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Edited Transcript of HTM earnings conference call or presentation 11-Aug-17 3:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 US Geothermal Inc Earnings Call

Boise Aug 16, 2017 (Thomson StreetEvents) -- Edited Transcript of US Geothermal Inc earnings conference call or presentation Friday, August 11, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas J. Glaspey

U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director

* Kerry D. Hawkley

U.S. Geothermal Inc. - CFO, CAO, Controller and Secretary

* Scott L. Anderson

U.S. Geothermal Inc. - Director of IR & Corporate Communications

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Conference Call Participants

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* Bhakti Pavani

Euro Pacific Capital, Inc., Research Division - Senior Research Analyst

* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

* James Patrick McIlree

Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology

* Jeffrey David Osborne

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Jeffrey Scott Grampp

Northland Capital Markets, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the U.S. Geothermal Second Quarter 2017 Earnings Results Conference Call. As a reminder, this conference is being recorded. A replay of this conference call will be available until August 18, 2017 by dialing (877) 481-4010 for the United States and Canada, and by dialing (919) 882-2331 internationally. And please use replay ID 18941.

I will now turn the conference over to Scott Anderson, Director of Investor Relations. Thank you. Please go ahead, Mr. Anderson.

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Scott L. Anderson, U.S. Geothermal Inc. - Director of IR & Corporate Communications [2]

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Thank you, Manny. Hello, everyone, and welcome to our second quarter 2017 financial results conference call. This is Scott Anderson, Director of Investor Relations and Corporate Communications. Today, I'm joined by Doug Glaspey, our Interim Chief Executive Officer and President and Chief Operating Officer; and by Kerry Hawkley, our Chief Financial Officer. Our earnings release was issued yesterday and can be found on our website at www.usgeothermal.com under the tab News, and a slide presentation is accompanying today's call, and that can be accessed on our company website, on our homepage, under Upcoming Events.

We would like to remind you that the information provided during this call may contain forward-looking statements related 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.

During the call, we will present non-GAAP financial measures such as EBITDA, adjusted EBITDA and adjusted net income. Reconciliations to the most directly comparable GAAP measures and management's reasons for presenting such information are set forth in the press release that was issued yesterday. Because these measures are not calculated in accordance with U.S. GAAP, it should not be considered in isolation from our financial statements prepared in accordance with GAAP. After our prepared remarks, we will conduct a question-and-answer session.

At this time, I'd like to introduce Doug Glaspey, Interim Chief Executive Officer, President and Chief Operating Officer, to provide an overview of the highlights of the second quarter of 2017. Doug?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [3]

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Thank you, Scott. Hello, everyone, and welcome to the presentation of our second quarter 2017 results. I'd like to call your attention to Slide 4. We're pleased to have produced our 19th straight quarter of positive EBITDA and cash flow from operations. Our operating revenue for the first half of the year achieved a solid increase compared to 2016, most of which is attributable to the increased output at Raft River with the addition of a new production well, but San Emidio also contributed with higher generation.

We completed the deepening of 3 wells at the San Emidio II project with strong results, which increased the proven reserved estimate for that project and the technical aspects of both San Emidio II and Geysers continue to advance as we prepare these projects for construction.

Additional work was also advanced under our $1.5 million grant from the Department of Energy to test innovative resource exploration technologies. Data interpretation from Crescent Valley and San Emidio II is providing new information which can be used to select drill targets.

Right now, I'll turn the meeting over to our CFO, Kerry Hawkley, for an update on our financials. Kerry?

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Kerry D. Hawkley, U.S. Geothermal Inc. - CFO, CAO, Controller and Secretary [4]

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Thank you, Doug, and good morning to our listeners on this call. I'll now discuss financial statements of U.S. Geothermal for the quarter ended June 30, 2017. Our financial statements and MD&A were prepared in a condensed format.

On Slide 6, U.S. Geothermal's balance sheet remained strong. Total assets were $239.9 million. Total liabilities were $109.2 million. Net stockholders' equity was $105.7 million. And total noncontrolling interests was $25 million. Issued an outstanding shares of common stock at June 30, totaled 19,123,018 shares.

