Ormat Technologies Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Ormat Technologies Second Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Please note this event is being recorded. I would now like to turn the conference over to Alex Steinberg with Alpha IR. Please go ahead.

Speaker 1

Thank you, operator. Hosting the call today are Duran Bashar, Chief Executive Officer Ozzie Ginsberg, Chief Financial Officer and Sridhar Lavi, Vice President of Investor Relations and ESG Planning and Reporting. Before beginning, we would like to remind you that the information provided during this call may contain forward looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward looking as defined in the Private Securities Litigation Reform Act of 1995. These forward looking statements generally relate to the company's plans, objectives and expectations for future operations and are based on management's current estimates and projections, future results or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties.

Speaker 1

For a discussion of such risks and uncertainties, please see risk factors as described in Ormat Technologies' annual reports on Form 10 ks and quarterly reports on Form 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. Reconciliations to the most directly comparable GAAP measures 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 atormat.com under the presentation link that's found in the Investor Relations tab.

Speaker 1

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

Speaker 2

Thank you, Alex, and good morning, everyone. Thank you for joining us today. In the Q2, we delivered strong financial results and healthy earning growth while making several portfolio expansions to drive continued revenue and profitable growth. Asset development is a strategic focus for us as we enhance existing projects, while also commencing operations and achieving commercial operations across our electricity generation and energy storage portfolio. This quarter, we commenced operations of approximately 100 megawatts in geothermal solar and energy storage assets.

Speaker 2

We are encouraged by the initial results we are seeing in our drilling campaigns in Olkaria and Puna and we expect to see an increase in generation by year end at both our plants. Our product segment has displayed a notable recovery in revenue, resulting in significant margin expansion and revenue growth for the segment. In the electricity segment, We successfully commenced construction of a 50 megawatt geothermal project in New Zealand in addition to the 10 megawatt expansion release to our buoyant power plant in Guadeloupe, following significant progress we made in obtaining the PPA. In addition, we commenced the development of the 42 Megawatt Aerolift Solar Project located Adjacent to our Rowley Geothermal Complex, following the signing of a long term PPA with San Diego Community Power. In our Energy Storage segment, we released for construction 3 battery storage facilities, The 35 Megawatt and 140 Megawatt Hour Aerialift project in California and 2 projects in Texas That's a combined capacity of 120 Megawatts, 2 40 Megawatt Hour.

Speaker 2

We expect each of these projects to be operational by the end of 2025, allowing us to take advantage of the recent decline in battery prices. As we look forward, we see the improved economics of our projects following the recent IRA guidance and the increased demand for our assets. As a result, we are excited to increase our medium term growth target by approximately 7% to 1.9 to 2 gigawatts by year end 2025, demonstrating our confidence in the company's growth plan. Now before I provide further updates on our operations and future plans, I will turn the call over to Assi to review the financial results. Assi?

Speaker 3

Thank you, Doron. Let me start my review of our financial highlights on Slide 5. Total revenue for the Q2 was $194,800,000 up over 15.2% year over year, reflecting substantial growth in our product segment. Q2 2023 total gross profit was $49,500,000 This resulted in gross margin of 25.4 percent, down from the gross margin of 34.1% in the Q2 of 2022. The reduction in gross margin performance for the quarter is driven by increased product segment revenue, which is operating historically of lower margin, in additionally to lower margin in electricity segment.

Speaker 3

Net income attributable to the company's stockholders was $24,200,000 or $0.40 per diluted share in the 2nd quarter. This compares favorably to the results of $11,300,000 or $0.20 per diluted share in the same quarter last year. Our solid performance combined with support from the inflation reduction date helped drive substantial growth in year over year net income and earnings per share. This legislation will continue to have a significant positive impact on bottom line results going forward. Adjusted EBITDA increased by 0.2 percent to $100,900,000 in the 2nd quarter compared to $100,700,000 in the Q2 last year.

