Ormat Technologies, Inc. (ORA) Q3 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Ormat Technologies' Third Quarter 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 that this event is being recorded. I would now like to turn the conference over to Rob Fink, Hayden IR. Please go ahead.

Thank you, operator. Hosting the call today 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 would like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecast, 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 Technology's Annual Report on Form 10-K and quarterly report 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 stockholders. 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 early this morning as well as in the slides posted on the 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 5 for the third quarter the total revenues grew 5.9% and Electricity revenues grew 5.4% as new power plant including Platanares, Tungsten Mountain, Olkaria and the three power plants we acquired with the US Geothermal acquisition mitigated a continued impact of the shutdown in the Puna power plant in Hawaii. While we continue to grow our revenue we face some challenges on the profitability side. The Puna shutdown that resulted in no revenues but with expenses in the P&L coupled with the larger than average number of production contribute that we had to replace in the quarter in nine months compared to the last year, impacted our overall margin nevertheless we delivered $75.6 million in adjusted EBITDA this quarter. Our solid continued profitability despite significant unforeseen event further demonstrate the strength and the resilience of our business model. As a vertically integrated company we have the unique advantage of controlling the entire value chain of geothermal development. And during the past month, we've made significant efforts to expedite the commitment of the 48-megawatt McGinness Hills III power plant now planned for early December 2018. We expect that the contribution of McGinness Hills III as well as high generation and margins expected in the fourth quarter should result in strong financial performance of the electricity segment that will support our full year 2018 guidance. Our product segment, in our product segment we've secured new contract during the contract and our backlog stand at $236.4 million supporting our outlook for 2019. I'll turn the call over to Doron for a review of the financial result before I provide an update on our operation. Doron, please.

