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Edited Transcript of ORA earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 Ormat Technologies Inc Earnings Call

RENO Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Ormat Technologies Inc earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Doron Blachar

Ormat Technologies, Inc. - CFO

* Isaac Angel

Ormat Technologies, Inc. - CEO

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Conference Call Participants

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* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Jeffrey David Osborne

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Noah Duke Kaye

Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst

* Paul Coster

JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies

* Rob Fink

Hayden IR, LLC - EVP and General Manager of New York Office

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Presentation

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Operator [1]

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Good morning, and welcome to the Ormat Technologies' Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Rob Fink. Please go ahead.

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Rob Fink, Hayden IR, LLC - EVP and General Manager of New York Office [2]

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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 related 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, 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 their 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 is set forth in the press release that was issued last night as well as in the slide posted on the company's website. Because these measures are not calculated in accordance with GAAP, they should not be considered in isolation from the financial statements prepared in accordance with GAAP. Before I turn the call over to management, I would like to remind everyone that a slide presentation accompanying this call may be accessed on the company's website at ormat.com under the Presentation link that's found in the Investor Relations tab.

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

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Isaac Angel, Ormat Technologies, Inc. - CEO [3]

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Thank you very much, Rob, and good morning, everyone. Thank you for joining us today. Starting with Slide 5. Ormat continues to benefit from the initiatives we have put in place to drive operational efficiency at our existing power plants. These efforts, which include adjusting resources and adding modern equipment, are helping to grow our generation and improve margins in our electricity segment, while simultaneously we're expecting our portfolio.

Generation in the electricity segment increased by 5.7% compared to last year as we begin to benefit from our Phase 3 of McGinness Hills power plant as well as the expansion of our Olkaria power plant partially offset by no activity at our Puna power plant. This resulted in a 5.6% increase in electricity segment revenue compared to the second quarter last year.

Excluding the impact of Puna, our gross margin for this segment would have been 41.7%. This margin is down, as we expected, from the first quarter of 2019, but lower-than-anticipated field maintenance expense in the quarter mitigate the expected decline.

We continue to make good progress in our efforts to resume operations at Puna, and we expect that our plant refurbishment activities will be completed on schedule by the end of 2019. But our operation will resume as soon as the local permitting and transmission network upgrades being undertaken by our local utility partner are completed by early 2020.

In our product segment, revenues declined slightly. However, we continue to benefit as the industry's only vertically integrated company. During the quarter, we booked approximately $26 million in new contracts from the Turkish market, and our backlog reached $201 million. Demand for our solutions remained solid.

We delivered $94.9 million in adjusted EBITDA for the quarter, up 17.4%. Adjusted EBITDA, excluding the impact of Puna, mainly from the business interruption proceeds is approximately $90.8 million, up 11.5% compared to last year. We are increasing our 2019 adjusted EBITDA guidance and reiterating our revenue guidance provided in the first quarter's earnings release.

I'll turn the call over to Doron for a review of the financial results before I provide an update on our operation. Doron, please.

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Doron Blachar, Ormat Technologies, Inc. - CFO [4]

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Thank you, Isaac, and good morning, everyone. Starting with revenues on Slide 7. Total revenues for the quarter were $184.1 million, up 3.2% compared to the same quarter last year. Breaking this down, the electricity segment grew 5.6%, and product segment revenues decreased 5.3%.

Moving to Slide 8. Revenues in our electricity segment were $129.1 million for the quarter compared to $122.2 million in the same quarter last year, with the growth resulting from recently expanded operations at McGinness Hills and Olkaria as well as contribution from the acquired USG plant, combined to overcome the loss of revenues resulting from the temporary shutdown of the Puna power plant.

Turning to Slide 9. Product segment revenues decreased to $52 million from $54.9 million in the same quarter last year. The decrease in revenue was due to the timing of certain orders which is routine in this part of office.

On Slide 10, you can see that the orders -- that the other segment contributed $3 million of revenue compared to $1.2 million in the same quarter of 2018. We have started benefiting from revenues at the Plumsted and Stryker battery energy storage project, which came online in the first quarter this year.

