Ormat Technologies, Inc. (ORA) Q4 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Ormat Technologies, Inc. Fourth Quarter and Full Year 2018 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 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'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, future results or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of such risks and uncertainties, please see risk factors as described in Ormat Technologies' annual report on Form 10-K and quarterly reports on 10-Q that are filed with the SEC. In addition, during the call, the company will present non-GAAP financial measures, such as adjusted EBITDA and adjusted net income attributable to the company's stockholders. Reconciliations to the most directly comparable GAAP measures and management's reasons for presenting such information as set forth in the press release that was issued last night as well as in the slides that are 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 is found in the Investor Relations tab. With that all said, I'd 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. The fourth quarter was a strong end to a solid year for Ormat, made even more impressive by the fact that we've overcome a wide range of significant challenges this year, not the least of which was the volcanic eruption, which forced the extended shutdown of one of our important power plants located in Hawaii. Even with this challenge, Ormat delivered record results and met the guidance. For the quarter, total revenue grew 14.5%, giving us 3.8% growth overall the year. Electricity revenue, even with the loss of Puna for eight months of the year, grew 9.5% for the year, benefiting from our newer plants, including Platanares, Tungsten Mountain, Olkaria and the three power plants we acquired as part of the US Geothermal acquisition. We delivered $368 million in adjusted EBITDA for the year, up 7%, even with the lost revenue and profits from Puna. As you may recall, our 2018 guidance suggested adjusted EBITDA to be between $370 million and $380 million for the full year, assuming successful resolution of our business interruption insurance claim for the Puna situation by the end of 2018. We stated that absent this resolution, our adjusted EBITDA would like to be impacted by approximately $20 million. Taking into account that we received $12 million in insurance proceeds instead of the $20 million assumed, we exceeded our adjusted EBITDA outlook. All-in-all, considering the challenges, this was highly successful year and I believe we continue to position Ormat for long-term success. As a vertically integrated company, we have the unique advantage of controlling the entire value chain of geothermal development. This will help us to bring Puna back online as quickly as possible, and work is well underway in this regard. I will talk about the progress later on the call. On the property insurance coverage, all the insurers accepted and started paying for the costs to rebuild the destroyed substation and other damaged property. However, only some of the insurers accepted that the business interruption coverage started already in May 2018. We are still in discussions to reach an understanding with the rest of the insurers to start paying for the business interruption as of May 2018. Turning to our product segment. Our 2018 results were above our updated guidance. Our pipeline continues to build and based on our current backlog, we are optimistic about the continued contribution of the segment to our business. I will turn the call over to Doron for the review of the financial results, 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 full year 2018, total revenues were $719.3 million compared to $692.8 million last year, an increase of 3.8%. The increase was attributable to a 9.5% year-over-year increase in the electricity segment revenues and a 179.4% increase in revenue from our other segment, which was partially offset by 10.1% decrease in revenues from our product segment. Moving to Slide 8. Revenues in our electricity segment was $509.9 million for the full year of 2018 compared to $465.6 million in 2017. This increase was primarily attributable to the commencement of commercial operations of our Platanares power plant in Honduras effective September 2017; the consolidation of US Geothermal, which was acquired in April 2018; the commencement of commercial operation of our Tungsten Mountain power plant in Nevada effective December 2017; the commencement of commercial operation of our Plant 1 expansion project in Olkaria complex in Kenya effective June 2018; and higher energy rates under the new Ormesa 1 PPA commencing December 2017. The increase was partially offset due to a