Welcome to Ormat Technologies Fourth Quarter and 2019 Year End Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note the event is being recorded. . I would now like to turn the conference over to Mr. Rob Fink, of FNK Investor Relations. Please go ahead.

Thank you, operator. Hosting the call today are Isaac Angel, Chief Executive Officer; Doron Blachar, President and Chief Financial Officer; and Smadar Lavi, Vice President of Corporate Finance and Investor Relations. Before beginning, 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, are based on management's current estimates and projections, 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 Ormat Technologies Annual Report on Form 10-K and quarterly reports on 10-Q that are filed with the SEC. In addition, during the call, the company will present non-GAAP financial measures, such as adjusted EBITDA and adjusted net income attributable to the company's stockholders. Reconciliations to the most directly comparable GAAP measures and management's reasons for presenting such information is set forth in the press release that was issued last night as well as in the slides that are posted on the company's website. In costes measures are not calculated in accordance with GAAP. They should not be considered in isolation from the financial statements prepared in accordance with GAAP. Before I turn the call over to management, I would like to remind everyone in a slide presentation accompanying this call may be accessed on the company's website at ormat.com under the presentation link that's found on the Investor Relations tab. With all that said, I'd now like to turn the call over to Isaac. Isaac, the call is yours.

Thank you very much, Rob, and good morning, everyone. Thank you for joining us today. Starting with slide 5. The fourth quarter was a strong ending to a good year for Ormat as our results exceeded the guidance for revenue and were within our guidance for EBITDA. We achieved growth overcoming some significant challenges that materially impacted our results. In particular, our power plant generation and overall revenue grew despite the loss of production from Puna facility in Hawaii for the entire year. We are delivering financial results with top and bottom-line growth. This is a strong testament to our revenue and geographic diversity our operation efficiency and the professionalism of our team. Overall, our total revenues for 2019 increased 3.7% to $746 million. With our electricity segment revenues growing 6% to $540.3 million, benefiting from new facilities brought online at the end of 2018 and as well as contributions from our acquisition of shorter. Our product segment revenues declined as expected, but our margins in this segment have normalized. Overall, we are well positioned for continued success in 2020 and going forward. As Puna is expected to come back online in the second half of 2020 and as we continue to benefit from incremental capacity from our projects currently under construction and enhancements. Additionally, I announced last night that I will be retiring as CEO of Ormat on July 1, 2020. I do so after proudly leading Ormat for the last 6 years and take in the knowledge that our Board has put in place an orderly management succession plan. Furthermore, as I will discuss shortly, I look forward to continuing to contribute to Ormat's success following my retirement. I'm excited that the Board has appointed Doron, Ormat’s CFO as my successor. Doron joined Ormat 1-year before me and…

Thank you, Isaac, and good morning, everyone. I would like to thank Isaac and the Board of Directors for their confidence in me. I look forward to moving to my new role as CEO, leading Ormat's devoted and professional team. Let me start the review of our results on slide 7. Total revenues for the full year 2019 was $746 million up 3.7% from prior year. Our cost of revenues increased 6.2% to $476.7 million in 2019. Breaking this down, the electricity segment grew 6%, representing 72.4% of total revenue in 2019, while product segment revenues declined 5.3%, representing 25.6% of total revenues in 2019. Energy Storage and Management Services segment revenues nearly doubled year-over-year to $14.7 million and represented 2% of our total revenue for the full year of 2019. Moving to slide 8. Revenues in our Electricity segment were $540.3 million for the full year 2019, compared to $509.9 million in 2018, primarily driven by commencement of commercial operations of the third phase of McGinness Hills Complex in December 2018 and a Kilauea expansion in mid-2018 as well as by the contribution from U.S. Geothermal acquisition in mid-2018. This was partially offset by the shutdown of the Puna plant following the volcanic eruption in May 2018, and by a decrease in generation due to curtailment by the offtaker in the Olkaria Complex in Kenya. Cost of revenues increased 4.9% to $312.8 million for the full year of 2019. This increase was primarily attributable to additional costs related to the power plant that were added during 2018 that I just mentioned. Turning to slide 9. Product segment revenue were $191 million for 2019, compared to $201.7 million in 2018. The decrease in revenue related to timing of revenue recognition of the projects included in our backlog. Cost of revenues…