Moving to Slide 11 for a discussion of our total gross profit and margin. Second quarter consolidated gross margin of 35.4% compared to 32.2% in the same quarter last year.

On Slide 12, gross margin for the electricity segment expanded year-over-year to 42.8%. As Isaac said, this was down sequentially, which we expected, but thanks to lower-than-anticipated maintenance issue, including routine pump replacement and well field issue, the decline was less than we expected. Gross margin in the electricity segment, excluding the impact of Puna, mainly from the business interruption proceeds, was approximately 41.7%. In our product segment, gross margin was 20.6% in the second quarter compared to 31.6% for the second quarter last year. As previously mentioned, it relate to the impact of 2 large Turkish contract at the lower margin than our usual margin. We anticipate margin to begin to normalize in the second half of the year, and we continue to expect gross margin for this segment in 2019 to be between 22% and 27%. Our other segment reported a negative gross margin as we anticipate.

Turning to Slide 13. Selling and marketing expenses for the second quarter of 2019 were $3.3 million compared to $3.7 million for the same quarter last year. General and administrative expenses for the second quarter of 2019 were $14.2 million compared to $15.9 million for the same quarter last year. This decrease was mainly related to high expenses in Q2 2018 associated with our identification of a material weakness related to taxes in the fourth quarter of 2017 as well as the restatement of our second, third and fourth quarter financial statement and our full year 2017 financial statement.

Turning to Slide 14. Operating income for the second quarter of 2019 was $46.9 million compared to $36.6 million for the same quarter last year. The increase was primarily attributable to higher revenues and improved gross margin.

On Slide 15, you can see the breakdown of the operating income by segment.

Turning to Slide 16. Net interest expense for the second quarter of 2019 was $21.5 million compared to $15.8 million last year. This increase was primarily attributable to U.S. Geothermal loans and new loans as well as interest related to sale of tax benefit as detailed in the slide, offset by lower interest expense as a result of principal payments of long-term debt.

Turning to Slide 17. Income tax benefit for the second quarter of 2019 was $3.5 million as we recorded a nonrecurring tax benefit of $13.3 million from our tax strategy plan to refile tax returns net of change in accrued withholding taxes given our decision to no longer reinvest our earnings in foreign locations, that's called APB 23 assertion. Income tax expense for the second quarter of 2018 was $29.1 million, as we recorded a nonrecurring tax expense of $16.9 million for the increase (sic) [decrease] of the valuation allowance related to foreign tax credit and production tax credit. Our effective tax rate benefit is 11.2%. Excluding the nonrecurring tax benefit occurring this quarter, Ormat's income tax provision effective tax rate would have been 31.1%.

Turning to Slide 18. Inclusive of this nonrecurring income tax benefit, Ormat reported net income attributable to the company's shareholders of $33.9 million or $0.66 per diluted share compared to net loss attributable to the company's shareholders of $0.3 million or $0.01 per diluted share. Adjusted net income attributable to the company's stockholders, excluding this nonrecurring tax item, was $20.6 million or $0.40 per diluted share compared to $16.6 million or $0.32 per diluted share in the same quarter last year.

Turning to Slide 19. Adjusted EBITDA increased 17.4% to $94.9 million from $80.8 million in Q2 of 2018. Adjusted EBITDA includes approximately $4.1 million and a negative $0.6 million of adjusted EBITDA related to Puna in Q2 2019 and Q2 2018, respectively. Adjusted EBITDA, excluding any impact from Puna, was $90.8 million in Q2 2019 and $81.4 million in Q2 2018. The Puna related EBITDA included $6.8 million of insurance proceeds received for business interruption in Q2 2019. No proceeds were received in Q2 of 2018. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide.

Turning to Slide 20. Cash and cash equivalents and restricted cash and cash equivalent as of June 30, 2019, was $181.6 million compared to $177.5 million as of December 31, 2018. The accompanying slide breaks down the use of cash for the 6 months.

Our long-term debt, as of June 30, 2019, was $1.3 billion net of deferred financing cost, and its payment schedule is presented on Slide 21. The average cost of debt for the company is 5.1%. Our net debt, as of June 30, 2019, was $1.1 billion.