Thank you, Isaac and good morning, everyone. Starting with revenues on Slide 7. For the third quarter of 2018 total revenues were $166.5 million, an increase of 5.9% from $157.2 million for the third quarter of last year. The increase was attributable to 5.4% year-over-year increase in the Electricity segment revenues and 7.9% increase in the revenues for our product segment which was partially offset by slight decline in revenues from our Other segment. Moving to Slide 8, Electricity segment revenues increased 5.4% to $116.9 million for the third quarter of 2018 up $110.9 million in the third quarter of 2017. The increase was due to the commencement of Platanares in September of 2017. The commencement of Tungsten Mountain in December, 2017. The consolidation of US Geothermal which acquisition was closed on April 24, 2018 and the commencement of Plant 1 expansion project in the Olkaria III complex in Kenya in June 2018. The increase was partially offset by decrease in revenue at our Puna plant following the volcanic eruption on May 3, 2018 since then the power plant was shut down. And by decrease in generation the Puna power plant that was taken offline for the maintenance issue and enhancement as well as decrease in generation due to the high ambient temperature and grid operators curtailment that was required mainly due to maintenance work performed by the grid operators. Turning to Slide 9, product segment revenues were $48.4 million for the third quarter of 2018 totaled to $44.9 million for the third quarter last year. On Slide 10, you can see that the new segments we added in the first quarter of 2018 contributed $1.2 million of revenue in our productivity compared to $1.4 million in the third quarter of 2017. Moving to Slide 11, for a look at our total gross profit and margin. Gross margin in the quarter was 29.3% of total revenue compared to 37.7% in the third quarter of 2017. The decrease was mainly attributable to the decrease in the electricity segment gross margin. Moving to Slide 12, for Electricity segment gross margin. Electricity segment gross was 31.7% compared to 41.9% last year. The decrease was primarily due to higher cost of revenue primarily attributable to the Puna Power plant in Hawaii under which we recorded cost of revenue with no associated revenues due to the shutdown of the plant following the volcanic eruption. Excluding the impact of the shut down in Puna the Electricity segment gross margin was 35.3%. The gross margin was also impacted this quarter by $3.8 million higher cost compared to the same period in 2017 related to pump which failed and needed to be replaced in some of our power plant. This impact represents 3.2% decrease in gross margin. Gross margin was also impacted by revenue losses and result of a decrease in generation mainly because of high ambient temperature and grid operator curtailment. This impact represents an additional 1.6% decrease in gross margin. While pump failures and replacement part of our plant and ongoing maintenance activity in the third quarter we had higher number of pump failures and therefore we had higher risk related expenses. Due to the fact, the many of the pumps were replaced in the first nine months of 2018. We projected a lower expense as related to pump replacement in the fourth quarter and therefore we expect that gross margin of the electricity segment excluding Puna to be approximately 43% for the entire year. Moving to Slide 13, in our product segment gross margin of 26.4% compared to 28.3% in the third quarter of 2017. Reflecting higher cost of revenue primarily attributable to the difference scope and different margin from the various sales contract we entered for the product segment as well as the increased competition in reduction in margins in our power plant. The gross margin for the entire year is expected to be between 25% and 30%. Our Other segments related to our storage activities reported a negative gross margin. Turning to Slide 14, selling and marketing expenses for the third quarter 2018 were $8.6 million compared to $3.6 million for the third quarter last year. This increase was primarily due to $5 million termination fee paid to NV Energy related to the termination of the Galena 2 PPA. General and administrative expenses for the third quarter of 2018 was $13.6 million compared to $10.9 million for the third quarter last year. The increase was primarily to attributable to increase in stock rate compensation cost associated with grants made in May and June 2018. The increase was also due to additional legal and royalty expenses associated with the remediation plan for material weakness related to taxes identified in the fourth quarter. Turning to Slide 15, operating income for the first quarter 2018 was $25.9 million compared to $44 million for the third quarter last year, the decrease of 41.1%. the decrease in operating income was attributable to the decrease in our electricity segment gross margin. The $5 million termination fees of Galena 2 PPA and the increase in general and administrative expenses. Turning to Slide 16, operating income attributable to our electricity segment for the third quarter 2018 of $20.2 million compared to $37.3 million for the third quarter last year. Operating income attributable to our product segment was $7.3 million for the third quarter 2018 compared to $7.8 million for the third quarter last year. Operating loss attributable to Other segment for the third quarter of 2018 was $1.5 million compared to $1.1 million for the third quarter last year. Turning to Slide 17, interest expense net for the third quarter of 2018 on $18.7 million compared to $11.7 million last year. this increase was primarily attributable to acquisition of USG and the associated and interest that USG that amounted to approximately $100 million. $1.3 million of interest expense related to the sale of tax benefit which includes the Tungsten Mountain tax partnership transaction we entered on May 2018. Higher interest expenses as a result of $100 million proceeds from senior unsecured loan received on March 22, 2018. Higher interest related net proceeds from revolving credit line with commercial bank to support our capital expenditure and a decrease of $2.4 million interest capitalized to projects. Turning to Slide 18, the income tax provision for the third quarter of 2018 was $1.2 million compared to $6.2 million for the third quarter of 2017. Our annual effective tax rate excluding mainly the impact of the valuation allowance released for the three months ended September 30, 2018 is approximately 44%. Turning to Slide 19, net income attributable to the company stockholder both $10.6 million or $0.21 per diluted share compared to $24 million or $0.47 per diluted shares in the third quarter of 2017. Adjusted net income attributable to the company stockholder excluding the termination fee which represented $5 million or $0.10 per diluted share was $15.6 million or $0.31 per diluted share compared to adjusted net income of $25.9 million or $0.51 per diluted share in the third quarter of 2017 which excludes the $1.9 million or $0.04 per diluted share attributable to a one-time make whole premium paid in connection with prepayment of OFC Senior Secured Notes and the DEG loan. Turning to Slide 20, adjusted EBITDA of $75.6 million compared to $76.4 million in the third quarter of 2017. The electricity segment portion of our total adjusted EBITDA in the third quarter was 89% compared to 87% in the third quarter of 2017 which reflects our strategic focus to enhance the electricity segment portion in our portfolio. reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide. Turning to Slide 21, cash and cash equivalent and restricted cash as of September 30, 2018 increased to $155.1 million up to $96.6 million as of December 31, 2017. The accompanied slide breaks down the use of cash for the nine-month. I will now turn as of September 30, 2018 with $1.2 billion net of the third financing cost and it's payment schedule is presented on Slide 23. The average cost of debt for the company is 4.9%. our net debt as of September 30, 2018 will be just under $1.1 billion. Turning to Slide 23 for an update new finance scheme. We announced last week that we completed the closing of Tranche under the finance agreement totaling up to $124.7 million for the financing of the 35 megawatt Platanares geothermal power plant in Honduras. Following the closing, we'll receive a disbursement of $114.7 million representing the full amount of Tranche 1 of the OPIC non-recourse project finance loan that carries a fixed interest rate 7.02% per annum with a maturity of approximately 14 years. the closing of second tranche of up to $10 million is expected during the first half of 2019. The proceed of the loan will be used to repay revolving bank credit debt. And finally on November 6, 2018 from the Board of Directors approved payment of quarterly dividend of $0.10 per share for the third quarter of 2018. The dividend will be paid on December 4, 2018 to stockholders of record as of close of business on November 20, 2018. That concludes my financial overview. I would now like to turn the call to Isaac for an operational and business update. Isaac?

