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Ormat Technologies Inc
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Good morning, and welcome to the Ormat Technologies First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded.
I would now like to turn the conference over to Rob Fink. 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, 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 filed with the SEC.
In addition, during the call, we will present non-GAAP financial measures, such as EBITDA and adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures and management’s reasons for presenting such information is set forth in the press release that was issued last night, as well as in the slides posted on Ormat’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 Presentation link that’s found on the Investor Relations tab.
With all that said, I’d now like to turn the call over to Isaac. Isaac, the call is yours.
Thank you very much, Rob, and good morning, everyone. Thank you for joining us today. Starting with Slide 5. This was an important and strategic quarter for Ormat. We completed the acquisition of U.S. Geothermal adding 28 megawatts to our portfolio from three operating power plants with the world price PPA, which is above our portfolio average price per megawatt hour.
Over the past few years, we have worked hard to improve the performance of our power plants, by replacing components with more advanced and efficient systems and by actively managing the output to match the resource. We plan to implement the same approach at the three power plants we acquired. We expect to improve profitability by 50% in 2019.
This approached combined with adding organic new capacity online yield the desired result this quarter, with record revenues, generation and profitability of the Electricity segment. As a result of the strong performance from our Electricity segment and the initial contribution of our storage initiatives, we nearly offset the expected decline in our product segment revenue and delivered adjusted EBITDA of $98 million.
We remain on track with meeting our growth target as we increased production at our Brady power plant by 4 megawatts. and this morning, we announced that we brought the third and last phase of the 330 megawatts Sarulla power plant online. Adding to our portfolio, 14 megawatts, which represents our share in the power plant. We continue to progress with remainder of our development pipeline, and in addition to Brady and Sarulla, we expect to add to our portfolio between 172 megawatts and 182 megawatts by the end of 2020.
In our Product segment, the secured new contracts and reached a backlog of $281 million up from $243 million at the end of February 2018. Since then, we booked over $80 million of new contracts. This strong backlog gives us more visibility in 2019, but may also support 2018 as we are now evaluating the probability to benefit from these contracts already this year. We also have expectations that our storage initiatives will augment our growth over the next few years. We have a new offering and remain on track to start construction on two 20-megawatt hour utility scale in front of the meter, battery energy storage systems located in New Jersey.
I will turn the call over to Doron for a review of the financial results, before I provide an update on our operations. Doron?
Thank you, Isaac, and good morning everyone. Starting with revenues on Slide 7. For the quarter, total revenues were $184 million, down 3.1% compared to the $190 million for the first quarter of last year. The decrease was attributable to a decline of product segment, largely offset by an increase in the Electricity segment’s revenue and the new contribution of our Other segment, which represents energy storage solutions.
Moving to Slide 8. Electricity segment revenues increased 14.4% to a $132.5 million for the first quarter up from $115.8 million in the first quarter of 2017. The increase was due to $8.4 million new revenue from our Platanares power plant in Honduras, which came online in September 2017 as well as $4.8 million from our Tungsten Mountain Power Plant in Nevada, which commence operations in December 2017.
An additional contributor is the increased generation at our Puna power plant attributable to successful improvement of the recent performance as well as higher energy rates under the new Ormesa 1 PPA, which also commenced in December of 2017. The increase was partially offset due to a decrease in generation in some of our power plants that we needed to take offline to address maintenance issues and enhancements.
Turning to Slide 9. Product segment revenue decreased 34.3% to $48.7 million for the first quarter of 2018 from $74.1 million for the first quarter of last year. The decrease in our segment – Product segment revenue was attributable to timing of revenue recognition.
In Slide 10, you can see that the new segment we added this quarter for the first time contributed $2.8 million of revenues for storage activities conducted by the Viridity.
Moving to Slide 11, for a look at our total gross profit and margin. Gross margin was 39.9% of total revenue for the first quarter compared to 39.2% in the first quarter of 2017. The increase was due to the Electricity segment.
