Isaac Angel - Chief Executive Officer Doron Blachar - President Assi Ginzburg - Chief Financial Officer Smadar Lavi - Vice President of Corporate Finance, Investor Relations Rob Fink - FNK, Investor Relations

Good morning! And welcome the Ormat Tech, Q1 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Rob Fink. Please go ahead.

Thank you, operator. Hosting the call today are Isaac Angel, Chief Executive Officer; Doron Blachar, President; Assi Ginzburg, Chief Financial Officer and Smadar Lavi, Vice President of Corporate Finance and Investor Relations. Before we begin, we would like to remind you that the 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, future results or trends. Actual future results may differ materially from those projected as a result of certain risk factors 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 Form 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. 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 earlier this morning, as well as in the slides posted on the company's website. Because these 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 that 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 would now like to turn the call over to Isaac Angel. Isaac, the call is yours.

Thank you very much, Rob, and good morning everyone. Thank you for joining us today. Starting with slide five, our financial results for the first quarter of 2020 demonstrate a strong start to the year, especially in terms of profitability. The world is currently facing a global health crisis, the impact and duration of which is still uncertain. In the first quarter we took prompt steps to secure the safety of our employees, to optimize our supply chain and enhance our liquidity position in order to support our growth plans. These efforts, together with the inherent, stable and long term contracted portfolio of our electricity segment, have enabled us to ease the impact of the COVID-19 pandemic at this time. All our power plants and manufacturing facilities are operating as expected. Importantly, our effort to streamline operations and optimize power generation at the plant level continues to produce benefit, leading to margin expansion and increased profitability. Our gross profit and operating income also benefitted from the receipt of $4.9 million related to a business interruption insurance claim for our Puna power plant compared to $1.3 million last year. Excluding this benefit, our operation income margin still increased more than 290 basis points on the lower total revenue, demonstrating the improvement in our electricity segment operations. This strong quarter reinforces our confidence that Ormat is in the right path with a resilient business model, geographic and revenue diversity and an excellent team. Let me spend a moment discussing our management transition process. As previously announced, I’ll be retiring from my position as CEO on July 1. Doron Blachar, our President and until recently our CFO, will take over as CEO at that time. If elected at our Annual General Meeting later this year, I'll be joining the Board of Directors as its Chairman. Additionally Assi Ginzburg just joined Ormat as our new Chief Financial Officer, enabling Doron to focus his attention on the transition process while assisting Assi and getting quickly up to speed. This process is proceeding as expected and I'm confident that the leadership transition will be a smooth one. Now I'll turn the call over Doron for a review of the financial results, before I provide an update on our operations. Doron?

Thank you, Isaac, and good morning everyone. Let me start the review of our result on slide seven. Total revenue for the first quarter of 2020 were $192.1 million, down 3.5%. Our cost of revenue decreased 11.7% to $110.3 million in the first quarter of 2020, resulting in an increase of $7.6 million in gross profit. Moving to slide eight for more details on our liquidity segment. Revenues in our liquidity segment were $142.9 million for both the first quarter 2020 and 2019, and represented 74.4% of total revenue for the most recent quarter. As shown in the slide, cost of revenue decreased by $6.2 million due to business interruption insurance income, determination of Puna lease transaction in the fourth quarter of 2019, and lower operating costs at some of our power plants. Turning to slide nine, product segment revenue decreased 9% to $47.4 million or 24.7% of total revenue for the first quarter of 2020. On slide 10, the energy storage and management services contributed $1.8 million of revenue for the first quarter of 2020, compared to $4 million last year. This decrease was mainly driven by revenue from a one-time EPC project in an amount of $2.4 million in the first quarter of 2019. Moving to slide 11, for a discussion of our total gross profit amount, first quarter 2020 consolidated gross margin was 42.6% compared to gross margin of 37.3% for the first quarter of 2019. The increase in gross profit and margin was driven by lower cost of revenues, that’s more than offset the year-over-year marginal decline in revenue. On slide 12, gross margin for the electricity segment expanded year-over-year to 50% compared to 45.7% for the first quarter of 2019. As explained, cost of revenues went down due to insurance income and termination of fleet…

Thank you very, very much Doron and I really appreciate your remarks. Before I move to operational review, I want to spend a few minutes on an update on COVID-19 and its current and potential implication on Ormat. As I mentioned in my opening remarks, in the first quarter we took prompt steps to minimize the COVID-19 implication on our employees and our business. Our first priority was to make sure that all our employees are safe and they are able to navigate this crisis unharmed. The employees in our manufacturing facility and power plant continued their work, working in separate shits, while minimizing physical contact between the different shifts. We have restricted external visitors and limited activities to critical and essential. Our employees who were able to work remotely worked from home way before this was required by the authorities and now we are preparing their gradual return to the office and location where circumstances and local government instructions allow it. We have not laid-off or furloughed any employees due to the COVID-19 and continue to pay full salaries. We continued our work with the local communities around our power-plant focusing on supporting on their health, education and other needs raised by those communities in our ongoing communication with them. Also, following the COVID-19 outbreak, Ormat donated N95maskes to our local hospital in Reno and donated food packages to communities around our foreign power-plants. We are approaching our customers when needed to notify them on any potential implications and we're communicating routinely with the utility. As mentioned we did not experience a material impact on our results of operations during the first quarter of 2020. However, we started to experience an impact in the second quarter of 2020, which varies among business segments. In the electricity segment we expect…

[Operator Instructions]. Our first question will come from Paul Coster with JPMorgan. Please go ahead.