Turning to Slide 22. Let me speak briefly to our financing activities during the second quarter. Year-to-date, we have successfully raised approximately $133 million in the aggregate, including $41.5 million, in the second quarter. During the second quarter, we completed a drawdown of $23.5 million under a nonrecourse loan agreement with U.S. financial institution for the financing of Plumsted and Stryker, 2 20 megawatt battery storage projects located in New Jersey. In addition, we raised approximately $18 million for our Bouillante project in Guadeloupe. Overall, Ormat is well positioned with ample access to additional capital to fund future initiative. On August 6, 2019 (sic) [August 7, 2019], the company's Board of Directors declared, approved and authorized payment of a quarterly dividend of $0.11 per share pursuant to the company's dividend policy. The dividend will be paid on August 27, 2019, to shareholders of record as of the close of business on August 20, 2019. That concludes my financial overview.

I would now like to turn the call to Isaac for an operational and business update. Isaac?

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Isaac Angel, Ormat Technologies, Inc. - CEO [5]

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Thank you very much, Doron. Starting with Slide 24 is an update on operations. Year-to-date, we added approximately 82,000 megawatt hours and increased our generation by 5.7% to 1.52 million megawatt hours by adding our McGinness Hills Phase 3 and Olkaria III expansion as well as from the consolidation of Neal Hot Springs, San Emidio and Raft River power plants in late April 2018. Specifically, in the second quarter this year, the 7 megawatt solar portion of our expansion in Tungsten hill come online. The expansion commenced commercial operation in early July. The year-to-date expansion in generation was partially offset by the Puna shutdown.

Turning to Slide 25 and 26. Let me spend a few moment providing an update on the situation at Puna. We continue to make good provision in our effort to resume operations at Puna. We expect that our power plant refurbishment activities, including the work on the substation, will be completed on schedule by the end of the year and expect that the plant will resume operations as soon as local permitting and transmission network upgrades being undertaken by our local utility partner are completed by early 2020. On the field side, drilling work to remove the plugs from our geothermal wells, we found that 2 of the production wells were damaged and we will have to repair or redrill them. In addition, we continue to work on the other wells. We believe that once we resume operation, capacity will gradually increase as we continue to complete necessary well repairs and drilling. 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 online.

Moving to Slide 27. As of June 30, 2019, we claimed $36.8 million of business interruption. And at the end of the second quarter, we have received a total of approximately $20 million in proceeds. We received $6.8 million of such proceeds during the second quarter of 2019. Discussions with the new -- with few insurers that are not paying the business interruption is ongoing and is quite possible that we will have to turn to legal procedures. The business interruption coverage compensates the company for the loss of profits that resulted from the inability of the own surface property to generate electricity. Once the power plant is on operation at any capacity level, we anticipate that we will not be eligible to business interruption proceeds.

Moving to Slide 28. We recently announced the operation of our first-ever geothermal and solar hybrid project. We added 7-megawatt AC solar expansion to the Tungsten Mountain power plant in Nevada, bringing our total generation capacity to 917 megawatts. We remain on track with our near-term growth plan to add between 120 and 135 megawatts by the end of 2021. This target is supported by the list of potential projects presented on the slide.

In Heber repowering, permitting, engineering and procurement are going -- are ongoing. And in Steamboat enhancement, engineering work and procurement are also ongoing. We are also optimistic about the mid- and long-term future opportunities for Ormat, expanding our geothermal portfolio around the world. We recently strengthened our position in Indonesia, where we acquired from a Medco Power subsidiary, 99 -- 49% of the Ijen Project for approximately $3 million. We are committed to additional funding for the project exploration and development, subject to specific conditions. The Ijen Project, which is final -- which its final capacity will be determined after exploration, include a geothermal concession and 30-year PPA for up to 110-megawatt capacity that currently is being extended. The project is ready for exploration and development with some slim holes already drilled.

Turning to Slide 29 for an update on our backlog. As of August 7, 2019, our product segment backlog stands at $201 million. In the product segment, we see opportunities in New Zealand, the Philippines, Turkey and Latin America. We anticipate that our backlog contract mix together with the lower margin contracts in Turkey currently in the backlog will drive product segment gross margin to be in the range of 22% to 27%. Long term, we believe opportunities in the other regions, as I mentioned, will help us to diversify our product backlog. Moreover, as our electricity segment continues to grow, the impact of the volatility of the product segment and especially margin volatility will have relatively less of an impact on our overall financial results.

