Q4 2023 Ormat Technologies Inc Earnings Call

Participants

Josh Carroll; IR; Alpha IR Group

Doron Blachar; CEO; Ormat Technologies Inc

Assi Ginzburg; CFO; Ormat Technologies Inc

Justin Clare; Analyst; Roth MKM

Ryan Levine; Analyst; Citi

Julien Dumoulin-Smith; Analyst; Bank of America

Derek Podhaizer; Analyst; Barclays

Presentation

Operator

Good morning, and welcome to the Ormat Technologies Fourth Quarter and Full Year 2023 earnings conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. If you ask a question, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star one again, please note that this event is being recorded.
I would now like to turn the conference over to Josh CAIRO with Alpha IR. Please go ahead.

Josh Carroll

Thank you, operator, and the call today are Ron Buschur, our Chief Executive Officer as against our Chief Financial Officer, and Smadar Lavi, Vice President of Investor Relations and ESG planning reporting.
Before we begin, we would like to remind you that information provided during this call may contain forward-looking statements relating to current estimates, current expectations, estimates, forecasts and projections about future events that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the Company's plans, objectives and expectations for future operations and are based on management's current estimates and projections, future results or trends. Actual future results may differ materially from those projected as a result of certain risk and uncertainties. For a discussion of such risks and uncertainties, please see risk factors, as described in Ormat Technologies' annual report on Form 10 K and quarterly reports on Form 10 Q as filed with the SEC. In addition, during the call, the company will present non-GAAP financial measures such as adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures and management reasons for presenting such information is set forth in the press release that was issued last night as well as in the slides posted on the website. Because these measures are not calculated in accordance with GAAP, they should not be considered in isolation from the financial statements prepared in accordance with GAAP.
Before I turn the call over to management, I'd like to remind everyone that a slide presentation accompanying this call may be accessed on the Company's website at ormat.com under the Presentation link that's found on the Investor Relations tab.
With all that said, I would now like to turn the call over to Ron Buschur to run the call is yours.

Doron Blachar

Thank you, Josh, and good morning, everyone. Thank you for joining us today for what concluded 2023 on a positive note, as its fourth quarter results.
Finishing off a successful year, the Company reported robust fourth quarter revenue growth with a 17.4% increase compared to the previous year's quarter and commendable 11.5% rise in adjusted EBITDA throughout the year or but maintained its momentum with the successful development execution and enhanced operational performance from existing facilities, coupled with a promising recovery in the product set. These factors collectively contributed to a 13% increase in total annual revenues and a 10.6 increase in full year adjusted EBITDA throughout 2023. At the beginning of 2024, we successfully augmented our capacity by adding 239 megawatts through development projects and acquisition. Among these portfolio additions, 157 megawatts were integrated into the electricity segment, comprised of 100 megawatt of geothermal and solar PV assets acquired in January 2024 and 82 megawatts from the addition of five new storage facilities to the storage segment. This expansion aligns with our multiyear capacity expansion targets, further strengthening our EBITDA and earnings generation in 2024 and beyond since the beginning of 2023, we have signed four long-term PPAs for a total of 98 megawatts in our electricity segment and 55 megawatts or 180 megawatt hour in our growing energy storage system. As we continue to successfully execute against our growth strategy, we expect the benefits of improved generation capacity and our team's demonstrated ability to sign PPAs with attractive pricing terms will continue to support solid returns and earnings performance for our shareholders as we head into 2024.
You know, for the segment we are encouraged by the recovery we saw in 2023. Annual product segment revenues grew 87.3% versus 2022, and our increased backlog of $152 million is representative of the growing global demand for our geothermal product. We expect this healthy demand combined with our industry leadership position to allow us to continue competing and growing our presence in key strategic regions.
Looking ahead to 2024, we expect to continue capturing the benefits of our successful growth strategy. We are on track with our capacity expansion in both the electricity and storage segments with a potential to reach between 2.1 gigawatt to 2.3 gigawatts across our portfolio by end of 2023. We anticipate a significant increase of 7% and 10% in revenues and adjusted EBITDA, respectively for 2024. We continue to see strong support for renewable energy that by the A. benefits, including the PTC for geothermal and ITC for storage. We expect this support will continue to create opportunities for new PPAs in both the electricity and storage segments and expect that these benefits will continue to reduce our capital needs and to help fund our growth strategy and enhance our EPS in 2024.
The currency environment carries encouraging tailwinds supporting domestic geothermal and energy storage driven by global decarbonization efforts and the collective push to utilize the words renewable energy resources to reduce greenhouse gas emissions in combat the impact of climate change.
Now before I provide further updates on our operations and plans, I will turn the call over to Assi to review the financial results. Assi?