On Slide 7, our results of operations for the first 6 months were down slightly from our expectations. Revenues for the 6 months were $14.7 million, up 4.1% from the same period in 2016. Plant expenses were $9.1 million, an increase of 16.6% from 2016. Gross profits or income from operations were $5.7 million, a reduction of 11.2% from 2016. The lost revenue and additional costs associated with the loss and repair of the vaporizer tubes at Unit 1 at Neal Hot Springs Unit 1 plus the completion of our 3-year State of Oregon property tax abatement contributed to the decline. The onetime impact for lost revenue is $0.83 million, and the property taxes, which will continue, was $0.7 million for the first 6 months, and it will be $1.06 million per year going forward.

Professional and management fees are 76% lower than the same period in 2016, primarily because in Q1 of 2016, we had a onetime charge of $753,000 for the review of strategic alternatives.

Interest expense was up $420,000 when comparing to 2017 to the prior year due primarily to the $20 million Prudential loan that was initiated in May of 2016. Income tax expense for 2017 increased $243,000, primarily due to an increase in revenues at Raft River and San Emidio.

Net income attributable to U.S. Geothermal was a loss of $0.18 million in a 2017 compared to loss of $0.34 million in 2016. On Slide 8, statement of cash flows. We began the year with cash and cash equivalents of $15.3 million and ended the second quarter with cash and cash equivalents of $13.5 million. Cash generated by operations was $5 million. Issue of common stock generated $0.4 million. And release of restricted cash reserves was $0.1 million. Principal payments on notes reduced our total debt by $2.4 million, payments to our partners were $2.3 million and capitalized development costs at Raft River, the WGP Geysers and El Ceibillo net of grant reimbursements totaled $2.6 million.

Thank you for your continued interest in U.S. Geothermal, and I'll turn the call back over to Doug.

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [5]

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Thank you, Kerry. I refer you all now to Slide 10. Data from our operating plants with total generation for the second quarter was 76,101 megawatt hours, a 10.5% increase over the same period in 2016, which had a total generation of 68,879-megawatt hours.

On Slide 11, Neal Hot Springs. Generation for the second quarter averaged 20.4 net megawatts per hour of operation, and you will note that the overall generation for Neal is still down compared to 2016 as a result of the extended outage on Unit 1 early this spring.

Neal operated at 91.6% availability for the quarter excluding scheduled maintenance. And all 3 units did finish their annual scheduled maintenance outages during the quarter. Unit 1 had an extended outage, so that the vaporizer tubes damaged in January could be replaced. We've received 2 payments totaling $1,570,000 from our insurer for property damage coverage on that incident, and a final payment is expected during the third quarter. This final payment will include the balance of property damage costs and the portion of business interruption insurance that was covered by our policy.

San Emidio on Slide 12, generation for the second quarter averaged 9.1 net megawatts per hour of operation. And I would note that San Emidio's generation for the first half of the year is 25% higher than the comparable period in 2016. San Emidio operated at 97.9% availability for the quarter and took its annual maintenance outage in April. Subsequent to the quarter, a small refrigerant leak was identified in the vaporizers on July 21. The plant was shut down for repairs and several pinhole leaks were found. A number of vaporizer tubes have been plugged, and we expect the unit to restart within the next few days.

On Slide 13, for Raft River. Generation for the second quarter averaged 10.2 net megawatts per hour and Raft operated at 98.5% availability for the quarter. Raft River produced 32% more energy during the first half of the year compared to the same period in 2016, primarily due to the addition of production well RRG-5 in late March. And Raft did take its annual maintenance outage in May.

Moving on to Slide 15. We will now talk about our growth plans for our advanced stage development projects. At WGP Geysers, we're continuing with the final design engineering for the plant principally working on the hybrid cooling system. In addition, the interconnection design work by PG&E is ongoing. We still have a final decision to make regarding how we ultimately connect into the transmission grid. The original plan to build a short 1.7-mile interconnection line to a substation is dependent upon acquiring a right-of-way from a private land owner. Those discussions are still in progress. As an alternative, we have the ability to build a specially designed substation right on the property, taking advantage of the transmission line that runs across the property. The interconnection line scenario generally has a lower cost -- capital cost requirement, and is included as part of our LGIA, that's our large generator interconnection agreement. The substation scenario has higher costs, which we have covered in our current capital model and does not require a third-party right-of-way.