Thank you very much, Doron. Turning to Slide 29 for a look at generation. Year-over-year, power generation in our power plants increased by 6.5% from 5.9 megawatt hours in 2018 to 6.2 million megawatt hours in 2019. This increase is attributed to the addition of McGuinness Hills Phase 3, the expansion in Kenya and the acquisition of USG Geothermal's assets as well as the new key generation in constant power plant, with the addition of the solar system. The increase was partially offset by the shutdown of our Puna power plant following the volcanic eruption and curtailment by the offtaker in the Olkaria III complex in Kenya. As you can see on Slide 30, we adjusted the generation capacity of our existing power plants based on their performance, and we expect continued adjustments and enhancements to optimize plant performance. In Don Campbell, we see some temperature decline of the resource and in McGinness the complex is performing a bit better than expected. In Zunil power plant, according to the PPA, revenues used to be calculated based on 24-megawatt generating capacity, and it was unrelated performance of the reservoir. In 2019 and onwards, revenues are calculated based on the actual generation of the power plant and therefore, the generation capacity was updated to reflect the current generation. Turning to slide 31. Let me spend a few moments providing an update on the situation at Puna. As of today, there is reconstruction of efforts at Puna continue. A building permit that is required for the construction of the substation was received recently. HELCO continues with the efforts to complete the upgrade of the transmission line, and we expect these efforts to end by mid-2020. On the field side, we completed the drilling of one of the production wells that was blocked immediately…

We’ll now begin the question-and-answer session. [Operator Instructions] First question comes from Mr. Paul Coster with JPMorgan. Please go ahead.

Yeah. Thank you very much for taking our questions. This is Mark Strouse on for Paul. Just start off with a congratulations on the retirements as well as the promotion. First question, Doron, maybe, are you able to quantify the impact to the 2020 revenue guidance from the delay in Puna?

We originally hope that Puna will gradually start in Q2 and get to full operations in Q3 and onwards. So the full operation is something that we still expect. So that we estimate the impact on Q2 of few million dollars, maybe $3 million, $4 million on the EBITDA.

Okay. And then looking out at your year-end 22-megawatt addition target. Does that include Puna coming back online? Or would that be in addition to Puna coming back online?

So Puna is in the numbers. Puna is in the megawatt numbers…

Okay. Okay.

… not in the addition, but not in the addition any more.

Okay. So $180 million to $200 million would be on top of the 38 to 46 from Puna?

Yes. That is all associated.

Okay. Great. Thank you. And then lastly, can you just give a bit more color on the potential magnitude of what replenishment means for product backlog? I mean, is that getting you back to where you were a couple of quarters ago to a year ago? Any color there would be helpful. I understand you're probably limited in what you can say, just given your new negotiations, but appreciate it.

Mark, this is Isaac, and thanks for your congratulations. Look, we are saying in the last six years that at the end of the day, because of the bumpiness of the product segment, we are pushing very hard the Electricity segment to be percentage was much higher. And as a matter of fact, 2019 product segment EBITDA presented only 9% of the EBITDA of the company as a total. But regardless to say -- and our projections for the last three years were basically around, if you recall, $160 million to $170 million. But eventually, a few of the markets booming, we did much higher numbers than that. This market namely being the Turkish market in the last 2.5 years, three years, because of political and financial reasons, the Turkish markets stopped. And even though there is a huge potential over there. We are not expecting it to be back in 2020, but maybe in 2021 and 2022. The company prepared itself for this issue in the Turkish market, and we concentrated in three other geographies namely New Zealand, Indonesia and the Philippines. Our expectation that one of countries, not expectation actually, as we said in the script, that we are expecting the first or one of these contracts to kick in sometime early 2022. But again, as I said, it may or may not happen. And it will happen, it will replenish 2020, sorry. It will replenish the backlog and the backlog will be again higher than before. It's a matter of timing. And we will obviously announce it whenever it will kick in.

Great. Okay. That's it for us. Thank you very much.

Thanks, Mark.

Our next question comes from Noah Kaye of Oppenheimer. Please go ahead.