Thank you very much Doron. Starting with Slide 25, starting with an update on Puna. The lava flow now appears to have stopped and the volcano alert level was officially lowered on September 5. Enabling us to initiate key steps that will ultimately bring Puna back online. Is it expected to be a long process, but we're moving rapidly. As a priority, our team has begun to process of building a new access route to the plant. We're working with HELCO the local utility. To build a new electrical substation as the prior one was consumed by the lava, additionally efforts to remove the plugs from the production wells and to open the monitoring wells have begun. In prior to this work, we're in negotiations with the insurance companies regarding the reimbursement for loss of profit and damage to the property. Turning to Slide 26, power generation increased in the third quarter by 7.1% primarily to the commencement of our Platanares and Tungsten Mountain pipeline and Olkaria III plant 1 expansion. Additionally the consolidation of Hot Springs, San Emidio and Raft River power plant contributed to the increase in generation. The increase was partially offset by the impact of the Puna shutdown as indoor mentioned by decease in generation at some of our power plants that were taken offline to address maintenance issues and enhancements. As well as a decrease in generation due to high ambient temperature and grid operators curtailment. Turning to Slide 27, as of November 1, 2018 our product segment backlog was approximately $226.4 million. We secured two new contracts in Turkey and we expect that our solid backlog to support revenue for 2019 and beyond. we're closely monitoring the developments related to the economic situation in Turkey and while we're continuing it to progress as planned with the signed contracts under the backlog the economic situation might impact our backlog and future pipeline. We're encouraged by the opportunities and pipeline for the product segments from regions such as New Zealand, Central and South America and Asia Pacific that will diversify our plan based for the product technology. Turning to Slide 28, we're continuing with our growth and pleased with the growth we achieved on the beginning of the year bringing our total portfolio to 862 megawatt and we're on track with our near term growth target and plan between 115 and 125 megawatt by the end of 2020. During the past month, we made significant efforts to expedite the commencement of the 48 megawatt McGinness Hills III power plant now planned for early December 2018. We're also planning to enhance the upper Steamboat complex in Nevada which will include Steamboat Hills and Galena 2 power plant. At Steamboat Hills we expect to add over 16 megawatt to the existing power plant before the end of 2020, by adding new equipment and optimizing the Geothermal field. The additional capacity from Steamboat Hills will also be sold to SCAPPA under the existing portfolio PPA. In Galena 2, we opted out to PPA with NV Energy and beginning in March 2019, we will start selling power to SCAPPA under the portfolio PPA at $75.5 per megawatt hour replacing lower pricing under the Nevada Energy PPA. Having the same off take for both Steamboat Hills and Galena 2 will enable us to optimize resource and improve future generation for the upper Steamboat complex as a whole. In addition to McGinness Hills and Steamboat Hills we're continuing our work on Tungsten Solar which we plan to complete in Q1, 2019 and additional prospects to support on our near and long-term target. Turning to Slide 29, we also continued to make progress in energy storage activity as a reminder during the second quarter, we broke around on 220 megawatt hours utility scale in front of the major energy storage systems in New Jersey. Construction is ongoing and the first system is expected to be operational in the fourth quarter of 2018 and the second system in the first quarter of 2019. These systems will be utilized provide ancillary services for PJM [ph] a regional transmission organization in balancing the electric grid and will also be available as a capacity asset. As a reminder this is a new initiative for us, we expect that revenues and expenses will fluctuate over the next three quarters and it is likely to take several quarters to reach a coin [ph] where this business will be profitable and stable. Turning to Slide 30, our estimated capital need for the remainder of 2018 include approximately $22 million for construction of new project and enhancement of our existing power plant. In addition, we estimate approximately $27 million to be invested in maintenance CapEx, storage activity and in our production facility. In the aggregate we estimate total capital expenditure of approximately $49 million for the remainder of 2018. We also expect $19 million for long-term debt repayment and $50 million for revolving bank credit repayment. Please turn to Slide 31, for discussion for our 2018 guidance. We're reaffirming the full year 2018 guidance and expect the electricity segment revenues to be between $500 million and $510 million. We expect product segment revenues to be between $190 million and $200 million. And revenues from energy storage and demand response activity to be between $8 million and $12 million as such, our guidance for total revenue is between $698 million and $722 million. Our 2018 adjusted EBITDA guidance is expected to between $370 million and $380 million for the full year. Assuming successful resolution for insurance claim related to the losses of Puna by the end of 2018. In the event that we don't reach a resolution of our insurance claim by the end of 2018, the 2018 adjusted EBITDA might be negatively impacted by approximately $20 million. We expect annual adjusted EBITDA attributable to the minority interest to be approximately $30 million. This amount includes our partner shares in the EBITDA related to the insurance claim for the Puna power plant. As we move past the inspectional situation in Puna. I'm confident in our unique business model in our diversified global portfolio that positions us to continue and deliver profitable growth. And this concludes our prepared remarks and I'd like to open the call for questions. Operator please.