Moving to Slide 12 for segment breakdown. Electricity segment gross margin increased to 44.5% from 43% primarily due to an increase in revenue from new power plants and the higher efficiency and lower O&M expenses in some of our operating power plants. In our Product segment, gross margin decreased from 33.3% to 30.7% reflecting increased competition mainly in Turkey and a different product mix and different margins in the various sales contracts we entered into for the Product segment during this period. As we previously guided, the gross margins for the entire year is expected to be between 27% and 30%. Our Other segments reflecting Viridity operations report a negative gross margin in the period.
Turning to Slide 13. Operating income for the quarter was $54.6 million compared to $59.5 million for the first quarter last year, a decrease of 8.2% year-over-year. The decrease in operating income was primarily attributable to the lower product segment revenues and gross margin and to higher G&A expenses, primarily due to an increase of approximately $2 million in costs associated with our identified material weakness related to taxes in the fourth quarter of 2017 and the additional work controls to compensate for such material weakness.
Operating income attributable to our Electricity segment for the first quarter was $46.4 million compared to $40.9 million for the first quarter of last year, which represents 13.5% increase. Operating income attributable to our Product segment was $9.6 million for the first quarter of 2018 compared to $18.6 million for the first quarter of last year. Operating loss attributable to our Other segment for the first quarter of 2018 was $1.4 million.
Turning to Slide 14. Interest expense net for the first quarter was $14.3 million compared to $14.9 million last year, down 3.9%.
Slide 15. For the first quarter, the income tax benefit was $2.1 million compared to income tax provision of $10.9 million for the first quarter last year. Our effective tax rate for the first quarter of 2018 was the negative 4.7% and for the first quarter of 2017 was 20.8%. Our aggregate effective tax rate for the first quarter of 2018, excluding the impact of tax benefit of $20.3 million for the reduction of the valuation allowance related to foreign tax credit due to the U.S. tax reform, was 39.4%.
Due to the continuous evolution of the Tax Cuts and Jobs Act signed into law on December 26, 2017, certain estimates as defined by Staff Accounting Bulletin 118 refer to a SAB 118 will refine and we’ll continue to be refined percent to potential legislative amendment and interpretation of the new law as they become available. As a result of amendments and interpretation during 2018, the company recorded, as mentioned before, a tax benefit of $20.3 million for the reduction of the valuation allowance related to foreign tax rates.
The IRS is issuing new guidance and clarification as a follow-up to the tax legislation, and we can expect additional changes going forward. Our effective tax rate is primarily based upon the composition of our income in different countries and changes relating to valuation allowance for certain countries.
In 2018, excluding the one-time tax benefit, we expect that our effective tax rate will be in the levels of 39%. Going forward, as the IRS continues to issue new guidance and clarification; we will update the market on the expected effective tax rate in future years. However, in light of the net operating losses and the production tax credit that we have, we don’t expect to pay cash tax in the U.S. in the coming years.
Turning to Slide 16. Net income attributable to the company stockholders in the first quarter was $44.7 million compared to $35.3 million in the same period last year, which represents an increase of $9.4 million. Earnings per share for the quarter was $0.88 per diluted share using $51.1 million weighted average number of diluted shares compared to $0.70 and $50.5 million weighted average number of diluted shares in the first quarter of 2017. Adjusted earnings per share, excluding the tax benefit of $20.3 million was $0.48 per diluted share for the first quarter of 2018.
Turning to Slide 17. Adjusted EBITDA for the first quarter reached an all-time quarterly record of $98.4 million compared to $91.8 million in the same period last year, which represents an increase of 7.2% mainly attributable to the Electricity segment. Electricity segment portion of our total adjusted EBITDA in the first quarter was 90% compared to 78.2% in the first quarter of 2017. In the first quarter, we had higher-than-expected EBITDA due to lower well field expenses in the Electricity segment. We may have these expenses later in the year. Reconciliation of EBITDA and adjusted EBITDA are provided on the appendix slide.
