Ormat Technologies Inc

NYSE:ORA

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, and welcome to the Ormat Technologies Fourth Quarter and Full Year 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be a question-and-answer session. [Operator Instructions] Please note, today's event is being recorded.

I would now like to turn the conference over to Rob Fink of Hayden IR. Please go ahead, sir.

[Robert Fink, Hayden IR]

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 related 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 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's reasons for presenting such information is set forth in the press release that was issued this morning, as well as in the slides posted on the company's 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 a slide presentation accompanying this call may be accessed on the company's website at ormat.com under the Events and Presentations link that's found on the Investor Relations tab.

With all that said, I now like to turn the call over to Isaac. Isaac, the call is yours.

[Isaac Angel, Chief Executive Officer]

Thank you very much, Rob, and good morning, everyone. Thank you for joining us today.

Starting with Slide 5, I'd like to start that Ormat delivered another strong year, driven by continued growth in our Electricity segment. We entered 2018 poised to build up our leadership position and create additional shareholder's value.

I'd like to start with our decision to postpone our 2017 10-K and the announcement of the expected material weakness. We expect to file our 10-K on or before March 16, 2018. The delay in filing is a result of the need to complete additional review procedures, primarily related to with respect to accounting for income tax in financial reporting.

We also announced that we expect to report material weakness in internal control over financial reporting as a result of a need to identify the deficiency related to accounting for income taxes. Although the work in relation to these review procedures is ongoing, the company believes our results of operations contained in this release are materially correct. And we are working diligently to remediate any issues.

In any case, we do not believe it will impact our operational performances or execution of our future plans.

Let us continue with 2017 key highlights. Being the industry's only vertically integrated player, with tremendous expertise in all facets, creates a significant competitive advantage that helps us to develop resources relatively rapidly and drive efficiency throughout the value chain. We have set a goal of adding an incremental 190 to 200 megawatt of organic growth by the end of 2020, on top of the approximately 90 megawatt of new capacity we have added over the last year from Sarulla, Platanares and Tunsgten Mountain power plants.

Additionally, once closed the U.S. geothermal acquisition should further bolster our growth. As we previously stated, we are focused on increasing the portion of revenues from the Electricity segment and expect that 2018, the increase in revenues and profitability of the Electricity segment will increase the total EBITDA margin and will and will contribute to our profitable growth.

In the Product segment, we secured new contracts and reached a backlog of $243 million to support revenues in 2018 and beyond. We also have expectation that our storage initiative will augment our growth over the next few years. We have advanced the new offering and are positioned to develop three battery storage systems in New Jersey during 2018.

I will turn the call over to Doron for a review of financial results before I provide an update on our operations. Doron?

[Doron Blachar, Chief Financial Officer]

Thank you, Issac, and good morning, everyone. Starting with revenues on Slide 7, for the full year 2017 total revenues was $692.8 million compared to $652.6 million last year, an increase of 4.6%. This increase was attributable to our Electricity segment, in which revenues increased by 7.3% compared to the corresponding period in 2016.

Moving to Slide 8, revenues in our Electricity segment were $468.3 million for the full year 2017 compared to $436.3 million in 2016. This increase was primarily attributable to the full year consolidation of our Bouillante power plant in Guadeloupe. The increase was also due to the commencement of our Platanares power plant in Honduras in September 2017, as well as the commencement of our Tungsten Mountain power plant in Nevada in December 2017.

An additional contributor is the increased generation at our Puna power plant, attributable to successful improvement of the resource performance. Electricity segment revenues were also increased as a result of $2.7 million generated by our Viridity business from the provision of energy storage and demand response services.

The increase was partially offset by a decrease in generation at some of our power plants, that we had scheduled to take offline temporarily to address maintenance issue.

Turning to Slide 9, full year 2017 revenue for our Product segment were $224.5 million, down 0.8%, compared to $226.3 million for 2016. The slight decrease was primarily attributable to a different mix of near-completion contract, a new contract signed during 2017 that impact the revenue recognition.

Moving to Slide 10 for a look at our gross margin. For the full year 2017 combined gross margin was 38.7%, compared to 40.9% in 2016. Our Electricity segment gross margin increased to 41.9% for the full year 2017, up from 40% in 2016, primarily due to an increase in revenues from new power plants and the higher efficiency in some of our operating power plants. Electricity segment gross margin includes a gross loss of $2.7 million from Viridity.