The substation scenario could require additional study time as part of the interconnection process. In any event, we're working along both paths to see which one ultimately provides us with the best economics and schedule. We have submitted the Geyser's project to a current RFP and we'll be submitting it to a second during the third quarter. I will discuss those in detail in a few minutes.

At San Emidio Phase II during June, we deepened the 3 remaining temperature gradient wells, and 2 of the 3 hit significant permeability and temperature. The third well intersected sub-commercial permeability but did flow, which indicates it may define one of the possible boundaries of this new resource.

On the basis of short-term flow test and pressure data, our consulting reservoir engineer has increased the resource size to 25.9 net megawatts with a 90% probability. That would be considered proven resource.

The 50% probability level at 47 megawatts remains unchanged because none of these wells fell outside the originally defined resource area. The Bureau of Land Management permitting process for the San Emidio II facility is moving along at its normal pace. This is an environmental assessment level NEPA study, and our expectation is that this permit will take until next spring at the earliest to get to completion. This could be modified depending upon the transmission route that is determined by NV Energy.

The large generator interconnection application that we submitted to NV Energy on June 26, has been accepted as complete and an initial meeting is scheduled for mid-August with the NVE Transmission Group to discuss our transmission proposal.

Our view is that the SE II development will fall into the 25 to 35 net megawatt annual average size range, which closely matches the design basis for the 3 power plant equipment packages that we purchased in 2016. The majority of this equipment is already in storage at the San Emidio site.

At El Ceibillo, we've advanced to the second round of projects in the German development fund drilling grant process. Our second phase application was submitted on July 24. This grant would provide a 40% cost share for the drilling of up to 3 production size wells at El Ceibillo. If GDF funding is used on the project and the power plant is constructed, the grant would be converted into a loan.

And in fact, the German Development Bank would like to finance the entire the project if that goes forward. We've also submitted a grant application in July to the U.S. Trade Development Agency for a feasibility study for El Ceibillo. It's currently being reviewed by the USTDA, and we expect to know if it'll be offered to us during the next several months. Expenditures for El Ceibillo are being carefully controlled until we can see the energy market advancing in Guatemala. While the Guatemalan government announced earlier this year that an RFP for 420 megawatts was going to be issued, there is still no indication of when that might be.

Moving on to Slide 16. Our greatest challenge right now lies in the area of power purchase agreements. As we have discussed in the past, the power purchase universe is changing in the west and particularly in California. We now have a multitude of community choice aggregators and industrial customers in addition to the more traditional utilities that we must pursue.

On Slide 17, I wanted to give you an update on where we stand today in regard to current and near-term requests for proposals for our projects. For San Emidio, we submitted a proposal NV Energy for a 25-megawatt PPA on July 6 and, just yesterday, were notified that we did not make the shortlist. We're preparing another submittal that would go to the Southern California Public Power Authority, SCPPA. And SCPPA is an organization of 12 municipalities in Southern California and has a renewable RFP open this year. A number of Nevada geothermal projects sell power to SCPPA or to some of the member cities. So with new transmission in place that ties Northern Nevada to Southern Nevada, a pathway is now open to sell power into Southern California, which we are pursuing.

For our WPG Geysers project, we have a 30-megawatt proposal into the City of San Francisco, which has formed its own community choice aggregator. The proposal was submitted on July 26 and the current schedule is indicated that their shortlist will be announced later this month. We will also submit a new proposal to SCPPA for the WGP Geysers project.

Moving to Slide 18. As we move the advanced development projects forward, we're also working in parallel to increase the generation at our existing operations. At Raft River, we converted an idle injection well to a production well by installing a pump and associated infrastructure. Well RRG-5 commenced production on March 21, and we picked up approximately 0.71 net megawatts per hour. The second step in this upgrade is an increase of capacity of our injection pumps, so we can push more fluid through the plant. The upgraded injection pump has been manufactured and was delivered to the site last week. We expect to have it installed and online within the next week.