[Operator Instructions] and our first question comes from Jon Windham from UBS. Please go ahead with your question.

I want to ask about the gross margins were lower than typical. Based on the release, I would estimate a third of that is related to Puna. I was wondering if you could want that's about right, is the first question. And then two, how would we roughly approximate the incremental gross margin that's between maintenance and the curtailment and then I'll have a follow-up after that.

Jon it's Doron. First you know, we didn't add the nine months and three months revenue growth margin and electricity revenue excluding Puna was 35.3 that's about 26% higher than what we had, but this is a data of excluding Puna because accounting wise although we're not recording any revenues we're still required to record big part of the expenses. Not only the positive effect, but the negative effect on the growth margin. In addition Q4 is winter, is cold quarter compared to Q3 which is summer and we estimate the annual gross margin for the electricity to be about 43%.

Okay, thank you. I guess the other question I would have, did I hear you correctly? You seem to be implying or saying that the increase maintenance expense on pumps would be offset by lower maintenance expense in the fourth quarter. Did I hear that correctly?

Yes in this quarter we had three-point compared to Q3 of last year, $3.8 million higher. Maintenance cost and as we see the growth of progressing already one month and the weak employee [ph] we expect a significantly lower maintenance cost in Q4.

Okay, thanks. And just last question, any comments around what drove the curtailment and what specific markets those were in?

The main curtailment was done because of our request from NV Energy to connect to making the sales faster than planned next year. And the actual works that they were done actually curtailed McGinness I and II for quite significant time which costed [ph] of about $600,000.

$600,000. Okay, got it. Thank you for taking the questions.

And our next question comes from Noah Kaye with Oppenheimer. Please go ahead with your question.

Just to follow-up on that, question around curtailment. I want to make sure I heard you right that it's related to some ongoing construction work and upgrades around those plants. There is no other reason for curtailment like too much of renewable energy or anything like on the grid? This is purely kind of construction issue, is that correct?

Noah, the two major curtailment which happened one in Nevada and the other one is Imperial Valley, we're connected with the direct Ormat our plants to interconnection to the grid and one of them as I mentioned was the interconnection that was built because of McGinness III and the other one a specific issue with an interconnection point in Imperial Valley and those were the major things that made a huge difference comparing to other third quarters. We have curtailment they're not usually significant from yearly basis unfortunately in this particular quarter. We had some kind of offer three or four curtailment that happened in one single quarter which affected negatively. But as usual, we have curtailment because as you probably know because of maintenance issues of transmissions lines and so forth.

Okay that's helpful. Thanks. And then I think you talked about working to diversify the product backlog we could just sort of level where things are at right now of that $226 million backlog. Roughly how much is for Turkey and what's for other geographies, we sort of ballpark at close.