Electricity gross margin exclusive of Viridity was loss a 42.7%, representing a 2.7 point increase compared to 2016. In our Product segment, gross margin decreased from 42.5% in 2016 to 32.2% for the full year of 2017. The decrease was primarily attributable to additional cost associated with our project in Chile, as well as increased competition mainly in Turkey and a different product mix and different margin in the various sales contracts we entered into for the Product segment during this period.

Turning to Slide 11. Operating income for the full year 2017 was $205 million compared to $201.9 million for the full year 2016, an increase of 1.6% year over year. The increase in operating income was primarily attributable to the increase in our Electricity segment gross margin and a decrease in general and administrative expenses. The increase was partially offset by a decrease in gross margin in our Product segment.

Operating income attributable to our Electricity segment for the full year 2017 was $154.5 million compared to $126.8 million for the full year 2016, which represents a 21.8% increase. Operating income attributable to our Product segment was $50.5 million for the full year 2017 compared to $75.1 million for the full year 2016.

Moving to Slide 12, our strong financial performance in 2017 enabled us to continue to streamline our capital structure and strengthen our balance sheets, which resulted in a meaningful decrease in our interest expense.

In 2017, net interest expense was $54.1 million compared to $67.4 million in 2016, which represents a 19.7% decrease. This decrease was primarily due to the repayment of $250 million of our senior unsecured bond in September 2016 that bore an annual fixed interest rate of 7% through the issuance of two new series of senior unsecured bonds, which bear an average interest rate of 4.2%.

The decrease is also due to lower interest expense as a result of principal payments of long-term debt and revolving credit lines with banks, as well as $3.9 million decrease related to an increase in interest capitalized to projects. The decrease was partially offset by interest expense related to Don Campbell Phase I project finance debt.

Please turn to Slide 13. Other non-operating expense net for the full year 2017 was $1.7 million, and includes a make whole premium of $1.9 million resulting from the prepayment of outstanding debt. This compares other non-operating expense net of $5.3 million for the full year 2016.

Other non-operating expenses net for the full year 2016, includes the prepayment fee of $5 million, due to the repayment of the senior unsecured bonds in September 2016, and in premium of $600,000 related to the purchase of $6.8 million aggregate principal amount of the OFC Senior Secured Notes.

Please turn to Slide 14. For the full year 2017, income before income taxes and equity in losses of investees more than $170.7 million compared to $141.1 million for the full year 2016. Adjusted income before income taxes and equity in losses of investees for the full year 2017 was $172.6 million. And it excludes $109 million of one-time make whole premium paid in connection with the prepayment of OFC Senior Secured Notes and DEG loan, which were recorded in the third quarter of 2017.

Adjusted income before income taxes in equity in losses of investees for the full year 2016 was $157.1 million. And it excludes $11 million of one-time settlement expense as well as $5 million of one-time prepayment fees, both recorded in the third quarter of 2016.

Now I'd like to go over a few quarterly financial highlights, beginning with Slide 15. For the fourth quarter of 2017, total revenues were $166.4 million compared to $166.5 million in the fourth quarter of 2016. Revenues in the Electricity segment were $128.5 million, an increase of 12.1% compared to the fourth quarter of last year, mainly due to additions of new projects to our fleet, as well as increase in revenues from our Puna power plant in Hawaii.

Revenues were also partially impacted by Ormesa, where we started to sell the electricity under 25-year PPA with SCPPA. This PPA replaced a 30-year old Standard Offer Contract #4 contract with Southern California Edison. Under the terms of the new PPA, energy from the power plant is sold to SCPPA at the rate of $77.25 per megawatt hour, with no annual escalation. Revenues in the Product segment was $37.9 million, a decrease of 27% compared to $51.9 million in the fourth quarter of 2016.

Turning to Slide 16, our Electricity segment gross margin increased to 41.6% for the fourth quarter of 2017, up from 39.7% in 2016, primarily due to an increase in revenues from new power plants and the higher efficiency in some of our operating plants.

In our Product segment, gross margin decreased from 40.8% in the fourth quarter of 2016 to 38.7% for the same quarter in 2017. Electricity segment gross margin includes revenues of $0.5 million and $1.9 million cost of revenues from Viridity.

