Ormat Technologies, Inc. Q2 FY2024 Earnings Call

Good morning and welcome to the Ormat Technologies Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Thank you, Operator. Hosting the call today are Doron Blachar, Chief Executive Officer, Assi Ginzburg, Chief Financial Officer, and Smadar Lavi, Vice President of Investor Relations and ESG Planning Reporting. Before beginning, we would like to remind you that the information provided during this call may contain forward-looking statements relating to the current expectations, estimates, forecasts, and projections about future events 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. Actual future results may differ materially from those projected as a result of certain risks and uncertainties. For discussion of such risks and uncertainties, please see the risk factors described in Ormat Technologies Annual Report on Form 10-K and core reports on Form 10-Q filed with the SEC. In addition, during the call, the company will present non-GAAP financial measures such as adjusted EBITDA and reconciliations to the most directly comparable GAAP measures. The reasons for presenting such information are set forth in the press release issued last night, as well as in the slides posted on the website. A slide presentation accompanying this call may be accessed on the company's website at Ormat.com under the presentation link found on the Investor Relations tab. With all that said, I would now like to turn the call over to Doron Blachar. Doron, the call is yours.

Thank you, Josh, and good morning, everyone. Thank you for joining us today. During the second quarter, Ormat again delivered strong financial results driven by our consistent improvement across all our operating segments and our focus on continued profitable growth. The second quarter saw a 9.3% increase in total revenues and a 25% increase in adjusted EBITDA compared to the second quarter of last year. This improved performance was primarily led by the expansion of our capacity-generating portfolio and improved operating performance, translating into solid returns. Within our electricity segment, we continue to drive consistent growth during the quarter, largely driven by the addition of the Enel assets acquired at the beginning of the year. We also benefited from the continued improvement at our Puna facility and the contribution of a full quarter of performance at our Heber 1 facility, which resumed operations in last year's second quarter. The performance of our energy storage segment has continued to stabilize and deliver improved results, with the segment exhibiting strong revenue growth versus the prior year due to the contribution from the 83 megawatts of new projects that came online in the last 12 months. Additionally, we are making progress towards transitioning our energy storage business to a more balanced portfolio through a mix of RA contracts, tolling agreements, and merchant projects, focusing on stability, higher returns, and improved margins. This effort is highlighted by a recent 15-year RA agreement with the City of Riverside for our shared storage facility, which we expect will be eligible for approximately 40% ITC benefit. Furthermore, we received the release for construction of Luisa, a new storage facility of 100 megawatts, 200 megawatts RO in Texas, also expected to be eligible for a 40% ITC benefit. With the first half of the year now behind us, our generating capacity portfolio stands at 1420 megawatts, as the demand for renewable energy and zero-emission power generation solutions continues to increase. The increased and growing demand strengthens our confidence that we are progressing well towards our long-term goals, which directly aligns with the global trend of reducing carbon emissions from power production. Additionally, our growing energy storage segment is showing a strong trajectory, not only for revenue growth but also for enhanced returns and earnings contributions. Now, before I provide further updates on our operations and plans, I will turn the call over to Assi to review the financial results for the quarter. Assi?