Assi Ginzburg

Thank you, Tyrone. Let me start my review of our financial highlights on Slide 5. The fourth quarter marks another strong finish to an overall excellent year in 2023, creating positive momentum as we head into 2024 and positioning us well as we aim to deliver on our multiyear financial and operating targets.
Total revenue for 2023 was $829.4 million, up 13% year-over-year. And revenue for the fourth quarter was $241.3 million, marking 17.4% growth year over year this fourth quarter and full year results represent solid growth across both our electricity and product segments. Across the full year 2023, our adjusted EBITDA result of $481.7 million increased 10.6% compared to $435.5 million in 2022. Our record fourth quarter adjusted EBITDA results of $139 million increased 11.5% compared to $124.7 million in the fourth quarter of last year. Year over year the growth in adjusted EBITDA was largely driven by an increase in revenue in electricity and product segments, combined with a larger contribution from tax equity transactions in the full year 2023, net income attributed to the company's stockholders was $124.4 million, or $2.8 per diluted share, representing an increase of 88.9% and 77.8% versus the prior year, respectively. On an adjusted basis, net income attributable to the company's stockholders was $121.9 million or $0.25 per diluted share, an increase of 32.2% and 25% versus the same period last year, respectively. The significant year-over-year earnings growth was driven by higher operating income, further supplemented by the impact of the IRS benefits that flow through our tax line in the fourth quarter of 2023, net income attributed to the company's stockholders was $35.7 million, or $0.59 per diluted share in comparison to $18 million or $0.32 per diluted share in the same quarter last year. On an adjusted basis, net income attributable to company stockholders was $40.5 million, or $0.67 per diluted share compared to $41.2 million and $0.73 per diluted share during the fourth quarter of 2020 to quarter over quarter earnings was impacted by a higher effective tax rate.
Moving to slide 6, we break down the revenue performance at the segment level. Electricity segment revenue increased by 5.5% to $667 million and 11.3% to $184 billion in the year and from a fourth quarter of 2023, respectively. This increase was largely driven by the new project that came online in 2022 and the commercial operation of our numerous geothermal solar PV and energy storage project. These include the Heber one geothermal power plant, which went which went online in May 2023. The quarter also benefited from improved generation at Puna power plant that had been operating at lower capacity in the first three quarters of 2023. In the product segment revenue marked a substantial increase, growing by 87.3%, $133.8 million and by 56.7% to $50.4 million in full year 2023 and in the fourth quarter, respectively. The growth in our product segment was primarily due to the new contracts that are reflected in a higher backlog and the timing of revenue recognition versus the prior period.
Energy Storage segment revenue decreased by 6.8% to $28.9 million in the full year 2023 and by 14% to $7 million compared to last year's fourth quarter lower year over year. Segment revenues was driven primarily by lower revenue in the PJM and coastal markets. As mentioned, rates were lower than 2022. New facilities that came online during the year partially offset the impact of weaker metal prices.
Moving to Slide 7. Gross margin for the electricity segment was 36.6% and 39.5% in 2023 and fourth quarter, down 20 basis points and 400 basis point, respectively. The decrease in full-year margin performance was mainly due to business interruption of $15.6 million recorded in 2022 compared to $6.3 million recorded in Q1 2023 related to the EBITDA in the Puna power plant as well as revenue at Polar due to lower generation and energy prices in the quarter. The reduction was mainly driven by $6.4 million of business interruption income recorded in Q4 2022 related to EBITDA. In the product segment, gross margin was 13.4% and 12.6% in the full year of 2023 and the fourth quarter, respectively, down 190 basis points and a 1,000 basis points margin decrease due to lower profitability associated with contracts that were signed during 2021 and 2022, partially offset by new contract with higher margin that were signed in 2023. Looking forward, we expect our products segment margin to be between 15% to 20%. The Energy Storage segment reported a full year gross margin of 6.4% compared to 21% in the prior year. The reduction was driven by significant pullback in merchant prices in the East Coast compared to last year's observed market-driven pricing strength in the fourth quarter of 2023, margin was negative 8.9% compared to positive 11.7% year-over-year. As we enter 2024, we expect improved margin rising to between 10% to 15%, supported by the Pomona to TPA that was signed this year and the COD of bottleneck, which also carry fixed-price tolling agreements Looking at slide 8, the electricity segment generated 94% of our total consolidated adjusted EBITDA in 2023. The product segment generated 4% of and the Energy Storage segment reported adjusted EBITDA of $9.9 million, representing almost 2% of total adjusted EBITDA. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide.
