Ormat Technologies, Inc. (ORA) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Ormat Technologies’ Fourth Quarter and Full-Year 2015 Earnings 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 this event is being recorded. I would now like to turn the conference over to Mr. Rob Fink of Hayden, IR. Please go ahead.

Thank you, operator, and thank you everyone for joining us today. Hosting the call are Isaac Angel, Chief Executive Officer; Doron Blachar, Chief Financial Officer; and Smadar Lavi, Vice President of Corporate Finance and Investor Relations. Before beginning, we’d 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 of future results or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of risks and uncertainties, please see Risk Factors as described in Ormat Technologies’ Annual Report on Form 10-K filed with the SEC. In addition, during the call, we will present non-GAAP financial measures such as EBITDA and adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures and management reasons for presenting such information is set forth in the press release that was issued last night, as well as in the slides posted on our website. Because these measures are not calculated in accordance with U.S. 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 the slide presentation accompanying this call may be accessed on the company’s website at ormat.com, under the Events & Presentations 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 for the presentation of our fourth quarter and full-year 2015 results and our outlook for 2016. Starting with Slide 4, this was a very strong conclusion to a very good year for Ormat. Our product segment outperformed our expectations, growing 23% for the year. Balancing headwinds related to the commodity prices with segment revenue in our Electricity segment. Our Electricity segment delivered 8.6% growth in generation that will support our future revenues growth. Despite challenges related to commodity prices, we maintained solid margin levels. This performance peaks to both our balanced business model and our methodical efforts to improve operational efficiency, improve profit margins, and diversify revenue. Our strong financial performance was only a small part of our achievements. In 2015, we took meaningful steps to increase shareholder value by completing the Northleaf and restructuring transactions, building our strategy, and starting to implement it. We continue to enhance all aspects of Ormat’s value chain to improve our performance as well as to progress with near and long-term strategic initiatives in our core geothermal business and in new activities to continue and provide long-term and sustainable growth. I will elaborate on the progress we have made and our plans for the future after Doron will review the financial results. Doron?