Speaker 3

We delivered this year over year adjusted EBITDA growth, which over covered lower margin in our electricity segment and energy storage segments compared to a year ago, driven by an observed decline mainly in energy storage merchant market. Pressing the revenue down at the segment level are presented on Slide 6. Electricity segment revenue increased 2.7 percent to $155,300,000 This increase in the electricity revenue year over year was driven by portfolio expansion at our CD4 and North Valley sites, We successfully came online and contributed to our revenues in the quarter. This helped overcome lower revenues for Puna due to temporary lower generation and lower energy prices versus last year. In the Products segment, Revenue increased by 2 22 percent to $33,500,000 and represented 72 2% of the consolidated revenues in the 2nd quarter.

Speaker 3

The year over year increase was mainly due to higher backlog. We also saw an improvement in margin capture for the product segment, driven by the improved contracts that we signed in 2022. And we expect product segment margin to continue and improve throughout the year. Energy Storage segment revenues were $6,000,000 Let's move now to slide 7. The gross margin for the electricity segment was 29.6% compared to 36.8% in the same quarter last year.

Speaker 3

The gross margin reduction was attributed to weaker performance year over year at our Puna facility due to lower generation combined with slightly lower energy prices for the period. The step down in gross margin for the segment as compared to the prior year period was also negatively impacted by the absence of the business interruption insurance proceeds, which helped drive strong margin in last year's Q2. Excluding these two items, gross margin in Q2 2022 was 32%, Not materially different in this quarter. We expect improved performance from our Puna power plant towards the end of the year, following a successful drilling campaign, which should help improve our margin going forward. In the Products segment, gross margin was 10.4% in the quarter, Notably higher than the 0.2% gross profit margin performance in the Q2 of last year.

Speaker 3

As inflation continued to abate and cost as seen through commodity prices continue to omelette, we believe that our product segment We'll continue to experience growth and produce strong gross margin performance. The Energy Storage segment recorded a gross margin of 1.9 an improvement from the negative margin recorded during the Q1 of 2023, but lower than the gross margin reported in the Q2 of last year. Lower merchant energy prices in the East Coast had a significant impact on energy storage margin performance. We expect margins to improve as large project with tolling and capacity agreement will start operation over the next year. Moving to Slide 8.

Speaker 3

When looking at a consolidated breakdown of adjusted EBITDA results, the Electricity segment generated 97% of our The Storage and Product segment both contributed 1.5% of the company EBITDA during the 2nd quarter. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide. Let's go to slide 9. Before I move to discuss the balance sheet data, I want to spend a few minutes discussing the impact of ITC and PTC on our P and L this quarter and going forward. We include in our income attributed to the sales tax benefit line in the P and L two types of PTC's credit.

Speaker 3

The first one is related to PTCs sold under equity tax transaction that we signed previously. And the second is In the second quarter, We've had 5 active tax equity transactions, for which we recorded $12,300,000 income, While the remaining $2,700,000 are related to transferable PTCs from a new geothermal facility that are not yet under tax equity partnerships. The two kinds of the recordable PTCs are included in adjusted EBITDA. The ITC benefits are equivalent to 30% to 40% Of the eligible investment, usually in the storage segment, the ITC benefits are related to our new energy storage facility And are recorded under the income tax provision line in the P and L, and we can sell them to anyone that needs this credit. In the Q2, we recorded $9,000,000 ITC benefits in the income tax line related to the 4 energy storage facilities that came online in the quarter.

Speaker 3

In the next few years, in line with our growth plans, To increase our energy storage portfolio, we expect to continually report lower tax rate. Looking at Slide 10, Our net debt as of June 30, 2023 was approximately $1,600,000,000 Cash and cash equivalents and restricted cash and cash equivalents as of June 30, 2023 was approximately $395,000,000 compared to $27,000,000 as of December 31, 2022. This slide breaks down the use of cash 6 months illustrating our marketability to reinvest in the business and service our debt. We note that this use of cash have been funded from equity offering, cash generated by our operation and strong liquidity profile we maintain. Our total debt as of June 30 was approximately $2,000,000,000 net of deferred financing costs and its payment schedule is presented on Slide 29 in the appendix.

Speaker 3

The average cost of debt of the company stands at 4.13%. Our balance sheet remains strong. During the Q2, we paid off Plumstead and Stryker loans, which carried a floating interest rate structure, reducing interest rate risk and further setting our balance sheet with nearly all of the remaining debt liabilities in fixed rate forms. Additionally, we saw a material increase in interest income during the quarter a result of the healthy financial position. Moving to Slide 11.