Turning to Slide 17. Operating income for the fourth quarter of 2017 was $48.4 million, down 5.5% compared to $51.2 million in the fourth quarter of 2016. The decrease was primarily attributable to lower revenues and gross margin in the Product segment.

Please turn to the next slide. Income before income taxes and equity in losses of investees for the fourth quarter of 2017 was $40 million compared to $36.7 million in the same quarter last year.

Please turn to Slide 19. Adjusted EBITDA for the fourth quarter of 2017 was $87.4 million compared to $76.9 million in the same period last year, which represents an increase of 13.6%, mainly attributable to the Electricity segment.

Please turn to Slide 20. Adjusted EBITDA for 2017 was $343.8 million compared to $323.8 million for 2016, which represents an increase of 6.2%, mainly related to the performance of our Electricity segment, which is adjusted EBITDA increased by 15.9% to $243.6 million in 2016 to $282.3 million in 2017.

Electricity segment portion of our total adjusted EBITDA in 2017 represents 82% compared to 75% in 2016. Demonstrating the execution of our strategies, as Isaac mentioned in his opening remarks. Reconciliation of EBITDA and adjusted EBITDA are provided on the appendix slide.

Turning to Slide 21. Cash and cash equivalents, as of December 31, 2017 were $46.8 million compared to $233.2 million, as of December 31, 2016. The company slide breaks down the use of cash for the full year. As you can see, we generated $245.6 million in cash from operating activities for the full year 2017. This compares quite favorably to the $159.3 million generated for operating activities in 2016.

Our long-term debt as of December 31, 2017 was $913.6 million net of deferred financing costs, and its payment scheduled are presented in Slide 22. The average cost of debt for the company is 4.8%.

With respect of capital structure, we refinanced and prepaid almost all of our high debt-bonds that were issued previously. Today, we have to balance and managed interest rate versus customers. In the corporate level, we are raising low cost debt, although outside of the U.S., there is a constant assessment of low cost debt and risk balance.

Our view is that power plants outside the U.S. should be financed by multilateral lenders with nonrecourse debt. In developing countries, it reduces the risk although it usually does come with higher interest.

We plan to finance the Platanares power plant in Honduras, we are negotiating nonrecourse project finance debt that will be provided by OPIC. The finance is expected to be signed and closed following the fulfillment of certain conditions precedent set forth in the loan documents.

On March 1, 2018, Ormat's Board of Directors approved the payment of quarterly dividend of $0.23 per share for the fourth quarter of 2017. The dividend will be paid on March 29, 2018 to shareholders of record as of the close of business on March 14, 2018. In addition, we expect to pay a quarterly dividend of $0.10 per share in each of the next three quarters.

Before turning the call back to Isaac, I would like to address the new U.S. tax reform and it's implication on Ormat. The new U.S. tax reform has multiple elements that impact an international company like Ormat. We start with the transition tax imposed on all E&P to-date outside of the U.S., and continued with [Gilty tax into] [ph] deductibility limitation and the [Beat] [ph] tax.

In Q4, we started to assess this implication, and we will include in the financial statement the best estimate we have. Based on SAB 118, we will continue to evaluate this implication and record any changes in the next couple of quarter. I'd say that in light of the NOL and the PTC that we have, we do not expect to pay cash taxes in the U.S. in the coming years.

In reviewing our tax accounting for fiscal 2017, we are preparing to file the 10-K. Our management identify the deficiency in the effectiveness of our internal control over financial reporting related to our accounting income taxes, which affected the recording of deferred assets and liabilities in our interim consolidated financial statement during the second and third quarters of fiscal 2017.

Our management has concluded that this deficiency constitutes a material weakness in our internal control over financial reporting. And accordingly, an internal control over financial reporting was not effective as of December 31, 2017. This deficiency resulted in immaterial errors, but this will not result in a material restatement in our previously issued interim consolidated financial statement, nor does it require a statement of or a change in our consolidated financial statement for any prior annual or interim period. We are in the process of developing and implementing the remediation plan to remediate this material weakness during 2018.

That concludes my financial overview. I would like now to turn the call to Isaac for an operational and business update. Isaac?

[Isaac Angel, Chief Executive Officer]

Thank you very much, Doron. Starting with Slide 24, are an update on operations. During 2017, we have added approximately 90 megawatts, an increased our fleet to 795 megawatts by bringing new power plants online. Additionally, as you can see on Slide 25, we adjusted the generation capacity of our existing power plants based on their performance.