Thank you, Isaac, and good morning everyone. Let me start by providing an overview of our financial results for the full-year ended December 31, 2015. Starting with Slide 7, total revenues for 2015 were $594.6 million, up 6.3%, compared to $559.5 million in 2014. The increase was driven by increased revenues in our Product segment of 23.4% compared to 2014 and was partially offset by 1.7% decrease in our Electricity segment, which represented 63.2% of total revenues. In our Electricity segment, as you can see on Slide 8, revenues were $375.9 million in 2015 compared with $382.3 million last year. The decrease in this segment was mainly due to a $30 million reduction in the revenues generated in the power plants that are tied to oil and natural gas prices, as well as lower revenues in Puna power plant having lower generation as a result of last year [indiscernible]. The decrease was offset mainly by additional revenues generated by the second phase of McGinness Hills and Don Campbell power plant in Nevada, which commenced operation in February and September 2015 respectively. In the Product segment, on Slide 9, full-year revenues were $218.7 million, compared to $177.2 million in 2014, which represented 23.4% increase. This increase was primarily due to the increased backlog we had at the beginning of the year and commencing revenue recognition on the new contracts as we signed early in the year. Moving to Slide 10, the Company’s combined gross margins for 2015 was 36.7% compared to 36.4% in 2014. In the Product segment, gross margin was 38.8% compared to 38.4% in the prior year. The increase was driven primarily by a shift in product mix and different margin in the various sales contracts for 2015, and improvements made in our – at our Ormat Manufacturing Facility. In the Electricity segment, gross margin was 35.5%, similar to 2014. Despite, the $30 million decrease in our annual revenues, as a result of lower natural gas and oil prices, we were able to maintain the same margin due to the operational improvements we conducted in our power plant as well as the addition of the second phase power plant in McGinness Hills and Don Campbell that came online in 2015 and in which we benefited from the economical scale. In 2015, 40% of our electricity revenues were tied to oil and natural gas prices. In February, we held our exposure to natural gas for 2016. In the past, we use forward contracts to hedge our revenue and adjusted EBITDA. This year, in light of the low natural gas and oil prices, we decided to hedge on natural gas exposure by setting coal option. This hedging strategy together with a transition to a fixed price PPA for Heber 1 power plant significantly reduces our exposure and we believe revenue and adjusted EBITDA in 2016 will be less vulnerable than in 2015. Moving to Slide 11, 2015 full-year operating income was $164.1 million compared to $143.5 million in 2014. Operating income attributable to our Electricity segment for 2015 was $99.3 million compared to $90.4 million for 2014. Operating income attributable to our Product segment was $64.7 million compared to $53.1 million in 2014. Moving to Slide 12, interest expense net of capitalized interest for 2015 was $72.6 million compared to $84.7 million in 2014, a 14.3% decrease year-over-year. This decrease was primarily due to lower interest expense as a result of principal payment of long-term debt and the revolving credit line with bank, a decrease in interest related to the sale of tax benefits and a slight increase related to interest capitalized to project. The decrease was partially offsets by an increase in interest expense related to a loan received to finance the construction of the second phase of the McGinness Hills power plant. Moving to Slide 13, net income attributable to the Company’s stockholders for 2015 was $119.6 million, or $2.43 per diluted share, compared to $54.2 million, or $1.18 per diluted share for 2014. The net income includes approximately $48.7 million non-recurring and non-cash income tax benefit and related expenses recorded in the third quarter of 2015 relating to new tax law in Kenya, which extended the period of utilizing investment deductions from five years to ten years for our Olkaria 3 power plant in Kenya. Excluding the non-recurring income tax benefit and related expense, net income attributable to the company’s shareholders was $70.9 million, or $1.44 per diluted share, compared to $54.2 million, or $1.18 per diluted share, in the third quarter of 2014. Now, I’d like to go over a few quarterly financial highlights beginning with Slide 14. For the fourth quarter of 2015, total revenues increased 14.6% to $171.1 million, compared to $149.2 million in the fourth quarter of 2014. Revenues in the Electricity segment increased 4.8% to $97.8 million in the fourth quarter of 2015, up from $93.3 million in the fourth quarter of last year. Revenues in the Product segment was $73.3 million, an increase of 31%, compared to $56 million in the fourth quarter of last year. Now on Slide 15; operating income for the fourth quarter of 2015 increased to $49.1 million, compared to $34.8 million in the fourth quarter of 2014, representing 41.1% increase. Net income attributable to the company’s stockholders, for the fourth quarter of 2015, were $23 million, or $0.46 per diluted share, compared to $7 million, or $0.15 per diluted share, in the fourth quarter of 2014. Please turn to Slide 16 on adjusted EBITDA. Adjusted EBITDA for 2015 was $291.3 million, compared to $272.7 million in the same period last year, which represents a 6.8% increase. This increase was despite $22 million reduction in our annual adjusted EBITDA as a result of lower natural gas and oil prices. Adjusted EBITDA for the fourth quarter of 2015 was $79.1 million, compared to $68.3 million in the same quarter last year, which represents a 15.8% increase. Reconciliation of the EBITDA and adjusted EBITDA is described on the appendix slide. Turning to Slide 17, cash and cash equivalents, as of December 31, 2015, was $185.9 million. We generated $190 million in cash from operating activities, and invested $152.5 million in CapEx. The accompanying slide breaks down the use of cash during the year. Our long-term debt, as of December 31, 2015, and the payment schedules are presented in Slide 18 of the presentation. The average cost of debt for the company stands at 5.9%. I would also like to mention that Ormat’s equity passed for the first time the $1 billion mark [ph] in which $1.08 billion. On February 23, 2016, Ormat’s Board of Directors approved the payment of a quarterly dividend of $0.31 per share for the first quarter. The dividend will be paid on March 29, 2016 to shareholders of record as of the closing business on March 15, 2016. In addition, the Company expects to pay a quarterly dividend of $0.07 per share in the next three quarters. That concludes my financial overview. I would like now to turn the call to Isaac for an operational and business update. Isaac?