I'm not sure that we're actually breaking down the backlog quarter after quarter but in order to give you some more color in this particular quarter. we still have the significant part of this backlog coming Turkey, I would say more than 50%, but the bright side is we also have backlog coming from in the Philippines, it's not a potential the ones that we have New Zealand and we have other countries and I mentioned during the conference call. We're worried on the financial development in Turkey even though somehow the currency exchange rate in that glue up few weeks ago and going back to normal. Our main concern is, if our customers that are obviously financing their power plant will be able to finance the sustained rates that they were financing before. So that was the reason for the remarks saying and for the future, we are increasing trying to diversify faster our markets around the world, that we'll be able to compensate if and when there will be some kind of slowdown.

Okay, great and then, maybe a last one from the - first of all congratulations on closing the OpEx loan. Great to see.

Thank you.

At your Investor Day, you talked about all of the opportunities in emerging markets Ethiopia, Egypt many other areas where there's resource and clearly a need for power that those geographies, if I look at what you're thinking about adding through now 2020 that doesn't really seem to be contributing. It seems like most of the projects to come online are North America. Has anything changed in terms of how you're thinking about development, prospects or financing or cadence? How should we think about some of those geographies and the project pipeline there working its way into the portfolio?

Okay, Noah as I mentioned before. First of all, as you very well know that the Geothermal development takes time and as a matter of fact we have a prospect as we speak in Indonesia and which we are developing and we are continuing with our effort in Ethiopia. The reason for the delay was mainly financial issues dealing with how to repatriate the funds that we'll get in the country and this was the main thing in that because delaying the final signature of the PPA which I hope will be solved soon. So if we're talking about the geographies that we start then which are mainly Indonesia and Ethiopia? I want to believe that we're on track on those projects. On the other hand, I also discussed about project in Central and South America and you very well know we come online with the projects in Honduras and I also said during one of our last calls that we have additional prospect in Honduras. So this is also one of countries that we're focusing and we'll continue to focus, but there's nothing wrong also the domestic development that we are building. I'm optimistic that we will come up with new announcement also in the US and don't forget that we still have to develop and deliver 185 megawatt to SCAPPA which we're on track as we speak. And another focus that we are putting a lot of emphasize on is the enhancement of the existing power plant as I remark the Steamboat Hills to being as we speak actually being I don't know if you know the complex that the four power plants and we're trying to build and we're trying to enhance them and operate more efficiently with the resource. We have more power plants in the same situation which are complexes and also in Imperial Valley and we're planning to do some also, for the development in the company continuing explained and as I said we'll be using our numbers both on the significant year and also in the upcoming years by means of megawatt and so on. So unfortunately we have this two issues and we had few other issues the contract [ph] rate in this particular quarter, but as the management we're optimistic and we're on track on what we discussed during the analyst day and beyond. Sorry for the quite for short.

No, we appreciate the color, I think. My takeaway here's there's more announcements potentially both in national and domestic. So thank you for that. appreciated.

And our next question comes from Paul Coster with JP Morgan. Please go ahead with your question.

This is Mark Strouse on for Paul. Thanks for taking our questions. So I understand there's still a lot to be learnt about the Puna facility but now that the lava has stopped flowing. Can you just kind of give your latest thoughts of how long it might take to get that plant back up and running?

Okay, Paul as we all know that the lava stopped that the duration, the emergency situation was lowered and as we speak now we're building the bulldozers are basically building the exit flows through the power plant. Our operators are avoiding the power plant from last few weeks and trying to extend. The next steps are building the substations together with HELCO and then we believe that we'll be in a situation to unplug the wells within the next few weeks. Our expectation today is but again we will not know for sure until we've unplugged that the resources is untapped and we're not expecting problems with the resource but in terms, I have to be very careful on this thing. If everything will be okay, we'll expedite and as I said before the first estimation it was six to 18 months from beginning of operation which started actually, now but we will do our best to expedite the and do it before.

All right, okay. Thank you. And then you've made the decision that transition the Galena 2 PPA. Pay the $5 million termination fee this quarter, can you just talk about the payback period for that under the new PPA how long will it take to recoup that expense.

Look it's a very fast payback between two to three years. So for us, it actually has more than one [indiscernible] because one thing is straight forward it's much better than PPA comparing to much lower, but the second thing is, it will be - in the current situation it is selling electricity to two different utilities using and utilizing the same resource and now after March 2019 basically, we'll be setting consolidate upper Steamboat into one power plant and we'll be setting to one utility and by that also we will utilize much better and much more efficiently the resource. So it's a very, very good resource.

Okay, all right. That's it for us. Thank you very much.