Thank you, Doron. Let me start my review of our financial highlights on Slide 5. Total revenue for the second quarter was $213 million, marking growth of more than 9% year-over-year. Our consolidated top-line expansion was driven by growth across all of Ormat's operating segments, which serve as a testament to our continued track record of executing profitable growth. Ormat's second quarter 2024 gross profit was $61.4 million, up 24% versus $49.5 million in the second quarter of 2023, resulting in a consolidated gross margin of 28.8% versus 25.4% last year. The increase was driven by solid margin expansion across all three operating segments. Net income attributed to the company’s stockholders was $22.2 million or $0.37 per diluted share in the quarter, compared to $24.2 million or $0.40 per diluted share in the second quarter of the previous year. Adjusted net income attributable to the company’s stockholders increased by 0.3% to $24.3 million. Adjusted diluted EPS was $0.40, similar to the second quarter last year. Net income was adjusted to exclude write-offs, mainly related to the decommissioning of OREG 4, a 4-megawatt REG facility, as well as unsuccessful exploration activities. Second quarter adjusted EBITDA was $126.1 million, an increase of 25% compared to the $100.9 million generated in the prior year period. This strong year-over-year increase was driven by higher revenues and improved gross margin across all three business segments, in turn driving higher operating income. Our improved gross profit was primarily driven by the newly acquired portfolio assets in early 2024, the improved operation at our Puna power plant, and the contribution from the Heber complex repowering. On slide 6, we break down the revenue performance at the segment level. Electricity segment revenues increased by 7% to $166.2 million, driven by the factors mentioned earlier. This revenue growth was partially offset by weaker performance at Dixie Valley due to an unplanned outage, which Doron will touch on later in the call. In the product segment, revenues marked a substantial increase, growing by 13.1% to $37.8 million. The growth in our product segment was supported by a stronger backlog and the timing of revenue recognition. The current product segment backlog stands at approximately $165 million as of August 5, 2024, and includes the EPC of the Dominica BOT project with a state-owned utility. The energy storage segment revenue increased by 48.1% to $8.9 million in the second quarter, driven by 83 megawatts that came online in the past 12 months, including the 20-megawatt East Flemington project that started operation in the first quarter of this year. Additionally, energy storage revenues benefited from improved pricing, mainly at PGM. Moving to Slide 7, gross margin for the electricity segment was 33.5% in the second quarter, up from 29.6% from the previous year. The margin expansion was driven primarily by improved year-over-year generation performance at Puna and the Heber complex, as well as the reduction in our power plant O&M costs. In the product segment, gross margin was 13.7% in the second quarter, up from 10.4% in the second quarter of 2023, increasing due to improved profitability on our contracts. Within the energy storage segment, gross margin during the second quarter was 5.7%, compared to 1.9% in the prior year. Energy storage gross margin benefited from higher profitability from our Pomona 2 new tolling agreement and improved merchant prices at PGM. Breaking down adjusted EBITDA at the segment level on Slide 8, the electricity segment generated 91% of Ormat's total consolidated adjusted EBITDA in the second quarter. The product segment contributed 5%, and the energy storage segment accounted for 4% of total adjusted EBITDA. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slides in the back of the presentation. Moving to slide 9, in the second quarter, we recorded $15.8 million in income related to tax benefits, compared to $15 million last year. The increase is primarily related to the North Valley tax equity transaction entered into in October 2023 and higher transferable PTC from other tax equity transactions. We recorded a $6.2 million ITC benefit in the income tax line related to the two storage facilities, East Flemington that came online in the first quarter of the year, and Bottleneck that is expected to come online towards the end of the third quarter this year. We anticipate that we will receive up to $125 million in cash proceeds related to the PTC and ITC benefits in 2024. These proceeds will effectively reduce our capital needs, expanding our ability to fund our growth while maintaining profitability across our base of generating assets and ultimately lowering the capital intensity of our growth efforts. Looking at slide 10, our net debt as of June 30, 2024, was approximately $2.2 billion, equivalent to 4.2 times net debt to adjusted EBITDA. Cash and cash equivalent and restricted cash as of June 30, 2024, was approximately $164 million compared to $288 million at the end of 2022. Slide 10 breaks down our use of cash for the six months, illustrating Ormat's ability to reinvest in the business, service our debt obligations, and consistently return capital to our shareholders while growing our business. Our total debt as of June 30, 2024, was approximately $2.4 billion, net of deferred financing costs, as presented on Slide 29 in the appendix, outlining the payment schedule. The average cost of our debt for the company stands at 4.63%. The majority of our debt liabilities are at fixed interest rates, which we believe will help maintain Ormat's competitive edge in the current elevated and volatile global interest rate environment. Moving to slide 11, we have approximately $654 million of total available liquidity. After the quarter ended, we issued $45.5 million under the 2022, 2.5% convertible bond to refinance debt. Please note that the bond itself cannot be converted to equity. If the convert is in the money, we will pay additional interest only. We will be able to make the additional payment in cash or shares based on our decision. Our total expected capital expenditure for the remainder of 2024 is approximately $292 million, as detailed in Slide 30 in the appendix. We plan to invest approximately $138 million in the electricity segment for construction, exploration, drilling, and maintenance CapEx. We also plan to spend $140 million for the construction of our storage assets for the remainder of 2024. Ormat’s balance sheet and capital resource position are well-suited for the continued execution of our growth plan and capital deployment. As we progress with our growth plans, we are consistently increasing our cash generation, which, combined with the expected cash from utilizing tax benefits, will fund our CapEx. We continue to maintain excellent liquidity and have ample access to additional capital as needed. On August 6, our board of directors declared, approved, and authorized payment of a quarterly dividend of $0.12 per share payable on September 3, 2024, to shareholders of record as of August 20, 2024. We expect to maintain this dividend level for the next quarter as well. That concludes my financial overview. I would now like to turn the call over to Doron to discuss some of our recent developments.