Yes, thanks for taking my questions, and by the way congratulations to the executives; one, on elevation to the board, the other one, elevation to the CEO role; it’s going to be fun. So the guidance that you’ve issued, can you just elaborate a little bit about Honduras and Olkaria in particular. Why is it for instance the – you can see this reduction in capacity, not having much impact on EBITDA from Kenya, and what is and what is not in guidance for Honduras? Thank you.

Thank you, Paul, and thanks for your remarks. First of all in Kenya, we have both capacity payments and energy payments and the capacity payments is the vast majority of the income coming from the power plant. The capacity payments remain as it is on those curtailments and the thing that is not paid is the energy. On the 150 to 133.9 drop, we are still negotiating and discussing with the utility if they have the ability to have to make this drop, because according to the contract they don't have it. So our expectation is that eventually it will be a non-significant drop on revenue coming from the power plant.

On the Honduras?

On Honduras, they just let us know on force majeure. They send us a regular force majeure, that which we are sending to some of our customers in the product segment, and they don't have any claims whatsoever at this stage, so we don't know yet.

In both cases the sort of, the payment or the receipts were sort of lagging a little bit I believe. Accounts receivables are up fairly significantly year-on-year. It seems to pre-date COVID, so can you just kind of give us some sense of the overall dynamics with these two off-takers.

Of course! A quick thought with Kenya. Kenya are lagging with payments for the last five to six years. Pretty much they are paying eventually and there is no big difference on payments in Kenya. Sometimes in the middle of the year, it becomes – how many days over there; 61 days and they closed the gap. So there is not much of a change in Kenya. The major change was in the last few months. We are expecting curtailments on data because of the COVID-19, but as I said, it's only affecting energy payments and not capacity payments. On Honduras, I believe in the last year or so the payments are on time, they are not lagging any payment since managements changed in there, I think it was a year ago or maybe it’s more than that, but they have $20 million of debt, which is already more than a year due that was accumulated with the previous management and we are in a process of an arbitration. They don't have any claims against the $20 million. They're not claiming that it’s not due. They are simply saying that they are waiting for a funding coming from IMF and then they will close the gap also known as [inaudible]. These are – those are the situations with both customers.

Got it, thanks. The last question, on the projects that you’re looking to deploy over the next 18 months or so, is there any risk and can you sort of quantify the risks that you know a project gets pulled.

We have – most of the project are with SCPPA1 portfolio projects until the end of 2022 and those projects are already lined up when we expect to be online, on time with those projects and on top of it we declared last quarter at the end of the year, we are building PTC projects that will be – unless we will find additional portfolio projects SCPPA or other CCA’s, then they will be sold at the beginning at the market price.

Okay, thank you very much.

And these projects are also as planned.

Got it. Thank you.

Our next question will come from Noah Kaye with Oppenheimer. Please go ahead.

Yes, thank you. This is Kristen on for Noah. I appreciate you taking our questions. If we could just follow-up on the PTC comment that you just made, you know last week in response to a request from Congress, the Department of Treasury indicated that it anticipates modifying the rules in the near future on eligibility requirements for projects eligible for production tax credit. You know the thought is that developers will get more time to complete work on this project. So, you know what are your current expectations in terms of exploration work and CapEx you’ll spend this year to qualify projects for PTC eligibility and how would you be helped by adding those extended timeline?

Okay Kristen, you're right. There was some information on that last week, but it was mainly on solar and storage and wind, sorry, and not necessarily on geothermal. We are hoping through our lobbies that it’s going to be also on geothermal. In any case, we have a list of projects that we're – I don't know the slide number – on slide 27 that articulates the projects that are going to be ready for PTC this year. Obviously if PTC will be prolonged for 2021 and further, then we will have more projects that will qualify for PTC. So far, because of the improvement within the liquidity, we don't see any issue on supporting those PTC projects that we declare.

Okay, thank you. And then can you update us on feasibility study in Indonesia for the then 110 megawatt geothermal expansion? You know when should that study be complete and what should we anticipate as far as next steps?

As a matter of fact, the Ijen project is progressing better than planned. We already hit on the first well drilling resource much earlier than expected and so according to our geologists, the resources is there and the plan was to finalize it by 2022 until 2023, and we believe we will be on time and try to be earlier.

Okay, great. And then the last question for us, for Pune, you know when do you anticipate the transmission upgrade will be complete and has the utility work substantially begun and you know what is the impact overall from COVID-19 as far as the timeline?