Turning to Slide 30 for an update on our storage activity. In our storage side of our business, we continue to leverage our market core capabilities in project origination, development, engineering, procurement, construction, financing and operations together with the unique IT network operation center and talented workforce obtained through the Viridity acquisition to expand our footprint and build a robust project pipeline. We successfully created one of the most diverse storage portfolios in the market, spending multiple regions in the U.S. with Plumsted and Stryker, 2 20-megawatt hour operation project selling services to PJM; Rabbit Hill, 12.5 megawatt hour project in Texas, that is under construction and will sell services to ERCOT; 5 megawatt hour Hinesburg project under commissioning in Vermont, connected to ISO New England markets; and 40 megawatt hour Vallecito development project that will sell services to CAISO. These projects have multiple applications, both in front of the meter as well as behind the meter, with combination of contracted revenues and merchant revenues. We are using technology from multiple Tier 1 vendors in the battery side and inverters and other key components. Our efforts in the battery storage activity are directed both towards greenfield development as well as towards M&A and joint development opportunity.

Turning to Slide 31. Our estimated capital needs for the last 2 quarters of 2019 include approximately $105 million for construction of new projects and enhancement of our existing power plants. In addition, we estimate a $25 million of capital expenditures for maintenance of our operating power plants. For our exploration and development activity, we plan to invest approximately $10 million and an additional $10 million spend for our storage activity. For our production facilities, we plan to invest approximately $6 million. Also, we'll repair a new drilling in our Puna power plant to resume operation at its original 38-megawatt generation capacity, we expect between $30 million to $50 million. Next, we expect insurance proceeds to recover part of this investment. In the aggregate, we estimate total capital expenditure for the last 2 quarters of 2019 of approximately between $186 million and $206 million. In addition, we expect $41.5 million for long-term debt repayment in the last 2 quarters of 2019, an additional $38.1 million for repayment of short-term revolving lines of credit that we assume will be renewed.

Please turn to Slide 32 for a discussion of our 2019 guidance. We are increasing the adjusted EBITDA guidance we provided in the first quarter's earnings call and reiterate the revenue guidance. The increase in adjusted EBITDA is the outcome of the minimal well field issues and lower pump replacements we experienced in the second quarter. In summary, I'm encouraged with our progress and believe the company is operating efficiently. By the end of 2019, we expect to have Puna power plant ready for operation, and we continue to work closely with HELCO and the local agencies to expedite the work to enable us resuming the operation of Puna. Ormat continues its efforts to put these challenges behind us and is very well positioned in the growing geothermal and storage market. And this concludes our prepared remarks.

Now I would like to open the call for questions. Operator, if you may, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Noah Kaye with Oppenheimer.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [2]

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Maybe to start with the energy storage, on the financing side, you got LIBOR 3.5% 7-year tenor, it looks like you put a bit more than half kind of the capital requirement on with nonrecourse debt here. How should we think about your ability to do that for future projects given that this was merchant? And how do we think about kind of your levered equity IRRs in cases where you have to do something like this because I certainly think this is a positive development?

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Doron Blachar, Ormat Technologies, Inc. - CFO [3]

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Noah, this is Doron. This is one of the things that was important to us when we started with the energy storage is the ability to nonrecourse a merchant project. And this was the first time we've done it, and the LIBOR plus 3.5% is for the first project. We expect to continue and leverage our storage project as we build them. Roughly, I'll say, the leverage is about 60%, 65% of the total invested capital.

And going forward, we might take this approach on a specific project or alternatively in order to be more efficient. Now we might combine a few projects and leverage them together, so it will be a, on one end, a larger facility. And the fact that we will bundle a few of the projects together, we'll obviously reduce some of the risk, and we expect that through that, that will enable us to get better -- lower margins and better financing.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [4]

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Makes sense. Turning to products briefly, looks like with the new contracts, the Turkey exposure increased a bit sequentially. Maybe can you update us on the pipeline for products generally and in other geographies?