Thank you, Assi. Turning to slide 13 for a look at our electricity segment operating portfolio. Portfolio growth during the quarter was positively supported by the recently completed COD for Beowawe Repowering. Actual generation in the quarter increased due to the positive contribution of our recently acquired Enel assets and Heber 1. Our Puna facility showed continued improvement during the second quarter, running at approximately 31 megawatts. Turning to slide 14 for an update on our operating footprint. At our Olkaria power plant in Kenya, we achieved a significant milestone by successfully conducting capacity tests that reached approximately 148 megawatts. This achievement will result in higher capacity revenues during the quarter. These higher capacity revenues were offset by force curtailment, which reduced our revenues and generation output. On Olkaria, I would also like to update that the tax preliminary investigation we reported in the first quarter 10-Q was closed, and the initial demand for $79 million was reduced to zero. Our recently acquired Enel assets have continued to positively impact our results, with the asset generating revenue and EBITDA of $8.6 million and $6.1 million, respectively. As discussed on our first-quarter earnings call, we have started to enhance the three acquired geothermal assets, which we expect will translate into expanded returns through improved performance. We are also evaluating options to build a new up to 35-megawatt power plant at Cove Fort, Utah, by the end of 2027, which was initially planned to be completed in 2029 at a lower capacity. As noted previously, we experienced an unplanned outage during the second quarter at our Dixie Valley facility, resulting in lower electricity generation that negatively impacted revenues and EBITDA by approximately $4.5 million. The plant has resumed partial operation, and we expect to resume full operation in the fourth quarter after a 30-day shutdown in October. Annually, we anticipate the impact from Dixie Valley will result in a reduction of $9.6 million in revenues and $8.2 million in EBITDA. This reduction was taken into account in our revised guidance. Turning to slide 15, our product segment backlog stands at $165 million, which is up 38% compared to the second quarter of 2023 and 27% compared to Q1 2024. This increase is mainly related to the inclusion of the EPC of the Dominica BOT project, which we expect will be online by the end of 2025. We remain encouraged by the growing demand for geothermal, which should allow us to maintain a strong backlog. Moving to slide 16, the storage segment continues to show signs of solid incremental growth on a sequential basis, highlighted by the strong second quarter and first half growth delivered by the segment. The results during the quarter were largely supported by the new projects launched in 2023 and the East Flemington facility that came online during the first quarter. Moving to slide 18, as we announced at our recent Investor Day, we are now targeting our portfolio capacity to reach between 2.6 gigawatts and 2.8 gigawatts by year-end 2028. These targets suggest we expect to see an annual growth rate between 15% and 17%, with the majority of this growth focused in the U.S. While we see many promising opportunities internationally, the U.S. has become a much larger focus for our growth efforts given the rapidly increasing opportunities in the region for both our electricity and storage segments. Our consistently strong performance over the last few quarters has positioned us well to achieve our long-term capacity targets and translate that strategic growth into returns. Due to our increased focus on the U.S. market, we have ramped up our business development efforts to secure long-term agreements for the electricity segment, both with traditional utilities and tech companies. At our Heber 1 facility, we renegotiated the project with the same parties and