of technology 2008 was an important year for Ormat. There are four areas that we have been working and could open new activities to the company.
The first is energy recovery in LNG gasification terminals. Our first project is with ENAGAS of Spain.
Second area is power generation from copper used fluid from oil and gas wells. This is a joint project with the US Department of Energy.
We have completed the installation of the ORC unit of the Oil Test Center near Casper, Wyoming and the project is currently undergoing test. The third area is EGAs, the advanced exploration techniques with the recent grant from the Department of Energy for a second EGS R&D project this one near old Brady facility.
The fourth is our R&D work in solar energy. The thing that we have assembled works on both indigenous development and screening of applicable technology.
Effect full results from this work could constitute an important growth driver for Ormat in the future years. And now to slide number 7.
The regulatory environment continues to be favorably for the renewable energy both in the US and internationally. In the US the PTC was extended two years last October and the stimulus includes the host of provisions that we greatly benefit during renewable energy industry.
As far as renewable energy is concerned the bill involves four areas, tax incentive, financing, grant, and direct action. Most specifically on the tax incentive side there is a one-year extension of the 50% bonus depreciation.
More importantly, the act called for a three year extension of the PTC, until 2013 and give an option to forgo PTC and claim a one-time 30% investment tax credit. In addition, the bill gives an option to forgo investment tax credits and receive cash grant from the US treasury for 30% of the project cost.
This grant will be available for projects placed into service into 2009 and 2010 or for those who are starting construction during 2009 or 2010 and are completed by the deadline. The deadline for geothermal project is 2013.
In addition to the grant, the financing aspect of the bill include the DOE loan guarantee for renewable energy project, that start construction by September 30, 2011. This should substantially reduce cost of date for the renewable energy project.
The Act also authorizes tax credit bonds for special application. In looking outside the United States, the regulatory involvement continues to be beneficial to Ormat.
During the fourth quarter of 2008, we were able to benefit from a mandate of the executive board of the United Nations (inaudible) and climate change. Our Amatitlan geothermal project in Guatemala was officially registered as a Clean Development Mechanism or CDM as it is called.
The project is expected to effect emissions of approximately 83,000 (inaudible) and if such, it will be eligible to receive 35 dimension reduction credit which is equivalent to thermal carbon dioxide, which can be glided or soaked. The project has a long-term contract to sell Amatitlan [ph] credit to European value.
Moving to slide 8, in terms of our future. Our growth is highly dependent to several variables, including our ability to secure new development leases, our success rates in the exploration activity, and the ability to secure capital resources to finance our investment plans.
During 2008, we were successful in securing fulfillment rights for approximately 150,000 acres of land to explore geothermal resources in 12 sites that are located in Alaska, California, Hawaii, Nevada, Oregon, and Utah. The exploration activities were and will remain a challenge for our growth plans and we continue to prepare our sales for this challenge.
The result of exploration of some of the sites were not as successful as we hoped and consequently we had to delay the construction of two of our Nevada projects Jersey Valley and Carson Lake. Yoram will elaborate on this later in the call.
And finally financing on slide 9. I am pleased to say that we have done well in this area despite what is happening in the credit market.
We were able to secure committed lines of credit totaling approximately $338 million. We closed the second stage of our tax monetization transaction where we received above $70 million – $63 million.
We also received approximately $150 million net from the sale of 5.1 million shares of common stock in a Block Trade. More recently we signed the credit agreement for a third party refinancing of our person of the equity in the Olkaria III project for up to $105 million with a reasonable cost of debt.
We are still in negotiation to enter into a tax equity duty for our North Brawley project. The current financing climate has weakened the tax equity market and nailed down the annual (inaudible) which translated into escalating yields.
In summary [ph], the provision of the similar effect, the substantial benefit for geothermal project, therefore we are currently evaluating what makes most sense for almost and this may effect the structure we reviewed to finance this project, we are also continuing the negotiations with the financial institutions regarding the refinancing of our equity investment in the Amatitlan project. With that let me now turn the call over to Yoram.
Yoram Bronicki
Thank you, Dita and good morning everyone. I would like to begin on slide 11.
Our US generation for the quarter was up 21.1% to about 650,000 megawatt hour. For the full-year generation was up 13.6% to about two-and-a-quarter million mega watt hour.