decrease in revenue at our Puna power plant that we shutdown immediately following the volcanic eruption in May 2018, and generation at some of our power plants that were taken off-line to address maintenance issues and enhancement, high ambient temperatures and curtailments. Full year 2018 revenue for our product segment was $201.7 million, down 10.1% compared to $224.5 million for 2017. The decrease was primarily attributable to the timing of revenue recognition over the signed contract included in our backlog. On Slide 10, you can see that the other segment contributed $7.6 million of revenue compared to $2.7 million in 2017. This segment includes revenues from the provision of energy storage, demand response and energy management service. Moving to Slide 11 for a discussion of our total gross profit and margin. For the full year 2018, consolidated gross margin was 37.6% compared to 38.7% in 2017. On Slide 12, our electricity segment gross margin was 41.5% for the full year 2018, down from 42.7% in 2017, mainly due to the impact of the shutdown of Puna and due to maintenance expenses related to higher number than average of production pump failures in 2018 in some of our power plants. Gross margin without the impact of Puna was approximately 42%. In our product segment, gross margin was 30.3% in 2018 compared to 32.3% for 2017, reflecting the increased competition and reduction in margins in our contracts. We expect gross margin for this segment in 2019 to be between 22% and 27%. Our other segments related to our storage activity reported a negative gross margin of 29.2%. Turning to Slide 13. Selling and marketing expenses for 2018 were $19.8 million compared to $15.6 million for 2017. This increase was primarily due to the $5 million termination fees paid to NV Energy related to the termination of the Galena 2 PPA, which was partially offset by lower sales commission related to our product segment due to the nature of contract. Selling and marketing expenses for the year ended December 31, 2018, excluding the termination fee, constituted 2.1% of total revenue for such year compared to 2.3% of such revenue for the year ended December 31, 2017. General and administrative expenses for 2018 were $47.8 million compared to $42.9 million for last year. The increase was primarily attributable to an increase in cost associated with our identification of a material weakness related to taxes in fourth quarter of 2017 as well as the restatement of the second, third and fourth quarter financial statement of full year 2017. Expenses from our storage business and expenses resulting from first-time inclusion of US Geothermal business. The increase was partially offset by $10.3 million adjustment with respect to an earnout provision related to the acquisition of our Viridity business as the company determined that the second milestone to be measured at the end of fiscal 2020 will not be achieved. Operating income for 2018 was $185 million compared to $205.0 million for last year, a decrease of 9.7%. The decrease was primarily attributable to a $13.5 million goodwill impairment charge related to the Viridity acquisition and other items as explained before. Turning to Slide 15. Operating income attributable to our electricity segment for the year ended December 31, 2018, was $155.5 million compared to $157.6 million for the prior year. Operating income attributable to our product segment for the year ended December 31, 2018, was $38.1 million compared to $50.5 million for 2017. Operating loss attributable to our other segment for the year ended December 31, 2018, was $8.5 million compared to a loss of $3.1 million for 2017. The reduction is mainly impacted by goodwill impairment charges net of the earnout as I mentioned before. Turning to Slide 16. Net interest expense for 2018 was $70.9 million compared to $54.1 million last year. This increase was primarily attributable to new loans envisaged in this slide, offset by lower interest expense as a result of principal payment of long-term debt. Turning to Slide 17. The income tax provision for 2018 was $34.7 million compared to $21.7 million for 2017. Our annual effective tax rate, excluding mainly the impact of the valuation allowance released in 2018 was approximately 42%. Net income attributable to the company's stockholders for 2018 was $98 million or $1.92 per diluted share compared to $132.4 million or $2.61 per diluted share for 2017. Adjusted net income attributable to the company's stockholders for 2018 was $106.1 million or $2.08 per diluted share. Adjusted net income attributable to the company's stockholders and diluted EPS for 2017 was $155.2 million or $3.06 per diluted share. Net income attributable to the company's stockholders