All of the increased generation that comes from these changes is captured under our PPA with Idaho Power, which has approximately 3 megawatts of additional capacity available. These changes at Raft River have to be done in steps, so we can evaluate the response from the Geothermal reservoir and how the overall wellfield is affected. The reservoir has remained stable over the past few months since we added production well RRG-5. And once upgraded, the injection pump goes online, the wellfield will be rebalanced and we'll evaluate additional changes that we may make to increase generation further.

At Neal Hot Springs on our hybrid cooling project. Like Raft River, the PPA for Neal Hot Springs has approximately 3 megawatts of capacity available to increase plant generation. To take advantage of the extra capacity, we have been working toward the installation of a hybrid cooling system. That is, we would add a water-cooled system to work in conjunction with the existing air-cooled system. This system would operate during the summer months when the plant's output falls due to the high ambient temperature.

We are in the process of testing the last water well we drilled earlier this year. And our hope is that we will confirm that we have enough water to build a hybrid-cooled system on 1 unit. To do this, we need 250 gallons per minute of water. We have an engineering firm contracted and working on the detailed design of the hybrid facility, so we can obtain accurate capital and operating costs for our economic model. To complete the needed volume water for all 3 units, we are currently discussing the possibility of acquiring service water rights through lease or purchase from private owners and investigating how that water may be used within Oregon Water law.

Our Neal project is located in an arid region where neither groundwater nor surface water is abundant, especially in the summer. But the positive economic impact from water cooling must be examined. Additionally, we continue to operate a pilot scale water treatment system that has demonstrated it can upgrade our geothermal injection fluid to a high enough quality that it can be used in the water cooled portion of the system. While this source of water is 100% dependable, it would add extra capital and operating cost.

If we aren't able to source enough water to allow all 3 units to be modified for hybrid cooling, as I said previously, we would still like to have at least 1 unit modified and ready to operate for the summer of 2018. Capital expenditures for this project will have to be approved by our partner Enbridge, and the Department of Energy is the lender before construction can begin.

Moving to Slide 19. Our revenues for the second quarter are above the same period last year at $6.31 million compared to $5.66 million. Gross profit fell slightly as did our net income attributable to U.S. Geothermal, and Kerry has mentioned the costs that are involved in that. Our EBITDA on a consolidated basis for this quarter was $2.15 million compared to $1.94 million for the same quarter last year. And our U.S. Geothermal-only portion of EBITDA for the quarter was $1.32 million compared to $0.91 million for the same quarter last year. The second quarter is traditionally one of our lowest quarters for generation due to contract structure and it is the time we take our annual maintenance outages.

On Slide 20. This slide, of course, shows our historical performance over the past 3 years as well as our guidance provided for 2017. We are reaffirming our consolidated guidance for 2017. Based on our current operations, we expect operating revenue of $30 million to $34 million, adjusted EBITDA of $15 million to $19 million, EBITDA of $14 million to $18 million and net income, as adjusted, of $4 million to $8 million. We would also like to reaffirm our guidance for U.S. Geothermal only less our minority interests based on the same criteria. We expect operating revenue of $18 million to $22 million, adjusted EBITDA of $9 million to $12 million, EBITDA of $8 million to $10 million and net income, as adjusted, of $1 million to $4 million.

In summary, on Slide 21, we are diligently working on our development and expansion projects to increase generation and grow the company. Despite having suffered a large mechanical issue in the first quarter at Neal Hot Springs, our operations team came back with a strong second quarter. The operating plants continue to improve and the development projects are being move forward in anticipation of acquiring a PPA. While the power market in the Western United States continues to undergo significant changes, the demand for renewable energy is still growing in every state and indeed around the world.

We remain optimistic about the opportunities that lie ahead for U.S. Geothermal.