Turning to Slide 18. Cash, cash equivalents and restricted cash as of March 31, 2018, increased to $105.1 million from $96.6 million as of December 31, 2017. The accompanying slide breaks down the use of cash for the quarter. As you can see, our cash from operating activity for the quarter was impacted by the payment of approximately $44 million withholding tax based on cash distribution from our subsidiary Ormat Systems to all Ormat Technologies. Our long- term debt as of March 31, 2018, was $984.3 million, net of deferred financing costs. And its payment schedule is presented in Slide 19. The average cost of debt for the company is 4.9%. Our net debt as of March 31, 2018, was $879 million.
Please turn to Slide 20. With respect to our capital structure, we recently raised $100 million low-cost debt with a fixed rate of 4.8% per annum from the Migdal Group, a leading insurance company institutional investor in Israel. Outside of the U.S., we announced last week that we signed the finance agreement with Overseas Private Investment Corporation, OPIC, the United States government’s development finance institution, to provide a $125 million loan on a non-recourse private finance base for the 35-megawatt Platanares geothermal power plant in Honduras. We expect to draw down the loans in two tranches. The first tranche is $115 million with the closing and the second tranche of $10 million within two quarters from closing.
Closing and disbursement of the OPIC loan are subject to customary condition for funding, which we expect to satisfy by the end of the second quarter of 2018. Upon closing, the interest rate on the loan will be determined and is expected to be between 6.75% and 7.25% based on the current estimate for the U.S. Treasury and for the additional spread on OPIC certificate of participation.
We are proud with our long-standing relationship with OPIC that started with OPIC’s financing for Olkaria complex in Kenya more than five years ago, and we appreciate OPIC confidence in our technology, operational skills and our focus on bringing reliable, cost-effective, renewable geothermal power in emerging markets.
On May 7, 2018, Ormat’s Board of Directors approved the payment of a quarterly dividend of $0.10 per share for the first quarter of 2018. The dividend will be paid on May 30, 2018 to shareholders of record as of the close of business on May 21, 2018. In addition, we expect to pay quarterly dividend of $0.10 per share in each of the next two quarters.
That concludes my financial overview. I would like now to turn the call to Isaac for an operational and business update. Isaac?
Thank you, Doron. Starting with Slide 22, for an update on operation. During the first quarter, we have added approximately 56 megawatts, and increased our fleet to 851 megawatts by bringing new power plants online and acquiring power plants from U.S. Geothermal. As part of the USG acquisition, we become the owner of three operation power plants at Neal Hot Springs in Oregon, San Emidio in Nevada and Raft River in Idaho. With a total net generation capacity of approximately 38 megawatts, in Neal Hot Springs, we are partners with Enbridge Incorporation, which holds 40% ownership interest.
in addition, we become the owner of development assets, which includes the project at the Geysers, California, a second phase project at San Emidio, Nevada; a Greenfield project in Crescent Valley, Nevada and El Ceibillo project located near Guatemala City, Guatemala.
Turning to Slide 23, generation in this quarter was positively affected by the contribution of Tungsten and Platanares as well as from Puna. the overall generation year-over-year increased by 6.7%. on May 3, 2018, the Kilauea volcano located in close proximity to our Puna geothermal power plant in the Puna district of Hawaii’s Big Island erupted following a significant increase in seismic activity in the area in the recent weeks. We have taken steps to secure the Puna facilities including among others taking electricity generation offline, evacuated nonessential personnel from the power plant and we are in the progress of moving pentane [ph]to an off-site location.
We are still assessing the impact of this eruption on our Puna facilities. Any significant physical damage to the plant are extended shutdown of the Puna power plant could have an adverse impact on the electricity generation and availability, which in turn could have a material adverse impact in our revenues. We continue to monitor the condition of the Puna facilities, coordinate with HELCO, the offtaker and without other local authorities and are taking steps to both further secure the power plant and restore its operations as soon as it’s safe to do so.