are awaiting final approvals for a PPA that carries a price level as discussed in our Investor Day. In addition, we are discussing portfolio PPAs with utilities in Nevada, California, and Oregon, and with one of the tech companies, driven by the increased demand for renewable energy as a result of AI energy needs. All the PPAs are negotiated at price ranges similar to those presented at our recent Investor Day. Turning now to slides 19 and 20, which display our geothermal and hybrid solar PV projects currently underway. We are on track to complete the Ijen project in Indonesia by the end of 2024, with Zunil in Guatemala planned to be completed by 2025. Additionally, in our solar PV portfolio, we expect to complete our CODs for the Beowawe solar project by the end of this year. Moving now to slides 21 and 22 to discuss the third layer of our growth plan, our energy storage segment. At our Bottleneck facility in California, we are wrapping up the commissioning stage, and we now anticipate that the 80-megawatt, 320-megawatt hour storage facility will begin operating by the end of the third quarter of this year. In total, we have seven different storage projects under development that we expect to achieve COD by the end of 2026, adding a total of 435 megawatts, 1240 megawatt hours to our storage portfolio. As discussed during our Investor Day, our strategy calls for a balanced split between tolling agreements and merchant market pricing. Before I move on to discuss our guidance, I’d like to mention the recent positive development in permitting. A few weeks ago, the U.S. Senate introduced the Energy Permitting Reform Act, which seeks to ease the environmental review for solar, wind, and geothermal projects in ways the oil and gas industry has long enjoyed. This is exciting for Ormat. If this bill passes, it will serve as a positive advancement in our strategic growth plan, potentially accelerating the timeline for the necessary permitting to advance our geothermal exploration and solar projects. This development will put us in an even stronger position to reach and exceed our long-term operating capacity goals. Please turn to Slide 23 for a discussion of our 2024 guidance. We have narrowed and increased the midpoint of our expected total revenue, which we expect to range between $875 million and $910 million, with electricity segment revenues between $710 million and $720 million, product segment revenues between $130 million and $145 million, and energy storage revenue between $35 million and $45 million. Due to increased profitability across all our segments, we have increased our expected adjusted EBITDA midpoint, expecting the range to be between $520 million and $550 million. We expect annual adjusted EBITDA attributable to minority interest to be approximately $20 million. I will end our prepared remarks on slide 24. To summarize, we are proud of what we have accomplished during the first half, continuing to execute against our long-term growth targets while delivering strong financial results. Encouragingly, these results are driven by our premium geothermal and energy storage solutions, our strong business development track record, and our ability to achieve better project returns through higher PPA pricing and tolling agreements. With favorable PTC and ITC benefits and the cash flow from operations, we have a unique ability to maintain self-funding of our future growth through cash generation as Ormat continues to progress along its growth trajectory. As we look ahead, we continue to see strong industry tailwinds for both geothermal and energy storage that will drive increased profitability as electricity demand grows with the rise of data centers. With all this combined, we believe that we are on the right path forward to drive significant stakeholder value in 2024 and beyond. This concludes our prepared remarks. I would now like to open the call for questions. Operator, please.