Speaker 3

In the first half of twenty twenty three, We have invested $247,000,000 in cash CapEx to advance our growth plan. We have $920,000,000 of liquidity between our cash balance and available items created. Our total expected CapEx remaining for the 2 quarters of 2023 include $328,000,000 of capital expenditure as detailed in Slide 30 in the appendix. Overall, we have strong position in terms of capital sourcing with excellent liquidity and access to additional capital at attractive rates to support our development. On August 2, 2023, our Board of Directors declared, approved and authorized a payment of quarterly dividend of $0.12 per share To all holders of the company issued outstanding shares of common stock on August 16, 2023, payable on August 30, 2023.

Speaker 3

In addition, the company expects to pay quarterly dividends of $0.12 per share in the next quarter. That concludes my financial overview. I would like now to turn the call over to Doron to discuss some of our recent developments.

Speaker 2

Thank you, Assi. Turning to Slide 13 for a look at our electricity segment operating portfolio. Our generation growth continues to be positively supported By the addition of North Valley and the operation of the Brady Solar Facility, they provided 25 megawatt and 6 megawatt of capacity, respectively, following the CODs which occurred during the period. Our electricity results were impacted by lower generation and lower prices at Puna, But we still managed to increase revenues year over year through strategic expansion to the portfolio and operating assets. Turning to Slide 14 for an update on our backlog.

Speaker 2

We have seen significant improvements from last year And our backlog now stands at approximately $120,000,000 with approximately $44,000,000 in contract signed since the beginning of the year. Moving to Slide 15. The Energy Storage segment was affected by lower merchant energy rates at PGM as Assi explained earlier. However, 4 new facilities started operations in the Q2, which added a combined capacity of 62 Megawatt of 62 Megawatt Hour. In July, we started operation of our Pomona II, a 20 Megawatt, 40 Megawatt hour facility in California that will provide auxiliary services to the Cairo grid.

Speaker 2

In addition, we released 3 new storage projects that will add 155 Megawatts 3 80 megawatt hour and support our 2025 growth targets. Moving to Slide 1718. The overall demand for electricity and energy storage projects remains strong. Combining this with our unique development capabilities, We are well on track to improve our 2025 targets. We increased our target to 1.9 to 2 gigawatt capacity portfolio, representing close to 70% growth at the midpoint compared to year end 2022.

Speaker 2

This will be achieved through the addition of 230 megawatts to 2 60 megawatts of geothermal and solar energy power plants Compared to 2022, 512 megawatts to 582 megawatts of energy storage capacity, demonstrating significant year over year growth. Slides 1920 display the geothermal and hydro solar PV projects currently underway. We released for construction 2 geothermal projects, the top 2 in New Zealand and buoyant in Guadalupe and the AROLEAF solar project in the U. S. Following a positive progress we have made in the DPA.

Speaker 2

Slides 21 and 22 highlights the next layer of our growth plan, the energy storage segment. As presented on Slide 21 As I mentioned earlier, we successfully commenced the operation of Andover, Aptown, Howard and Bowling Green projects. Additionally, in July, we commenced operations on Pomona Twin California. We have today 6 projects totaling 2.75 Megawatts, 7.40 Megawatts Hour actively underway And combined with the current operating assets, our portfolio will exceed the 1 gigawatt hour. Our energy storage pipeline remains robust It stands at 3.3 gigawatt or 11.5 gigawatt hour of capacity.

Speaker 2

Please turn to Slide 23 for a discussion of our 2023 guidance. We are reiterating our guidance, which includes full year revenue to range between $823,000,000 $858,000,000 representing a 12% to 17% increase year over year. Within the electricity segment, revenues are expected to be between 6.70 $685,000,000 a 7% increase at the midpoint. We also expect product revenues to be between 120 $135,000,000 an approximately 79% increase at the midpoint. Storage revenue guidance is $33,000,000 to $38,000,000 for the year, which is also a significant increase year over year.