Increasing of overall US generation resulted from both new plants that started commercial operation and improved performance from existing facility. In our previous calls, we described a few events that offset our overall US power generation; however, all of them were rectified by the fourth quarter where we enjoyed record generation.
The idle prices of 2008 provided record revenue out of our Puna plant. As oil prices have been declining since December, the rates in 2009 will be lower given the generation mix on the Big Island the plant enjoys the favorable rates even at current mid-level oil prices.
For example the rates for this month, is similar to the rates of Puna in the second half of 2005. We have completed construction of a 109 megawatt during the year, the majority of them at the very end of the year which means that the revenues resulting from their additional will be reflected gradually during 2009 with full OPEC expected at the end of the second quarter of 2009.
Looking now at our construction development and exploration activity on slide 12, for – our drilling plans for 2009 include drilling and exploration well in Ormesa, which if successful will increase the potential for this complex. In Heber South we plan to drill one well that will bring the complex to its designed generating capacity, and the Amatitlan plant in Guatemala we commenced the drilling of additional wells, which we hope will get the plant to its designed generating capacity of 20 megawatts.
And the GDL plant in New Zealand, we plan to drill another well to provide for redundancy in the resource supply. In the next three years as presented in the table on slide 13, we plan to add between 82 megawatt and 94 megawatt of generating capacity from both geothermal and recovered energy power plant.
In Puna, we have planed to add 8 megawatt through the construction of OEC units in 2009. We are still in discussion with Hawaii Electric Light Company for the sale of this additional power.
In our OREG sector we announced earlier this month that the second OREG 2 unit has commenced commercial operation. We are in final completion of the 4 megawatt Peetz project and expect the remaining OREG unit and the GRE unit to be completed by the end of the year.
We hope to complete the construction of the 30 megawatt East Brawley project in 2009, but due to the loading of (inaudible) our required permit this project is now scheduled for 2010. Planning continued success in our exploration work in Jersey Valley – the Jersey Valley project the plant could be completed by late 2010.
Turning to slide 14 describing longer-term projects. Phase III of the Mammoth project in California is preceding and is expected to deliver between 20 megawatt and 30 megawatt of additional generation.
We are currently negotiating a long-term contract with Southern California Edison. Our share for the additional power will be 50% and the other 50% is owned by an unrelated third party.
We expect the completion in 2011 is due to the long permitting process in this area. In the Imperial Valley, we are in the process of obtaining the exploration permit to pursue the exploration activity and the project where we have a 50 megawatt with PPA with Southern California Edison.
We are currently developing and conducting exploration activity on the McGinness Hills project in Nevada. In the Carson Lake project, we completed two wells and found elevated temperatures, but no significant water flow.
We are now evaluating the visibility of utilizing a shallow reservoir to make power. In the Sarulla project the consortium is currently negotiating certain amendments including an adjustment of commercial term and intends to proceed with the project after those amendments have become effective.
Based on the exploration results these projects have a potential capacity of between 151 megawatts and 168 megawatts. These projects underdevelopment if implemented are expected to come on line after 2010.
Turning to slide 15, I would like to provide you with an update on the exploration activity that will support our growth on a longer-term base. In the past years Ormat engaged in what is arguably the largest effort undertaken by a single company to categorize mat sample and drill Greenfield prospects in the US at least in the last 20 years.
The exploration of Greenfield prospect is characterized by a high degree of uncertainty. North Brawley is a result of this effort.
Jersey Valley and East Brawley are expected to be additional projects resulting from our exploration activity. However impossible at this point to predict how many megawatts each project will yield.
To accelerate the exploration process we have put in the past years substantial base of people equipment and techniques which will allow us to perform this work with better control over cost and schedule. This longer-term exploration will be performing our various leases in Nevada, Hawaii, Utah, Oregon and Alaska.
Some of it assumes this year. Thank you and I would like to turn the call to our CFO Joseph Tenne.
Joseph Tenne
Thank you, Yoram and good morning everyone. Beginning with slide 17, for the year total revenues were $344.8 million, a 16.5% increase from revenues of $296 million in the previous year.