As of today, there is no damage to the power plant; however, we don’t know yet the impact of the eruption on our production injection wells. We have a business interruption of property insurance coverage; however, this is an ongoing event and until it stabilize, we will not know the potential indemnification we can recover from the insurance company or if at all.
Turning to Slide 24, for an update on our backlog. As of May 7, 2018, our product segment backlog increased to $881 million. We were able to sign new contracts in the amount of over $80 million, which most of them are in Turkey, which continue to represent a significant share of our total backlog. As I mentioned on the beginning, we are evaluating the timing of the new contracts, and we will update next quarter if there will be an additional contribution to 2018 revenues.
We anticipate that our backlog contract mix, together with the revenue volume to break a product segment margin to be in the range of 27% to 30%. Longer term, we believe opportunities in the other regions will help us to diversify our product backlog and will positively impact our revenue and margin in 2019 and beyond.
Moving to the next slide. We remain on track with our near-term growth and we are updating our target between 172 megawatts and 182 megawatts by the end of 2020 from organic growth following the commencement of Brady and NIL 2. This target is supported by the list of projects presented on Slide 25 and additional projects under development. In 2018, we expect to add additional 58 megawatts from the repowering of Olkaria complex in Kenya, and from the third phase of McGinness Hills in Nevada.
In Olkaria, we expect to add approximately 10 megawatts at the complex in the second quarter of 2018. With respect to the 48 megawatts McGinness Hills three in Nevada engineering, procurement and equipment transportation is ongoing. Drilling is on process and we expect commercial operations towards the end of 2018.
Turning to Slide 26. In early 2018, we initiated three storage projects. In mid-April, Viridity announced commencement of a new behind-the-meter 1 megawatt hour project, which could serve Atlantic County Utility authorities, unique ecological green facility by a Battery Storage as a Service model, optimizing the facility economics as well as providing PJM interconnection, grid ancillary services.
Additionally, on Slide 27, we announced that Viridity expects to start the construction of two 20-megawatt each utility scale in front of the meter, battery and energy storage systems located in New Jersey. The projects were initiated by Viridity and are expected to be operational in the fourth quarter of 2018.
Ormat’s through Viridity, will finance, construct, own and operate the projects. The battery energy storage systems will be utilized to provide ancillary services to assist PJM interconnection in balancing the electric grid. In 2019, the projects are expected to generate average revenues of between $7 million and $8 million, mainly from ancillary services. The project’s revenues are based on spot prices and may vary from period-to-period. We continue to participate in RFPs on the East and West Coast and build a portfolio that will contribute to our earnings in the mid and long-term.
Turning to Slide 28. Our estimated capital needs for the remainder of 2018 include approximately $111 million for construction of new projects and enhancement of our existing power plants. In addition, we estimate approximately $40 million for maintenance CapEx for our 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 $35 million, and additional $36 million is planned for our storage activity. We also plan to invest in our production facilities approximately $9 million. In the aggregate, we estimate total capital expenditures of approximately $231 million for the remainder of 2018. In addition, we expect $52 million for long-term debt repayment in 2018.
Please turn to Slide 29 for a discussion of our 2018 guidance. We are updating our guidance to reflect the contribution of U.S. Geothermal. In 2018, we expect total revenues between $711 million and $735 million. By segment, we expect electricity segment revenues between $523 million and $533 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 $11 million. We expect adjusted EBITDA between $368 million and $378 million, and we expect annual adjusted EBITDA attributable to minority interest to be approximately $28 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 full contribution of the new capacity that came online in 2017, including Platanares and Tungsten Mountain as well as from Sarulla. Sarulla contribution is accounted under the equity method and is expected to have notable contribution to our EBITDA in 2018 and beyond.