Speaker 2

Adjusted EBITDA for 2023 is expected to be between $480,000,000 to $510,000,000 a significant improvement from 2022 throughout the range. I will end our prepared remarks on Slide 27. We are pleased with our results in the first half of twenty twenty three and are satisfied with the progress we have made towards our new growth targets, adding approximately 100 megawatts of new generation capacity and starting construction of approximately 260 megawatts of new capacity. We will continue to be the beneficiary of growing demand for renewable and energy storage, and we expect to continue to benefit from PTC and ITC under the IRA. We look forward to achieving our goal of 1.9 to 2 gigawatts by year end 2025.

Speaker 2

As always, we remain dedicated to delivering sustainable profitable growth for our shareholders, while also making a positive impact on the environment and the communities where we operate. This concludes our prepared remarks. Now I would like to open the call for questions.

Operator

Thank you. All right. Your question comes from the line of Noah Kaye with Oppenheimer. Please go ahead.

Speaker 4

Good morning. Thanks for taking the questions. So just first on electricity results, Maybe just explain what drove that lower Puna generation? To what extent was this planned? And given you're Reiterating the full year electricity outlook, just help us understand the cadence of improvement to recovery over the back half of the year?

Speaker 2

Hi, Noah. Thank you. It's Doron. In Puna, as you know, we have been continuously in a drilling campaign. Effectively, what happened, the growth generation a bit low is one of the well reduced its flow rate On one hand and the other part that impacted the revenues is the pricing.

Speaker 2

As you know, we have 25 megawatts Puna that are tied to the avoided cost. Some of us might not remember, but last year there was a big war between Russia and Ukraine that Still ongoing, but now it's less in the news. And pricing at that time were almost $300 per megawatt hour. They just stand at about 200. So that was a big impact.

Speaker 2

However, we finished drilling Case 22 and we are connecting it. It should be connected at the beginning of Q4 And the initial outcome or the initial temperature and pressure that we see are very positive. So overall, we see that we despite the impact on Puna in Q2 that we will be within the guidance that we gave at the beginning of the year.

Speaker 4

Yes. So it sounds like to the extent there's a real pickup there, it would be in the Q4. Okay. And Upsizing the year end 2025 portfolio targets, it looks like that's really all driven by higher storage. So Maybe you can talk a little bit about the drivers of increasing the storage outlook, Your thoughts on treasury guidance around ITC for storage and the implications for Ormat And just what gives you confidence in sort of strong project economics on the storage developments going forward?

Speaker 2

Okay. You're right. We increased the future guidance due to the storage projects that We already released this quarter and that we expect to continue and release. We see the storage returns today very good. We see Projects return somewhere in high single digits and equity return that can get to double digits.

Speaker 2

The IRA guidance that the IRS issued They improved significantly the view on the ITCs that storage can sell. It came out with the guidance that they are still For cash only, they can be used 3 years backwards. So the value of the ITC went up, you cannot trade with them. They have to be We do see significant impact and that allows us to this project. Most of the projects that were released today are in with 40% ITC And that obviously improved the returns.

Speaker 2

We also saw in the last quarter the reduction in the battery price. So all in all this quarter between reducing the battery pricing and increasing the ITC allowed us to release more projects. And in reality, the minute we release a project within a few weeks after that, we issued a PO for the batteries to Confirm or to fix the price that we pay and that reduces the risk that we have.

Speaker 3

Noor, maybe one more thing. This is Asi. Especially in California, Our customers are really scrambling in getting our array contracts. A lot of developers are now understand How tough is to get the interconnection? How much built over years a pipeline that allow us now to start construction of project And we actually see RA tolling prices at even higher level than what we signed with the bottleneck.

Speaker 3

And hopefully, Pomona too that was just start operating in the next few weeks will sign, I think the highest tolling that we've seen. Again, it's still under negotiation, but I believe it will be the highest tolling. We've seen significantly higher than the one before.

Speaker 4

Very helpful. Maybe just one more. The industry on the geothermal side has Fairly awash in news around new disruptive drilling and sensing techniques, Maybe expanding the addressable market, it sounds like early days here, but very interested in your perspective And some of the innovations happening in the industry and from a technology development perspective to what extent Ormets participating in some of that technology innovation?

