Good morning, and welcome to the Ormat Technologies, Inc. Q3 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Rob Fink of FNK IR. Please go ahead.

Thank you, operator. Hosting the call today are Doron Blachar, Chief Executive Officer; Assaf Ginzburg, 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 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 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 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 last night as well as on the slides that are 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 Doron Blachar. Doron, the call is yours.

Thank you, Rob, and good morning, everyone. Thank you for joining us today. Starting with Slide 5 and 6. This was another good quarter for Ormat. We continue to navigate successfully the challenges of the COVID pandemic, delivering year-over-year improvements in our profitability and making significant progress in executing our long-term plan to increase our geothermal storage and hybrid solar geothermal capacity. Our third quarter results reflect the strength of our business model and operating execution. We generated double-digit increases in year-over-year operating income and adjusted EBITDA and made progress with our efforts to grow our electricity and storage segment. We delivered strong cash flow from operations this quarter, driven by a $20.1 million payment received from ENEE, our customer in Honduras for prior year's outstanding invoices and improved collection from KPLC, our customer in Kenya. KPLC has made all scheduled payments for the third quarter and has started reducing overdue amounts in October. Also in Kenya, we favorably resolved a $190 million tax assessment. The most significant assessment of the tax assessments issued by the KRA. We settled this assessment with an expected limited impact on the fourth quarter P&L. Additionally, the force majeure declared by KPLC in Kenya was removed in early September. We are continuing our efforts to grow our electricity segment, as I will elaborate later on the call. We are also encouraged by our storage segment results this quarter. The strength of these 2 segments is helping us to offset the current decline in the product segment results, which is being impacted by the reduced backlog, lower revenue and lower profitability affected mainly due to COVID-19 effect. I will turn the call over to Assaf Ginzburg for a review of the financial results before I provide further update on our operations. Assaf?

Thank you, Doron. Let me start my review of our financial performance on Slide 8. Total revenues for the quarter were $159 million, down 7% and cost of revenue decreased 9% to $105 million. The net result was a decrease in gross profit of 3%. However, gross margin increased from a 32.5% last year to 34% this quarter. Moving to Slide 9 for more details on our electricity segment. Revenues for the quarter in our electricity segment were $124 million, in line with same period last year. This quarter, we benefited from increased revenue in Steamboat Hills, Ormesa and Brawley, offset by lower revenues in Olkaria as a result of the curtailment during this period. Cost of revenue this quarter included business interruption insurance income related to Puna of $2.6 million, out of a total of $20.4 million via insurance income received this quarter. This compared to $1.2 million included last year in gross margin. As a reminder, on the GAAP, we allocate the proceeds from the business interruption insurance, first, the cost of revenue of the electricity segment; and when that is exhausted, the balance is allocated to insurance income under operating expenses under a separate line item in the P&L. Turning to Slide 10. As expected, product segment revenue were lower in the quarter by $13.4 million compared to last year due to the continuing impact of COVID-19 on this segment. On Slide 11, the Energy Storage and Management Services segment generated $5.7 million of revenues, an increase of 62.5% over last year. This segment enjoyed from the Pomona addition, following its acquisition in July, which contributed $2.4 million to our quarterly revenue. Moving to Slide 12 and 13 for a discussion of our gross profit and margin. The third quarter consolidated gross margin improved by a better…