Operator, we're ready to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Jeff Grampp of Northland Capital Markets.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD and Senior Research Analyst [2]

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Started first at SE II here, I guess, a couple of questions. First just kind of digging through last night's 10-Q versus first quarter one. It looked like you guys altered the size of the expected size of the plant and then pushed back the commercial start date. Can you maybe walk us through kind of the changes there? And then maybe on this recent RFP, if you guys kind of have any sense, I know, you're probably 24 hours into getting this update, but do you have any sense of kind where that ranked, maybe where the shortfall was on why you guys didn't make the shortlist, would be helpful?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [3]

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Sure. On the NV Energy RFP, and that was a specific RFP for a 25-megawatt PURPA project. They -- unfortunately, they don't tell us where we fall short. We also don't know who made the shortlist. Our general feeling is -- just by the way the RFP was written and some of the documents in the RFP, it could have been slanted towards solar. But it was an open RFP and they were asking for all resources. So I can tell you that the price we offered this time compared to a price we offered in an NV Energy RFP a year ago was substantially lower. And that's about all I can tell you on that front.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD and Senior Research Analyst [4]

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Okay. And then shifting over to Raft here and you guys got, it sounds like, a new pump coming up here shortly that kind of figure out where things kind of trend from here. But just generally can you guys maybe talk a little bit about how performance of the new well has been relative to expectations? And to the extent you can kind of handicap where potential production goes from here within the kind of new range -- within the ranges that you guys have talked about?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [5]

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Sure. The pump is actually run very well. We've been running at it about 1,100 GPM with essentially no impact to the water levels in the adjoining wells. So that's that balancing the wellfield issue that we talk about. It has been coming up still slowly in temperature, probably be not as fast as we'd like it to, but we'll just have to see what it'll do as we go forward. I would like to circle back though, Jeff, on your San Emidio II question. We haven't defined the extent of the resource yet. We're now at a point where we can't drill any further, from an exploration basis, until we get our environmental assessment approved by the BLM. So we'll probably hold at this point until we get that approval and we can drill more wells. Essentially, what we've looked at as far as size, and we've kind of had a 25 to 45 megawatt range, I'll call it. If we build that plant with all 3 units air-cooled, it would produce 45 megawatts in the cold of winter. You might recall that these air-cooled plants do have a bit of a swing on generation though. So we're trying to parse everything now in annual average numbers rather than, possibly, maximum output. And that goes back to -- even to our interconnection agreement. We have a 45-megawatt interconnection agreement. So if we are operating that facility with all 3 units, and it's a 35 net megawatt annual average facility, it can still produce 45 megawatts in the winter time. So we have to have 45 megawatts of transmission capacity available to us. So that -- hopefully, that explains a little bit where these numbers are. If it turns out that the reservoir will only support, say, 25 megawatts or 2 units, that would be a 2-unit facility, that would explain why would go to that level of size. But it really all depends now on the ultimate size of the reservoir. We did, as I said, respond to the NV Energy RFP for 25 megawatts because that was the size. They wouldn't consider anything larger or smaller, it had to be 25 megawatts. We don't want to pass up that kind of opportunities. So we did bid into to it.

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Operator [6]

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The next question is from Gerry Sweeney of Roth Capital.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [7]

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I wanted to talk a little bit about the Geysers. Obviously, on the first quarter call, your -- there was certainly a level of excitement in terms of that moving along. And as we can see here in the presentation, you have some detailed plan engineering continuing and you're looking at the contractors, but you're also submitting some proposals for PPAs at the facility. My question has to do with pricing. I know there's been some PPAs priced at the sub $80 megawatt level but, historically, you've always targeted the Geysers at, we'll say, a number above $80 per megawatt. What's your sort of calculus on the market today, where pricing is for geothermal megawatts and where you're going to submit your proposals? Have you changed your pricing to match the market a little bit more?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [8]

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Well, good question, Gerry. First I'll say, it is still -- the challenge in the market out there is still competing with solar. Although, what we're finding is that a number of off-takers are basically full. They've filled their portfolio with as much solar that they can take, which, of course, as an intermittent, doesn't provide round-the-clock power. We can't get into the $70 level generally speaking for a new grassroots project -- geothermal project in the Western U.S., especially in California. So I don't think our pricing has changed an awful lot. We do, at this point, still have the 30% ITC from the Federal Government. That has not been renewed yet. If it's not renewed this year, that could have a negative impact on our pricing. So as far as competing with other geothermal projects, I think, we're going to be at the lowest number of any new greenfield geothermal project in the State of California. I know there's been some prices in the $70s that are coming out of combined projects, generally in Nevada, but those contract prices are typically and, in this particular case, if we're looking at the Ormat 150-megawatt contract, includes a number of existing facilities that are going to be coming off contract, and they can clearly be put out there for a much lower price.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [9]