Thank you very much, Doron, starting with Slide 20 for an update on operations. As I mentioned in my opening remarks, this was a very good year for Ormat, and I would like to elaborate on some of the achievements being accomplished. We have discussed few times in 2015, the joint venture with Northleaf Partners through which we monetize the portion of our portfolio and provided the company with additional capital for expansion. The partnership has progressed exactly as we hoped it would and we expect to add the second phase of Don Campbell power plant with the joint venture in the first half of 2016. We also successfully completed the share exchange transaction with our former parent entity, Ormat Industries. The net result of this transaction increase the public float of our stock from approximately 40% to approximately 76% of our total shares outstanding, which helped to expand and improve our liquidity. This transaction also streamlined and simplified Ormat’s corporate structure. With these two milestones, serving as a foundation, we share with the market a new multi-year strategic plan for long-term sustainable growth at an Analyst Day in March in New York. This plan involved facility optimization to maximize profitability, geographic expansion, and market expansion involving Ormat transitioning from a leader in geothermal energy to a global leader in renewable energy. During the year, we have refined and started to implement a number of the elements of the new plant and pleased to report that we made significant steps to gain each of these components of our strategy. Moving to Slide 21; we made improvements in all aspects of our value chain with using manufacturing lead-time, improving management control and procurement. This process translates into a significant improvement in gross margin and adjusted EBITDA margin, if [indiscernible] on the Electricity segment on Slide 22, generation in 2015 was 4.8 million megawatt hour compared to 4.5 million megawatt hour in 2014, which represents 8.6% increase primarily as a result of the second phase of Don Campbell and McGinness power plants that commenced operation in 2015. We have made planned level adjustments, designed to optimize our electricity generation including the elimination of older or less efficient components with the goal of improving profitability. This progress is evident in the financial results we are reporting today. We see improvement in the adjusted EBITDA per megawatt with the similar levels in 2015 compared to 2014, despite commodity impact on revenues. We see a significant reduction in O&M cost and we see a reduction in CapEx per megawatt from a range of $4.5 million to $5 million per megawatt to a range of $4 million to $4.5 million per megawatt. We believe that new capacity that was recently added from Olkaria power plant in Kenya should further improve operation margins, which will in turn drive higher levels of adjusted EBITDA and profitability. Turning to Slide 23, we also made progress in our geographic expansion goals as evidenced by the recent announcement the signing of binding Memorandum of Understanding to acquire, gradually, 85% of geothermal power plant in the Island of Guadeloupe. As we stated at the Analyst Day, growth through M&A is a key part of our overall strategy. Our strong balance sheet positions Ormat well to execute additional strategic execution – acquisitions. As it relates to our goal of expanding our technological and geographical base in the geothermal market, we announced the milestone collaboration with Toshiba. For nearly five decades, Ormat is focused on and maintain a leadership position with low to medium to the geothermal projects. Toshiba is the recognized leader in the higher-end of the technology. Together, Ormat and Toshiba are well positioned to bid on and win product contracts as well as potential projects based on the combined technologies of these two leaders. Already we are seeing expansion of opportunities related to this collaboration. Finally, looking this market expansion to new activities, we are evaluating several solar PV projects outside the U.S., as well as storage projects in the U.S. Turning to Slide 24 to an operation update. Our current generation capacity increased to nearly 700 megawatts. We made a few adjustments to reflect the updated status of our generating capacity. We increased McGinness Hills and Don Campbell complexes generating capacity to 83 megawatts and 41 megawatts respectively to reflect the enhanced performance of these plants. The generation capacity of Ormesa complex was reduced to 42 megawatts mainly to a permanent shutdown of one of the steam turbines and some of the old OECs not that we optimized plant performance. Turning to Slide 25; we’ve continued to expand our portfolio of geothermal plants. In January, we’ll reach commercial operation of Plant 4 in Olkaria III complex in Kenya. This expansion increased the complex total generation capacity by 29 megawatts to 139 megawatts. Together with the McGinness Hills and Don Campbell second phase in the last 12 months, we commenced commercial operation of three new power plants in an aggregate capacity of over 90 megawatts. All three plants were constructed and start operation well ahead of planned schedule and will contribute to 2016 revenues. We will not have been achieved – we will not have been able to achieve this, if we don’t have an in-house products division. Again reinforcing the importance are vertically integrated and well balanced business model. Moving to Slide 26 for an update on projects under construction. We plan to add 160 megawatts to 190 megawatts by the end of 2018 by bringing new plants online, expanding existing plants as well as adding capacity from a recent acquisition. As part of this expansion plan, we recently announced the commencement of construction of the Platanares geothermal project in Honduras. In December 2015, we concluded the drilling activity as well as extensive tests that support our decision to construct a 35 megawatt project, which is larger than initially estimated. The project expects to reach commercial operation by the end of 2017. We also initiated development of efforts in two projects in Nevada: Tungsten Mountain and Dixie Meadows are each expected to generate 25 megawatts to 35 megawatts, once they come online in 2017 or 2018. We have drilled several exploration wells both sides. And while drilling activities ongoing, we