On to slide 18, in our Electricity Segment total revenues for the year were at $252.3 million, a 16.8% increase over total revenues of $216 million in the previous year. This increase is primarily attributable to a $26.8 million of additional revenues generated as a result of an increase in our electricity generation capacity from new power plant that came in line, the enhanced performance of existing power plants, and increase the energy rate in Hawaii and in California.
The increase in our United States electricity revenue was offset by a decrease in the generation of Steamboat 2/3 project as a result of the temporary shutdown required to replace the project Ormeasa and increasing the generation output of the great complex and increasing the generation output of the OREG 1 project and exploration of the Adder under the Heber 2 power purchase agreement. Also attributable is net increase in revenues of $95 million resulting from our international power plants.
The total cost of revenues attributable to our Electricity Segment was $170.1 million as compared to a $148.7 million in the previous year, which presented a 14.4% increase, which reflects increased cost relating to new and enhanced projects that came online including depreciation and increase in labor in the fuel cost in existing plan and liquidated damages to our customers as a result of not meeting the capacity targets under certain power purchase agreement. And in our Product Segment on slide 19, total revenues for the year were $92.6 million, a 15.8% increase over total revenues of $80 million in the previous year.
Most of the increase in revenues was derived from two large geothermal projects. The Blue Mountain project in Nevada and the Centennial Binary Plant in New Zealand.
Total cost of revenues attributable to our product segment for the year was $72.8 million as compared to $68 million in 2007 which represented a 6.9% increase. Moving now to the next slide, for the year the Company’s gross margin was 29.6% compared to 26.8% in 2007.
Gross margin for the Electricity and Product Segment is presented in slide 20. Now to side 21, net income for the year was $49.8 million or $1.12 per share diluted compared to $27.4 million or $0.70 a share diluted for the year-ended December 31, 2007.
Such increase in net income was primarily attributable to $17.1 million increase in our operating income $19.3 million decrease in interest expense and $7.3 million increase in minority interest. As a result of the high volume of projects under construction, during the year we were able to capitalize significant potion of our interest expense.
In 2009, the volume of projects under construction would decrease and as a result our interest expense net of the amount capitalized will increase. These were partially offset as you can see in the slide by an increase in income tax provision, impairment of option rate securities, and foreign currency translation and transaction losses, and a decrease in equity income received and interest income.
Foreign currency translation and transaction losses for the year were $70.7 million compared to $1.3 million for the year-ended December 31, 2007. The $6.4 million increase is primarily due to foreign currency translation losses in the amount of $3.3 million in respect of a loan denominated in New Zealand dollars, which was granted to our New Zealand subsidiary GDL, with functional currency in the New Zealand dollar, and to losses on foreign exchange transactions, which did not qualify as hedged transaction for accounting purposes.
The foreign currency transition losses in respect of the loan granted to our New Zealand subsidiary will be craved because of the creep [ph] which was financed by such loan. Net income for the year includes stock-based compensation related to stock option of $4 million as compared to $3.3 million in the previous year.
Now I would like to go over few quarterly financial highlights beginning with slide 22. For the fourth quarter, total revenues were $95.5 million, an increase of 35.2% from $70.7 million in the fourth quarter of 2007.
Electricity Segment revenues for the quarter was $62.1 million, an increase of 11.8% as compared to $55.5 million during the same period in 2007. Product Segment revenues for quarter were $33.4 million, an increase of 120.9% as compared to $15.1 million for the same period in 2007.
Now in slide 23, net income for the fourth quarter of 2008 was $11.7 million or $0.26 per share diluted. Net income for the fourth quarter of 2007 was $8.9 million or $0.22 per share diluted.
In the quarter ended December 31, 2008 and 2007 there were 45.4 million and 40.9 million weighted average shares respectively used in the compensation of the diluted earnings per share. As shown in the following slide, slide number 24, adjusted EBITDA for the year 2008 was $124.7 million compared to $107.2 million for the year-ended December 31, 2007.
And for the fourth quarter, adjusted EBITDA was $31.5 million compared to $25.2 million as for the same quarter in 2007. Reconciliation of GAAP net income to adjusted EBITDA is set forth in slide 32.
To the next slide. As of December 31, 2008 the company has cash and cash equivalents and also marketable securities of $34.4 million compared to $60.7 million as of December 31, 2007.