Thank you, Assaf. Turning to Slide 25 for a look at generation. Power generation in our power plants in the quarter declined by 3.5% compared to last year. This decline is mainly due to the lower generation at our OREG facility and some curtailments in the Olkaria power plant. However, revenue remained unchanged because of different energy rates under our portfolio contracts. As noted on Slide 26, our efforts to resume generation at the Puna plant moved forward and the construction of the electrical substation and transmission line is completed, and the power plant is currently connected to the transmission line. On the field side, we connected 1 new production well to the power plant, and we are in the process of connecting a second production well. We expect to start generating power in the next few weeks with a gradual increase in generation to 29 megawatts by the end of the year, although the exact timing remains uncertain. We plan to further expand generation throughout 2021 as we aim to build a new power plant with 46 megawatts. Turning to Slide 27. We continue with our work to grow our more profitable electricity segment, and we are on track with our development to add 160 megawatts to 180 megawatts in the next 2 years and compared to the 24 megawatts we added in the last 2 years, 2019 till 2020. As a result of these expansion efforts, we are expecting our CapEx in 2021 to be higher than in previous years. As we discussed last quarter, as part of our preparation for a weak 2021 in the product segment, we are using our vertical integration capabilities to shift manufacturing capacity to focus more on internal initiatives to support our electricity segment's future growth. We are allocating manufacturing, exploration and…

[Operator Instructions] The first question comes from Noah Kaye with Oppenheimer.

I guess, just to start with Kenya, did I hear you correctly that KPLC lifted the force majeure in September? And does that imply not only the factor to paying regularly, but are they buying power at/or comparably near pre-pandemic levels at this point?

Yes. They lifted the force majeure at the end of September. And they are buying more than what they've bought in Q3, still a bit less than last year. But what we've seen in Kenya is that they -- regardless of COVID, the country is returning roughly to normal business. So we hope that the current curtailment, which are lower than Q2 will continue to decline.

Yes. Okay. That's helpful. And then on the business interruption insurance, can you just -- I mean, just really so we can kind of back this out for next year. Can you just remind us, like year-to-date, what the insurance proceeds have been? And how much is sort of outstanding in terms of your claims as you start to get Puna back online here in 4Q?

Noah, this is Assaf. If you're looking between gross margin and the separate line item of insurance income, it's roughly $30 million year-to-date.

Okay. And I'm sorry if I didn't catch you, but did you expect to recover any more in 4Q? And how much is outstanding?

Out of the $100 million policy, we have collected roughly 60% of the policy. And we're still negotiating with the insurance company, including with one of them, we're actually in a -- in the legal event right now. And therefore, we cannot provide, at this point, guidance for Q4. I will say it's less likely that we will have something in Q4.

Okay. So that may still be to come in 2021. And just on products, and obviously, we've watched a declining backlog here. I think at this point, although you're indicating it -- sounds like some good prospects for the near-to-medium term. Just for everybody's modeling benefit, I mean, should we really be thinking about this $50 million or so as a reasonable revenue indicator for 2021? How likely is it that you could book enough and then turn that around into revenues over the course of next year to do significantly better than sort of this $50 million level?

So we're not giving any -- at this stage, we're not giving guidance for next year. But obviously, there is a time -- since we are recognizing revenue percentage of completion, there is a time delay between the time we sign a contract and until we can actually start to recognize revenue from it. So obviously, 2021, as we said, is going to be lower than 2020. And contract that we signed today can come into effect towards Q2, 3 and onwards, if we sign them today.

Right, right. That's helpful. And finally, the last one. Again, understanding you're -- it's too early to give formal guidance or anything like that for next year, but you did mention that CapEx is going to be higher next year, which I think is really indicative of your putting foot on the gas here with development. In order of magnitude, are we looking at somewhere along the lines of a 10% to 20% increase? Or could it even be even greater than that?

If you look in the -- Now we said that we had 24 megawatts in the last 2 years, and we plan around 160 to 180 megawatts. So the increase in 2021 and 2022 is going to be higher than 10% or 20%.

[Operator Instructions] The next question comes from Mark Strouse with JPMorgan.

Most of them have actually been answered. But if you could just kind of break down the revenue guidance narrowing it towards the lower end of the range for this year? Can you just kind of quantify the different buckets that drove that? Was there any kind of changes in expectations for Puna timing or pullbacks on the Kenya production? Anything like that, that you could provide more color, that would be great.

Yes. So thank you, Mark. On the electricity side, the main parameter is, as you said, Puna. We were hoping it will start earlier. Unfortunately, it is taking a bit longer to work on the field. So that's the main driver that pushes it to the low end. The product segment, we shortened the guidance, which is in the middle. So there's no major change over there. And on the storage front, I think it's roughly where we said it will be.