Thanks. Good morning. Appreciate you taking the questions. And yeah, again, as the previous analysts, congratulations Isaac on your pending retirement. And that's Doron the CEO role. We wish you both well and look forward to it.

Thank you very much.

Thank you very much.

So I might not have caught this in the prepared remarks. What was the drivers of the lower year-over-year Electricity segment gross margin performance?

I think the year-over-year gross margin segment had a very small difference. The main difference relates to the insurance process that we receive from Puna. So, once you exclude these differences, you can see that actually, gross margin in fiscal 2019 was 44% compared to 42% in 2018. So, actually, gross margin, excluding the Puna impact went up.

Okay. But it says in the slide 20 that without Puna, 4Q 2019 was 46.9% and without Puna, 4Q 2018, it was 48.6%. So, its 150 bps decline year-over-year?

Yes. Yes.

For your gross margin--?

Yes. Yes, I responded to the annual level in the Q4 2018. It is the difference between 2019 and 2020 related to weather issues. Nevada had extremely hot Q4, temperature were much higher than normal. And as you know, our power plants are air cool. And whenever there is a very hot temperature, there is an impact on the -- on this from the power plants.

Okay, that's helpful. Thanks. North Valley, that's a Greenfield project, correct?

It's a Greenfield project, again to the existing intermediary project that we acquired from U.S. Geothermal. And basically, it was a development project which arrived together with the deal, and we are developing it right now.

Right. With the downsizing of the expected resource. Obviously, the economics still meet the hurdle rate or it wouldn't be in your pipeline. Just -- would that be the case without the PTC, how did that play into it?

Look, the PTC is basically a completely new era in Ormat. As you probably know, that we never build the power plant without a PPA before. And because of the PTC now, the company decided to start building and operating power plants and sell them on the market, expecting to a PPA that will kick-in during the life cycle of the project. Our expectation is that with the growing RPS, specifically in Canada -- sorry, in California and Nevada and other states, that the electricity prices for green energy will be higher than today. And we expect that -- and our IRR number is with the PTC on those power plants. And you should also remember that our costs are going down year-after-year to build those power plants. So, basically, starting 2022, our model is a bit changing and we will be building power plants prior to PPA received from affinity or a customer.

Okay. You'll build the power plants starting in 2022 with which projects are we referring to here? You're talking about metals and –

We – now Bouillante is outside of the U.S., it's in the Caribbean but we have a list of prospects, which are in the list. I don't recall the exact number of the slide. But you can look at the 10-K and feel list of those projects, which are prospect to be built within those – within the PTC initiative.

Okay. Okay. If I can get some more in –

Obviously, Noah, obviously, this will accelerate the growth of the company by these power plants.

Right. So on this prospect list, yes, it's very much weighted to the U.S. I don't see Kenya listed. I think you were reported as being bidders on the KenGen, 140-megawatt tender. Just kind of given the fact that you are expanding in the curtailments that you experienced there in KPLC's financial challenges. How are you thinking about your participation in that market at this point?

Okay. First of all, let's differentiate between the PTC initiative, which is solely in the U.S., of course, in the other countries, which are foreign countries. On the other countries, Kenya being one of them, obviously, we are experiencing curtailment today and we – and you're right, there is a certain issue. We are monitoring the situation. We will be – we are participating in the tender. But eventually, the management and the board will decide when and how much to invest in Kenya for excellence in build or not build those power plants.

Now, if I can add, the list of prospects, these are players that we actually have a land position. The tender in Kenya, it's a tender to be then maybe all also problem, but we don't have the land position. So it is not listed on the prospects here.

Right. So everything on the prospect slide is places where you've got the land concession?

Yes. Exactly

Okay. That's very helpful. Thank you.

Thank you, Noah.

[Operator Instructions] Our next question comes from Jeff Osborne, Cowen and Company. Please go ahead.

Yeah. Good morning and congratulations on my end as well. Just a follow-up on Kenya. Can you talk about the receivables that are due from them as well as on door, is the situation getting better or similar to prior quarters?