and EPS is also impacted by lower contribution from Puna as a result of the partial profit received from our insurer. Turning to Slide 19. I'd like to go now over a few quarterly financial highlights. For the fourth quarter of 2018, total revenues were $190.5 million compared to $166.4 million in the fourth quarter of 2017. Revenues in the electricity segment were $138.3 million, an increase of 8% compared to the fourth quarter of last year, mainly due to the Tungsten Mountain and Olkaria III expansion projects, which came online in the last 12 months as well as the generation from the acquired US Geothermal asset, partially offset by the shutdown of the Puna plant. Revenues in the product segment were $49.7 million, an increase of 31.3% compared to $37.9 million in the fourth quarter of 2017. Other segments revenues were $2.4 million for the fourth quarter of 2018 compared to $0.5 million for the fourth quarter of 2017. Turning to Slide 20. Our electricity segment gross margin increased to 54% for the fourth quarter of 2018, up from 42.8% in the fourth quarter of 2017. Excluded Puna business interruption insurance profit, gross margin was 48.6%. In our product segment, gross margin increased from 28.7% in the fourth quarter of 2017 to 32.2% for the same quarter in 2018. Turning to Slide 21. Operating income for the fourth quarter of 2018 was $68 million, up 40.5% compared to $48.4 million in the fourth quarter of 2017. The increase was primarily attributable to the increase in gross margin, mainly due to the electricity segment. During the fourth quarter, [indiscernible] the goodwill impairment charge of $13.5 million and we also wrote down the earnout in the amount of $10.3 million with the net effect of $3.1 million, both related to the acquisition of our Viridity. In Slide 22, you can see the income before income tax and equity in losses of investees for the fourth quarter. In Slide 23, net income attributable to the company's shareholders for the fourth quarter was $18.2 million or $0.36 per diluted share compared to $34.6 million or $1.27 per diluted share for the same period last year. The decrease is primarily due to an income tax expense of $31.4 million compared to an income tax benefit of $28.3 million for the three months ended December 31, 2017. Please turn to Slide 24. Adjusted EBITDA for the fourth quarter of 2018 was $113.2 million compared to $87.4 million in the same period last year, which represents an increase of 29.4%, mainly attributable to the insurance proceeds related to the Puna plant recorded in the fourth quarter. In Slide 25, adjusted EBITDA for the full year of 2018 was $368 million compared to $343.8 million in 2017. The electricity segment portion of our total adjusted EBITDA in 2018 was 89% compared to 83% in 2017, which reflects our strategic focus to enhance the electricity segment portion in our performance. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide. Turning to Slide 26. Cash and cash equivalents and restricted cash as of December 31, 2018, increased to $177.5 million, up from $96.6 million as of December 31, 2017. The accompanying slide breaks down the use of cash for the 12 months. Our long-term debt as of December 31, 2018, was $1.27 billion, net of deferred financing cost, and its payments schedule is presented on Slide 27. The average cost of debt for the company is 5%. Our net debt as of December 31, 2018, was $1.1 billion. Turning to Slide 28. Let me speak briefly about our financing activity during 2018. During the year, we successfully raised approximately $260 million in the aggregate for a variety of initiatives, including OPIC financing for Platanares in Honduras, tax equity transaction for Tungsten Mountain and $100 million in corporate bonds. Most recently, we signed a financing agreement related to the Olkaria recent enhancement and we are in the final documentation to finance our Amergin storage projects. These two financing are expected to close in Q1. Overall, Ormat is well positioned with ample access to additional capital to fund future initiatives. On February 25, 2019, Ormat's Board of Directors approved payment of a quarterly dividend of $0.11 per share for the fourth quarter of 2018. The dividend will be paid on March 28, 2019, to stockholders of record as of close of business on March 14, 2019. In addition, we expect to pay a dividend of $0.11 per share in the next three quarters. Before I turn the call to Isaac, I would like to update you that the company is working on mediating the material weakness and has done significant progress, including recruiting a new VP, Global Tax. As of today, all new annual and quarterly processes and portfolios have been agreed with the auditors and we are doing the testing to confirm that we are checking this in Q4 and in the coming quarter. If these are annual controls, they will be tested again in the fourth quarter of 2019, and we expect to be fully remediated in Q4 of 2019. Before concluding my remarks, one last note. Yesterday, we issued our press release and it has a typo, the Q4 adjusted EPS should be $0.42 and not $0.52 as published. There is no change to the annual adjusted EPS. We will be showing a revised press release. 