[Operator Instructions] The next question is from Jeff Osborne with Cowen & Co.

A couple of questions on my end. On the -- congratulations on the -- resolving the Kenya thing, that certainly has been an overhang for investors for quite some time. So great to see. How do we think about where the $6 million should be modeled for next quarter? Is that in other expense? Or is that a cost of goods item?

I suggested we will put it in the tax line item. It will include $3 million roughly of interest and penalties. And right now, we're planning to book everything in the tax line item. So it will not impact EBITDA. It will only impact the tax rate. But the good news, as you know, Q4 is usually our best quarter, and that's why that impact shouldn't be as significant.

Got it. And then on the storage side, you alluded to the blackouts. Was there any abnormal pricing that you saw in the third quarter that maybe the current run rate isn't repeatable? I know you gave guidance for the year, but how do we think about what you saw in the third quarter and associated profitability, just given the overall pricing environment for adequacy resources such as batteries?

Yes. They were quite -- the blackout did push pricing to be out of the ordinary in California, pricing rose to $1,000 and $2,000 per megawatt hour during the blackout. But on the contrary, in Texas, that usually has in Q3, extreme pricing. In 2019, they actually had even an hour with $9,000 per megawatt hour. They had the mild summer. So actually that didn't happen. So we do see some abnormalities in Q3 in California. So Q3, we expect Q3 to be a bit better than other quarters in the energy storage. But still, since it's not that material to Ormat. It is something that we'll need to follow, and we'll obviously give you additional guidance as we grow this business.

Got it. And Doron, you've had M&A as a target for years. And other than U.S. geothermal, you haven't been that active. How would you reflect on the past several years of M&A as a strategy for Ormat and then relative to future M&A? You've obviously done things in storage, but I think in the past, you've alluded to geothermal tuck-in acquisitions as well. Can you just touch on what the pipeline looks like now relative to the 2 different technologies that you're focused on?

Yes. So on geothermal, there's an active pipeline today of potential acquisition. On the geothermal front, we are trying to make acquisitions that are synergetic to us and that they are accretive to Ormat. And knowing the industry and knowing the risk with the resources, sometimes we have a better understanding of the risks and the forecast. And by that, we sometimes maybe underpriced compared to other potential acquisition that we've seen happen. But we are looking at a few projects today that are in the market. And on the storage, we did some acquisitions. We are discussing additional acquisitions. These are usually smaller acquisitions like Pomona and others. So I do expect to see some more acquisition in the near term.

Got it. Certainly it be a challenging 2021 then for potential capital allocation, I guess, if you've got an elevated CapEx year and then also M&A. So how do you plan on paying for any M&A, assuming it's sizable on the geothermal side? Or are these pretty small?

No, they might be sizable within our capital ability capacity. So we did raise the bond, $300 million bond earlier in the quarter. We do have significant approaches by different financial institutions to do -- to give us money -- to lend us money. Capital is available. If we have the right target, with the right price, we can finance it even.

Makes sense. And my last question was just on the $20.1 million from Honduras, was that in the guidance as it relates to adjusted EBITDA last quarter? I'm just trying to get a sense of the moving pieces with the EBITDA guidance change this quarter. How much of that was the Honduras event versus just sort of operational assets and sort of flow through?

The Honduras event was a cash flow event. It didn't go -- didn't flow through the P&L. So that was a pure cash one you can see it. The one thing that did go through the P&L is the business interruption that increased the EBITDA and following that guidance. And you can see that we have a specific line item in the -- after the G&A of business interruption income of $17.7 million that is there.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Doron Blachar for any closing remarks.

Thank you. So thank you, everybody, for joining us on this special day in the U.S. Still unknown results, but hopefully, it will be the right one, whatever the right one you want it to be. And I want to thank you for the continued support, and talk to you soon. Thank you.

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