Moving to Slide 9. In the fourth quarter, we recorded $18.7 million in income related to tax benefits, for which $14.7 million was income related to five active tax equity transaction. While the remaining $4 million is related to our thermal PTC, which were recorded in 2023 under the provision of the fracture reduction act, the income related to tax benefit increased this quarter by $11.2 million compared to the same period last year. For the full year, income related to tax benefits increased by $27.2 million. Also in the fourth quarter and full year 2023, we recorded $1.4 million and $18.7 million of ITC benefit in the income tax line related to new storage facilities that COD this year. For fiscal year 2024, we expect an annual approximately $5 million to $10 million reduction in PTC recorded under the income attributed to the sale of tax benefit line of the P&L due to the termination of one of our tax equity transaction that reach the fleet offset by new transaction. We expect to sign related to Heber and be wildly. We also expect to record $14 million in ITC benefits to our storage facility under the income tax line. The way we plan to record the ITC benefits during 2024 is slightly different compared to 2023 and instead of recording the entire benefit under the tax line in the quarter that the storage project came online. We expect to reduce our tax rate proportionately throughout the year. We anticipate the receipt of approximately $145 million in cash proceeds related to the PTC and ITC benefit that will reduce our capital needs for 2024.
Looking at slide 10, our net debt as of December 31, 2023, was approximately $1.8 billion, equivalent to 3.7 times debt to EBITDA. Cash and cash equivalents and restricted cash and cash equivalents as of December 31, 2023 was approximately $288 million compared to $27 million at the end of 2020.
To Slide 10 breaks our cash for the 12 months illustrating Ormat's ability to reinvest in the business and service our debt obligation while returning capital to our shareholders.
Our total interest, our total debt as of December 31, 2023, was approximately $2.1 billion net of deferred financing costs, excluding the short-term commercial paper we issued is presented on slide 33 in the appendix and outline the payment schedule. The average cost of our debt for the Company stand at 4.3%. We think it is important to note that nearly all of our debt liabilities remain fixed rate in nature, which we believe will help continue to position Ormat competitively in the rising global interest rate environment.
Let's move to Slide 11. We have approximately $741 million of total liquidity. Our total expected capital for 2023 for is approximately $550 million. As detailed in slide 34 in the appendix in 2024, we plan to invest approximately $40 million in acquisitive segment and construction drilling and maintenance CapEx and one, $87 million in our storage assets, although much is very well positioned to execute our strategic growth plans from a capital resource perspective, maintaining excellent liquidity and ample access to additional capital as well as cash we expect to receive from the added benefit. We expect that each project that reach commercial operation in the next few years in the US will be entitled to between $30%, 40% of funding, supported by the new IRB benefits.
On February 21st, 2024, our Board of Directors declared approved and authorized payments of quarterly dividend of $0.12 per share to all holders of the company issued and outstanding shares common stock on March sixth, 2024, payable on March 2020, 24. In addition, we expect to pay a quarterly dividend of $0.12 per share in each of the next three quarters.
Finally, on January fourth, 2024 from our completed the strategic acquisition of contracted operating geothermal and solar assets from Enel Green Power North America or much paid $272 million, 400% of the equity interest in the portfolio. The overall transactions were funded with available cash in combination with new corporate loan in the amount of $200 million that were raised in January 2024. In aggregate assets, portfolio acquisition is expected to be immediately accretive to both revenue and EBITDA, and we intend to further improve the performance of the acquired asset portfolio through a series of operational enhancements and optimization initiatives.
That concludes my financial overview. I would now like to turn the call over to Darren to discuss some of the recent developments.