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 30, is an update on operations. During 2018, we added approximately 115 megawatts, and increased our fleet to 910 megawatts by adding three operating assets acquired as part of the USG acquisition and by bringing new power plants online mainly McGinness Phase 3 that has recently commenced operation. Additionally, as you can see on Slide 31, we adjusted the generation capacity of our existing power plants based on their performance, and we expect continued adjustments and enhancements to optimize plant performance. At Ormesa, we are replacing all the equipment. In Amatitlan, we will reduce the pipe losses by improving the gathering system that connects the wells to the power plant. And in Tuscarora, we plan to reduce the use of water for cooling by converting part of the water cooling system to an air-cooling system. Turning to Slide 32. Generation in 2018 was positively affected by the commencement of Olkaria III expansion in mid-2018. Platanares and Tungsten Hills that come online in late 2017 as well as from the consolidation of Neal Hot Springs, San Emidio and Raft River power plants from the end of April 2018. The increase was partially offset by the impact of the Puna shutdown. The overall generation year-over-year increased by 6.9%. Moving to Slide 33 and 34 for an update on Puna. We continue with our efforts to resume operation. We have already constructed a new access road to the power plant, drilled a new fresh water well and started to open production wells that were plugged due to the lava eruption. Also an additional rig is being dispatched to the island to enable us to drill additional wells, if it is necessary. Along with this rapid and hard work come some encouraging news. Initial test to the geothermal injection wells at Puna indicate higher temperatures at the reservoir with no sign of negative impact on pressure. We are working with HELCO, the local utility, to replace the substation that was destroyed by lava, and we believe that they are doing everything that is required to be ready to take our power online. In light of that, we currently estimate that we will be ready for the operation towards the end of 2019. Last week, I was in Hawaii, visited the power plant, and I talked with both the governor and the mayor as well as with the management of the Hawaiian utility. And they assured me that they are doing everything that they can to help us meeting our target to resume operation by the end of the year. Obviously, the successful operation of Puna power plant is significantly dependent on the results we will receive from the geothermal wells after we open them and from the operation of the power plant equipment towards the end of the rebuild process. Moving to the next slide. We remain on track with our new term growth, and we plan to add between 127 megawatts to 142 megawatts by the end of 2021 from organic growth. This target is supported by the list of potential projects presented on the slide. As you can see, we have three solar PV projects in the list, two are adjacent to the geothermal power plant and will be used to serve the auxiliary power. This will be able -- this way, we will be able to serve more power to the off-taker under the SCAPPA PPA. We also have one stand-alone solar PV project that we recently won a PPA in RFP process. In addition to organic growth, we continue to pursue M&A opportunities. Turning to Slide 36. We continue to expand our geothermal development inventory and add new prospects to support our future organic growth. As of today, we have around 38 prospects worldwide. Turning to Slide 37 for an update on our backlog. As of February 26, 2019, our product segment backlog stands at $216.8 million. Included in our backlog is a new contract that we sign in Turkey and a significant contract in New Zealand that will start generating revenues in 2019. We are in final phases of signing an approximately $60 million contract that is not yet included in our backlog. In the product segment, we see new opportunities in New Zealand and the Philippines. More than 400 megawatt of geothermal power has been developed in New Zealand over the past 10 years, and it remains a stable and attractive market for growth that we are