are making progress towards securing PPAs. We believe that these projects may qualify for the production tax credit. In Sarulla, Indonesia, engineering and procurement for the first phase is completed, while in progress for the other two phases. The construction for the first phase is in progress. The infrastructure work has been substantially completed. The major equipment including Ormat’s OECs and Toshiba’s steam turbine for the first phase have arrived to the country, larger portion already at the site. The drilling of production injection wells is also in-progress for all three phases, but currently the project company is experiencing some delays mainly in the meeting some of the drilling milestones as well as few EPC milestones. It should also be noted that project is facing some cost overruns resulting mainly from drilling. The consortium members are examining the significance of these cost overruns and their potential implications for the project’s budgets as well as for the financing of the project since the cost overruns and drillings delays may impact the project’s ability to drove on the debt financing and force additional equity investment by the consortium members. All contracting milestones under Ormat supply agreement were achieved and the manufacturing work is currently progressing as planned. The first phase of operation is expected to commence towards the end of 2016. And the remaining two phases of operations are scheduled to commence within 18 months thereafter. We also expect to close the acquisition of Bouillante Geothermal Power Plant in Guadeloupe Island by May 2016, which will be immediately accretive to Ormat’s EPS. The projects are just described as well as additional projects including Menangai in Kenya are under various stages of development and expected to support our expansion by the end of 2018. Besides the investment in new projects, we are continuing our exploration and business development activities to support future growth. If you could please turn to Slide 27, you’d see that our CapEx requirement for 2016 is approximately $264 million. We plan to invest a total of approximately $83 million in capital expenditures, on new projects, under construction and enhancements and additionally approximately $101 million are budgeted for exploration activities. Development of new project is investment in new activities that reflects expenditure under the new strategic plan and maintenance CapEx for operating projects. In addition, $63 million will be required for debt repayment. Turning to Slide 28 for an update on our Product segment. Our backlog, as of February 23, 2016, stands approximately $256 million. Our backlog together with the new contract that we expect to sign will support our financials. Moving to Slide 29 for a regulatory update. Increasingly, government and private sectors are taking actions to fight climate change and move towards to low carbon resilient and sustainable future. We have seen this in the United States as key states set long-term goals, established minimum requirements and create incentives for the use of renewable energy. As we have previously noted, in October, California expended on its existing renewable portfolio standard or RPS policy. The new low requires that utilities procure 50% of their electricity from renewables by 2030, an increase of 33% required by 2020. Hawaii is an even more aggressive low requiring that 100% of its energy come from renewables by 2045. And in December, the United States Congress agreed to grant extension to the tax credit for geothermal energy as part of the broader production tax credit program. While these programs within the United States are encouraging, in December we also saw action on a global level. In December 2015, 195 countries signed a historic agreement at the Paris Climate Change Conference, held in Paris. For the first time, all countries committed to setting nationally climate targets and reporting on their progress. We believe that submission of national targets in five years cycles signal to investment within technology innovators that the world will demand increased use of renewable energy in the decades to come. This comes after a group of 20 countries including the U.S., U.K., France, China, and India pledged to double their budget for renewable energy technology over the next five years as part of a separate initiatives called mission innovation. World leaders are clearly increasing the focus on renewable energy. Geothermal is based on the energy is uniquely positioned to benefit from this trend and Ormat is focused on remaining a global leader in this space. Turning to Slide 30 for our 2016 guidance. In 2016, we expect total revenue to be between $620 million and $640 million. We expect revenue in our Electricity segment to be between $410 million and $420 million. The Electricity segment revenue guidance assumes current oil and natural gas crisis. For the Product segment, we expect revenues to be between $210 million and $220 million. We expect 2016 adjusted EBITDA from $300 million to $310 million. This estimate includes approximately $9 million of expected income related to tax equity transactions compared to $25 million in 2015. Excluding this demand, the expected increase in adjusted EBITDA should reflect an operational growth of between 9% to 13%. We expect annual adjusted EBITDA attributable to minority’s interest to be approximately $17 million. This amount assumes the inclusion of the second phase of Don Campbell power plant in the joint venture with Northleaf. In summary, 2015 was a very good year for Ormat and I’m excited about our future. The significant declines in the price of oil and natural gas have impacted many industries and we are not immune, while we cannot predict what will happen in the commodity markets during 2016. We can state with growing confidence that the demand for renewable energy is growing. Volatility of fossil fuels only contributes to this demand. This creates an environment where leaders, like Ormat, can grow and expand their market share. It is truly an exciting time to be a part of this great company, and I’m optimistic about the future of Ormat into geothermal industry in general. This concludes our remarks for today and I thank you very much for your ongoing and continued support. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Paul Coster of JP Morgan. Please go ahead. Mr. Coster, you may proceed.