Doron Blachar

Thank you. Thank you, Asic. Turning to Slide 13 for deeper glimpse at our operation operating portfolio generation growth in our core electricity segment carried support from our multiple facilities we achieved during 2023, most notably at North Valley in April. Additionally, we brought operation back online at our Heber one facility following the replacement of the equipment, allowing higher generating capacity. And we also completed an expansion to the Dixie Valley plant that we undertook to maximize the value of our existing PPA. Our portfolio capacity also carried additional support from fully operation that CD4 and tungsten Phase two, which if we achieve the respective facilities over the course of 2022. This was partially offset by a reduction in capacity at our Plano facility due to operational issues related to the performance of the wellfield, which caused us to run the plant at lower capacity. The performance of pooler improved in the fourth quarter and is currently operating above $30 million. Our current total generating capacity, including the NN assets we recently purchased stands at 1,215 megawatts in the electricity segment compared to 1,070 megawatt in 2020. This marks a 13.6% increase versus prior-year level, positioning us well to achieve our multi-year portfolio expansion thoughts.
Turning to slide 14, I will give more details on our operating footprint. We are back to normal operating at the operation at Puna and have successfully increased generation above 30 megawatts, up from the low 20s we observed earlier in the year. We recently received an approval from the Hawaiian PUC for new PPA, the facility and confirmation of the EAS., the new PPA expands the contracted capacity until the fixed energy rate. This will remove the volatility of the current avoided cost structure. Ppa will be in effect following the completion of the pulp and upgrades expected in 2026 and will carry an average rate per megawatt hour of of approximately one $127 to $137 per megawatt hour. Assuming we sell 100% of the generated electricity at Olkaria power plant in Kenya. We're currently operating at the 125 megawatt level, up slightly from prior year. Our operational teams continue to work to work to increase the capacity of carrier and the drilling campaign we conducted in 2023 has shown successful results that are now being tested. We are up optimizing the resource utilization and expect the connection of the new wells to support and improve future performance in the Caribbean. We continue with the development of the wind power plant at Guadalupe and expect to finalize detailed negotiations shortly at the end of 2023, we signed a new BOTPPA. for new 10 megawatt power plant. We expect to build in Dominica near our brand partners with the proximity of these two power plants creates attractive operational synergies that will reduce manpower costs and strengthen the economic potential of the expected new partners.
And on the strategic front on Slide 15. In October, we announced the acquisition of the contracted operating assets portfolio in the United States from Enel Green Power North America. This transaction closed January 2020 for the asset portfolio, including three geothermal facilities and three solar PV facility carries consolidated capacity generation of roughly 100 megawatts with a three year trailing average annual EBITDA contribution of $24 million portfolio securities. The opportunity to expand the economics through a targeted CO2 growth investment, including operational optimization through the replacement of existing equipment with best in class internally manufactured equipment and the option to explore future greenfield projects in Utah and in California.
Turning to slide 16, our product segment backlog stands at $152 million. This backlog carries roughly $167 million of contract, obviously signed in 2023, including the recently signed $95 million geothermal contract for the North American project in New Zealand, we see future potential coming from New Zealand, Indonesia and Latin America.
Moving to slide 17 for an update on our Energy Storage segment. The segment reported lower revenues and gross margin in the fourth quarter due to lower year-over-year merchant rates, primarily in the PJM and tighter market. We successfully field these new projects to add 82 megawatts or 102 megawatt hour in total to our fleet. And we are currently in the final stages to commission the 20 megawatt 20 megawatt hour Islington facility. We also successfully secured a long-term tolling agreement for one of two facilities. This agreement marks the third tolling agreement in our expanding portfolio following the 2022 bottling contract and 2023 Annual if solar and storage facility. These three agreements contribute to the growth of the stable, profitable and predictable revenue stream for the Energy Storage segment with over 40% of the segment's revenue expected to be contracted by the end of 2024.