Turning to Slide 26, generation in this quarter was positively affected by Puna and Bouillante as described by Doron, as well as from Platanares coming online. The overall generation year-over-year increase by 1.7%.

Turning to Slide 27 for an update on our backlog. As of February 26, 2018, our Product segment backlog increased to $243 million. We were able to sign new contracts in Turkey, which continue to represent a significant share of our total backlog. We view this region as one with many opportunities due to the geothermal resources and the government's commitment to geothermal energy.

We are positioned to utilize our vertically integrated structure to price our offerings competitively to push out more competition. We also continue to expand our presence in New Zealand, where we signed a $50 million EPC contract related to Ngawha extension geothermal project. We expect to contract to have a significant contribution to our 2019 and 2020 Product segment revenuers.

Additionally for the first time in a decade, we received an order from EDC in the Philippines. We are targeting the Philippines as a market with the potential for our product sales, and we believe, this order will create more opportunities in the region.

Our backlog also includes the Soda Lake $36 million EPC contract that was signed in December 2016, and is still pending final notice to proceed. This contract was not included in 2018 revenue guidance. We anticipate that our backlog context mix - contract mix together with a lower revenue volume and a weaker dollar expected in 2018, will bring Product segment margin to be in the range of 27% to 30%. Longer-term, we believe opportunities in other region will help us diversify our product backlog and will positively impact our revenues and margin in 2019 and beyond.

Moreover, as we progress with our strategy to increase our Electricity segment portion in the total revenues, we expect lower impact of decremental changes in the Product segment on our financial results.

Moving to the next slide. We remain on track with our near-term growth, and we are updating our target with between 190 and 200 megawatts by the end of 2020 from organic growth. This target is supported by the list of projects presented on Slide 28, and additional projects under development. We also plan to add new capacity from enhancement to our Brady and Puna power plant.

At Brady, we are replacing the equipment with new Ormat binary units, following which we expect the capacity of Brady complex to increase by 4 megawatt to approximately 22 megawatt. We expect to complete the enhancement in the first quarter of 2018.

At Puna, we are planning to replace 10 old steam units with two new Ormat binary units and upgrade the existing auxiliary equipment. This upgrade will increase the Puna complex generation capacity by 8 to 46 megawatt. We have entered into negotiations HELCO to secure a PPA for the increased generation during the original term of the existing PPA, and we are also negotiating extension to the PPA for the period beyond 2027.

Assuming, we complete negotiations with HELCO successfully, we should expect the upgrade to be completed by late 2018 or 2019 or early 2020. In 2018, we plan to have Solar PV project in one of our geothermal plant and use solar for the auxiliary power at these plants. We have to do more on this project in the future.

Turning to Slide 29, we continue to expand our geothermal development inventory and add new prospects to support our future organic growth. As of today, we have approximately 32 prospects worldwide.

Turning to Slide 30, 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. We concluded the post-acquisition process, added staff to support future activity and developed unique offering of Battery Storage as a Service or BSAAS systems.

In 2018, we plan to complete three storage projects, including a 1 megawatt hour Behind-the-Meter energy storage system that's expected to come online in the first quarter of 2018, and to 20 megawatt hour project in front of the meter energy storage system, expected to be online by the end of this year. 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 31. In January, we signed a definitive agreement to acquire U.S. Geothermal for a total consideration of approximately $110 million on fully diluted basis. U.S. Geothermal is currently operating three geothermal power plants in Oregon, Nevada and Idaho. These three properties currently generate 38 megawatts of electricity and they have an existing PPA with favorable pricing, which allows for up to 55 megawatt.

Once this acquisition closes, we anticipate utilizing our capabilities and expertise to improve generation and our plant efficiencies, as we have done with Ormat's existing portfolio. We believe that we can improve the profitability of U.S. Geothermal's operations by more than 50% during 2018 - 2019 through the implementation of synergies and cost reduction. We anticipate closing in the second quarter of 2018, subject to regulatory approvals, approval by U.S. Geothermal shareholders and other closing conditions.

Turning to Slide 32, our estimated capital need for 2018, include approximately $156 million for construction of new project and enhancement of our existing power plant.

In addition, we estimate approximately $51 million for maintenance CapEx for operating power plant including $18 million investments for standby wells that we plan to drill at our Puna power plant. For our exploration and development activity, we plan to invest approximately $41 million and additional $40 million planned for our storage activity.