During the year most of our cash was used to fund capital expenditures and to pay long-term debt to our parent and to third party. The provision [ph] of our long-term debt as of the end of December 31, 2008 in the pages scheduled is presented in slide – in the presentation.
Finally in slide 26 – finally if you turn to slide 27, you will see that on February 24, 2008 our Board of Directors approved the payment of the quarterly dividend of $0.07 per share. The same for the Company’s dividend policy, which targets an annual payout ratio of at least 20% of Company’s net income subject to Board approval.
The dividend would be paid on March 26 to shareholders of record of the close of business on March 16. The Company expects to pay a dividend of $0.06 per share in the next three quarters compared to $0.05 per quarter in 2008.
Thank you all and I would like now to turn the call back to Dita for final remarks.
Dita Bronicki
Thank you, Joseph. Please turn to slide 29 in which you will see our CapEx requirement for 2009.
We plan to invest in 2009 $199 million for enhancement of existing project and development and construction of new projects. In addition, our capital expenditure budget for operating project is approximately $18 million for 2009.
We expect to invest $32 million in exploration during 2009 and approximately $2 million were budgeted to investing machinery in the quick plant for the same period to the end of 2009. To recap, we have placed the capital resources hold them necessary to fund our CapEx requirement of about $250 million for the year.
As to the outlook for 2009, we expect our 2009 Electricity Segment revenue to be between $280 million and $290 million. This is based on our current assumption for the rate of Puna and our current reception for the rent up of Brawley.
We also expect an additional $9 million of revenue from our sales Electricity revenues generated by a subsidiary, which is accounted for under the equity metrics. With regard to our Product Segment, we expected our 2009 revenues would be between $100 million and $120 million.
Let me end my remarks by summarizing the key take away for the quarter and the year. First, we saw a strong top line growth in both Electricity and Product Segment, the backlog in our product segment has grown and is substantial.
Despite some minor delays in two of the projects our generating portfolio continues to grow and we continue to add the (inaudible) sources to move forward with our growth plan. And finally we are well funded to support our growth and we continue to explore innovative ways to fund this growth.
As always, we remain committed to managing our business responsibly for this challenging period and I would like to thank you all for your support. Operator at this time I would like to open the call for questions.
Operator
(Operator instructions) Your first question is from Ben Kallo of Stanford Group.
Ben Kallo – Stanford Group
Hi good morning.
Dita Bronicki
Good morning, Ben.
Ben Kallo – Stanford Group
Could you kind of give us a little more detail around Carson Lake, you mentioned briefly, and then also on the line and the plan that for financing that project?
Yoram Bronicki
Ben, it is Yoram. On Carson Lake, we have done two or we have drilled two fairly deep wells to try and identify a deep resource.
From our results it is not there, but as we drilled in to the deep resource we have identified a lower temperature potentially prolific resource, which we call the shallow resource, we will explore that if this seems to be productive and a commercial project can be built around it and we will do that. Of course until we have proven that it is a viable resource there is nothing that we can say.
Ben Kallo – Stanford Group
And then on the – financing requirement that you have the next round of drilling finished?
Yoram Bronicki
No.
Ben Kallo – Stanford Group
Okay, so what is timing for financing the project, can you give as any more detail on that.
Dita Bronicki
The timing financing is something that you have estimated that it doesn’t always happen or doesn’t always close when you estimate but as it looks now it will be done before this summer and just to emphasis the project is generating today at around 17 megawatts and the drilling is in order to bring it to the 28 megawatt unrelated to the financing.
Ben Kallo – Stanford Group
Okay and then my last question is as far as PTC versus the ITC what are the different IRRs that you see, if you take the ITC upfront? And is that – are you guys looking at that for Brawley instead entering into sometime of tax modernization?
Dita Bronicki
The general answer that depending on the capital cost of the project, sometimes ITC is most favorable and sometimes PTC is more favorable. As you know there is a big variance in the capital that equals the geothermal project and depending on the capital cost regardless of the self for funding sometimes ITC is in more favorable and sometimes PTC is more favorable.
Typically with respect to tax monetization the new ASP has opened a various forms of tax monetization. You can do the traditional partnership fleet, you can do leases, you can do other forms of ineffective financing depending on the condition of each say, specific projects.
We do not have a specific plan for North Brawley; we are evaluating what would make a most sales. Especially the result for the possibility to get a grant in Europe say ITC.