excited to expand our presence in. The Philippines, which has historically been one of the largest and most active geothermal market, lost two status of countries with geothermal power generation capacity to Indonesia only last year. The Philippines currently has geothermal fields that supply about 10% of the nation's energy, with a long-term plan to increase the capacity by 25% by 2040. We are optimistic that we will see new beneficial opportunities coming from this large two markets. We anticipate that our backlog contract mix, together with the lower margin contracts with Turkey, will drive product segment gross margins to be in the range of between 22% and 27%. Longer term, we believe opportunities in other regions, as I mentioned, will help us diversify our product backlog and will positively impact the product segment in 2020 and beyond. Moreover, as we progress with our strategy to increase our electricity segment portion in the total revenues, we continue to be expecting lower impact of incremental or decremental changes in the product segment on our financial results. Turning to Slide 38. In early 2017, we acquired Viridity as part of our strategic plan to expand our reach into energy storage and leverage Ormat's core capabilities in this growing market. In the fourth quarter, we made the decision to put new leadership in place at this segment as we have not been satisfied with the growth. We remain optimistic about our Battery Storage as a Service or BSAAS system, through we believe it will take time the market -- though we believe it will take time for the market to mature and fully recognize the benefits of this offering. We completed the two 20-megawatt hour in front of the mutual energy storage systems during the first quarter of 2019. We acquired additional project site in Georgetown, Texas, in which we were involved in the past and now it's fully owned by us. We planned this to be a 10-megawatt, 12.5-megawatt-hour project that will provide frequency regulation and load shifting services to ERCOT. We plan to complete it before the end of 2019. We continue to participate in RFPs on the East and West Coasts and build a portfolio that will contribute to our earnings in the mid and long term. Turning to Slide 39. Our estimated capital needs for 2019 include approximately $159 million for construction of new projects and enhancement of our existing power plants. In addition, we estimate approximately $56.7 million of capital expenditures for the maintenance of our operating power plants, including drilling in Puna power plant. For our exploration and development activity, we plan to invest approximately $10.9 million. And additionally, $14.1 million as planned for our storage activity. We also plan to invest in our production facilities approximately $9.2 million. In the aggregate, we estimate total capital expenditures of approximately $250 million for the full year of 2019. In addition, we expect $68 million for long-term debt repayment in 2019. Please turn to Slide 40, for a discussion of our 2019 guidance. For 2019, we expect total revenues between $720 million and $742 million, excluding any impact from Puna power plant. By segment, we expect electricity segment revenues between $530 million and $540 million, again, excluding any impact from Puna during 2019. Product segment revenues expected to be between $180 million and $190 million. In the other segment, we expect revenues of between $10 million to $12 million. We expect adjusted EBITDA between $370 million and $380 million with no Puna related EBITDA. We expect annual adjusted EBITDA attributable to minority interest to be approximately $23 million, again, excluding any impact from Puna during 2019. For information purposes, the trailing 12 months, prior to the volcanic eruption, Puna generated $43.7 million in revenue and $26.7 million in EBITDA. Even absent these contribution, we are forecasting growth in our electricity segment. The pace of growth, absent Puna and any related business interruption in insurance proceeds outpaces the pace of growth reported in 2018 and demonstrating our diversified business model. We are still pursuing the business interruption insurance proceeds. We are entitled to receive in connection with our Puna facility. We anticipate -- and we anticipate to receiving additional proceeds in 2019. Please turn to Slide 41. In summary, 2018 was a strong year for Ormat, despite some significant challenges. By the end of 2019, we expect to have Puna backup in operating. And as we continue to put these challenges behind us, Ormat is very well positioned in the growing geothermal and storage space. And this concludes our prepared remarks. Now I'd like to open the call for questions.