Please turn to Slide 19, where I will briefly discuss our Boston. We continue to see an increase in the demand for geothermal energy as the successful and steady execution of our growth strategy has given us the confidence to reiterate our 2026 targets that we provided in early 2022, with the successes we have achieved thus far in our growth efforts, supported by the attractive organic and acquisitive growth captured in 2023. We are targeting between 2.1 to 2.3 gigawatt portfolio capacity by year end 2026. Our critical target markets of California and Nevada recognized the critical role the geothermal resources play in supporting the respective energy grids are the forefront of developing and supplementing keep them medium power generation with reliable and renewables, high-capacity geothermal energy resources with zero emissions. This support has helped sustain and expand the tailwinds for future PPAs. Additionally, it has created adjacent tailwinds for energy storage demand as added storage capacity will be necessary for the region to achieve those goals and further reduce greenhouse gas emissions to supply power to the grid.
As we have discussed previously, the inflation Reduction Act, which was signed on August 16th, 2022, it has had a significant positive impact on our ability to develop geothermal and storage asset in the US at higher economics due to lower capital needs. We plan to continue seeking the PTC benefits for our new geothermal power plant and plan to enter into further tax equity transaction, which can fund over 40% of our capital needs. Four new geothermal plants in the US.
Moving to slide 12, we are on track with our long-term targets as communicated back in 2022. In our other states, we expect to increase our total electricity portfolio generation to between 1,450 and 1,470 megawatts by the end of 2026.
In energy storage, we remain on track with our growth plans, and we expect to reach between 700 to 800 megawatts or 1.9 to 2.3 gigawatt hours by year end 2020 sales marketing and more than fivefold expansion from prior capacity levels.
Slides 21 and 22 shows the geothermal and the hybrid solar PV project currently underway. We are on track with our have a pilot project, which we expect to be complete in the second half of 2024 later towards the end of 2024. We expect to achieve the commercial commissioning for the Egypt plant in Indonesia, which will add another 15 megawatts of capacity to our loan portfolio in 2025, we expect to add 20 megawatts in operations in the Caribbean area and one large power plant in New Zealand. In addition, we are planning to upgrade our recently acquired assets and add approximately 17 megawatts between the end of 2025 and 2020 Puna North Brawley soon and new prospects that will have successful exploration. I'll expect it to be operational by end of 2020.
Our project developments underway in our solar PV portfolio are weighted toward the first half of the year as we expect to commission the Steamboat Hills solar by the end of Q1 and North Valley and be wildly by Endo.
Yes. Moving to slide 24, the third layer of our growth plan focuses on the growth and development of our energy storage assets. We currently have seven projects under development that will add 355 megawatts or 1,060 megawatt solar plus storage portfolio by the end of 2021. We are currently in the latest stage of field, the in our 20 megawatt lease Leamington storage facility, Nutrio also we released for construction the shared 80 megawatt 320 megawatt hour storage facility in California that is expected to be online in the second half of 2020.
Our pipeline in energy storage, as displayed on Slide 25 shows, although potentially future capacity at 3.6 gigawatt of 13.1 gigawatt hour. Geographically, we continue to focus our efforts largely in the core target market of the United States will have the ability to benefit from the increased demand for energy storage capability.
Please turn to Slide 26. For a discussion of our 2020 forecast, we expect total revenues to increase by 7% year-over-year. At the midpoint, it could be between 860 and $910 million, with electricity segment revenues between $710 million and $730 million, an increase of 8% compared to 2020 results. We expect between $115 million and $135 million in the product segment and energy storage revenues are expected to be between $35 millionand $45 million. We expect adjusted EBITDA to increase by approximately 10% at the midpoint to range between $515 million and $545 million. We expect annual adjusted EBITDA attributable the minority interest to be approximately $18 million.
I would add our prepared remarks on Slide 27. This was a strong quarter that capped off a very strong Q4, but we are confident that our attractive and differentiated portfolio of power-generating assets, our unique growth strategy and our demonstrated ability to develop attractive geothermal solar PV and energy storage projects with attractive long-term PPA, positioning us for success and will drive significant shareholder value as we progress across 2024.
Before we open the call for questions, I'm happy to tell you that we will have our next Investor Day in New York City on June 2020 24.
This concludes our prepared remarks. Now like to open the call for questions. Operator, please.