Please turn to Slide 30. In summary, this was a very strong start for 2018 for Ormat as we are benefiting from organic and electricity growth to further strengthen our leadership position. Ormat remains the only vertically integrated participant in a growing industry. We hope and expect that situation in Puna will stabilize soon. I’m very optimistic that we will continue to see the benefits of our strategic initiatives in 2018 and beyond.
This concludes our prepared remarks. Now, I’d like to open the call for questions. Operator, if you may please.
[Operator Instructions] Our first question today comes from Noah Kaye with Oppenheimer. Please go ahead.
Yes. Hi. This is Kristen, on for Noah. Thank you for taking our questions.
Thank you.
Thank you, Kristen.
So first, we know that you finalized the U.S. Geothermal acquisition; can you give us some detail on the development pipeline? I believe U.S. Geothermal has previously said that the pipeline included about 120 megawatts of advanced stage Greenfield projects in California and Nevada, Guatemala. So what is your assessment of those opportunities at this stage?
Do you want to take this or I’ll…
Okay. I can start. So I would say that when you look on the U.S. Geothermal pipeline, a development pipeline, you need to split this basically into two parts. The first one relates to an expansion in San Emidio and Phase II in San Emidio in Nevada, which looks very interesting to us for a resource standpoint, and we’re looking for a PPA over there. And the second one, which is go together with this one, is the site they have in California, the Geysers – the Geysers that site has again, some verification of the resource, however, similar, the question of the PPA.
And I think over the last three years, U.S. Geothermal was trying to get the PPA. There was no success. So, this is something that we’ll continue to do, but that’s a bit longer down the road since PPA in that area are bit harder to get. So these are the two more advanced developments assets. The other assets either in Guatemala, which is a very nice asset and we have similar assets next to it and in present in Nevada and other places. For assets, this will join our pipeline, and we’ll develop them overtime. I think as Isaac said, our first focus is to improve the existing power plants similar to what we’ve done in Ormat. The PPA that can support more than 38 megawatts and we are now starting to develop a more detailed plan how to increase the generation in the existing power plants.
Okay. And then just moving on to the OPIC loan. Congratulations on securing that. Now that, that’s done and as you look at your remaining CapEx needs for the year, what’s your view on how you intend to fund that? Or what are you thinking about in terms of your financing strategy?
We have just signed, the OPIC deal that will close it a month from now, probably a month and a half. So if we do utilize all of our capital plans and improve them, they will probably go to the market some time in Q3 or Q4 to get additional financing. It can be in the U.S. or outside of the U.S., but it depends on the progress that we do on the exploration and development of the assets.
Okay. And then the last one for us, can I check on rebuilding the product backlog, you mentioned that over the longer term, you’re looking to diversify geographic, the composition of that backlog. Is that an opportunity where the ORIX partnership is starting to bear fruit yet?
And let me first relate to the backlog itself, as you probably noticed, it is the highest backlog ever without Sarulla project in Ormat, which only in the last two months, we added $18 million to it, which is giving us a great comfort for 2019. And as you said before, and I mentioned in the call, we are diversifying by the fact that increasing our electricity revenues and profitability faster than in the product segment by that eliminating the bumpiness of revenues and profitability for the upcoming years.
But having said that, we are still – we have still a strong pipeline on the product side, and we are also diversifying it by that that we are moving into new countries such as New Zealand, Philippines and others that used to be Ormat clients long ago. We are coming back to that. We expect that the agreement that we signed with ORIX will help us, which we are already utilizing this channel, to increase our offering and availability in those Far East countries, which as I mentioned, Philippines and Indonesia, China and others. The work that we are doing together, which their BD and our BD is in progress. And I’m optimistic that in the upcoming years, as I said before, we feel much more secure now on 2018 and 2019, and I want to believe that this partnership will lead into new product sales 2019, 2020 and 2021 in those countries, which I have mentioned. That’s a very long answer to a short question. Sorry, Kristen.
No. We appreciate the color. Thank you so much.
Thank you.
Our next question comes from Jeff Osborne with Cowen and Company. Please go ahead.