Sorry I had my mute on there. Thank you very much for taking my questions. Congratulations on concluding an excellent year. So looking forward, I wonder if perhaps you can take us through your sort of cash outlook for the year, it looks to me like you’ll be using in excess of $100 million of your cash balance, unless you tap into new sources of finance. So perhaps you can talk us through that please?

Hi, Paul, thank you. This is Doron. Basically, when we look, we do need – we do have an increased capital plan and increased gross plan. As the PTCs were extended, we are planning to do one or two tax equity transactions. And in addition to that some of the projects that we are constructing like in Honduras or one of the two projects in Nevada that we’re now finishing the exploration phase in Tungsten and Dixie, we will do project finance for them. So the construction will be financed with the specific loan program.

Okay. So, you’re not going to be – you don’t anticipate tapping the debt or equity markets this year?

No, to the extent no – unless, we will increase our accelerated growth, which is expected.

Right. Can you – you talked to us a little bit about the Toshiba partnership? You alluded to sort of benefiting you already. What is the nature of the benefit you’re seeing?

Hi, Paul. This is Isaac. I think it’s one of the best things happened during the last year. In the last six months, we have exposure to much more projects than we did in the past because of the fact that both companies are approaching a high-end, low-end and middle-end of the projects together. Actually, we have even a win, which I cannot speak about it as of now, but we will talk about it in the very near future. And I’m very, very optimistic that this collaboration will bring in 2016 more and more projects, specifically in other countries mainly in Europe and Southeast Asia.

Okay. My last question is looking at your anticipated deployment activity, it looks to me like revenues and I assume EBITDA should accelerate a little bit in 2017, just eyeballing the megawatts that come online. Is that a reasonable assumption to make?

It was a short answer and unfortunately I have a long – it was a short question and I have a long answer. As you realize with the year passing through and we have $256 million contract in Sarulla, which will be ending in sometime during 2017. We have to accelerate our Product segment, but you realize that it will be difficult to staying the same growth in Product segments with this project ending. But on the other hand realizing that and we announced it on March in New York, the company is making tremendous efforts to accelerate the Electricity segment and we believe we will continue – we will sustain growth, but not necessarily it will be divided in the same percentage between products and electricity looking forward. On the other hand, I should say, we’re not giving any outlook for 2017 or 2018, and the only outlook that we’re giving is in 2016. But, in general, if you look within the next five years, we are expecting a step-up function in our Electricity segment, and the company is doing tremendous efforts and as part of the accelerated CapEx that you’re seeing to build more and more power plants internally and also externally.

Very good, thank you very much.

Thank you.

Our next question comes from Dan Mannes of Avondale Partners. Please go ahead.

Good morning and also congratulations on a strong quarter and a strong year.

Thank you very much, Dan.