Question and Answer Session

Operator

At this time, I'd like to remind everyone in order to ask a question, press star, followed by the number one on your telephone keypad. Our first question will come from the line of Justin Clare with Roth MKM. Please go ahead.

Justin Clare

Yes, hi. Thanks for taking our questions. So first off here, I might have missed it, but did you share the expectations for electricity gross margins in 2024? If not, but would you mind providing color on the expectations there? And then just wondering if we compare the gross margin in 2024 to 2023, what are the key elements that we should be thinking about that are influencing the change. So there's that pool now operating at a higher level of capacity. There's also the acquisition of our assets. But what are the other factors that we should be thinking about?

Doron Blachar

Yes, a good morning. So when we look at the 2023 of electricity and I'm going to talk on the full year and for the full year, the gross margin was roughly 36.6%.
When we look at the 2024, we expect a slight uptick by one or 2% in the gross margin. It's coming basically from a three elements. One, as you rightfully said, that Paula is operating at a much higher capacity for the full year expected 2024 versus versus 2023.
Second, in Olkaria, we had a very successful drilling campaign that we expect in the second half of the year to impact us very positively and third is the assets. So finance that also contributing a high relatively high gross margin.

Justin Clare

Okay. Got it. That's helpful.
And then you reiterated the 2026 capacity target here 2.1 to 2.3 gigawatts. I was wondering if you are still anticipating to meet the interim target for 2025. So you had talked about 1.9 to 2 gigawatts potentially by the end of 2025. Are you on track there? It looks like you do have the assets in geothermal and solar to achieve that target storage. It seems like some assets may be needed to be added to the pipeline still. So how are you thinking about that at this point?

Doron Blachar

We are we are expecting to reach the target for the end of 25. As you said, when you look at the lease of prior to the release, including the Shield product that we released this week. We're very close to have all of the detail all the farther that would get us there. There's still some projects on the energy storage that we'll need to release and we are working to lease them getting the final permits and we so we do expect to be in line with these targets.

Justin Clare

Okay, got it. And then maybe just one more it looks like your prospects that you're exploring here increased a decent amount in quarter over quarter. I think you have 42 now versus 33 last quarter.

Doron Blachar

I was wondering can you just expand on what drove the increase there and what so what opportunities you're pursuing, the prospects in the U.S. and because that's what you are referring to increased mainly due to the acquisition of NLI that brought in new targets, a new greenfields, the new time in California. And it's an ongoing process that we continuously look at opportunities whenever we have a chance we buy new lands, the BLM issue. But I think the main difference, you say the acquisition of email and the potential prospect they brought in scattered.

Justin Clare

Okay. Thank you.

Doron Blachar

Thank you.

Operator

Your next question comes from the line of Ryan Levine with Citi. Please go ahead.

Ryan Levine

Good morning. I'm hoping to start off on New Mexico and U.S. You have one development project there that recent legislation it came into the cap passed last week. What's your outlook for development in that state? And is there more meaningful commercial opportunities that you're seeing emerge in Mexico.

Doron Blachar

So we have real quality, New Mexico as a potential for increase, which we actually like I can tell you that until the last the legislation and few weeks ago, we didn't see stronger regulatory support in New Mexico. But with this new change, we are looking at it. We know that there are power plants over the operating can tell you that we are also looking on the energy storage market in New Mexico.
So this is definitely a place that we are looking at. Okay.

Ryan Levine

Maybe shifting region of the world in terms of Kenya, can you give us an update around the cash payments may have received this quarter and that's the case not out in how the state of commercial negotiations or the state of those projects are progressed.

Doron Blachar

As you know, as I mentioned in the last call, a Kenya ARA. last year was rising not because of the KPLC. and ability to pay, but because of lack of USD in the country because of a very good day, whether in the second half of 2023 that positively impacts the agriculture export in addition to the fact that the Kenyan government was able to issue $2 billion of new debt bond a few weeks ago, I'm happy to say that in the first 40, 50 days of 2024, we already collected over $32 million. And so out of the $80 million that was owed to us by end of 2020. For end of 2023, $32 million was already collected, and there was a very good outlook to continue with this strong collections so I will say that so far for the year, a very good outcome to our cash and benefiting us tremendously. If you look at the cash flow last year, we were suffering by almost $60 million increase in the receivable. I hope that this year we'll see the opposite and therefore, the operating cash flow will be much stronger as of the negotiation, as you know, and everybody knows that in every negotiation there is it needs to be a win-win situation. We have a valid contract with BP until 2034. We are always happy to negotiate new terms on a win-win basis. I can't say that there was any change in the prospects of getting into a new way term because mainly of the fact that almost electricity is needed and it's already priced probably the most cheapest electricity may Kenya other than Kendrion. So I don't anticipate any major changes in the contracting going forward. And if there will be one, we will say we will announce it to the market. But as I said at the beginning, they need electricity and they are paying for it. And we expect 2024 at least four from as of today to have a very strong collection in Kenya.