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On that note, are there -- speaking of -- I know, getting a new PPA on an existing power plant is certainly a competitive advantage. As you're looking at the market, are there any other plants that are coming off of contract in the next couple of years that would be competitive or provide maybe a -- well, coming off contract that you know about that could be competition to you?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [10]

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Our belief right now is that most of the contracts that we're terminating in the near-term have been recontracted. Both in Northern and Southern California, and now in Nevada. So we don't see -- we did have that competition, there is no doubt. Two years ago, a year ago, they were highly competitive and in most of these bid processes. We just don't see that today. And in some cases, these RFPs are specifically asking for new construction because they're also trying to stimulate more jobs, reduction in carbon. Recontracting an old power plant doesn't reduce your carbon footprint. So we have some optimism based on how some of these RFPs are written. San Francisco, for instance, wants their power to come from within a 100-mile radius of the Bay Area, there is not a lot of geothermal projects that meet that criteria. So anyway, we think we're competitive, as competitive with any other geothermal project as we can be. We're always looking for a way to bring our price down. And our #1 goal is to get a PPA and get that project under construction.

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Operator [11]

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The next question is from Bhakti Pavani of Euro Pacific Capital.

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [12]

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Your phone on mute?

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Bhakti Pavani, Euro Pacific Capital, Inc., Research Division - Senior Research Analyst [13]

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Can you hear me now?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [14]

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Yes, we can.

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Bhakti Pavani, Euro Pacific Capital, Inc., Research Division - Senior Research Analyst [15]

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Okay. Sorry about that. My question is on San Emidio II. So I know in the prepared remarks, you mentioned that you guys are still waiting for the environmental assessment so that you can drill further wells. Do you kind of have a time line on when do you expect to receive that? And what are your plans on drilling additional wells to test the resource capacity?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [16]

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Based on when we submitted that document to the BLM, it's typically a -- we'll say, it's 9- to 12-month time period. So in 12 months, would put us, I think, in next April. That could be extended. The BLM goes through its process. What we've also seen at BLM these days is they have a fair amount of turnover in their employees that can slow these things down. But thus far, they haven't brought up any significant issues with us. We remain in contact with them, all of the additional studies -- environmental studies have been done. So we believe that this process is moving as quickly as it can move.

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Bhakti Pavani, Euro Pacific Capital, Inc., Research Division - Senior Research Analyst [17]

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Perfect. That's great color.

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [18]

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So as far as additional drilling, I'm certain that our geologists would be happy to give me a new drilling plant to drill more wells. The advantage we have now, of course, is with 4 out of our 5 wells currently drilled, which are slim holes, identifying the high commercial permeability at those locations. All we have to drill for production wells -- all we have to do for production well drilling is to twin those existing slim holes, and we have 4 production wells that could support our 25-megawatt sized facility.

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Bhakti Pavani, Euro Pacific Capital, Inc., Research Division - Senior Research Analyst [19]

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Perfect. And with regards to SCPPA, right, do you a have time line on when do you plan to submit the bid? And when can you hear from them?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [20]

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Well, we're going to submit 2 different bids to SCPPA, and that would be both from San Emidio II and from Geysers. That is an open solicitation. So you can submit the bids anytime during the year. We will submit both of those, my expectation is within the next 3 weeks, 3 to 4 weeks, I guess, we'd get them both in. And then I think the SCPPA members meet on a monthly or bimonthly basis and review their contracts. So once we get those submitted, we could hear something from them within a month afterwards. But we will be following up especially with individual member cities that have already expressed interest in Geothermal.