Okay, look, it is an ongoing story over there. The first thing was that it’s going to be ready by November 19 and then it was prolonged by the PUC because of the public hearing to the beginning of this year. Now, the public hearing was announced. So far we don't have any objection, so the expectation is that HELCO will be erecting the poll and the transmission by August. If it will be happening, then we will be more than glad to start delivering electricity, starting with the transmission lines. I am expecting to lower electricity much before that, but unfortunately this will be on, let’s say a service transmission line and a very low amount, so we won't be paid for it, but at least we will test the power plant, the resource and so on.

Just to be clear, any specific delays owing to construction availability or anything related to COVID-19?

So far nothing that we are anticipating, because we were ready before time with everything that we needed, so I hope there won't be any last moment resource issues that will hold up. Unless something will happen, as I said before, we will be flowing electricity to the utility to be sold sometime around August.

Okay, thank you for our questions.

Thank you.

[Operator Instructions] Our next question will come from Jeff Osborne with Cowen & Co. Please go ahead.

Hey, good morning guys, a couple of questions on my end. One, just circling back to Kenya, I think beyond the curtailment and the receivables, I think if my memory is right, the other issue that some investors had there was the ongoing litigation. Is there anything you can update us as it relates to the historical tax receipts. I think they're claiming you over $200 million for back taxes.

Hey Jeff, it’s Doron. Basically we received assessments from the KRA on various items, and all of these assessments you know based on our understanding, based on our auditors and the legal advice that we got are totally not relevant or correct to the operations of Kenya, of an IPP in Kenya. They have a much more important than just to Ormat. So we’ve got the assessment and we are responding to it within a few weeks and then we’ll start you know the process where we are filling it. It is based on our understanding of the Kenyan tax law, as well as our advisors. There are no merits to any of these claims they are arguing. I would say that at least a few of them, well they’ve already argued with us in the past, and then they went back on them. So we’re not sure exactly why are they coming back on these items, but we will work within the Kenyan processes, starting you know with an alternative dispute resolution process and then if still needed you know, we’ll go through the relevant legal process.

Got it. So it sounds like it will be ongoing for quite some time. Is there any other detail you can…

Yes, it feels like that.

Alright. Is there any other detail you can give us as it relates to the capacity versus energy payments? You know when you look at it, I think the average price there is roughly $119 or $120 a megawatt hour. Is there a way to think about the risk around curtailment? Is it 90% capacity and 10% energy or any help you can give us in terms of magnitude? I understand Isaac indicated that the majority was capacity and you know felt comfortable it will be paid, but is there any finer point that you can put on that as to magnitude?

Yeah, you're not correct with the numbers Jeff. They're a bit lower than what you just said, but the 90% to 10% is quite accurate.

Okay. And then is there any update on the insurance…

Jeff?

Yeah, sure.

One thing, if you look on the numbers you know, the capacity pays regardless of the actual generation of curtailment. So whenever they do make a payment and the generation is lower, the capacity still doesn't change. So that you know can tweak on a specific quarter, the calculated average per price, per megawatt hour. In reality the actual price when they are taking the full energy is more in the area of the 90s, they are taking both capacity and energy. But on a specific quarter the curtailment or sometimes an outage for maintenance or anything like that, you know the average can go up a bit.

Got it. It’s helpful, I appreciate the clarification there. Maybe just switching gears, two other quicker ones I hope, on the insurance side. So I think you mentioned in the slides $27.8 million’s been received. If my memory is right, the total that you could potentially receive I believe was $100 million. Is there any sense of cadence on when additional insurance checks would be coming in similar to what you received this quarter?

The total policy as you said is about $100 million. We did receive some more small amounts in April. We are discussing and it is built with different layers, different insurers. So we are discussing with the other insurers on some kind of a settlement, but there is one insurer that they wasn't willing to discuss settlement and we sued him, and honestly I can't understand how you know multiple insurer companies will pay the policy and one decided he doesn't want to pay, but we’ll have to see that through the legal court if needed.

Got it! And then just to be clear, the guidance does not include any insurance; is that a safe assumption, for the rest of the year?

The guidance includes you know business interruptions similar to what we usually make with Puna. So it’s not – doesn't come all in the revenue, but there are some small number you know that might impact the guidance.

Okay. Now last one for you Doron is how should we think about tax rate for the year?

I think tax rate you know this quarter was around 37% you know. It is very hard to focus the tax with the changes with the specific tax status that Ormat’s had with the valuation allowance, past the valuation allowance that we have. You know the best estimate going forward usually is what we’ve recorded in the last period as a good estimate going forward, but it obviously can vary between the countries and the years. Obviously tax rates are different in the different jurisdictions.

Got it, thank you. That’s all I had.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Isaac Angel for any closing remarks.

Thank you very much, Brent, and as I said before, we are in a very strange and difficult era and no doubt that there will be markets and companies which are going to change completely during this era. I personally believe that Ormat, because of a very specific ingredient, is very well positioned to go through this era strongly even then better. With the devoted employees, the very experienced management team, with the support, full support of the Board, very long term contracts which are already signed and are going to be signed in the future, and a strong cash flow, I’m very optimistic that we will be able to go through this difficult era regardless if it's going to be ending this summer or it's going to take another year to go. And thank you very much for the ongoing support. Have a nice day!

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