Ryan Levine

Okay. And then on the storage segment, I appreciate all the disclosure around your fixed versus merchant risk or revenue mix, if there are any the hubs that may have caused the margin pressure in this recent quarter? And how are you seeing the outlook for storage margin going forward? And to the extent there's any resource adequacy or any other payments that that are relevant for that margin outlook that we should.

Doron Blachar

So I would say 2023 was a relatively low merchant pricing across the all the whole market that we operate in. And that's why you saw lower margins in the energy storage. Part of the balancing of the risk that we are doing is signing tolling agreements or PPA agreements we've signed with Pomona to sign with bottleneck. That cut will come online this year. And as I said before, we expect at the end of the year to be around 40% contracted. And next year we have additional contracts coming with the PPAs and we are negotiating additional contracts with PPA.
So all in all, there's going to be a balance. So we will not see this high volatility that we see today. However, we definitely do not want for storage assets to be contracted because we do believe that we can get benefit from this volatility.
We just want to have it better aligned in on margins. So we expect in 24 around 10% to 15% gross margins in the second half of 2024 to be even higher than what 15% to 20% once bottleneck comes into operation.

Ryan Levine

Great. Thanks for taking my questions.

Operator

Your next question comes from the line of Julien Dumoulin-Smith with Bank of America. Please go ahead and good morning.

Julien Dumoulin-Smith

Can you hear me, students and slip. Thank you very much, guys, because it well, look, thank you.
First time if I can just talk a little about the storage segment as to what exactly is going on vis a vis just the latest revenue guidance, obviously a little bit more flattish last year off of a robust 22. As you think about the cadence of that business over time. Here you've had a couple of flattish years. You've been putting more capital into it, obviously more profitable than the earlier years, but just a little bit more color on just why it still is sort of in the same ballpark here, if you will.

Doron Blachar

And the negative margins in the quarter came from the the negative margins in the quarter, as we said, it relates mainly to the merchant pricing and the fact that most of the fleet is merchant what was going to change once a Pomona, a tolling agreement kicked in and bottleneck at the second half of the year, we finished 23 with around $29 million.
The guidance that we gave the 35 to 45, which is close to 40% increase year-over-year.
What we see in the storage market is that as we bring online more project and we signed more contracted, the pricing goes up actually, if you go an annualized 23 and 24 to see, you know how they would look at the top of all the assets come online, it would have operated for the full year, you will probably see over 50% increase year-over-year. If we actually are starting to benefit from the growth that we see in the stores when you see the plan that we have to grow the storage to over 700 to 800 megawatts at the end of 26. M is a significant growth, and we expect it this segment to grow to continue and grow significantly as we continue to lease large projects during the year.
And as I said at the margins, we expect 24 to be 10% to 15% with the second half after bottleneck coming in to operations around 15% to 20%.

Julien Dumoulin-Smith

Got it. Excellent. And then just this would be the longer-term here. Am I right? You've obviously we're talking here about storage growth, but overall, you guys have this Analyst Day coming up. How many years forward do you expect to provide here and in the interim here, just as you think about these targets that you had, how are you thinking about achieving the sort of 25, 26 financial metrics that you've articulated. I get that maybe you're not going to pivot to something that might have. We've been more of a longer dated view to it by midyear.

Doron Blachar

Look, what we've said now is that the target that we've set in 2022, the growth targets, we are reiterating the growth target, and we expect to be in line with the growth targets as we come to the Analyst Day in June, we will obviously come with a longer term target. I can't tell you exactly how many years down the road, but the in all the previous analyst days, you know, we give longer-term targets. So, you know, the Company is going. I think today we gave out the target for the end of 26. Again, for one 2.1 to 2.3 gigawatt of operating assets, which is a very nice growth.