Yeah. Good afternoon. A couple of quick ones here. Can you just give us what the Puna run rate would have been if the facility didn’t have any downtime this year? I’m just trying to put the guidance in the perspective relative to the plant being off-line.
Okay. The roundup numbers for Puna are, again, very roundup numbers, are about $38 million of revenues yearly and about $20 million in EBITDA. But as of now, we don’t know if there is a damage to the power plant or there will be a damage to power plant. Because as I hear that there is some kind of a slowdown in the lava and the eruption, we don’t know yet if there is damage in our wells, either production or injection.
So it’s a very – it will be very difficult to assess if there will be damage and what the size of their damage and when will we – we will be able to go back to production. I want to remind you that this is not the first time and that was an eruption in the Big Island, and it happens once in a while. I’m optimistic that at some stage in a near future, we will start to assess when basically the sulfur will go away. Because the main problem today is not the lava or the eruption.
For us, it’s basically the sulfur coming or the gases that are coming – that make them come to our direction. When this thing will be cleared, we will assess the situation of the power plant, which seems intact and also we will start the flow the wealth to understand where we stand with the wells. And here if everything will be okay, we will return the penta to the power plant and start operation.
So as of today, it is very difficult to assess what’s going to be the damage, if at all. And that’s why we didn’t update anything in our numbers, because we can absorb a certain business interruption. Beyond that, we have an insurance, both for business interruption or/and property. But as I said, as this is an ongoing event, it’s very difficult to assess now what is the real damage if at all.
That’s very helpful. Two other real quick ones. Just the $80 million of bookings on the product side. Is the margin profile of that in Turkey similar to what you’ve experienced over the past 12 to 18 months? So that’s question one. And question two is just as we think about the others that segment or storage in New Jersey and other states as that ramps up. how do we think about the margin profile of that business?
Okay. First, relating to the additional $80 million that we added in the last few months. And I just remind you that we are only in May 2018. But based on these numbers, we stated that our gross margin is expected to be between 27% to 30% in 2018, and we expect it to be a bit higher in 2019 because of a difference in sales mix, which we are expecting already for the next year. On the second question that you asked about Viridity. As I said before, on this particular two projects, which we are talking about $7 million and/or $8 million yearly revenue, we are expecting relatively high profitability. But this doesn’t reflect necessarily on all our storage sales, because this particular one is an operation that we are building, financing and operating by ourselves. We have additional prospects that we are building and providing solution for third parties. And over there, expectedly, a profitability will be lower than that. But these particular ones are very high.
That’s helpful. I appreciate it.
Thank you, Jeff.
Our next question comes from Sophie Karp with Guggenheim Securities. Please go ahead.
Hi, good morning and thank you for taking my question. I wanted to ask you about storage and maybe drill a little more in the economics of that. What you’ve seen in terms of returns versus your CapEx that you invest in those assets? And also other opportunities to maybe go beyond auxiliary services and provide build storage assets that would provide picking generation or something like that. Thank you.
Hey, Sophie. obviously, it’s a new segment for us and there is a severe competition. So you can take it that the IRR rate that we are expecting on these owned projects are, at this stage, much higher than the geothermal market that we are operating in, sometimes even double. But as it’s a young market, I am not sure that this profitability will hold for many, many years to come. And it will start to stabilize as the market will start some kind of a saturation within the next four, five years. But as of today, the profitability rate that we are looking into in those projects that we are already building, are very high.
And there – is there an opportunity to go beyond auxiliary services right now?
Yes, there are. We are, as we speak, are participating in numerous RFPs both in West Coast and in the East Coast. And also outside of the U.S., our expectation is that we will be building few more – at least start building few more projects during 2018 and also beyond.
Got it. And is there any particular, I guess, backlog or storage projects beyond these two? Or this is just too early to say what that would look like?