Thank you. We will now begin the question-and-answer session. We'll take our first question from Noah Kaye at Oppenheimer.

Thanks for taking the questions. First on storage. Just wanted to put a finer point on the expected timing for Bottleneck to come online. I think you mentioned that would be this quarter. Just give us a sense of where you are at in the process, any kind of puts and takes towards getting this to final completion? And then it seems like just better merchant prices and some of the better pricing under Pomona is helping offset any delay in contribution from Bottleneck in the full year guide. Is that the right way to think about it?

Hi, Noah. Thank you. So, regarding Bottleneck, we’re in the final stages of commissioning the facility. Following that, we have some commission tests with FCE and Kaiser and the offtaker. So we expect the project to come online by the end of September. We did expect it to come a few weeks earlier, so we do have a delay, but that's included in our numbers that we've issued.

Right. And as far as the potential offset in terms of just better economics from the rest of the portfolio, is that the right way to think about it, because obviously Bottleneck is a substantial project?

Yes, definitely. We've seen better pricing across all our fleet, more in PGM, but also Texas has better pricing and California also had decent pricing. So we have a larger fleet today, so we can cover for this few weeks delay.

Very helpful. And then you talked at Investor Day and gave some specific numbers on where pricing has trended on the geothermal side. And it's very encouraging. As we look at the developments, the portfolio development that you've got listed on slide 19, all of these have PPAs, I guess. Can you help us think through where there may be upside to the current portfolio concerning either re-contracting or additional capacity that can be contracted out more favorably? How should we dimension that?

I would say that we signed two portfolio PPAs with CC Power and NV Energy. All the contracts that are going to be re-contracted with these two PPAs will have better pricing than what they are today. The pricing for the PPAs we are negotiating today relates to the following period after 2028, and over that we stated pricing in the area of around 100-plus, depending on the specific location. Most of the projects you see here will come online before then. The PPA negotiations for the cohort we acquired earlier this year are progressing well. We reassessed the plant expected to be in 2029, now hoping for 2027, potentially at a higher capacity. We're finalizing it but it might be up to 35 megawatts, and we are also negotiating with Salt River Power for a PPA for this expansion.

All right. That's very encouraging. I'll turn it over. Thank you.

Thank you.

We'll move next to Justin Clare at Roth Capital.

Hi, good morning. So, wanted to start off on your Olkaria project in Kenya. So it sounds like you had a successful capacity test up to 148 megawatts here. I was wondering where that plant is operating on average. And what the potential is to move that capacity upward toward the 148 megawatts or potentially up to the 150 megawatts where your PPA is. Could we see that by the end of the year? Or, how do you see the average stable capacity trending ahead here?

As we discussed in Q4 and also in Q1, we were able to have very successful drilling campaigns in Kenya. Right now, the plant can generate 148 megawatts, and that's the capacity we are charging our customer. We don't see a reason why this number will come down; we should stay at that level in the foreseeable future. We also have a plan in the next few months to recalibrate the way the wells flow into the facility to maintain high capacity. We are experiencing curtailment in Kenya year-to-date, including July; we've probably lost $7 million to $8 million due to the curtailment. So the plant is running at lower capacity, but it's available to run close to 150 megawatts. I don't think there's much difference between 148 megawatts and 150 megawatts. But we're satisfied with the success of the drilling campaign.

Okay, great. That's helpful. And maybe you could just elaborate on the reason that you're seeing the curtailment and what you anticipate ahead here. Is there potential for that to be reduced, or where you won't see curtailment going forward?

We know there are interconnection issues and capacity on the lines. Other developers in Kenya are also developing projects. Maybe KPLC has some take-off pays to fill before they buy geothermal. That said, our energy price is quite low at around 3.5 cents per kilowatt. We believe it will be very attractive for KPLC to purchase more energy from us. We've picked up production quickly from 110 megawatts to 148 megawatts. They may need to adjust to the change, as the plant is now much larger. I don't have direct knowledge of when this will adjust, but we are planning to meet with KPLC over the next few months to reduce curtailment's impact.

Okay, got it. And maybe just shifting over to your battery storage business. Was wondering if you could talk about your ability to secure the domestic content adder for your battery projects in 2025 or 2026. It sounds like suppliers offer different approaches to qualify for domestic content. Is that a possibility in the coming years?

We are discussing with all battery suppliers. Some claim they can meet the domestic content requirement in 2024; they are looking at ways to meet it in '25. The IRS guidelines are becoming stricter over time. Most of our projects have a 40% domestic content. We don't see any of the projects achieving 50% yet, but we examine each project, consulting with foreign and local manufacturers to assess local content attainment possibilities. Additionally, whether or not higher pricing for local content is balanced by the ITC benefits will also be a consideration.

Got it. Okay, appreciate it. Thank you.

Thank you.

We'll move next to Derek Podhaizer at Barclays.