So this is still under evaluation.
Ben Kallo – Stanford Group
Okay thank you.
Operator
The next question is from Gregg Orrill of Barclays Capital.
Gregg Orrill – Barclays Capital
Thanks very much. Two questions, first on Puna, I was wondering if you could elaborate a bit more on what your assumption there is for the oil prices in your revenues guidance and how that impacts the project and then second what are you seeing in California in terms of new rates, new contracted rates for plants when you consider what RACs [ph] are worth and the environment for power?
Dita Bronicki
Okay on Puna, we have assumed the rate that we got for February will more or less be maintained for the year. So, we have noticed or felt the decline of oil prices from wells, where they are to day, maybe a slight decline, but not a substantial decline.
Of course we don’t have the crystal ball to know what will happen and it can do better and it can be a sought of decline, but as you have mentioned the correlation between the oil price and the rate is not 1:1 because of the specific circumstances on the island. With respect to California, we have not seen new prices, but what we have seen is a strong appetite so I would even say hunger of the utilities to get more and more in nuclear energy.
The increased target of 30% is really taken seriously by the utilities in California.
Gregg Orrill – Barclays Capital
And what would that translate to in terms of – I guess the terminology would be avoided cost for power?
Dita Bronicki
My guess would be as good as yours because I do not know. But I would assume that the market condition will dictate a higher size for a renewable energy therefore conventional energy how much higher I cannot guess.
Gregg Orrill – Barclays Capital
Okay thanks Dita.
Operator
Your next question is from Dan Mannes of Avondale.
Dan Mannes – Avondale
Good morning everybody. A couple of clarification questions first as it relates to the North Brawley financing, you mentioned the grant, but then on the slide you talked about the grant being 30% of the equipment cost, is there a nuance there or is it 30% of the total installed cost or just for instance the equipment?
Dita Bronicki
There is a nuance, maybe equipment – equipment is the term of the law – of the tax law, but this means that what is excluded from the grant then is a transmission line.
Dan Mannes – Avondale
Sure.
Dita Bronicki
Building and the intangible portion of the building cost
Dan Mannes – Avondale
Okay. Got it and then, in terms of the grant, the funding of the grant is that also conditioned on the plant reaching commercial operations or can that be drawn during construction at all?
Dita Bronicki
The traditional way of recognizing ITC, which is going to be applicable for the grant as well is when the project is placed in service. Placed in service means starting to generate electricity in commercial terms, not necessarily commercial – not commercial terms, commercial quantities, not necessarily commercial operation like in the case of Brawley, if the commercial operation is expected to be 50 megawatts, the ITC will be eligible when we reach, I don’t know 20 megawatts or whatever is considered and there is a – in the placement element in need, whatever is considered a commercial quantity.
Certainly 1 megawatt is not a commercial quantity. Where exactly it’s in between, I don’t know.
One of the changes in the stimulus they experience is for project with contraction period is over two years, you can claim the grant or so if construction proceeds.
Dan Mannes – Avondale
Okay. One other question, on the CapEx guidance you gave which is approximately $250 million.
If you can trash that with what your implied guidance was in your Q3 call, it’s dropped about $130 million. Can you maybe give us a little bit of granularity and maybe what’s been moved out of ’09 CapEx?
Dita Bronicki
The main number is the delay in the Brawley. If Brawley was expected it should be completed in 2009, it was expected to be in actual site constructions as we speak; and unfortunately, we have not yet received of the permit.
California became a little more difficult, you know, with all the encouragement of a renewable energy permitting it’s not coping with that, and the process of permitting takes longer. And as we speak, we do not have yet the permit for Brawley, and that’s why it’s delay to 2010.
As a result of it, the CapEx is delayed and partially would be done in 2009, but partially only in 2010.
Dan Mannes – Avondale
So as we model this out, should we assume that this probably doesn’t come online until fairly late in 2010 then?
Dita Bronicki
Yes.
Dan Mannes – Avondale
Okay. And is there any impact from some of the Nevada projects that look like now or either post-2011 or maybe off the chart, things like Carson and Buffalo.
Dita Bronicki
Buffalo really will always be in our assumptions. Its land purpose is figurement [ph] which was to be an applied either to Buffalo or to Jersey we’re we think that L.A.
