OPC Energy Ltd. (OPCE) Earnings Call Transcript

Hello, and welcome to OPC Energy Ltd.'s Second Quarter 2026 Investor Meeting. [Operator Instructions] For your convenience, this meeting is being recorded and will be uploaded to the company's website to a limited time. With us today are Mr. Giora Almogy, CEO of OPC Energy Ltd.; Ms. Anna Berenstein, CFO of OPC Energy Ltd. Before I hand over the floor to Giora, I would like to point out that other than historical data that will be presented, some of the information discussed during this call may constitute forward-looking information as defined under the securities law. Such information includes, among other things, forecasts, estimates and statements regarding future events, which are subject to risks and uncertainties. The company's actual results may differ materially from those anticipated due to various factors as detailed in the company's official Hebrew report filed with the relevant authorities. This call does not replace the need to review the company's official Hebrew immediate and periodic reports, which include complete information, including risk factors and forward-looking information in accordance with the securities law. Nothing stated during this call constitute an offer or invitation to purchase or transact in the company's securities nor shall it be considered investment advice. I will now turn the call over to Mr. Giora Almogy. Giora, please go ahead.

Thank you. Good morning. So this morning in Tel Aviv, we reported our Q2 earnings. I'm happy to report very strong financial results. I will go briefly and Anna, of course, will go into in detail. But I think that maybe we'll start with an overview of, I think, the main 3 pillars of success that we are seeing that are driving the company forward. The first thing, of course, is the macro environment that we're operating in. Both in Israel and the U.S., we are seeing growing demand for power. We've seen that in the U.S. now on the consecutive -- second consecutive summer and winter, we are seeing actual peak loads and also absolute energy coming up. And that's, of course, triggering the regulatory actions, which have a very strong potential for us for growth in the next -- as I will describe in our projects. Also in Israel, of course, there is growth that is driving the market forward. In terms of this is at the macro level, we have a very strong tailwinds, both from the market itself and the regulators who are encouraging new builds of new generation into the system. In terms of our execution, I think the second pillar that is very strong in our -- in this -- demonstrated in this quarter is our actual execution. This quarter, we reported the financial closing of an 850-megawatt combined cycle in Israel. In the previous quarter, we reported Basin Ranch construction, financial closing of 1.4. So over the last few months, we've started construction of 2 large-scale projects, roughly 2.2 gigawatts, reflecting an investment of -- capital investment of $3.5 billion. And that is, and I will describe later, our overall CapEx development plan that we have of $13 billion over the next 2 years. So definitely, we're seeing very strong growth in the future, but also actually executing our current plan. So as I said, Hadera reached financial closing and started construction. We also added Rogue's Wind reached commercial operation for 114-megawatt wind project in the PJM. And on top of that, we are continuing our consolidation efforts. We've been able to fully consolidate now a third asset. So overall, in the U.S. today, we have 3 fully owned assets, reflecting 2.8 gigawatts of capacity. And also in Israel, this quarter, we signed a PPA with a leading Israeli data center developer, reflecting a demand of -- an increasing demand over the next few years of up to 460 megawatts. In terms of the growth opportunities, which are really a result of our continued development and of course, the tailwinds and the strong growth in the market, we see several very significant growth opportunities in the coming few months as a result of the regulatory reform in the PJM. One, and we'll go -- dive deep later on, on Shay, we have a 2.1 gigawatt project that should be able to participate in the RFP in the 15-year capacity auction opportunity that is coming actually in this September. Furthermore, we reported that we are negotiating a PPA with a leading global hyperscaler in the U.S. Signed a PPA for a 1.5 gigawatt combined cycle in Ohio and the U.S., a project named Walker. So both of these investments reflecting roughly or north of $7 billion of investment that we see as an immediate opportunity for growth as a result of the reform in the PJM and the requirement for more capacity in the system. Furthermore, we are continuing to develop our Safe Harbor renewable pipeline of 1.9 gigawatts. As I mentioned today, we have -- we've added this quarter 114 of wind. We have total operating 755 and another Safe Harbor. Of course, we have also early development pipeline, but also 1.9 gigawatt of Safe Harbor status. That on top of Ramat Beka, which I'll describe in the next few slides, create a very strong growth opportunity beyond the 2 projects we just started construction in the next few months. So to the numbers, and again, Anna will go in detail, but you see the increase in EBITDA from $90 million to $131 million over the quarter, a 46% increase. Our consolidated adjusted net income rose from $5 million to $34 million and consolidated FFO from $57 million to $90 million. So this is the -- I would say, our capital plan, I describe it as, I would say, our development conveyor belt. If you see on the left-hand side, Basin Ranch and Hadera expansion are projects that a few, I would say, last year were in the advanced development stage. We have been able through our very strong execution capabilities to bring these projects into construction mode and the first project Basin will be in operation in '29, Hadera in 2030. Ramat Beka, also a project which was early went to advanced development and we're really now week or months away. We expect to start construction of this project by the end of this year, another roughly 550 with a very large storage, 3.9 gigawatt hour of BESS system. So that's the next project. Shay and Walker, Intel are the next wave of our construction. Shay and Walker, I described and go in more details. Intel is also a project we're developing in Israel. We expect to start construction by the end of '27. And of course, the Safe Harbored project. So if I look at the overall plan, we're talking about a capital plan of $13 billion, roughly $3.5 billion already under execution, which will increase our overall capacity from currently roughly 4 gigawatts of operating to 13, including the [indiscernible] gigawatts by the year 2030. Diving into Israel. So Israel is a market that is growing constantly. We are seeing now accelerated growth as a result of electrification of many aspects, but also now data centers playing a center stage in the growth in Israel. We're seeing actual growth and the projections to go from 3.4% to 3.7% a year, even higher than that and a very big push to new data centers there. Today in the system, the peak load of the system today in Israel is roughly 15 gigawatts. We have interconnection requests from data centers of 27 gigawatts. Similar to the U.S., the system operator and the regulator stopped to review and understand what can be done in order to eliminate some of or I would say, to filter some of these projects and also -- but also in order to increase demand. We believe that ultimately, like in the States, there will be 2 pushes, one for new projects, similar to Hadera, which enjoy a fixed capacity payment and that's selling to the system operator. But also we believe that -- and there is this discussion now that it will be the same bring your own generation as in the U.S., meaning that new data centers will need to bring their own generation, bring their own capacity. In that sense, I think OPC has a very unique position and experience. We already have behind the meter, I would say within the premises experience of building power stations, both in Hadera, Sorek, Intel. So our existing sites and new sites are definitely a very strong growth engine for us in the coming years to develop beyond what our existing current pipeline. We also reported this quarter, one we signed, as I mentioned, the PPA with a leading Israeli data center developer. So we'll start selling power from -- until 2030 will increase to roughly 460 megawatts of actual PPAs. Furthermore, in order to start increasing our sales, as we build Ramat Beka and Intel, which we sell to end users, we've been awarded a capacity tender to buy 200 megawatts of capacity, which we ultimately sell to end users. That will create an immediate revenue source for us and also lead ahead to the future lead the customer base for the new generation projects that I mentioned. So on this graph, Hadera, I will talk in a second. But really, the next stage is Ramat Beka. Ramat Beka is at least 550-megawatt solar project we've been able to approve the zoning plan at the government. We've signed key equipment and EPC and also finance or some of them are fully signed, some are under advanced negotiations. We have received a positive grid connection study and secured our grid connection, and we expect to start the construction of this roughly -- all-in roughly $1.5 billion project by the end of '26. This project should be in commercial operation by the end of '28. Hence, we are starting to increase our sales to end users. This project will sell through long-term PPAs and the award of the virtual capacity and increasing our sales to end users. Intel is also a 600-megawatt project. Within the premises of Intel, we are now in advancing the zoning process and in advanced negotiations with Intel for a PPA. We believe this project will start construction towards the end of '27. Hadera, which will reach commercial financial closing is an 850-megawatt combined cycle, construction cost of $1.3 billion. On top of that, we bought the land. This is 1 single complex, the land which we have already in existing cogen plant. It will be a single complex of roughly 1 gigawatt. We started construction in June of this year. A COD is expected in 2030. The economics of this project are underpinned by 2 revenue streams. One is a fixed capacity payment, which is 3.31 agorot/kilowatt hour, roughly $330 a megawatt day, and that is indexed to the CPI and applicable for 25 years from commercial operation. And on top of that, our revenue stream from selling energy to the spot. Our estimate that once the capacity limitations are removed, the first few years, we were limited to 670 and then up to 850. So full year EBITDA when the capacity limitations are removed is approximately $204 million for OPC. In the U.S. before going into our projects, the macro -- you can see the macro picture, which is really a reflection of the growth in the market, growth in peak demand and growth in energy. So energy margins or the spark spread has increased dramatically, roughly 50% from last year. This is a result of increasing demand, very limited increase in generation and stable gas prices, which result in a very high spark spread. So the realized spark spread that we're estimating, half of that is already behind us in the Q2 results. A significant portion is hedged and the remaining is our estimate for the future of the market until the end of this year. So you could see a very large jump in our capacity in our energy revenues. On the right-hand side is the capacity. We just -- recently in June, there were the results of the latest capacity auction. As you can see, from '28 or '27 actually, these auctions are all hitting the cap. But what is increasing is the uncapped price, theoretical price. So