A couple of follow-ups. First, the acquisition in Guadeloupe – first, congratulations on getting an acquisition done. Can you give us a little bit more color maybe on the structure of the PPA, they’re number one. And number two, is this – the closing of this transaction included in your guidance for 2016 or not.

Hi, Dan. It’s Doron. For the second part, yes. The guidance includes the acquisition of Guadeloupe response. The first part basically, the PPA in Guadeloupe has a capacity payment and has an energy payment. We cannot – we still don’t own the assets at closing, haven’t happened. So we cannot discuss too much in details, because we still don’t own the power plant, but there is a capacity and an energy payment that grows up – goes up as the generation goes up.

Okay. And maybe could you walk through the structure of the purchase, does it face – you’re going to own all – 85% of all 15 megawatts this year or you own a piece of that and then it grow – then there are multiple payments to them? Could you maybe just walk us through how that works?

We’re going to own upon closing 80% of the facility, and then the investment – the acquisition and the investment structure says that in the next two years from the closing. Recently, Ormat will increase its capital investments to the company and by putting in more cash into the company; the percentages will go up and will reach once all the cash is invested to 85% ownership by Ormat. Since, we are going to have 80% on closing. We will consolidate obviously the company. We are the controlling shareholders. And our people actually have been there already and analyzing the projects to see how we can expand it sooner rather than later.

Got it. A real quick one on Tungsten and Dixie Meadows, it’s great to see you guys are finding some more drilling success. Can you talk at all about the PPA market for those plants, the last several Nevada plants, you’ve sold into California. Alternatively, is this an opportunity to perhaps get a commercial PPA? If you could talk to us about the PPA environment, that would be helpful?

Dan, do you know as I know that the PPA environment in the U.S. is a bit suffering in the last few years. On the other hand, Ormat was – we successfully achieved few PPAs in the last year or so. And even though I cannot talk on the details, but I’m optimistic that our future growth in the Electricity segment will come both from the U.S. and from the other countries. And I’m very optimistic that we will be able to gain PPAs for these two power plants and more in the U.S.

Okay.

But unfortunately, I’m not in a position to talk about terms, numbers and so on. I really hope that this will be an outline very soon.

Okay. Olkaria 3 with the completion of the most recent phase, can you maybe help us to understand the new agreement you have and your ability to expand this and also is this included in the some portion – is another leg of Olkaria 3 included in the 160 megawatts to 190 megawatts that that you’ve laid out through 2018?

Well, no – first of all, no doubt that Olkaria is one of our most successful prospects. And there is an opportunity to increase Olkaria to the third phase as we already have assigned PPA. I don’t know if we disclosed it, but it is 400 megawatts, which 29 of them are already consumed. And there is a possibility to increase it to Olkaria 5, but it is not in the numbers that mentioned in the 180 megawatts – sorry, 160 megawatts to 190 megawatts.

I would like maybe just to add a little bit color. In the 160 megawatts to 190 megawatts, obviously, we have projects that are not finalized or have final PPAs and finish exploration. These are projects that are in the process. And at the end of the day, we don’t know exactly all the projects that will come in. We have seen today, this next phase is not in the numbers, but exploration and resources tend to change over time. And so we might see that there is additional result and may be an addition to increase it or not, so it’s not in the initial estimate, but it can obviously come in, if that is something that will go out or whatever.

Dan, I will reiterate, what I just said to Paul before. We are working very, very diligently to make this step up function as I talked about it in our meeting last year and I think that this will fuel the growth of Ormat in the next upcoming five years or more. And it will come both from the U.S. as I said and elsewhere, specifically from African countries and Southeast Asia.

On that note, one of the major geothermal owners in Southeast Asia at least through some trade publications is reportedly considering selling and this will be a very major asset that could be a step change in terms of your output if you pursed it. Is that – without discussing a particular M&A opportunity, how serious are you on M&A at this point and would you consider kind of assets of that time – type of scope and scale?

Dan, it’s very, very premature way. We got the same teaser yesterday and we are looking into it. Don’t forget that we are talking about an asset of over maybe $2 billion. So, it’s something that we should certainly look into, but it’s very early to talk about it seriously.