We also plan to invest in our production facilities approximately $12 million. In the aggregate, we estimate total capital expenditures of approximately $300 million for the full year 2018. In addition, we expect $58 million for long-term debt repayment in 2018 and additional $51 million for repayment of short term revolving lines of credit.

Please turn Slide 33, for a discussion of our 2018 guidance. I would note that beginning in 2018 we anticipate reporting three discrete line items for revenue. We will be adding an Other line item, reflecting energy storage, demand response and energy management related revenue in addition to the Electricity and Product line items.

Additionally, as we have not yet closed the U.S. geothermal acquisition, we did not include any of the expected financial contribution in our 2018 guidance. In 2018, we expect total revenues between $688 million and $712 million. By segment, we expect Electricity segment revenues between $500 million and $510 million. Product segment revenues expected to be between $180 million and $190 million.

In the Other segment, we expect revenues of between $8 million and $12 million. We expect adjusted EBITDA between $355 million and $365 million. And we expect annual adjusted EBITDA attributable to minor interest to be approximately $24 million. As we previously stated, we are focused on increasing the portion of revenues from the Electricity segment.

In 2018, we expect that the increase in profitability of the Electricity segment will mainly come from the full contribution of new capacity that come online in 2017, including Platanares and Tungsten Mountain as well as from Sarulla with two phases, SIL and NIL.

Sarulla contribution is accounted under the equity method and is expected to be notable contribution to our EBITDA in 2018 and beyond. We expect that this increase in revenues and margin expansion in the Electricity segment will mitigate the expected reduction in our Product segment sales and will contribute to our profitable growth.

Please turn to Slide 34. In summary, 2017 was another successful year. We opened new opportunities, grew our portfolio and expanded our geographic footprint. Ormat remains the industry leader, the only vertically-integrated participant in a growing industry. And I'm very optimistic that we will continue to see the benefit of our strategic initiatives in 2018 and beyond.

And this concludes our prepared remarks. Now, I would like to open the call for questions. Operator, if you please.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Noah Kaye of Oppenheimer. Please go ahead.

[Noah Kaye, Oppenheimer & Co.]

Good morning. Thanks for taking the questions. Hey, Isaac and team. I just want to start with the pipeline trajectory here. You've updated the organic growth outlook to adding 190 to 200 megawatts by year end 2020. I think before this, the target was 150 to 160 megawatts by year end 2019.

So just so I can understand how we should be modeling this, what should apples-to-apples be for how much you think you're going to add by 2019, understanding that as subtracting out 24 megawatts at Tungsten that you already brought online?

[Isaac Angel, Chief Executive Officer]

Noah, I don't have in front the rate on for each specific year, everything in the aggregate. You can see on the presentation where we added a few projects that I don't think we've discussed before. It relates to the Puna enhancement, CD4, Tungsten, solar and the Viridity powering. But I don't have the specific breakdown for each of the years in front of me to give you a specific response on 2020 numbers. We will try to provide it to you offline, Noah.

[Noah Kaye, Oppenheimer & Co.]

Okay. But I think it's fair to then just calculate, if I take out Tungsten that there is an additional 65 megawatts of new projects that you see coming online by 2020, kind of relative to what you guided before through 2019. So...

[Isaac Angel, Chief Executive Officer]

Yeah, [indiscernible].

[Noah Kaye, Oppenheimer & Co.]

Yeah, yeah. Maybe just understanding both for this quarter and then for the year ahead guidance, you called out $0.5 million of revenue from Viridity in the quarter, $1.9 million of COGS. What was Viridity OpEx in the quarter and how should we think about Viridity EBITDA and sort of all the energy storage, other profile for 2018, because it certainly appears like it is at least in the short term margin dilutive?

[Isaac Angel, Chief Executive Officer]

Noah, don't forget that the company only joined us during 2018. And it took us at least two quarters to sort out and consolidate into the company. The actual real project - we have two types of projects, we have projects that we are building program in front of the meter and behind the meter. And we have projects that we are building that are - built on our equity and we will operate them.

And we are building - and we have EPC projects. The main two or two something projects, which will be adding to revenue sometime next year will be finished this year. But - so, I am not expecting this segment to be impressive before the end of 2018.

[Noah Kaye, Oppenheimer & Co.]