Look, we have given a guidance for this segment. In order to fulfill the guidance, obviously, we have a backlog, which we are not – and it is not significant to Ormat’s operation at this stage. We are not really giving a backlog for this particular segment. My expectation is, as we expect this grow exponentially within the next year or so, then in 2019, may be we can – we will start also to indicate backlog in this particular segment.
All right. Got it. Thank you very much.
Thank you, Sophie.
Next question comes from Gerry Sweeney with ROTH Capital. Please go ahead.
Good morning. Thanks for taking my call. Early in the prepared remarks, you talked about some other power plants being down in the first quarter. Can you remind me; obviously, were these more unscheduled down periods or are they – these basic maintenance issues? I think we discussed it on the fourth quarter call, but I don’t think actually remember what the outcome was?
Gerry, everything that was mentioned in the call was planned earlier. There is nothing that is a surprise or a breakdown as you put it. Besides the fact that we stopped last Thursday the Puna operation. But even Puna, luckily enough was supposed to go into a shutdown basically today. So if the shutdown starts at three or four days earlier than expected. And so again, as I said before, we are monitoring the situation and we will see what and when – how and when we will start off the operation in Puna and if we think positive, I hope this thing will settle down somehow within the next few days or…
Got it. And then on the…
But frankly, it is very difficult and impossible to predict.
Understood, clearly understood. So on the material weakness; I think Doron mentioned there was about $2 million in costs in the quarter. Will there be any spillover into the second quarter costs associated with the material weakness? And will there be any sort of permanent uptick in SG&A, just for additional people monitoring, et cetera associated with the issue?
Hi, Gerry. Doron. We don’t think that there is going to be any ongoing uptick in G&A. We might see some additional costs in Q2 and Q3 when we develop some new controls or document. The process is a bit differently in order to compensate for the control. But I don’t think it should – at least at this point, I don’t think it should be material and definitely, there is no need for an ongoing impact on G&A.
Got it. Thank you very much, Doron.
Our next question comes from [indiscernible] with Citi. Please go ahead.
Hello.
Hi, Michael.
Good morning and good afternoon to everybody. You already answered the question about Puna. I just want to know what is your view about trying to increase the production in the next two years in Puna after the shutdown? And another question regarding the backlog, you saw some new contracts in late 2017 and some of them in Turkey. How do you expect the economic environment now in Turkey, affecting the future margin on the product segment, which is already relatively low?
Okay. Let me start with Puna. We had a plan previous to this event to increase production in Puna, and I believe eventually it will also happen. And the plan was built around to increase production without using more resource than we are using today. This plan is still going on. I’m – I hope that this particular event will be behind us very soon. And we will start – we will continue with our plans together with the offtaker, HELCO in Hawaii, which is an ongoing process and we will do it eventually. On the Turkish environment, you’re right, there is a certain crisis in the Turkish financial environment as we speak, but the electricity in – the geothermal electricity in Turkey has some kind of an advantage comparing to other type of electricity.
And the government is subsidizing it, and this subsidy, well, should go on at least until 2022. And so far, we are competing well with our competitors. And as you can see, we already secured pretty much 2018 and also serious part of 2019. And we are diligently developing additional markets outside of Turkey. We already announced a deal in the New Zealand that will be in effect in 2019. We have few more coming in the pipeline. So I’m not really – at this stage, I’m not really worried about the profitability level in Turkey going below than what we have today, but time will tell.
Thank you very much.
Thank you, Michael.
At this time, this will conclude our question-and-answer session today. I’d like to turn the conference back over to Isaac Angel for any closing remarks.
Thank you for your ongoing support and participation in this call, ladies and gentlemen. As we all understand that we are optimistic for the future, and we had a very good quarter in Q1 and we are expecting a very good year. I hope that this event in Puna will be short and not damaging, and we are monitoring it on daily basis. The senior management is on-site taking decisions as things develop. And we will keep you posted on the future. Thank you very much.
The conference has now concluded. Thank you very much for attending today’s presentation. You may now disconnect your lines.