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

First, I think, just topical, during this earnings season, can you provide an update on your exposure to PG&E? And how you would access the risk with any other off-takers or sort of a second derivative?

Okay. The risk today remains in Mammoth power plant with around 18 megawatts of power supply to PG&E. As we've notified that the -- after Chapter 11, they will continue to pay. Our expectation is that the impact will be low or no impact, as we can see that the price so far electricity provided is lower than many, many PPAs that they have, including solar and others.

Okay. And in terms of any second derivative risk, whether it's with SCAPPA, CE or any others? You don't see any contingent impacts?

Not as of now.

Okay. Very good. I appreciate it. And with Puna, I just want to understand and really appreciate all the detail. Should our base assumption be that the plant will begin generating revenue again in early 2020? Is there any reason at this point not to think that will be the case? You mentioned something about kind of testing the adequacy of the resource again. Can you just unpack that a little bit and how we should think about kind of our longer-term forecast?

Yes. First of all, our operational plan is that the power plant will be selling electricity by the end of this year, but obviously depends on the fact that we are unplugging production wealth as we speak. The first one is being unplugged this week. And even though we tested the reservoir through the injection was that they were not plugged and the reservoir seems to be okay, we cannot be sure that those plugged wells are intact. Even if they are not, then we are moving in an additional larger rig to fix those wells. So overall given the fact that the damage to the power plant was minimal and the expectation that the reservoir is intact, we are very optimistic that we will be able to be online, as I said, before the end of this year. Given the fact that also we are completely coordinated with the local government and the local utility that they know and they are striving for this green energy to be provided, I am very optimistic about Puna.

Okay, great. On the energy storage side, you commented to bringing a new leadership. Where exactly do you feel the segment is falling short? What do you expecting to change? How should we think about your go-to-market strategy?

As I said before, we are regrouping. We did regrouping during Q4 of 2018. And we are more focusing as of now on the immediate project, on more products which are in front of the meter and mainly providing services of frequency regulation, voltage regulation and simply providing electricity -- they sold electricity to the grid. And those are the end more on projects under our own ownership. So the new management is regrouping in this manner. As I mentioned during the call, we already started three power plants during 2019 -- sorry, '18 and the first quarter of 2019. We have few more prospects, one of them being already build and will be delivering electricity towards the end of this year and we have more. So we simply change management, change focusing. And we're building assets by means of software and hardware. We build the lab in our main facility in Yavne that is simulating a power plant and by that enhancing our ability providing more efficiency in battery usage. So overall, because of this focus, I am optimistic -- management is optimistic that 2019 is a turning point for us in this industry.

Sorry, if I could just squeeze in one more here. Maybe a longer-term question for the team. I know that there were only targets rather than guidance, but going back to the 2017 Investor Day, the goal was to get to something around $600 million of adjusted EBITDA by 2022. I think, if we add back the Puna contribution, we'll add something like $400 million run rate for '19, with call it a 15% to 16% increase in the operating portfolio expected to come online over the next couple of years. So just how should we be thinking about that long-term $600 million target? How we're going to get there?

Noah, one of the things that -- first of all, we are pretty much on target on our electricity segment by the -- true organic growth. We are still looking to few M&As. And if you recall, within those targets, we had a certain percentage of an M&A, which is not -- which was not small. And overall, looking in what are we doing, we are -- I am optimistic that we will be close to the number. We have a slight delay on the storage side. As you realize that this is lagging a year on what's expected. Overall, I think, we are okay towards the target.

I apologize, I actually don't recall like an M&A goal was specified as part of that. Can you just remind us what it was?

It was 2017, I have to go back and look at the presentation, which is not in front of me right now. But as I recall, there was a certain percentages of M&A added to that. So I'll come back to you later on this.

The next question comes from Paul Coster with JPMorgan.

This is Mark Strouse on for Paul. So just a question about the insurance proceeds. So I understand there is no contribution included in your 2019 guidance. But, I guess, how should we think about the amount that you will be seeking from insurance in 2019? Is the $26.7 million in EBITDA that you mentioned that the Puna had in the GTM prior to the eruption? Is that kind of a right ballpark of the amount that you will be requesting anyway?

I'll say, the $26 million is in the ballpark assuming that all the insurers will act as they should act and pay the claim. So, in general, business interruption -- the idea of the business interruption is to pay the company once an event happens. As this -- the event didn't happen, that's the idea. And this is the range, I don't have an exact number in front of me, but on 12 months, that's the range.

Okay, that's helpful.

Mark, on this respect, look, we are very adamant on this thing. We bought a lava insurance, paid premium and there was lava. As a matter of fact, large portion of the insurance pays and they recognize the fact that this happens. And we have exactly the same policy with each one of those insurers. So our expectation is, each one of them will pay as they should.

Okay. That's good to hear. And then can you just maybe provide a bit more color on the assumptions that go into your electricity segment guidance for the year? Just regarding capacity factors and pricing per megawatt hour, if you can?