So we should assume no - basically no EBITDA contribution or is it actually…?

[Isaac Angel, Chief Executive Officer]

Exactly. So our guidance is EBITDA for 2018 doesn't really include any positive impact coming from the segment. The first two quarters were quarters that we consolidated the company into and started to build projects in the second year, which is 2018 is the year that we are building up our portfolio and product and projects around U.S. So I believe that the main impact on EBITDA will be coming beginning of next year.

[Noah Kaye, Oppenheimer & Co.]

Great. Great. I appreciate calling that out. And then, just on financing, couple of questions on financing, I think you look at all the capital funding needs, just kind of wondering generally how to think about funding that. And then kind of maybe a minor item here, but I believe we're still waiting on an OPIC disbursement related to the project, one international project, a substantial disbursement. Can you kind of update us on what the timing of that will be?

[Doron Blachar, Chief Financial Officer]

Yes, we are in the practically the final stages of financing our Platanares project in Honduras. We do because you say it's more than $100 million of financing. And that, obviously, currently is financed with our own equity so once this comes into play it will support our CapEx in 2018.

In addition to that, I would say that we are in advanced discussions to get some corporate loans if we need as well as some tax equity discussions that we have for the Tungsten project that came online in December that we expect to have in the second half of the - to finalize in the second half of the year.

[Noah Kaye, Oppenheimer & Co.]

Okay, great. And just to be clear, you think that the OPIC funding will likely come, say, by the end of the first half of this year?

[Isaac Angel, Chief Executive Officer]

Yes.

[Noah Kaye, Oppenheimer & Co.]

Oaky. Thank you so much.

[Isaac Angel, Chief Executive Officer]

Thanks, Noah.

[Doron Blachar, Chief Financial Officer]

Thank you.

[Operator]

[Operator Instructions] Today's next question comes from Paul Coster of JPMorgan. Please. go ahead.

[Paul Coster, JPMorgan Chase & Co.]

[indiscernible] if you don't mind, a few questions. What is the dividend policy moving forward? If you can just walk us through what's happening there, please. And the tax rate for 2018, what should we assume?

[Isaac Angel, Chief Executive Officer]

On the dividend policy, we did say that we're going to pay about $0.10 in the next three quarters. It's a similar dividend policy, we are - however, we did increase the first three quarters' dividend in order to more streamline the four quarters' dividend. The Q4 will have a catch-up our policy of 20% of net income, but since Q1 to Q3 continue to grow and we actually increased them from $0.08 to $0.10 this year, we assume that the catch-up would be significant lower then what we see this year.

Regarding the tax rate with tax reform that in the U.S., and its multiple implications on Ormat. It's very hard to give the number. I think that if you're looking on cash basis then we don't see paying cash in the U.S. due to the NOLs and the PTCs that we have. And the other locations would be similar to previous years. So it's very hard to give you a specific percentage of tax rate to put in today.

[Paul Coster, JPMorgan Chase & Co.]

Okay. You just got upgrade activity in 2018, and I think, I heard you say, Angel, that the margins and the EBITDA - the EBITDA margins for the Electricity should improve. Can you just talk us through the capacity factor impact of the upgrades and why does that the margins are not impacted by that?

[Isaac Angel, Chief Executive Officer]

Paul, on the efficiencies - on the percentage there is a real difference, if you look year-by-year. The growing percentage of profitability is mainly coming of two things. The first one being a new power plants added to the fleet, which their O&M expenses are lower than older power plant.

And the second thing is efficiency coming from the older power plants, and they're being enhanced and developed and changed based on our new technologies. So overall, if you look a few years back, we are expecting our profitability on those power plants still continue to grow.

[Paul Coster, JPMorgan Chase & Co.]

Okay. And one question, this might be just a narrower on my part. But I thought Dixie Meadows was coming online imminently. Can you just talk us through what's the status of that facility is?

[Isaac Angel, Chief Executive Officer]

We still have Dixie Meadows on our expected fleet, but unfortunately as we have to drill in a different area that we are expecting to get permits to drill there. So it will take more time to come up with available resource and build up a power plant on it.

[Paul Coster, JPMorgan Chase & Co.]

So what timeframe do you [indiscernible].

[Isaac Angel, Chief Executive Officer]

It's not going to happen in 2018.

[Paul Coster, JPMorgan Chase & Co.]

Okay. Thank you very much.