Speaker 3

We are

Speaker 2

OMA is the leading company in geothermal. So any new development that will drive geothermal to be widely spread And increase the ability to build more geothermal facilities is a huge upside format. As you said, most of these items are still in early stage, have not been fully Commercially or viable, but we are watching it very closely. We have specific people today that are looking at different Startups to make sure that we see this new technology that we keep it and if we will be able to utilize it to utilize it. And I would say, if there would be the ability to have geothermal energy everywhere, I assume that would have been the only renewable energy because it's a 20 fourseven energy, renewable energy.

Speaker 2

So We're looking at it very closely. Unfortunately, we haven't seen one that have changed the dial so far And we hope that there will be one that will come soon.

Speaker 4

All right. Well, we'll stay tuned. Thanks for taking the questions.

Speaker 2

Thank you.

Operator

Great. Thank you. Your next question comes from the line of Justin Clare with ROTH MKM. Please go ahead.

Speaker 5

Yes. Good morning. So I wanted to start on Geothermal and you had indicated that you've started construction on the 50 Megawatt geothermal project in New Zealand. I was wondering if you could just speak A little bit more about your development pipeline, how that's progressing in terms of the other prospects that you're evaluating And what the potential might be for other projects that could be released for construction and The possibility that those could be completed in the, let's say, 2025 timeframe.

Speaker 2

Hi. Thank you for the question. You have on the slide the list of projects that we have already discussed and mentioned. I can tell you that due to the significant demand that we see in the U. S, We have quite a lot of discussions internally how we can push forward a project.

Speaker 2

The 2025 timeframe, a geothermal project takes longer than 2.5 years to develop if you don't have the resource. We are now doing quite a lot of exploration. We have doubled and tripled Our exploration efforts and our exploration team was willing today between 5 to 7 locations in parallel in order to develop And on top of the U. S, we are working quite a lot in Indonesia, Well, we are drilling in 2 locations. 1 of them might To get to the end of 2025, but that's not for certain.

Speaker 2

And we are also looking in other places, In other countries that have geothermal and are looking for the geothermal developer That can develop the product because at the end of the day, somebody wants a renewable energy, which is 20 fourseven, it is only geothermal. So we are discussing and negotiating in other countries, But this is not yet ready to be discussed.

Speaker 5

Okay, great. That's helpful. And then maybe just shifting to the product segment. You indicated you expect Product segment gross margins to improve throughout the year here. I think you had previously talked about a range 15% to 20% in terms of what was possible there.

Speaker 5

Do you anticipate in getting into that 15% gross margin range for Q3 and Q4, maybe just speak to the trend you expect there.

Speaker 3

Good morning, Justin. This is Assi. Yes, we are looking to go toward the 15% to 20% throughout the year. As you know from last year that at this We had basically no margin already in Q2. We had close to 10% margin and As all the projects going away and the new 2022 signed contracts kicking in, We should see a better margin because they were signed and it improved margin.

Speaker 3

And I will say that I do hope that As we continue to sign contracts in New Zealand and in Turkey, these margins will continue and stay higher than what we saw in the A few years.

Speaker 5

Got it. Okay. And then just one on storage. So you've added more projects here with PPAs in the storage segment. I was wondering if you could speak to the visibility you might have into the gross margin for that Segments,

Speaker 2

do you have

Speaker 5

a better sense for how the margins might trend in Q3 and Q4? I know there's still that merchant component, but Maybe you could

Speaker 2

just speak to the visibility there.

Speaker 3

So when we look at the Q3, we do see some improvement in LRP prices in the Eircot area, we don't see much improvement in the other two areas that we operate, which is The new contract that has PPAs We'll kick in starting mostly next year. And I do expect to be somewhere between 15% to 25% gross margin. I can tell you that the projects that we are signing now PPAs may have slightly higher gross margin in them, But let's sign those contracts and we'll have more visibility. So when I look between now year end, we will see some improvement Because also we have new projects coming in and there is a lot of fixed cost in operating the business. But I Expect in late Q1 next year when the bottleneck kicks in and Pomona too will have a full tolling agreement too To start seeing pickup in margin, I hope we'll get eventually to the 25% margin in storage With around 50% to 60% of EBITDA margin.