Hey, good morning. Just wanted to ask about the margin outlook for both product and energy storage. I know product you previously guided us to 15%-20%. We're still below that now. Can you help us bridge to get into that 15%-20% range? And on energy storage, similar; I know, Bottleneck seems like it has pushed out to the end of the third quarter. I'm thinking about a margin inflection there that you previously discussed. Could you share the overall margin outlook for product and energy storage?

On the product segment, our target remains 15% to 20%. This quarter, we were at 13.7%, a bit below this target. We observe that projects we're working on and signing achieve margins within our guided range. Specific quarters might show lower margins, but that's our target.

On the storage front, looking at Q4 with Bottleneck expecting to operate, we anticipate double digits, anywhere from 10% to 15% margin. This doesn't assume adverse weather events. Bottleneck's income is mostly expected in Q3. As it stands now, Q3 will not include Bottleneck for most of the quarter, so the margin environment is expected to align with what we've seen this quarter.

Got it. That's helpful. And just back on the product. Any primary drivers for margins at that 13.5% range?

The overall market is very competitive. Some of our projects signed have a large construction portion, which is part of the EPC we’re doing for mostly in our New Zealand customers. Those projects involve a big portion of construction, with margins averaging around 10%, contrasting the margins of selling equipment alone. The Dominica BOT project is now recorded as a third-party project and carries around a 22% margin. It should thus improve margins as we progress toward next year.

Got it. That's helpful. And then I guess just following up on the pure equipment sales. This is more of a broad question, but could you frame for us the dollar per megawatt exposure you may have on the product side from the growing unconventional geothermal players or startup communities, whether you call it EGS or AGS? How do you view the potential for partnerships with those groups looking to build and construct power plants using their new designs? Please help frame what kind of opportunity this presents for you, even on a dollar per megawatt basis.

If EGS technology proves successful, and if people can utilize water fracking to generate hot water or steam, this could result in significant upside for the product segment as more geothermal projects come online. We are hopeful and eager to see that. Internally at Ormat, we are also exploring EGS, as we are developers of projects. If this technology succeeds, I'd like to mention that Ormat has had a patent on these technologies for 18 years. We’re keen to leverage the technology for new projects, and we are keeping an eye on startups entering this space, viewing it as a promising potential upside. However, success isn't something we perceive in the short term—hopefully mid-term—but numerous technological challenges remain before this can be economical and bankable.

All right, great. Appreciate all the color. I'll turn it back.

Thank you.

Next, we'll move to Jon Windham at UBS Financial.

Hi good morning, and thank you for taking the questions. I would be very interested in just getting your high-level thoughts about particularly the PJM capacity auction and how you think about future battery storage projects in that region. I know you mostly focused on development in California and Texas, but do you see PJM as an opportunity moving forward for the storage business?

On the PJM capacity market, we've been mainly focusing on generating assets and four-hour batteries, not the kind we operate. While the dollar amount this year was ten times better than previous years, the actual capacity payment remains relatively low. Currently, we have about 100 megawatts and 100-megawatt hour in PJM, which is essentially our project size. We have one more project coming online early next year. We view this as a promising market. We enjoyed better pricing last year, and this year has continued to deliver higher pricing. We are observing the market closely, hoping for higher prices. Typically, the PJM market has higher prices in the winter while Texas has higher prices in the summer; there’s a nice balance there. Thus, we see potential upside, though it won’t directly impact our assets.

Appreciate that. Be well.

We'll go next to Ryan Levine at Citi.

Good morning, good afternoon. Is there any update to the Reno Nevada data center growth opportunity, and what are the current expectations or outlook for your business there?

Yes, definitely. There’s potential and upside. We are negotiating, actually exchanging term sheets with one of the data centers in Nevada looking to buy geothermal energy from us. This is a bilateral discussion, competing against others, including NV Energy and another utility in California that we’re also negotiating with. Ultimately, we’re okay selling to the utility, which can then sell to the data center, as long as we get the right pricing. We’re discussing with all of them, and once we finalize any agreements, we will update the market.

Okay. And what's the company's current exposure to Chinese battery suppliers, and has that exposure changed with some recent contracting activities with your counterparties?