Operator

Doug, once again, it is star one for any questions and our next question will come from the line of Derek Budweiser with Barclays. Please go ahead.

Derek Podhaizer

Hey, good morning. I just wanted to go back to the 2024 guidance. You guys talked about gross margin, expansion of electricity of products and storage. But can you just clarify as far as how much EBITDA support you expect out of the PTCs? Just trying to triangulate the guide and the different puts and takes there so you could expand on what brings you get the revenue guide, what brings you on the margin front and then the PTCs would be helpful and good morning, Derek.

Assi Ginzburg

As I mentioned on the call, we expect PTC. to be down roughly five to $10 million year-over-year because of the elimination of one of our facilities that we enter into 10 years ago. And it basically ended its steel pallet tax equity transaction. And this will be offset to that is the $5 million to $10 million is the net number.
We will plan to enter into new tax equity transaction in Heber in Malawi. But the net number, you know, this year, we had $62 million. Next year, we expect five to $10 million.

Derek Podhaizer

Got it. That's very helpful. Thank you. I wanted to ask about the 12 megawatt reduction. As you guys put in your deck. I mean, can you help explain that to us? What's what's driving that? How should we think about that for all your other projects just going forward and then just curious as far as what the call on the balance sheet capacity could be as potentially having a re equitize or just some thoughts around that as far as what it means for covenants?
Yes, it's just everything with the covenants and the reductions and how we should think about it as far as the call on the balance sheet, let's start with the balance sheet, the balance sheet is very strong.

Assi Ginzburg

Debt to EBITDA is yearly end towards the 3.7 times the metrics our covenants are sometimes are around six to seven times debt to EBITDA. So for us to be even close to it, our EBITDA should be half or we should borrow additional $2 billion with no additional EBITDA it from a liquidity perspective, as we said, we have over $700 million of liquidity and we did not impact the liquidity by the transaction because we borrowed additional $200 million to fund it.
So on the balance sheet side, I think Walmart is one of the strongest companies in the industry with probably the lowest leverage in the industry. If you look at our peers, our peers are mainly leveraged five to six times. And therefore, we don't anticipate at this point any equity requirement. We raised the equity in 2023, anticipating a strong M&A market, knowing what we see in front of us and there, we were actually right and times very well the transaction of the equity versus the transaction of the offering.
Can you repeat the question on the 12 megawatts, which page are you looking at? Just for me to follow to so I can answer.

Derek Podhaizer

Yes, no, and I appreciate all those comments on slide number 13, just the 12 megawatt reduction, just how to think about that and what's driving that and how should we think about that for the rest of the portfolio.

Assi Ginzburg

So I think every time every quarter we do every year, we balanced all the power plants. You know, some power plants have maybe more cooling than was anticipated, and that's how we adjust the portfolio. I don't think there was any one project that was bid, but it was maybe a year and a negative.

Derek Podhaizer

Got it. Okay. That's helpful.
And then just one more question for me. Can you just talk about the capacity factor trends? I then you're bringing on more solar, which would be dilutive to the geothermal assets, but how should we think about your capacity factor over the next few years and all the puts and takes around that?

Assi Ginzburg

I think that the fact that we are bringing more and more new facilities should over time increase the capacity factor. Also, we know where you have been there for nine Kenya assets that were not performing well over the last few years, we expect them to perform much better over the next year or two starting even already important. So we should see a slight uptick. You are right that the actually the solar is not as dilutive as you think because they produce we're producing more electricity from the power plant. But you're right, the capacity factor of the solar is lower, but please remember that on our solar, the effective price that we are getting is actually geothermal price, so maybe dilutive to the capacity factor, but it's very accretive to the earnings.

Derek Podhaizer

Got it. Great. I appreciate the comments.

Operator

We have no further questions at this time. I'll hand the call back to Ron Buschur for closing remarks.

Doron Blachar

Hi. Thank you. 2023 was a very good year and we expect 2024 to be even a better year or what is committed to a growth as we demonstrated in 2023 with the new project to really lift and Daniel acquisition, and we are continuing to grow the company with the target that we have set. I want to thank all of you for your support and looking forward to see you in June. Thank you.

Operator

That does conclude today's call. Thank you all for joining. You may now disconnect.