And our next question comes from Gerry Sweeney with ROTH Capital. Please go ahead with your question.

Doron I think you mentioned gross margins in the electricity segment hitting 43% or for the full year ex-Puna. I think Puna was about a drag of $7.5 million in Q2, $4.2 million in Q3. What's the run rate on the Puna drag in fourth quarter and then into next year? Are we going to see this sort of trend down or will that stabilize?

On the revenue side until the power plant doesn't come online we will not see any revenue.

But I mean that on the expense side, sorry go ahead.

On the expense side, we obviously continue to see the depreciation account-wise, we cannot stop the depreciation. It's really additional expenses in the range of $1 million to $2 million that we still have, once we finalize the discussions with insurers, the expenses on the cost of goods would be only the depreciation and all the revenue that we will get basically the business interruption part will be recorded it's part of the operating, but not is part of the growth margin.

Okay and then, is it been business interruption. I think you're - let me take a half a step back. You mentioned in the presentation that potentially up to $20 million of insurance proceeds in the fourth quarter if you finish negotiations within the insurance company. Is that $20 million all you could get for business interruption? Because I'm under the impression business interruption would have been for the full year or there's certain limits. Maybe can you discuss those potential limits on the insurance and if $20 million, is the max that you can get on that?

No $20 million is the amount that we expect to get this year for 2018. Once with that 2018 we still continue to collect the business interruption for 2019 until the power plant comes online.

Is there a max amount of - is there an insurance limit on that business interruption?

There's an insurance limit on the business interruption plus the property damage combining the $100 million so the substation and the monitoring wells this is part of this insurance to base on the damage that we now to-date substation and monitoring wells, this is maybe it's close to $10 million. I don't think that we look on the BI or as of 18 months from when we started working. We don't see that the BI would run out. The BI insurance would run out as long as there's no additional damage to the property.

Okay, great. that's helpful and then just switching gears a little bit. I know you closed the US Geothermal acquisition four quarters ago. I know one of their assets I think San Emidio II was an undeveloped field and the HTM or US Geothermal talked about there being some potential in that field. Have you dug further into the assets and what are your thoughts on just the overall acquisition and is there some upside to it in terms of expanding fields etc.?

I will start and Isaac can foot on. Just one thing, you know according to insurance we're in negotiations with the insurance companies. So this is obviously until we finalize them this is our expectations. San Emidio Phase II is prospect in order US Geothermal had a very high hope to, we're also seeing that it is viable prospect with our the reading there and the rest of the power plant, the US Geothermal is coming online internal [indiscernible] as we expected maybe a little bit behind at what were expected. We thought you know that the power plants would be a bit better shape and we're doing a little bit more maintenance today to them to get them to the run rate that we expect and we're selling the pad in 2019, we expect them to be regular part of our power plant.

Great. that's it from my end. Thank you very much.

And our next question comes from Jeff Osborne with Cowen and Company. Please go ahead with your questions.

Just had two quick ones here on Nevada, just with the ballot [ph] measured today possibly going to 50% renewable can you just touch on beyond San Emidio II which you just addressed what other sites you have without PPA's that could be developed.

First of all it's a very good news of course, if it still happens but with the California going to 100% 45 and Nevada going into 50% obviously there will be serious room for Geothermal in both space and obviously we only have couple ones, so it's not an issue but we're - as I said before we're expecting and hoping and we're optimistic that we'll have more PPAs in both states and obviously there is nothing something a side that I can talk about it right now. But again the fact that this RPS is our as they're now, it will add value to our business in the future.

I guess what I was getting, do you feel comfortable with your line position given most of your sites were signed with SCAPPA my impression was that you didn't have that many undeveloped sites in Nevada to leverage the developments in California and Nevada, but maybe I'm wrong.

Yes Jeff I don't know exactly how many aces we have, but I already mentioned in one of the earliest calls that we're pretty much a real estate company and we have lots of landfills in Nevada and California. And we're expediting as we speak our Greenfield exploration.

Good to hear. And is there any risk just with the NV Energy $5 million fee for the breakup of the contract. Is there any animosity between the two parties that fit, if they're forced to buy more power from you in the future?

No, not at all. It was done on mutual understanding. They are very clever and smart guys and they exactly understood and today as it stands for them, the remaining of the contract represented a certain amount of money. There was a negotiation and it was obviously closed in a very good space between both companies. We are in a very good position with them.