Okay. And then my final question, as you look at the Product segment, we’ve been really impressed with the way you’ve been able to maintain margins last year, a lot of that you guys have done internally in terms of improving operations. Historically, you’ve kind of managed expectations as it relates to product margins, maybe a little bit lower than what you put up the last year. Can you maybe help us out a little bit in terms of how to think about sequential margins in the Product segment for 2016 and beyond? And secondarily, as you mentioned your backlog of 260, most of that’s going to go out the door in 2016. It sounds like you have pretty high confidence you’re about to bring in some more material backlog in the fairly near-term?

On the margin sides, we are confident that we will be able to keep somehow the margins on the levels that we are. It might deviate a bit depending on the product mix that in the countries that we are operating in. On the second thing, as I said before, it will be very difficult to maintain the same levels of product going forward when you lose or not lose – losing is not the right word, when you finish successfully a $256 million projects. On the other hand, we are bringing in new products – product constructs. But as I said before, I’m not really worried because our strategy that calls for increasing rapidly the growth in the electricity demand will basically fuel the growth of the Company as a total, and not necessarily we will be able to keep – to maintain the same ratio as we have today, which is pretty high as you have noticed in the last year. So I’m optimistic for the future, but not necessary in the same ratio in numbers. And to conclude I believe that the profitability is sustainable.

Sounds good. Thanks so much for all the color.

Thank you.

[Operator Instructions] Our next question comes from Ella Fried of Leumi. Please go ahead.

Hey, I also like to congratulate you on the result. I have two questions. First is regarding the Toshiba Corporation, what do you say that it is already reflected in the Product segment or do you see it affecting the product segment beyond Sarulla?

Hi, Ella. Thanks for your congrats. And first of all, it’s not reflected in 2015 numbers, but it is reflected in 2016 and the backlog as it stands now, still not a very substantial number, but we expect that this number will grow looking forward. And to the second part, it’s pretty much the same answer as I gave to Dan and Paul before on the mix of Electricity and the products looking forward.

Thank you. And the second question is regarding your hedge for the next year. Could you elaborate basically or maybe give some numbers regarding this hedge?

Basically, what we did – basically in light of the very low oil and natural gas prices and since we have exposure to this commodity and we’ve decided to sell a call option, basically it hedges Ormat on the downside, not 100% on the downside, but it hedges Ormat up to a certain point on the downside and generates additional EBITDA to the company. The main idea of this hedge is to hedge the budget, which is the basis for the guidance. So we can keep it. So it’s a bit of different structure than a simple forward and standard forward has a selling of a call and buying a put, so we actually exercised half of the forward selling at call only.

So you had there like most of the cash flow of Puna?

Puna on the oil and on the gas Ormesa and the left part of Heber that is still on – on the gas part.

Okay. Well, thank you and again very impressive results.

Thank you very much.

Our next question comes from [indiscernible]. Please go ahead.

Hi, good morning or good evening. Also congratulations on your great 2015 results. Two questions. First of all with 2015 ahead, are you planning any divestments of power plants like you did or joint ventures like you did with Northleaf. And the second question is what’s going to happen in 2018 when the contract for Ormesa has come to expire?

Okay, Daniel, for us it’s good morning as we are in Reno. And for the first part, we are happy with our partnership with Northleaf and we are pooling in the second part of Don Campbell to the joint venture. We don’t have current partnerships plan in any other power plants and if [indiscernible] obviously we will notify the market on that. And on Ormesa, 2018, I wouldn’t be worried about it. We are working on it since last year and I’m optimistic that we will be able to resign PPA, which will not be linked to the gas prices in Ormesa.

And how many CapEx would be necessary in order to keep the reserve or to keep it going?

There is no CapEx required at this stage. We made lots of modifications in Ormesa. Last year, we shutdown a steam turbine part of the older equipment, re-change the structure of the operations. And at the end of the day even though we decreased the output of the power plant, we increased seriously the profitability. And there is – at this stage, there is no serious CapEx – any serious CapEx requirement over there. And Ormesa will serve our growth 2018 and onwards. And again – it will again decrease our exposure to natural gas prices by another one-thirds.

Okay, thank you.

Thank you.

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