Most of the battery manufacturers are based in China. Even if we buy from U.S.-based suppliers, they often source their cells from China. So we are indeed working with Chinese battery manufacturers who are supplying our batteries. We've ordered batteries for most of the projects listed in our presentation, except for the most recent Luisa project.

Okay. And in terms of your ERCOT battery opportunities, it feels like you added a project this quarter. Given the forward curves and the dynamic nature of that market, are you observing an acceleration or an increase in opportunities compared to previous quarters? Any color you'd like to share around development opportunities in that current market?

We are seeing improved returns. Market pricing appears higher than it has been. We are seeing PPAs signed similarly to past outcomes in California. We are also negotiating with some of our projects, including Bird Dog and Lower Rio. On top of that, we also benefit from a 40% IPC. Overall, we see better returns than we previously anticipated, attributable to the new PPA negotiations. Once finalized, we will update the market accordingly.

Thank you for your time.

We'll go next to Julien Dumoulin Smith at Jefferies.

Hey, good morning team. Thank you guys, appreciate it. Look, I just want to come back to the same vein as some of the last questions. In as much as you think about scaling up the opportunities, you guys rolled forward the outlook from '26, '28 with more megawatts. Given the commentary across the West and your conversation about evaluating portfolio agreements, how do you feel about scaling your opportunities further? How would you invest in early-stage permitting to meet this growing demand in the West? Especially since you indicated you're in discussions on some wide-ranging arrangements with several utilities. Could you help us understand how big this could be in terms of incremental megawatts, not just recontracting existing assets?

We provided growth targets for 2028. Since you've followed us for quite a while, when we issue targets, we usually detail a clear path to reach them. As we observe the growing demand for both geothermal and energy storage, we're increasing our commitment to developing more projects. I also noted the permitting legislation we hope to finalize next year. We foresee potential upsides in both geothermal and storage areas. As we proceed, we will keep you posted, similar to how we adjusted our '26 numbers during the year, and we hope to extend this to our '28 numbers as well.

Got it. And then related, how do you feel about ERCOT here? I see further assets announced there. How do you assess the risks on ancillary pricing? There are concerns about market saturation. While there are many opportunities in the West, pricing appears quite attractive in Texas now.

That's an excellent inquiry, Julien. We're currently negotiating for both Bird Dog and Lower Rio tolling agreements. Once finalized, we will have a well-balanced portfolio and can release more projects in Texas. Our target across the portfolio is about 50%-50% merchant versus contracted. Securing contracts in Texas will help mitigate pricing risks while we also seek merchant projects due to potential upsides on specific days or months in a year. We're striving for a proper balance, and that will inform our project releases.

All right, fair enough. Thanks a lot. Good luck with all your efforts. Thank you.

Thank you.

And we'll take our final question from Jeff Osborne at TD Cowen.

Good morning. Just one question on my side, Assi. I was wondering on the ITC cash benefits, how we should think about that benefit in the third and fourth quarter. I think you said $125 million for the year. I assume third quarter is a significant number, just with Bottleneck coming online. Do you have any insights on how we should be modeling that?

From a cash flow perspective, we expect to utilize and sell the ITC from Bottleneck, equivalent to $35 million, in addition to leveraging a tax equity transaction for Heber plants, which totals around $75 million. These amounts will predominantly settle in Q4. The remaining funds are PTCs that we expect to sell between September and October, roughly $25 million from the PTC transfer program, which will be sold throughout that timeframe. These PTCs are the 2023 and 2024 PTCs. Under the new law, we can sell them to a third party, and we are currently in the final stages of those negotiations.

Got it. And just to clarify, the $75 million from Heber is also in Q4?

Yes.

Perfect. That's all I have. Thank you.

You're welcome. Thank you, Jeff.

And that concludes our Q&A session. I would now turn the conference back over to Doron Blachar for closing remarks.

Thank you. Thank you all for joining us today. This was a very good quarter for us, and we remain focused on growth and profitability. Thank you for your support, and I look forward to speaking with you again next quarter.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.