Speaker 5

Okay. Very helpful. Thank you.

Operator

All right. Thank you for that. It looks like our next question comes from Julien Dumoulin Smith from Bank of America. Julien, please go ahead.

Speaker 1

Hey, guys. This is actually Cameron Loughridge on for Julian. Good morning. I just wanted to ask first starting on storage. So Nice to see the 2025 targets getting raised here this quarter.

Speaker 1

Congrats on that. I wanted to ask, how are we trending? How does this increase in 2025 put us in terms of reaching those 2026 targets You guys laid it out at Investor Day last year. And then on a related question, I believe I heard earlier in the call storage returns in the high single digits, but maybe my phone muffled. I just wanted to hear Just clarify that what you guys were referring to there.

Speaker 2

Thank you. So, Obviously, the more we grow and the more projects we bring online gets us closer and stronger with the guidance we gave on the Analyst Day for 2026. And on the storage part, it's a permitting process and Connection process to the grid that takes time and we do expect that as the portfolio of the storage will grow And will be more balanced between merchant projects, RA contracts and NPPA contract, the profitability will grow going forward On the gross margin as well as in the EBITDA, on the return, what I said is that we see high single digit return On the projects of the storage, today with ITC, this is the range that we see. Obviously, the project returns are in High single digits. If you look on equity returns, they are a bit higher than that even in today the interest rate environment.

Speaker 2

So you can get to lower double digits or very high single digits.

Speaker 1

Got it. Thank you very much for that. But just to put a finer point, it sounds like those 26 targets do still stand, no changes there?

Speaker 2

Yes.

Speaker 1

Okay, great. And then briefly just wanted to touch on product. Obviously, strong growth And revenue and backlog year over year, but backlog did decline quarter over quarter. Just wanted to kind of get a sense for How you see that trending sequentially here into the back half of the year and kind of what some leading indicators are for that business going forward?

Speaker 2

On the product segment, the quarter over Quarter analysis is complicated because it's a specific date when you sign the contract. So quarter over quarter might We are negotiating a few contracts today, both in New Zealand and in Turkey, which we hope will be finalized and will be signed in Q3 or by the end of the year. And within these contracts, we expect the future backlog to be higher. But specific quarter, sometimes you sign a little bit later and then it was another quarter. So when we look at the backlog, we usually Try to look at the year back to see some trends and from year ago it's up.

Speaker 1

Got it. Yes. Okay. Perfect. Thank you all.

Speaker 1

That will do it for me.

Operator

All right. It looks like we have one more question from Jeff Osborne at TD Cowen. Please go ahead.

Speaker 6

Good morning. I might have missed this, but I was just wondering how to think about the monetization of the tax credits and that flowing through the P and L in the second half of this year and then

Speaker 3

This is Asim. So currently when you look at the ITC's credit, those are mostly related to the storage assets that we bring online. So if you look at the appendix, you will see the list of storage project that we have between now and the remaining of the year. And basically you can see that the Pomona II was the one that came in early Q3. So we should expect in Q3 the benefits coming from those tax.

Speaker 3

We are currently booking it at the $0.90 per dollar of ITC. There are indication that the market is going to 95, 96 Based on what Ron alluded earlier. As we look into 2024 on ITC credits, this will be a very positive year for us. We have 3 projects as you can see on the slide, East Flamington storage project, the bottleneck and the Montague. I think between the 3 CapEx is close to $150,000,000 Bottleneck has a 40% ITC.

Speaker 3

So we definitely expect next year, if you do the math, Over $40,000,000 $50,000,000 of ITC credit. On a 90% base, you can do the math. It can add Significantly a value to the earning per share of the company and also provide a lot of cash to our business. Moving to the PTCs. As we mentioned this year, we are expecting to do few tax equity transactions.