– Jersey Valley will come online in 2010, and we are very optimistic about McGinnis, but this is an optimism before we did the extra leg exploration. Once we do the exploration, we’ll know the result.
Dan Mannes – Avondale
Okay. But Carson you had mentioned that you haven’t come up with –
Dita Bronicki
Carson, we need to evaluate if they accelerate or is really a solution, a viable solution or economic solution for that project. We know that the (inaudible).
We saw it during the drilling, but we didn’t measure it; and for this, we need to do some extra work which we expect to do it on the year in order to get to the answer. Is it a viable project or it’s not a viable project?
Total the quantities, total the temperature. Is it a viable project?
So it’s early to say. But Carson was assumed to be 15 megawatts so it’s not a big change.
Dan Mannes – Avondale
Okay and then just lastly on two questions there. First, in Yoram’s comments, you mentioned what time period the revenue should corresponds you, and I couldn’t quite get it, did you just say second half of ’05 as the timeframe which should corresponds to?
Dita Bronicki
Yes. That’s what he said.
Dan Mannes – Avondale
Okay. And then secondly on Puna, relative to the negotiation with Eco currently, how did the current negotiations correspond with the timing of adding the equipment and do you need to do any incremental drilling, i.e.
Is there a risk of those negotiations drying out if this one falls into 2010 as well?
Yoram Bronicki
There is always a risk but I think that you need to think of Puna against a backdrop of what the State of Hawaii is trying to achieve in terms of their own RPS; and geothermal being the most viable form of renewable energy, I don’t think – I think that this negotiation is always fun, but I don’t think that there’s a big risk that that part will not be built. And the beauty of that aspect is that there is very little drilling that needs to be done and we don’t see that as being contingent upon the negotiation with Eco, so the answer is we’re – we feel that there’s excellent reasons to think that this will get built into 2009.
Dan Mannes – Avondale
Got it. Thank you very much.
Operator
You next question is from Emily Christy of RBC Capital Market.
Emily Christy – RBC Capital Markets
Good morning.
Dita Bronicki
Good morning.
Emily Christy – RBC Capital Markets
Question on Sarulla, do you have any same expectations for that in terms of receiving product revenue for that?
Dita Bronicki
I’m embarrassed to say because if some of you remember what I said about Sarulla each time I think I spend a year each time and now talking and it is still a year. Until we finalized the stock purchase agreement to a point where we are satisfied with the date of the consortium is they’re only satisfied with date.
We cannot solve the financing process. So as long we didn’t finalize with the proper disagreement, it is theoretical, a one year.
Negotiations are going on now as we speak, but they need to be concluded positively so that the clock will start running.
Emily Christy – RBC Capital Markets
And in the negotiations then, I know you can’t give specifics, but are the size that far apart that it’s something that you didn’t want to say will be resolve within a year or is there any more clarity on what’s the hold up?
Dita Bronicki
The hold up is the process of negotiation. If our internal plan is to complete it within the next two month, but will it really happen?
I cannot say.
Emily Christy – RBC Capital Markets
Okay. And then moving on to the new technology, Avenues that you spoke about, with respect to the Solar, is that going to be in conjunction with your geothermal projects or separate?
And then, would you be involved as an operator or in the manufacturing and building product side of it. Where do see yourself falling in that spectrum?
Yoram Bronicki
Our geothermal basis is certainly a very good point to start from because we have in some areas large surface in warm, sunny places and that can certainly a point to start from, but the way we’re thinking about Solar is not limited to where we have geothermal operations. And our view is, what we would like to do at Solar is very similar to what we have been doing in geothermal, and this has had some control over core elements of the technology and mostly build, own, and operate power plants, so – however, granted we we’re at an early stage and it’s almost undefined at this stage, but if we had a choice this is where we’d like to go to.
Emily Christy – RBC Capital Markets
Okay. And then just one more question on the oil and gas recovery project.
Has that advanced to a point where you see it as a viable commercial application in the near term?
Yoram Bronicki
There are areas where it is a viable commercial application. A lot like geothermal, it is – there is a big scatter between numerous small sources of hot water or hot fluids; but then, there are few locations where the fluids in large enough volume that it makes the sense to build the project, to build the initial projects there.