[Isaac Angel, Chief Executive Officer]

Thank you, Paul.

[Operator]

And ladies and gentlemen, our next question comes from Jeff Osborne of Cowen and Company. Please go ahead.

[Jeffrey Osborne, Cowen and Company]

Yeah, good morning, guys. I was wondering if you could just expand on the tax issues or are these at the corporate level where the controls are or is it at the plant level, just any additional detail you can give us would be helpful.

[Doron Blachar, Chief Financial Officer]

The issue is basically - the corporate business are U.S. tax issues. I wouldn't call them too much issues. It's obviously as we said, they don't have any material impact on the financial statement. They relate mainly to internal control, the thought process, and its procedures and process.

[Jeffrey Osborne, Cowen and Company]

Got it. And then, how should we think about the PTC extension? And is there any ramifications to contracts that have been signed over the past year, year-and-a-half that were signed without the ITC, notably the SCPPA project?

[Doron Blachar, Chief Financial Officer]

No, the extension of the PTC is obviously a good thing. We are looking to see whether we can actually have maybe another project that will be able to have start of construction due to the extension from the end of 2016 to 2017. The existing project that we had coming online, Tungsten or McGinness 3 are - is as we understand it, eligible for the PTC.

And we - on Tungsten, as I said before, we are negotiating tax equity. And McGinness Phase 3 is also one that we will start negotiating as we get closer to COD.

[Jeffrey Osborne, Cowen and Company]

Got it. And then, may be just the last one for me on the U.S. geothermal. Can you talk about - first of all in 2Q, do you have any insight at this point, if that will be an early 2Q or late 2Q close, where do we stand on how we should model that?

[Doron Blachar, Chief Financial Officer]

Probably, the simple answer will be probably in the middle.

[Jeffrey Osborne, Cowen and Company]

All right, very good. And then, what about the 50% improvement that you're talking about in terms of the accretiveness? Is that - I imagine the Boise facility they have would be shut down pretty quickly. But as we model the plant-level economics, which are not in your guidance, is it a safe assumption to say that most of that construction would happen in 2018 and by the spring of 2019 would be largely done and is a tailwind for 2019 results?

[Isaac Angel, Chief Executive Officer]

Jeff, we didn't close this acquisition yet. And obviously, we're not coming with operational plans, what to close, how to close and when to close them. So one thing is sure, that once we close it we will come up with the plan that we have and prepared for this acquisition. Eventually, as I mentioned during my remarks before, our expectation is overall on year 2019, we will have 50% efficiency on the numbers.

[Jeffrey Osborne, Cowen and Company]

By the end of 2019, okay. My last question may be about U.S. geothermal that you could answer. It's just they're undeveloped assets, so Guatemala, Nevada, the geysers. Can you just touch on any of those as we look out to the end of 2020, recognizing it's not part of your 190 to 200 megawatts that you're talking about? But do you have any sense of confidence in those assets or have you not done any due diligence yet.

[Isaac Angel, Chief Executive Officer]

Obviously, we did due diligence, otherwise, we wouldn't be in a situation to offer and sign an agreement with them, so it will relate to Nevada. And if you relate to Guatemala, we have also an existing asset very close to their asset. But the main problem over there is the PPA. We don't - I don't see an upcoming PPA in the near future in Guatemala.

On the geysers, it's a different type of resource. And our resource group and engineering group are looking into it, what exactly we can do with it, because as everybody understands, it is a different type of a resource. And it's not a type of resource that we are dealing with. And again, same place there is an issue of PPA.

In other assets in enhancements, there might be a change. And that we can find the PPA for it in Nevada. And then it will be an immediate accretive to our fleet, an immediate accretion to our fleet.

[Jeffrey Osborne, Cowen and Company]

Great to hear. Thank you.

[Isaac Angel, Chief Executive Officer]

Thank you, Jeff.

[Operator]

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Isaac for any closing remarks.

[Isaac Angel, Chief Executive Officer]

Thank you very much. And, ladies and gentlemen, thank you for your ongoing support. And as we all realize, there is a hurdle this quarter and this year, which I believe our excellent employees and advisors will overcome in the upcoming very near future. And as we remarked, I don't think and believe that it has any impact on our strategy, execution and operation. And I'm expecting that 2018 being a much better year than 2017, which by itself, was an excellent year for Ormat. Thank you very much.

[Operator]

And thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect.