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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. To 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 Carroll with Alpha IR. Please go ahead.
Josh Carroll
Thank you, operator. With me on the call today are Deron Bouchard, Chief Executive Officer, Ozzie Ginsberg, Chief Financial Officer, and Smadar Lavie, Vice President of Investor Relations and ESG Planning Reporting. Before we begin, we would like to remind you that the 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 risk and uncertainties, please see risk factors as described in ORMAT technologies and report on Form 10-K 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 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 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 Duran Boshar. Duran, the call is yours.
Deron Bouchard
Thank you, Josh, and good morning, everyone. Thank you for joining us today. ORMAT concluded 2023 on a positive note with 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, ORMAT maintained its momentum with a successful development execution and enhanced operational performance from existing facilities, coupled with a promising recovery in the product sector. These factors collectively contributed to a 13% increase in total annual revenues and a 10.6% increase in full-year adjusted EBITDA. Throughout 2023 and the beginning of 2024, we successfully augmented our capacity by adding 239 megawatts through development projects and acquisitions. Among these portfolio additions, 157 megawatts were integrated into the electricity segment comprises 100 megawatts 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 multi-year 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 segment. As we continue to successfully execute against our goal 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. In our product 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 products. 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 the storage segments, with the potential to reach between 2.1 gigawatts to 2.3 gigawatts across our portfolio by end of 2026. 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 backed by the IRA 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 to help fund our growth strategy and enhance our EPS in 2024 and beyond. The current environment carries encouraging tailwinds supporting demand for geothermal and energy storage, driven by global decarbonization efforts and the collective push to utilize the world's renewable energy resources to reduce greenhouse gas emissions and combat the impact of climate change. Now, before I provide further updates on our operations and plans, I will turn the call over to Asi to review the financial results. Asi? Thank you, Doron.
Josh
Let me start my review of our financial highlights on slide five. 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 multi-year financial and operating targets. Total revenues 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. These four-quarter and four-year results represent solid growth across both our electricity and product segments. Across the full year 2023, our adjusted EBITDA results 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 the larger contribution from tax equity transactions. In the full year 2023, net income attributed to the company's stockholders was $124.4 million, or $2.08 per diluted share. This represents an increase of 88.9% and 77.8% versus the prior year, respectively. On an adjusted basis, net income attributed to the company's stockholders was $121.9 million, or $2.05 per diluted share, an increase of 32.2% and 25% versus the same period last year, respectively. The significant year-over-year earning growth was driven by higher operating income, further supplemented by the impact of the IRA benefits that flow through our tax line. In the fourth quarter of 2023, net income attributed to the company 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 attributed to the 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 2022. Quarter over quarter earnings was impacted by higher effective tax rates. Moving to slide six. 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 million in the year and from 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 projects. This includes the Heber One Geothermal Power Plant, 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% to $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 Kaizo markets, as merchant rates were lower than 2022. New facilities that came online during the year partially offset the impact of weaker merchant prices. Moving to slide seven. The gross margin for the electricity segment was 36.6% and 39.5% in 2023 and fourth quarter, down 320 basis points and 400 basis points, 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 Heber and the Puna power plant. as well as revenue at PUNA 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 fourth quarter 2022 related to HB1. In the product segment, gross margin was 13.4% and 12.6% in the full year 2023 and the fourth quarter respectively, down 190 basis points and 1,000 basis points. Margin decrease due to low profitability associated with contracts that were signed during 2021 and 2022, partially offset by new contracts with higher margins that were signed in 2023. Looking forward, we expect our product segment margins 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 II PPA that was signed this year and the COD of bottleneck, which also carries fixed price tolling agreements. Looking at slide eight, The electricity segment generated 94% of format total consolidated adjusted EBITDA in 2023. The product segment generated 4% 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 slides. Moving to slide nine. 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 transactions, while the remaining $4 million is related to transferable PTC, which were recorded in 2023 under the provision of the Inflation 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 benefits in the income tax line related to new storage facilities that COD this year. For fiscal year 2024, we expect an annual approximately $5 to $10 million reduction in PTC recorded under the income attributes of the style of tax benefits line of the P&L due to the elimination of one of our tax equity transaction that reached the flip date. Offset by new transaction we expect to sign related to Heber and Biwawi. We also expect to record $40 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 proportionally throughout the year. We anticipate the receipts of approximately $145 million in cash proceeds related to the PTCs and ITC benefits that will reduce our capital needs for 2024. Looking at slide 10, our net debt as of December 31st, 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 31st, 2023 was approximately $288 million compared to $227 million at the end of 2022. Slide 10 breaks our cash for the 12 months illustrating OMAT's ability to reinvest in the business and service our debt obligation while returning capital to our shareholders. Our total debt as of December 31st, 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 OMAD 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 2024 is approximately $550 million as detailed in slide 34 in the appendix. In 2024, we plan to invest approximately $340 million in electricity segment and construction, drilling, and maintenance capex, and $187 million in our storage assets. Overall, our market 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 IRA benefits. We expect that each project that reaches commercial operation in the next few years in the U.S. will be entitled to between 30% to 40% of funding supported by the new IRA benefit. On February 21, 2024, our Board of Directors declared, approved, and authorized payments of quarterly dividends of $0.12 per share to all holders of the company issued an outstanding shares common stock on March 6, 2024, payment on March 20, 2024. In addition, We expect to pay quarterly dividends of $0.12 per share in each of the next three quarters. Finally, on January 4, 2024, OMAD completed the strategic acquisition of contracted operating geothermal and solar assets from Enel Green Power North America. OMAD paid $272 million for 100% of the equity interest in the portfolio assets. The overall transactions were funded with available cash in combination with new corporate loans in the amount of $200 million that were raised in January 2024. The Enel Green 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 Daron to discuss some of the recent developments
Deron Bouchard
Thank you, Asi. Turning to slide 13 for a deeper glimpse at our operating portfolio. Generation growth in our core electricity segment carried support from our multiple CODs 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 operations at CD4 and tungsten phase II, which achieved their respective CODs over the course of 2022. This was partially offset by a reduction in capacity at our Puna facility due to operational issues related to the performance of the wellfield. which caused us to run the plant at lower capacity rates. The performance of Puna improved in the fourth quarter and is currently operating above 30 megawatts. Our current total generating capacity, including the NL assets we recently purchased, stands at 1,215 megawatts in the electricity segment, compared to 1,070 megawatts in 2022. This marks a 13.6% increase versus prior year levels, positioning us well to achieve our multi-year portfolio expansion target. Turning to slide 14, I will give more details on our operating footprint. We are back to normal operating at the operation at Kuna 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 POC for a new PPA at the facility. and confirmation of the EIS. The new PPA expands the contracted capacity and carries a fixed energy rate that will remove the volatility of the current avoided cost structure. The PPA will be in effect following the completion of the power plant upgrade expected in 2026 and will carry an average rate per megawatt hour of approximately $127 to $137 per megawatt hour assuming we sell 100% of the generated electricity. At our Olkaria power plant in Kenya, we are currently operating at the 125 megawatt level, up slightly from prior year. Our operational team continued to work to increase the capacity of Olkaria, and the drilling campaign we conducted in 2023 has shown successful results that are now being tested. 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 Boyan Power Plant at Guadeloupe and expect to finalize PPA negotiations shortly. At the end of 2023, we signed a new BOT PPA for a new 10-megawatt power plant we expect to build in Dominica near our Boyan Power Plant at Guadeloupe. 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 power plants. 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 2024. The asset portfolio, including three geothermal facilities, and three solar PV facilities, carries consolidated capacity generation of roughly 100 megawatts, with a three-year trading average annualized EBITDA contribution of $24 million. The portfolio also carries the opportunity to expand economics through a targeted series of growth investments, 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 $157 million of contract, mostly signed in 2023, including the recently signed $95 million geothermal contract for the Natamarike 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 PGM and KITO market. We successfully sealed these new projects to add 82 MW or 102 MWh in total to our fleet, And we are currently in the final stages to commission the 20 megawatt, 20 megawatt hour East Flemington facility. We also successfully secured a long-term toiling agreement for Pomona II facility. This agreement marks the third toiling agreement in our expanding portfolio, following the 2022 bottleneck contract and 2023 Arrowleaf Solar and Storage facility. These three agreements contribute to the growth of a 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 both plans. We continue to see an increase in the demand for geothermal energy, and the successful and steady execution of our growth strategy has given us the confidence to reiterate our 2026 target that we provided in early 2022. With the success that 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 gigawatts of portfolio capacity by year-end 2026. Our critical target markets of California and Nevada recognize the critical role that geothermal resources play in supporting their respective energy grids, are on the forefront of developing and supplementing intermittent power generation with reliable and renewable high-capacity geothermal energy resources with zero emissions. This support has helped sustain and expand the tailwind 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 their 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 16, 2022, has had a significant positive impact on our ability to develop geothermal and storage assets in the U.S. at higher economies 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 transactions, which can fund over 40% of our capital needs for new geothermal plants in the U.S. Moving to slide 20, we are on track with our long-term targets as communicated back in 2022 in our annual estate. 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 2026, marking a more than five-fold expansion from prior capacity levels. showcase the geothermal and the hybrid solar PV project currently underway. We are on track with our Biwawi repowering 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 EGEN plant in Indonesia, which will add another 15 megawatts of capacity to our growing 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 2026. Puna, North Valley 2 and new prospects that will have successful exploration are expected to be operational by end of 2026. Our project development underway in our solar PV portfolio are weighted towards the first half of the year, as we expect to commission the Steamboat Hills Solar by the end of Q1 and North Valley and Biwawi by end of Q2. 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 hour, to our storage portfolio by the end of 2025. We are currently in the latest stage of COD in our 20 megawatt East Flemington storage facility in New Jersey. Also, we release for construction the Shirk 80 megawatt, 320 megawatt hour storage facility in California that is expected to be online in the second half of 2025. Our pipeline in energy storage, as displayed on slide 25, shows our overall potential future capacity at 3.6 gigawatt, or 13.1 gigawatt hour. Geographically, we continue to focus our efforts largely in the core target market of the United States, where we have the ability to benefit from the increased demand for energy storage capabilities. Please turn to slide 26 for a discussion of our 2024 guidance. We expect total revenue to increase by 7% year-over-year at the midpoint and to be between $860 and $910 million, with electricity segment revenues between $710 and $730 million, an increase of 8% compared to 2023 results. We expect between $115 and $135 million in the product segment And energy storage revenues are expected to be between $35 and $45 million. We expect adjusted EBITDA to increase by approximately 10% at the midpoint to range between $515 and $545 million. We expect annual adjusted EBITDA attributable to minority interest to be approximately $18 million. I will end our prepared remarks on slide 27. This was a strong quarter that capped off a very strong year for OMAD. 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 PPAs position OMAD for successful and will drive significant shareholder value as we progress across 2024. Before I 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 20, 2024. This concludes our prepared remarks. Now, I would like to open the call for questions. Operator, please.
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 Clear with Roth MKM. Please go ahead.
Roth
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, would you mind providing the expectations there? And then just wondering, you know, if we compare the gross margin in 2024 to 2023 what are the key elements um that we should be thinking about that are influencing the change so there's the puna operating at a higher level of capacity there's also the acquisition of enel assets but what are the other factors that we should be thinking about good morning so when we look at the 2023
Josh
Electricity, and I'm going to talk on the full year. For the full year, the gross margin was roughly 36.6%. When we look at 2024, we expect a slight uptick by 1% or 2% in the gross margin. It's coming basically from three elements. One, as you rightfully said, that Puna is operating at a much higher capacity for the full year expected 2024 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 positively. And third is the assets of Fennel that also contributing high relatively gross margin.
Roth
Okay. Got it. That's helpful. And then you reiterated the 2026 capacity target here, 2.1 to 2.3 gigawatts. 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. How are you thinking about that?
Deron Bouchard
Yes, we are expecting to reach the target for the end of 25. As you said, when you look at the list of projects that we released, including the SHIELD project that we released this week, we are very close to have all the details, all the projects that would get us there. some projects on the energy store that we'll need to release, and we are working to release them, getting the final permits. And so, we do expect to be in line with these targets.
Roth
Okay. Got it. And maybe just one more. It looks like your prospects that you're exploring here increased a decent amount quarter over quarter. I think you have 42 now versus 33 last quarter. I was wondering if you could just expand on what drove the increase there and what opportunities you're pursuing.