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Isaac Angel, Ormat Technologies, Inc. - CEO [5]

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All right. Noah, this is Isaac. Contrary to previous quarters and year, actually the Turkish exposure is much, much less than before even though the last 2 projects that were signed were from Turkey, but in normal Turkish profitability, not as we -- as it happened to us in the last year. In general, the number in Turkey which used to be around 80%, 85% of the total backlog today is less than 45%.

So you can see a dramatic change in our diversification around the world. We have today the new markets that join our New Zealand, China, Philippines and others. So in general, I'm very optimistic that we -- after the crisis in Turkey, which is somehow clearing, we try to diversify that as fast as we can, and we were very successful on that.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [6]

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Okay. Great. And then just to clarify on the guidance and the EBITDA revision. Does the higher EBITDA guidance include the Puna proceeds -- insurance proceeds that you got this quarter? Does it not include...

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Isaac Angel, Ormat Technologies, Inc. - CEO [7]

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No, they are not included.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [8]

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Okay. But you did receive almost $7 million so -- and you didn't exclude that from EBITDA in the quarter, correct? So...

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Isaac Angel, Ormat Technologies, Inc. - CEO [9]

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No, of course not. The actual numbers they include the proceeds, but the numbers that we gave you, which is excluding Puna, doesn't also include the proceeds received from the insurance.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [10]

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Okay. So it's just $5 million from better operating performance and then the true kind of number right now implied is that plus what you've received in the insurance proceeds. Okay. That's very helpful.

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Isaac Angel, Ormat Technologies, Inc. - CEO [11]

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Thank you, Noah.

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Operator [12]

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(Operator Instructions) Our next question comes from Paul Costner (sic) [Paul Coster] with JPMorgan.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [13]

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I got a couple. The first one is on the hybrid initiative. Can you explain to us what the value proposition is there? How is it contributing to the bottom line?

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Isaac Angel, Ormat Technologies, Inc. - CEO [14]

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Okay. So Paul, as you're probably aware of the fact that in most of our power plant, we have parasitic loads, which is a result of pumps and other ancillary equipment that we are operating within the power plant. In some cases, this can be between 10% to 25% of the total production of the power plant. And the idea is that we will be powering those ancillary -- this ancillary power through solar facility that we are adding to the power plant. And by that, our net-net output of the power plant from the geothermal fluid will be higher than today. That's the main idea.

And the second part is, as you also know, we have output power fluctuation which are dependent on ambient temperature, and solar power and geothermal power with ambient temperature, they are -- they actually -- they fit together, which means when -- during noon time, when the actual power from the geothermal power plant is a bit low because of the temperature, we obviously have more solar power which is complementary.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [15]

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That makes great sense. The second question is, I'm sure you're aware of the Department of Energy's EGS initiative, and it just sounds incredible. And I'm wondering, are you involved? Is it a game changer? And if it is, what kind of time line do you think before we sort of start realizing the implied growth to geothermal power from that initiative?

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Isaac Angel, Ormat Technologies, Inc. - CEO [16]

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What's the initiative that you are referring to Paul?

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [17]

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This is the enhanced geothermal systems initiative?

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Isaac Angel, Ormat Technologies, Inc. - CEO [18]

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Yes, we were involved in enhanced geothermal systems initiative 4, 5 years ago but not anymore. We are not involved in the enhanced and also the fracking initiative that are going in a few places in the world.

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Operator [19]

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Our next question comes from Jeff Osborne with Cowen and Company.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [20]

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A couple of questions on my end. I was hoping you could just help us try to make a scorecard on the insurance side for both property damage and the business interruption? Can you just talk about cumulatively for both items, how much you've received thus far? And how much outstanding claims there are? I know you have the possibility of taking people to court, I just want to get a -- put it in perspective, what's received so far over the past few quarters relative to what the total opportunity is over time?

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Doron Blachar, Ormat Technologies, Inc. - CFO [21]

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Jeff, I don't have the exact figures in front of me, but I think that if you look on it roughly, we got the $20 million for the BI. We have a claim of a bit more than $3 million per month. So if you go from June of '18, so it's about 12 months. So 13 months, including July, so that would be about $36-something million. And out of that, we got the $20 million on the property.