It's – there is some changes there, I would say, on Kenya, the situation is quite similar. They keep on paying, they're paying, although they're paying a big delay, but they are constantly paying us. I don't remember the exact due date today, but in general, I think the longest is about 70 or 80 days. I think that the oldest one, but they keep on paying us. In Honduras, it's a bit of a more of a unique situation. They have been paying us constantly for the ongoing investors on time. And they are -- but there is an older debt that they haven't paid us and that is still open. But on the rest, they're paying us on time. On Honduras, what we did get, actually, we got an approval to sell an additional 3-megawatt to private customers. So that actually allows us to generate more electricity. The department can do and sell not to an electric company. And that, obviously, will be -- should be paid regularly from the private customer.

That's helpful. I appreciate the detail there. A question on the guidance front. So the 140 to 150 you mentioned that there was a contract that it sounded like you were in late-stage negotiations and feel comfortable that, that would come through at some point early this year, I think is how you framed it. Is that award potentially shippable in 2020? And is that in the guidance for product revenue or not? I was a bit confused on the timing. It sounded like you would win it but it was unclear when the revenue would be?

Jeff, it's not in the numbers. Our backlog is contracts which are signed and somehow paid for. And that's why everything that is in the guidance is deliverable and billable. This contract that we're talking about is the larger contract that, if it will kick in, then part of it will be deliverable this -- delivered this year. I just said, we are recognizing percentage of completion, so it's not just a question of delivery. It's also a question how much work we've done today. So we do expect that if we win it, and it will be signed, and we will be able to represent revenue in 2020.

Got it. That's helpful. And the last line of question I had was on the storage front, recognizing its small today, but certainly, the 150 to 200 megawatts of pipeline is impressive. I had a two-part question. One is that, can you articulate what size that would need to be, either in revenue or megawatts for that business unit to breakeven, was question one. And then question two is, just in the pipelines. I assume, it's all in front of the meter utility scale stuff, similar to what you're doing in California and Texas and New Jersey, but I was just curious what you're seeing in terms of the pricing environment for the 150 to 200 you're bidding or in the pipeline?

On your first question, we expect this segment to be positive on EBITDA this year. And the prices are -- it depends on the market and the services that we are providing. So it's very, very much -- but in general, if we're looking at the projects that we are building, our IRR just representing based on the prices that we have today are on low teens today and the geothermal power plant.

Got it. That’s helpful. That’s all I had. Thank you.

Thank you, Jeff.

Next question comes from Ella Fried, Leumi Bank. Please go ahead.

Hello, can you hear me? Okay. I would like also like to send the best wishes posed to Doron and Isaac and to wish them success. And the question I have, actually, could you please give us some details on short and long-term implications of the tax law reform, which I suppose we still – some of the effect is still there. Do you see any developments with the tax in the foreseeable future? And if not, could you give us some detail on it.

Hi, Ella, and thank you. The tax from….

Hi, Doron and good luck.

Thank you very much. The tax reform is obviously a complicated reform. It would structure that might be simplier to U.S. companies, but international companies with operations globally. It has quite uniqueness. So we are working on them. Would say that we try to guide the market that the tax rate for next – the effective tax rate for next year would be between 30% to 40%. And I know it's a relatively large range. But at this stage, with the complication it has, that's the range that we are able to give.

How much of it will be in the cash flow? Or how much of it would be deducted? And -- for how long do you have still as foreseeable from today's perspective, the tax credit and other assets that you could use in – if you could give us some kind of timeline?

Basically, we don't expect – most of this is accounting or actually booking tax entries. We don't expect to pay taxes in the U.S. until 2026 or 2027 or even maybe afterwards. And we are paying taxes in Israel. And we will probably start to pay taxes in Kenya, sometime in 2020. So overall, it should be in the range of $20 million to -- around $20 million, $25 million annually. But obviously, this is something that is subject to changes from the law, onetime events but the big part of the tax is the accounting.

Thank you very much. This is really helpful.

Thank you, Ella.

This concludes our question-and-answer session. And I'd like to turn the conference back over to Mr. Isaac Angel for any closing remarks. Please go ahead.

Okay, guys. Thank you very much for participating. Thank you for your support as I'm going to be here for at least 2 more quarters. This is not a good bye yet. So you will hear from me yet in the upcoming quarters and then we will say goodbye. Thank you very much, again, and thank you for your support.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.