Excellent and the last one I had is, just can you touch upon the strategy on storage. So you've got these two 20 megawatt projects one in the fourth quarter and one in the first quarter. Obviously the largest of that size that you've done. Do you want to execute on those before adding to the development pipeline or maybe just touch on the plan for the second half of 2019 or mid-2019? Is there anything that you've won you don't have to be specific but I just want to get a sense of, do you need to validate your EPC capabilities first before adding to the pipeline and maybe that comes along in a few quarters from now or is there already a very robust pipeline behind these two projects ready to go.

Jeff we only have actually three projects that are going to be online very soon. We have the fourth one I think, we only talk about also, and top of it if you recall we had the Rabbit Hill project that was - and two years ago with [indiscernible] company which had an issue and eventually we're continuing the project and it will be also online sometime during 2019 and beyond that, we have additional pipeline both in California and in other states. And but as I said in the call, we are releasing, re-restructured of all storage tanks and we're relating to it as a start-up running and building itself. Which means that, we're investing into it but from a P&L point of view it's not going to be stable? I mean it is being built but it will take a few quarters until no doubt that it's not going to happen in 2019 by - okay we're making a lot of money on them, it's not the case. We've realized management in the board that this thing needs nursing and investing and it will take time until those investments will return profit. So we put it aside as a third segment just to show you that we're certain about it, non-resolved very insignificant at this time but we will also get it peak that they're picking up and will be significant within the upcoming period.

Perfect. I appreciate the detailed response. Thank you.

And our next question comes from Ella [indiscernible] with [indiscernible] Bank. Please go ahead with your question.

First, I would like to check due to the quality of line. Didn't you say that you expected the growth margin for the year to be around 43% or I didn't hear you well?

Yes, our estimation is, that the gross margin for the whole year of 2018 will be electricity of course will be around 43%.

Okay, so I have another follow-up question. And what would you think - what do you expect to be the existing portfolios gross margin in steady state, let's say in the four or six quarters without the addition of the McGinness, just the existing portfolio and US Geo integrated into it.

Look, with the segment gross margin if we put aside this quarter as and put it aside in a single quarter is going up and if you recall in our analyst day, we said that we are striving to go into 45%, to only 45% gross margin within the next five years, it was two years ago. So we're pretty much close to this number and by introducing as you rightly said, new power plant such as McGinness III and Olkaria power plant and more let's say brown fielding enhancement which are helping to increase the gross profit. So I should say that we are on track to be between 45% to 50% by 2023.

Okay, you don't expect the existing situation to slow down significantly this progress like two quarters, three quarters. you actually expect in the next two quarters pretty steady recovery of the existing portfolio of gross margin, if I understand you right.

Yes you're right. If we put aside the Puna thing which as and Doron explained today a few minutes ago and that, it is a peculiar situation that we don't have revenue but we have the expenses which is changing the number of - then on the normal yes, you're right we are expecting the electricity gross margins to stable with difference between summer and winter of course, don't forget that the summer, the very warm summer month obviously degeneration goes down, but in yearly calculation we expect that we should hit the number that we should start.

Okay and all the question concerning the also follow-up question concerning the emerging markets mainly Ethiopia but not only, how would you define for instance Ethiopia or this kind of risk profile. The net yields that you're looking at in order to invest in significant project there net of finance because the question is of course coming from yields going up in the emerging markets yields going up, so what would you find lucrative net yields in this kind of profile risk projects.

As we already discussed before and I won't repeat it as you know in development in the US we're looking on high-teens equity IRR and on the - I said, lower high I'm sorry. In the US you're looking into low teens IRRs and elsewhere with the business interest such as Ethiopia, Kenya and Central American countries we're looking to high-teen IRR. Obviously the risk profiles are not fairly the same, but don't forget that we have loss of remediation in the risk side which is obviously financing through bank side pocket or [indiscernible] we playing political risk, incremental risk and so on, which means that it's not only the IRR but we're trying to mitigate the risk by additional doing as I said before to financing in others.

Okay, well thank you and thank you for taking my questions.

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

Guys, thank you very much. It was a challenging quarter for us. But as I said before we're - our numbers are robust and we reiterate our guidance for the whole year of 2019. And thank you very much for your ongoing support.

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