Deron Bouchard
The prospects in the US, I guess that's what you are referring to, increased mainly due to the acquisition of Enel that brought in new targets, new green fields in Utah and 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 is that position of Enel and the potential prospect they brought in.
spk06
Got it.
Roth
Okay. Thank you.
spk06
Thank you.
Operator
Your next question comes from the line of Ryan Levine with Citi. Please go ahead.
Ryan Levine
Good morning. Hoping to start off on New Mexico, I notice you have one development project there, the recent legislation that came into, that got 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 New Mexico?
Deron Bouchard
We have green corn in New Mexico as a potential green feed, which we actually like. I can tell you that until the last legislation a few weeks ago, we didn't see strong regulatory support in New Mexico. But with this new change, we are looking at it. We know that there are power plants over there operating. I 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 into.
Ryan Levine
Okay. Maybe shifting region of the world, in terms of Kenya, can you give us an update around the cash payments you may have received this quarter as the case not out and how the state of commercial negotiations or the state of those projects are progressing?
Josh
You know, as I mentioned in the last call, Kenya AR last year was rising, not because of KPLC inability to pay, but because of a lack of US dollars in the country. Because of a very good weather in the second half of 2023 that positively impacts the agriculture export, In addition to the fact that the Kenya government was able to issue €2 billion of new debt bond a few weeks ago, I'm happy to say that in the first 50 days of 2024, we already collected over $32 million. So out of the $80 million that was owed to us by end of 2023, $32 million was already collected and there was a very good outlook to continue with this strong collection. So I would 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 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 needs to be a win-win situation. We have a valid contract with PPA until 2034. We are always happy to negotiate new terms on a win-win base. I can't say that there was any change in the prospects of getting into new terms because mainly of the fact that all mass electricity is needed and it's already priced probably the most cheapest electricity in Kenya other than Kenyon. So I don't anticipate any major changes in the contract going forward, and if there will be one, we will announce it to the market. But as you said at the beginning, they need electricity, and they are paying for it, and we expect 2024, at least 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-verse merchant. risk or revenue mix. Is there any key 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 are relevant for that margin outlook that we should keep in mind?
Deron Bouchard
I would say 2023 was a relatively low merchant pricing across all the markets that we operate in, and that's why you saw a lower margin in the energy storage. Part of the balancing of the risk that we're doing is signing tolling agreements or PPA agreements. We signed with Pomona 2, we signed with Bottleneck. that will come online this year, and as I said before, we expect at the end of the year to be around 40% contracted, and then next year we have additional contracts coming with PPAs, and we are negotiating additional contracts with PPAs, 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 all storage access to be contracted, because we do believe that we can get benefits from this volatility. We just want to have it better aligned. And on margin, so we expect in 24 around 10% to 15% gross margin in the second half of 2024 to be even higher, around 15% to 20% once bottom comes into operation.
Ryan Levine
Great. Thanks for taking my questions. Thank you.
Operator
Your next question comes from the line of Julian DeMullen Smith with Bank of America. Please go ahead.
spk06
Hey, good morning. Can you hear me?
Deron Bouchard
Yes. Yes, Julian.
spk06
Excellent. Thank you very much, guys. I hope you guys are well. Look, thank you. First off, if I can, just can we talk a little bit about the storage segment? Just what is that going on vis-a-vis just the latest revenue guidance? Obviously, a little bit more flattish last year off of a robust 22, but How do you think about the cadence of that business over time here? You've had a couple of flattest years. You've been putting more capital into it, obviously more profitable in 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. And the negative margins in the quarter.