After that, it’s a huge potential, but you have to work real hard with numerous small units to tap into this. And for this to be commercially viable, you need to have regulatory environment that mandates this.
Technically speaking, we do – the technology is there.
Emily Christy – RBC Capital Markets
Okay. Thank you very much.
Operator
Your next question is from Pratish Mongi [ph] of Piper Jaffray.
Pratish Mongi – Piper Jaffray
Thanks for taking my question. A lot of my questions have been answered.
But can you comment on the financing environment for project financing given the Stimulus Bill and your track of provisions there? Are you seeing any favorable changes there or expect any favorable changes there?
Dita Bronicki
Two responses, one, there is an ability to do project finance in the current environment already for those projects. Costs are higher than they were last year or two years ago, but there’s an ability to do it.
What the Stimulus will do is it opens the possibility of DOE loan guarantee, which means that it opens the possibility for very low cost of dates. Now, the reality in the last three years has been that there was program of DOE loan guarantee part of the Energy Act of 2005, which didn’t go anywhere.
I mean, we have not participated in it, but if we will the other developer applications have been submitted and it has taken them very long to process them, to approve them, and no approval has been received under this program so far. The current administration and the Secretary of Energy went loud and clear to say, they’re going to change it; they’re going to make this process fast and efficient.
Let’s hope and see.
Pratish Mongi – Piper Jaffray
Great. Can you – so in the current environment, the concern is that energy consumption especially in the US might actually fall by 1% or 2%.
So, on the demand side of things, where are you seeing in terms of the RFP activities now horses a couple a few months ago? And I also – can you comment a little bit on the activities on the international front.
Like there were news recently in Indonesia building up bidding, opening up bidding for 15 geothermal fields and similar activities in Kenya and other countries. Now, can you first talk a little about the RFP activities in the US and then some more color on the international activities?
Thanks.
Dita Bronicki
It is correct that demand is doubling in the United States, doubling internally in the United States and that the natural result of reduction in demand for electricity is a reduction in demand of the utilities for a new electricity. But this is not the case with respect to nuclear energy because the RPS mandate requires the utilities to increase their share of their renewable energy year-over-year.
And that increases higher than the reduction in demand, so we do not see an impact of it on the appetite of the utilities for renewable energy. On the contrary, we see an increase appetite for renewable energy and the utilities with whom we work in Nevada, California, etc.
Pratish Mongi – Piper Jaffray
Great.
Dita Bronicki
Internationally, it is told that Indonesia has launched a very aggressive and new build of renewable energy, but it is not translated yet into specifics. They have to decide, what is the rate at which they are going to buy renewable energy?
And there was a proposal on the table earlier, actually later this year, the last part of 2004. They are now in the process of reviving it.
We need to watch them, and we’re watching them very closely. But we don’t know – I mean, it is not something, which will happen in the next quarter.
It must be a longer term.
Pratish Mongi – Piper Jaffray
Okay. Thank you very much.
Dita Bronicki
You’re welcome.
Operator
Your next question is from Angie Storozynski of Macquarie Capital.
Angie Storozynski – Macquarie Capital
Thank you. A couple of questions, with the pullback in raw material prices should we expect that the cost of new builds for geothermal plants is going to come down as well?
And also for the products – I mean, I’m basically trying to figure out what your future gross margins will be for products line which will be impacted by raw materials but also your capacity needs or your financing needs will depend on the cost of new build for new power plants. So if you could comment on this issue.
And the second one is what are the growth expectations going forward? Because it looks like we are adding or you’re adding about between 50 megawatts to 60 megawatts per annum over between ’08 and ’10.
If I recall correctly, the plans were almost doubled at this rate. It’s almost 100 megawatts per annum.
What is the run rate going forward, let’s say beyond 2010?
Dita Bronicki
The first is question is the one that I cannot quantify, but I can refer to it conceptually. We do see cost of all material today, at the level they have been two years ago.
So definitely it’s substantial with the reduction of cost of all material. We have not seen the same reduction rate in the cost of engineering equipment.
You know when you buy compressor, when you buy transformer, we have seen a certain reduction but not the full part of it because there is the labor cost and the opportunity cost. So, we cannot see a reduction equal to the reduction in all material, but certainly substantial reduction in new build.