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Bhakti Pavani, Euro Pacific Capital, Inc., Research Division - Senior Research Analyst [21]

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Perfect. With regards to the Neal Hot Springs, I know, in the past you have discussed about using recycling water for the hybrid cooling system. Are you guys still thinking about doing that? If you can provide some more color?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [22]

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Well, quite frankly, I think, we're thinking more about treating our injection water to produce cooling water. Our pilot plant, thus far, has been operating very well. It produces high-quality water. So personally, I'll say this personally, because it is so hard to find water out in that very dry country, that is our best and most dependable source of water. We just have to add that additional step. Now that's going to add capital and operating costs, so we have to scale up our pilot plant. We're doing the same kind of water treatment, actually, on our cooling water down at Raft River. So it's not alien to us. It's a process we already are operating. And I think there's good reason that we may very well go that way if we want to get all 3 units onto hybrid cooling. Now from a cautionary standpoint, I guess, I would say, it's attractive to me that we build 1 unit first and we operate that unit and kind of make sure everything works as designed, work the bugs out of it and then move on to building the next 2 units. So it doesn't bother me that we might built 1 unit first and then transition to the next 2 units the following year.

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Bhakti Pavani, Euro Pacific Capital, Inc., Research Division - Senior Research Analyst [23]

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And what kind of capital and operating expenses increase are we talking about?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [24]

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Well, our initial capital estimate for all 3 units to add hybrid cooling was in the -- on the order of $10 million. Now that would probably increase, and I won't venture a number right now, if we go to water treatment on the injectate. And I will mention, by the way, that using geothermal brine in the cooling process is allowed under the State of Oregon water laws. So that's one of those hurdles you always have to look into. Sometimes it is allowed, sometimes it isn't allowed because it does become a consumptive use of water. So we don't have the final numbers yet on capital and operating costs, especially if we're going to use the injectate and have to treat that injectate, Bhakti.

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Bhakti Pavani, Euro Pacific Capital, Inc., Research Division - Senior Research Analyst [25]

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Okay, fair enough. That's it from my side.

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [26]

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Sure. And I will note, of course, that we do have the detailed design engineering going on right now for the basic hybrid cooling system. And all we'd have to do to increase or refine that number is add the water treatment portion. So we'll be very close here, I think, in the next couple months to have the final numbers.

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Operator [27]

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(Operator Instructions) The next question is from Jim McIlree of Chardan Capital.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [28]

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Doug, you talked about an insurance payment in Q3, can you size that? And does that go through the income statement?

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Kerry D. Hawkley, U.S. Geothermal Inc. - CFO, CAO, Controller and Secretary [29]

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The insurance payment is somewhere in the range of $700,000 to $900,000, and a portion of that will be going through the income statement. But it's to the tune of between $200,000 to $400,000 depending upon how we work out in our negotiations going forward.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [30]

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And that's just a reduction of expenses? Or that go through revenue (inaudible)?

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Kerry D. Hawkley, U.S. Geothermal Inc. - CFO, CAO, Controller and Secretary [31]

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A lot of is going to be business interruption, which would be revenue.

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [32]

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A majority of this last payment will be the business interruption portion.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [33]

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Got it. And then on Slide 18, you had -- (inaudible) here again. So on Slide 18, you had revenue increase projections for both Raft and Neal. And I just wanted to verify that both of those revenue projections assume the full project is completed, is that correct?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [34]

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Yes. The increased revenue noted would assume that we did the 3 megawatts at Raft and the 3 megawatts at Neal.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [35]

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Okay, great.

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [36]

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Now for Neal, by the way, we only do 1 unit for 2018, of course, that would only be 1 megawatt.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [37]

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Understood. And there are no planned outages for the rest of the year, is that right?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [38]

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We typically take short, say, 2-day planned outages in the fall, generally in October, I think, is when they're usually scheduled before we go into winter, but that's the limit for all 3 facilities.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [39]

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Right. Okay. And then my last one. So in the 10-K -- excuse me, in the 10-Q, the expected commercial date for San Emidio II increased from Q4 of '19 to Q4 of '20, and that's a function of the -- of not making the shortlist on the PPA for NV Energy, is that right? So now you just have to find another PPA and that's adding time to the commercial date, is that a fair assumption?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [40]