So pricing per megawatt hour is based on the specific PPA. Some of them were disclosed, some of them we cannot -- we do not disclose specific pricing of them, but -- when you look and see on the capacity factors, power plants that come online, like McGinness, say, 1, 2, 3 or Campbell, they have a very, very high capacity factor. They actually operate almost 100% or 98%, 97% of the year. The other ones have lower capacity and sometimes gets us to the 90%. So the best way to look at it is to look on the 28 numbers and from that look forward.

If I may add to that, most of our low-capacity power plants are obviously in Imperial Valley, which we are in the process of enhancing both Heber and Ormesa. So looking forward, there will be sustaining capacity rate as our Nevada power plants -- from newer Nevada power plant. And also we have a few older-type power plants in Nevada, such as Steamboat, which is also being enhanced, as we speak now.

[Operator Instructions]. The next question comes from Jeff Osborne with Cowen and Company.

A couple of questions on the product segment. I saw that you are excluding $60 million from the backlog. Can you just talk about the decision behind that? And if you were to get that across the finish line, would any of that revenue come through in 2019?

Hey, Jeff, the idea is that we don't include anything in the backlog, unless we have a properly signed contract and the down payments. Simply, this particular contract is phases of signatures and the down payment is not yet received. That's the reason that it's not included, but on the other hand, it's in very advanced phases. So we felt that we should mention it in the press release and in the conference calls.

And, Jeff, to add, we don't talk about -- as Isaac feels specific contract, but since we feel that this is in very advanced or very late stages, I think signature phases, we started right to put it in, but into the backlog comes only, as Isaac said, the signed contracts and only after they're signed.

Got it. But, I guess, what I'm trying to get a hand on is your level of conservatism, which certainly, that is one, but if that were to be signed next week, for example, is your understanding of the project that it's attributable to? Would any of that product to be delivered in calendar 2019? Or is that more of an issue for next year in 2020?

Part of this $60-something million will be delivered in 2019 year.

Yes. And I will just say that it is forecasting timing of future project, this potential project, at least in the '19 numbers, we have some assumptions on it included in this guidance that we gave. So the guidance is not only signed contract, the guidance is some of our expectation and we expect to sign this contract.

Got it. Okay. That's helpful. And then can you just talk about what the situation is you're seeing in Turkey, given your exposure there? And the lower-margin guidance for the product segment? Are you passing on some of the currency risks that your customers have? Is that manifesting itself in lower pricing? Or is the pricing more of an indication of just the competitiveness of the overall environment?

First of all, Jeff, relating to the Turkish market, due to the financial situation, which burst in the last six months over there, there is a slowness in the Turkish market. Even though today the Turkish market is representing the lower margins in our orders, the company did tremendous effort during the last six months to diversify. The 2019 number will include much more other markets than 2018 and up, but we are still very cautious on giving guidance on a lower margin because there is and there was serious competition mainly on product issues, not only in Turkey, but in some other countries. And that's why even though the product sales will be -- market will be diversified looking forward '19 and '20. We are still cautious on the gross margin side.

Got it. The last one I had for you was around the cadence of the product revenue through the year. Do you have any sense of your delivery schedules? And how we should think about that through the year? Is it 60% in the back half of the year or evenly distributed through the year? Any thoughts there would be helpful.

As of today, the first cues use on the numbers provided look stronger, as you mentioned, comparing to the second half. But as in the product market, this can change. And maybe another piece of information, Jeff, if you remember that our delivery times used to be around 18 months, they drop down to 11 months. And today, they are less than 10, which again makes this segment a bit more fast-moving segment, which can change during the year.

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

Thank you very much, operator. First of all, as we said, this was a very challenging year for us. And we made it through very successfully. And I'd like to thank all our employees around the world that made tremendous effort during this year on all segments to make it happen. And I'm sure that we are now positioned much well for a better 2019. Thank you very much for your support.

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