As to the growth plan, we had to reduce our plans for 2009 and 2010 as we have announced today, due to slower progress on the exploration side and delays in permitting. We are working very hard to catch up, which means to do more exploration sites in parallel so going to 2011 and beyond, we could go back to the rate of those that we were planning.
Maybe not 100 megawatts, maybe 80 megawatts or maybe more than 100 megawatts depending on the results of the explorations and it is too early to say what these numbers will be.
Angie Storozynski – Macquarie Capital
Okay, that’s great. But trying to quantify the margins again, historically, your product margins were about – well anywhere between 15% to 20%, I’m talking about gross margins, and for the electric segment was about 35%, 36%.
Is it – do you think that these margins are sustainable? Should we assume a higher, lower number?
I know that product margins are very product specific or contract specific, but is it possible that now with the pullback in raw material prices the margins might expand for products or not?
Dita Bronicki
No. We’re trying to give guidance on margins, but let me respond conceptually to you.
The reduction in the product margin in 2007, 2008 were result of the huge increase, I would say an uncontrolled increase in cost of all materials, so it is only natural that when the pendulum moved to the other side, we will see a result on the other side.
Angie Storozynski – Macquarie Capital
And just the last question, what were the penalties for insufficient capacity factors of some of the plans with PPAs. I never heard about it before.
Is it something that happened in the fourth quarter and it doesn’t have to do with any maintenance work or what happen there?
Yoram Bronicki
This has to deal with or it varies between plants, but basically it was the prolonged equipment problems that prevented us from generating the power that we agreed to under the PPA. If you have a short term problem, it is generally – you can generally overcome it and that does not require a penalty, but in the case like Stimulus 2 and 3 or a conclusion was that the equipment issues are too significant to be repaired and that we actually had to go into a replacement of all the power units and a complete shutdown of the plants and so on.
It’s too long of a process to be able to go through it without an impact which is the case. And there are other areas that if you have continuous resource decline and you really cannot.
There is no way to make it up by equipment if the resource is just not there, and the contracts have mechanisms that address it.
Angie Storozynski – Macquarie Capital
Okay. Thank you.
Operator
Your next question is from Paul Clegg of Jefferies.
Paul Clegg – Jefferies
Thanks for taking my question. Most of my questions had been answered at this point but maybe a couple residual ones.
Are you seeing any lack of access to capital cause any pullback and interest in REG solutions? Customers who want to make the investment but just cannot come up with the funding right now.
Dita Bronicki
No. We have not seen any.
I mean, we have seen a very strong product for the segment to backlog. No, the answer is no.
Paul Clegg – Jefferies
And then maybe kind of a follow up on the previous questioners comment, can you talk about how potential project returns for geothermal have changed in the current financing environment? You mentioned that the cost of funding had gone up a little bit, and then raw material cost reductions potentially benefiting in the future, but are they enough to offset the funding cost increase impact to get even project returns or are we actually seeing project returns go down as a result of that funding cost impact?
Dita Bronicki
I don’t think that they will go down. You know, it’s over the question of to which project to apply it.
The funding cost may increase for projects which have been built on the – during the high construction stage. And so, on a specific project, it may have a negative impact.
On the other hand, on new projects, the new build, we definitely don’t think that the funding cost will offset construction cost. And I want to emphasize again the DOE loan guarantee program, which will do the funding cost, not increase funding cost, and that’s a huge opportunity.
The DOE loan guarantee program is not for innovative projects. It’s not for – it’s for any renewable energy projects.
And it’s – there is some $60 billion budget for it, so it’s a huge potential for financing, a flow of finance pole.
Paul Clegg – Jefferies
That’s very helpful. Thank you.
Operator
Vijay Singh [ph] of Janco Partners.
Vijay Singh – Janco Partners
My questions have been answered. Thank you.
Operator
At this time, there are no further questions. Ms.
Bronicki, do you have any closing remarks?
Dita Bronicki
I would like once again to thank you for your participation in today’s call and your continued support for Ormat. We are extremely encouraged by this purpose that is folded to us, in to the renewable energy as a whole, as well as the confidence in our ability to benefit from these opportunities.
We look forward for future communication. Thank you.
Operator
Thank you. This concludes today’s conference.
You may now disconnect.