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That's not the reason actually, Jim. Remember, we had asked for an enlarged SGIA, or a small generator interconnection agreement, which we are on the verge of signing and would have taken us to a total of 19.9 megawatts, just before we made our expanded discovery. Once that expanded was -- discovery was made, we had to reapply, in this case, for a large generator interconnection agreement. And it's really the schedule for that LGIA, now, that is pacing item on when we could get online at San Emidio. It's not really drilling or construction. It's the schedule for the interconnection system.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [41]

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I see. Okay. Is there a possibility that you'll have to go through that kind of cycle again? Or we -- or you're fairly confident about the size of the reservoir now and what the interconnect (inaudible)?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [42]

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No, we wouldn't have to go through the cycle again. And as I said, we've got a meeting scheduled for next week. You always have a sit down meeting with NV energy transmission once they've accepted your application, and you go through the issues, schedules and what everybody's likes, dislikes and plans are. So that's scheduled for next week.

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Operator [43]

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The next question is from Jeff Osborne of Cowen and Company.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [44]

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Most of the questions have been answered. But just a couple of quick ones. On the San Francisco RFP, when would electricity be expected on that?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [45]

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I think we're -- what have we got, Scott?

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Scott L. Anderson, U.S. Geothermal Inc. - Director of IR & Corporate Communications [46]

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I don't have the Q in front of me. To sell electricity?

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [47]

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Right. From the Geysers as part of the San Francisco RFP, and I had the same question with SCPPA, just curious when that would be considered.

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Scott L. Anderson, U.S. Geothermal Inc. - Director of IR & Corporate Communications [48]

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And again, in both of those cases, to some degree, that's -- the pacing item is the interconnection agreement and interconnection infrastructure rather than when the utility would like to have that power. So we've moved that -- we're currently at the third quarter of 2019 for the Geysers.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [49]

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Got it. And then when would you expect clarity on the right-of-way versus building your own substation? And then what is the actual physical cost of the substation itself?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [50]

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Well, we're moving both of those in parallel. I'd like to get the right-of-way cleared up here and get an answer from those landowners within the next couple of weeks. We are proceeding with PG&E to study the substation on the property. It's interesting that it does have a higher capital cost, but we believe that, that is capital cost that would be recovered from the utility as a system upgrade. So it's got about a $5 million higher capital cost to go that route. But we believe those dollars would be recovered over the first 5 years of operations. So it's financial impact is not as large as the capital would indicate.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [51]

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Got it. And then just 2 other quick ones, can you just talk about any clarity on the M&A side to hit your 5-year plan, recognizing that there is a management transition, but just what are you seeing in the overall market for M&A and kind of rough pricing per megawatt?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [52]

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I would say that some of the M&A activity has slowed down. There are still some opportunities out there for growth. I think, in part, because if it's an existing facility and it's near the end of its PPA then you have to look at how it can be recontracted and what your expectations are. In some cases, we would have the ability to bring to bear that [pass] equipment. For instance, let's say we use 2 units at San Emidio II. We'd still have another unit we could deploy to a project that maybe has an older facility that needs upgrading. So it's hard to put a number on those megawatts if they're operating megawatts close to the end of the PPA life. That's usually what the situation you're looking at. So rather than take resource risk, you're taking PPA risk, which, as we've talked about earlier, is -- appears, at this point, to be a lower risk because you can offer a lower price for that product. The wellfield is developed, the interconnections are done and you're really looking at the possibility of a plant upgrade similar to what we did at San Emidio I. So I don't have a number for you.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [53]

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Make sense. Last question I might have missed this at the start, but did you give an update on the CEO search and how that's progressing? Or any rough timing clarity there?

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Douglas J. Glaspey, U.S. Geothermal Inc. - Co-Founder, Interim CEO, President, COO & Director [54]

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No, we didn't. And of course, we do have a search committee formed. And when we make some progress or we make a decision, we'll make a public announcement.

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Operator [55]

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Thank you. There are no further questions in queue at this time. I would like to turn the conference back over to management for closing comments.

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Scott L. Anderson, U.S. Geothermal Inc. - Director of IR & Corporate Communications [56]

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Thanks, Manny, and thank you to everyone for participating in our call today. If you have any further questions, please feel free to call us at area code (208) 424-1027. Thanks, again, for your interest in U.S. Geothermal. Goodbye.

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Operator [57]

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Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.