We've got a few millions, but the property -- it's basically, it's a very -- there's no argument on the properties. So it's just a question of us doing the procedure with insurance companies, gathering the invoices, showing it to them and getting the money. So the property is quite straightforward.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [22]

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Just so I understand the property side better, do you have to complete the restoration of the project? And that's more of a maybe mid-2020 event as you're up and running, you can then go to the insurance companies and say, here's how much it costs? Is that the mechanism?

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Doron Blachar, Ormat Technologies, Inc. - CFO [23]

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For the property, we can issue claim as we move along. So far, we've got $4 million for the property and $7 million for the [BI], but it's a question of us issuing a request. So we're not waiting for anything. It's something that is an ongoing issue.

One more thing, I think, it's important to take into account, the business interruption goes with the properties. So this is one policy. The other policy that we are activating, and we also started to get money on is the control of well policy because of the damaged wells that was found in the quarter, we're working not to redrill them, to unplug them, and this is a different policy that covers the work on the wells.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [24]

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Got it. Okay. Two other questions or lines of questioning. You had some tax movement this quarter, can you give us any insight as to either including or excluding the benefit this quarter? How should we think about the tax rate for the full year?

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Doron Blachar, Ormat Technologies, Inc. - CFO [25]

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We expect the effective tax rate, excluding this onetime, to be around 31-point-something percent. The net impact of the changes in the taxes strategy that we did was about $13.3 million positive.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [26]

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Right. Okay. I saw the 31% for the quarter. I wasn't sure if that's a good run rate for the year. The last question I had is, as you look out to the second half and, in particular, in the third quarter, where it's been very hot. Is there any ambient temperature issues or ongoing maintenance that rolled over from Q2 into Q3, just as we think about the margin profile for the electricity business? Is there anything to flag for the quarter that we're in currently?

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Isaac Angel, Ormat Technologies, Inc. - CEO [27]

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Jeff, this is Isaac. Q2 was exceptionally good from the well field or pump issues. So we expect some spillover statistically that will happen during the second half of the year. That's why we are very cautious on our expectation. But on the other hand, some of the things are working well. Most of the modifications that we built are working as expected.

So obviously, there will be some spillover on the ambient temperature side. As you can imagine that our budget and expectation to take into account the expected ambient temperature, we are operating for more than 50 years, but unpleasant things can happen. So we have to be ready for it.

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Operator [28]

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Our next question comes from Gerry Sweeney with ROTH Capital.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [29]

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Just 1 or 2 more additional questions on Puna, if I may. Now that you're in the process of repairing the facility, any opportunity to upgrade the facility, maybe increase production or increase efficiency, while you're in there doing the work right now?

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Isaac Angel, Ormat Technologies, Inc. - CEO [30]

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Gerry, our first priority is to back -- to bring the power plant back as it was working at the evening of the eruption, and that's what we're trying to do. If you recall before the incident, actually very close to the incident, we had a plan to enhance the power plant to a much higher output. And we were in discussions with HELCO in order to also extend the PPA for further than 2020. These negotiations has been picked up where they stopped before the eruption, and we are in negotiations with them on that. And based on those negotiations, we will decide how to continue with the enhancement of the power plant in the future.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [31]

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Got it. And then back to the insurance side, any material changes in terms of cost of insuring the facility on a go-forward basis after everything we've been through? And then is there an opportunity to potentially even self-insure the facility and maybe perhaps some savings?

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Doron Blachar, Ormat Technologies, Inc. - CFO [32]

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The impact of the event already occurred in the last renewal that we did. So the premium for the insurance went up, which is obviously something that you can expect, but -- that's it. In general, we renew the policy in the middle of the year, this year and last year, so actually the cost -- the premium cost is already included.

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Operator [33]

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

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Isaac Angel, Ormat Technologies, Inc. - CEO [34]

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Thank you very much, operator, and thank you very much, everybody, on the call for -- and not on the call for your ongoing support. We went through a challenging year in 2018, and '19 looks much more promising for the company. And we will be doing our best within the company to make it happen this year and also in the future. Thank you very much.

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Operator [35]

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