Deron Bouchard
I think on the negative margins of the quarter, as a 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 Pomona toiling agreement kicked in and bottlenecked the second half of the year. We finished 23 with around $29 million. The guidance that we gave is 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 projects and we sign more contracted assets, the pricing goes up. Actually, if you go and annualize 2023 and 2024 to see how they would look if all the assets that come online were operated for the full year, you will probably see over 50% increase year over year. So we actually are starting to benefit from the growth that we see in the storage. When you see the plan that we have to grow the storage to over 700 to 800 megawatts at the end of 26, it is a significant growth and we expect this segment to continue and grow significantly as we continue to release large projects during the year. And as I said, on the margins, we expect 24 to be 10% to 15%, with the second half after bottom and coming into operations around 15% to 20%. Got it.
spk06
Excellent. And then just vis-a-vis the longer term here, obviously we're talking here about storage growth, but overall, you guys have this analyst day coming up. How many years forward would you expect to provide here? And then the interim here, just as you think about these targets that you had, how would you think about achieving the sort of 25, 26 financial metrics that you'd articulated? I get that maybe you're now going to pivot to something that might have a little bit more of a longer dated view to it by mid-year.
Deron Bouchard
Look, what we've said now is that the target that we've set in 2022, the growth targets, we are reiterating the growth targets and we expect to be in line with these growth targets. As we come to the analyst day in June, we will obviously come with longer-term targets. I can't tell you exactly how many years down the road, but in all the previous analyst days, we give longer-term targets. So you will know where the company is going. I think today we gave out the target for the end of 26 again, 2.1 to 2.3 gigawatts of operating assets, which is a very nice growth target.
Operator
Once again, that is Star 1 for any questions. And our next question will come from the line of Derek Podizer with Barclays. Please go ahead.
Derek Podizer
Hey, good morning. I just wanted to go back to the 2024 guide. You guys talked about gross margin expansion on electricity 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, you know, the different puts and takes there. So do you expand on, you know, what brings you, we got the revenue guide, but what brings you on the margin front and then the PTCs would be helpful.
Josh
Good morning, Derek. As I mentioned on the call, we expect PTCs to be down roughly $5 to $10 million year over year because of the elimination of one of our facilities that we entered into 10 years ago, and it basically ended. It's the Opal tax equity transaction. and this will be offset the the 5 and 10 to 10 million is the net number we will plan to enter into new two tax equity transactions in hebrew and in bihawi but the net number you know this year we had 62 million next year we expect 5 to 10 million less got it that's very helpful thank you um i wanted to ask about the 12 megawatt reductions you guys put uh in your deck i mean
Derek Podizer
Can you help explain that to us with 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 to re-equitize or just some thoughts around that as far as what it means for covenants. Yeah, just everything with the covenants and the reductions and how we should think about it as far as the call on the balance sheet.
Josh
Let's start with the balance sheet. The balance sheet is very strong. Debt to EBITDA is here at the end. It was at 3.7 times the metrics. Our covenants are sometimes around 6 to 7 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. From a liquidity perspective, as we said, we have over $700 million of liquidity. and we did not impact the liquidity by the NL transaction because we borrowed additional $200 million to fund it. So on the balance sheet side, I think Ormati 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 have many leverage 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 we were actually right and timed 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 so I can answer it. Yeah.
Derek Podizer
No, and I appreciate all those comments. Number 13. Just the 12 megawatt reduction, just how to think about that, you know, what's driving that, and how should we think about that for the rest of the portfolio?
Josh
So every time, every quarter, every year, we balance all the power plants. You know, some power plants have maybe more cooling than what's anticipated, and that's how we adjust the portfolio. I don't think there was any one project that was big, but it was a mega here and a mega there.
Derek Podizer
Got it. Okay, that's helpful. And then just one more question for me. Can you just talk about the capacity factor trends? I mean, you're bringing on more solar, which should be diluted to geothermal assets, but actually think about your capacity factor over the next few years and all the puts and takes around that.
Josh
I think that the fact that we're bringing more and more new facilities should over time increase the capacity factor. Also, you know, you have in Pune and 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 in Pune. So we should see a slight uptick. You are right that actually solar is not as dilutive as you think because we are 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 it's dilutive to the capacity factor, but it's very accretive to the earnings.
Derek Podizer
Got it. Great. I appreciate the comments. We'll turn it back.
Operator
We have no further questions at this time. I'll hand the call back to Daron Bouchard for closing remarks.
Deron Bouchard
Hi. Thank you. 2023 was a very good year and we expect 2024 to be even a better year. OMAD is committed to growth as we demonstrated in 2023 with the new project we released and the NL acquisition. And we are continuing to grow the company with the target that we have set. So 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. Give me now, disconnect.
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