Speaker 3

So the tax equity income should continue in RISE as we bring more and more assets online. When we look at next year, the biggest addition next year will be the in the U. S, It will be the Biowi repowering. While it's a 6 megawatt project in the slide, It's actually a repowering of the full plan and it will be roughly equivalent to a 20 megawatt Facility that will be entitled to PTC, so that will add to our PTC value. On the other hand, we do have an historical Tax equity transaction that basically will discontinue in the end of this year because it basically reached almost 10 years operation And it's contributing around $9,000,000 to $10,000,000 annually of P2C.

Speaker 3

So next year, what we will see is a $10,000,000 reduction in tax equity transaction on one hand, but then all the projects that kicked in this year plus the Diwao we should at least make up for it. So year over year, we should see flat with slightly up numbers. So bottom line, ITC will be extremely significant next year. PTC should be very close year over year and all of it will bring a lot of cash to the company to support our growth.

Speaker 6

That's helpful. Maybe just two quick thoughts, Phoebe. The legacy $9,000,000 to $10,000,000 which project is that?

Speaker 2

Forgot

Speaker 5

to I forgot. I'll come back

Speaker 3

after it when we have a call. Yes.

Speaker 6

No worries. And then maybe the final question is just how should we think about the new energy community map? Quite a bit of Nevada It's characterized as an energy community, which would give you an extra 10%. So you mentioned, Doron, that you were accelerating Drilling and testing, are you specifically targeting energy community areas to try to capture that extra 10% now that you have A proverbial roadmap on where to go or not necessarily?

Speaker 2

Unfortunately, the resource underground doesn't follow the map. So whenever we See a resource, we will develop it regardless of the 10%. I would say that the PPA pricing of today that continues to go up Supports geothermal development regardless of this additional 10%, which is a very nice upside, But we

Speaker 3

do have assets That are sitting on the 40% or if you think about the $30 plus PTC, with that being said, the returns are so good that regardless of that we will do the project, but we may benefit We may get lucky. We were surprised of how big part of Nevada is part of the energy community. With respect to storage, we were very lucky to have many of our storage assets in The 40% ITC criteria and the 2 assets that we released this quarter, which is the BirdDog and Lower Rio Are both entitled to 40%. In addition to our biggest project right now, which is bottleneck, that's also entitled to 40%. It looks like we will benefit from the energy community on top of The expectation that the liquidity of the ITCs and PTCs will be extremely high because of the ability to carry the next 3 years, The tax credits versus the historical profits of other companies.

Operator

Great. Thank you. We have another question from Derek Podhiser from Barclays. Please go ahead.

Speaker 5

Hey, good morning. Just one question for me. You talked about battery prices being an area of relief. Just wanted to get a sense of your long term outlook. Have these prices structurally stepped down or is this temporary and you would expect inflation to creep back in?

Speaker 5

Just some overall thoughts on those battery prices and what do you think about over the Few

Speaker 2

years. What we've seen in the battery prices in the shift of the suppliers From a fixed long term contract where you would order and You would sign a contract and order the batteries over time to the fact that pricing is getting fixed only when you issue the actual PO. And until that time, the pricing are tied to lithium prices as well as other elements. Lithium prices, I believe over the last year, year and a half went up 500%, went down 50%, went up another 200%. I think at the end of the day, it is important to have the right frame agreement with the battery developer And be ready to issue the PO once the economic of the project are working.

Speaker 2

It might be that you do not catch the lowest price repricing, but obviously not the highest. But regardless, if the economics of the project works, then that's the time to issue The PO and once you issue the PO, the prices are fixed. So that's basically the way we look at it. We do Side frame agreement and we issue the POs simultaneously when we start construction of the project And by that, they lock in the return that we see.

Speaker 5

Great. I appreciate the color. I'll turn it back.

Operator

Great. Thank you. I will now turn the call back over to Doron Boshar for closing remarks.

Speaker 2

Thank you. Thank you. This was a strong quarter and represents our continuous work to grow the business With 37 Megawatts of geothermal and solar and 62 Megawatts of energy storage coming online 102 Megawatts of geothermal and solar and 155 Megawatts, 380 Megawatt Hour of energy project storage that started construction this quarter. These projects will support our future growth And that allowed us to increase our target for the end of 2025. Thank you everyone.

Operator

Thank you. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
Ormat Technologies Q2 2023
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