this result -- this auction without the cap would have ended at $555 per megawatt per day. And also, the PJM was unable to clear roughly 6.8 gigawatts of UCAP capacity, which means that the market is short in 2029, and that shortage is expected to increase as demand picks up. And as I mentioned, capacity is not joining the market. So we see, in any case, this margin increasing. And of course, that is the basic trigger that pushed the PJM to the reform that I mentioned before, and we'll talk about it in a second. In terms of the results to OPC and to CPV, first of all, our growth is focused on the growth of our new projects, which I mentioned, Basin Ranch will coming on '29 and the future projects. Our growth is also coming from buying out minority interest. We were able to reach 100% ownership in Shore and Maryland in the operating projects and also Basin Ranch. That's a source of growth, of course. The growth of the system is pushing up the energy and the capacity prices. And all of that is resulting in an EBITDA in the 6 months EBITDA, a jump of roughly 25% versus the first 6 months of last year. And you can see the trend of both energy and capacity adding as capacity prices increase next year for mid of this year, we can definitely see a continued growth of our revenues and EBITDA in the U.S. in the coming years. Talking about the proposed pathways to really solve this issue of growing demand, increasing prices and a shortage of generation, PJM basically took -- there's 3 legs to this -- dealing with this issue. The first, I think, is a fundamental one is the interim resource adequacy service, which basically says that new loads coming from June 2027 will need to bring your own generation. That results, and we have reported this quarter that we are now negotiating a 15-year PPA with a large international hyperscaler for our Walker project basically to sell 15 years the energy and the capacity to the hyperscaler, which really will allow them to build the data centers they're looking at. This is a project that we are progressing with. And this quarter, we have already disclosed that we have signed a slot reservation agreement for the equipment as we progress with the project. The second push is for the load, as I mentioned, is increasing regardless of the other data centers and the PJM needs to fill in this gap. So it went out for the reliability backstop procurement process. This is a onetime procurement that is expected to happen in September, procuring 6.8 gigawatts, which translating into combined cycles is roughly 10 gigawatts of new combined cycles, eligible resource of new generation BESS or demand response. Shay, and we'll talk in a second, is in a very good position to participate in this tender -- in this auction and the overall capacity in the capped option price is roughly $555 per megawatt day with the auction targeted for September and announcement by the end of this year. So these are the projects that I mentioned. Basin Ranch, already, as I said, the -- as Texas maybe identified or acted first in terms of responding to the increasing growth, and we were able to start construction late last year of Basin Ranch, the largest project, [indiscernible] project in Texas. And now in the new processes, both in the reliability backstop and the bilateral matchmaking between demand and generation, we have 2 very significant projects, 3.6 gigawatts, more than $7 billion of investment. In the coming, I would say, by the end of -- by '27, '28, we should be already in construction of these projects on top of the 1.9 gigawatts of Safe harbored projects, which will add to our existing 750 megawatts of renewable power that we are operating in the states. So a few details or more details into Shay. Shay, we own 70%. 30% is owned by a leading global equipment manufacturer that has also reserved the project equipment for this project. Project is located in West Virginia, 3 trains, roughly 2.1 gigawatts, estimated construction cost before financing of roughly $4 billion and we should start construction. I would say that in terms of the commercial structure of this project, we are making very good progress in the interconnection, really the long lead item here or the gating item is the connection. We expect to sign an interconnection agreement in early 2027. We have very good progress and results on this interconnection process. So that's definitely a critical path on this equipment. I mentioned, also land rights and licensing. So we're all on track to start construction. In terms of the commercial structure, I talked about the 15-year capacity auction. But also on top of that, of course, there's energy. We reported this quarter, we executed a gas -- a 10-year gas netback agreement with EQT, leading the largest gas manufacturer in the U.S. And that will basically fully secure our energy payments for the first 10 years of the project, adding the gas capacity revenues. This will enable us to bring significant leverage to this project and, of course, create a significant value for the company. As I mentioned, the critical path here is the auction, expected in September, award expected by the end of the year and then start of construction --signing the interconnection agreement and start of construction in 2027. Walker is a project we're now making significant progress under the matchmaking bilateral arrangements. So this is a project in Ohio. Same, we are 70% with a global equipment manufacturer that owns 30%. Also here, this quarter, we are reporting that we have signed a slot reservation agreement to secure the equipment and the commercialization of this project to be under a long-term 15-year PPA, setting the capacity energy of this project. The project still has to move ahead and progress in the interconnection queue, of course. But overall, if you look at the combining, Shay and Walker, these are the 2 large projects which we should start an investment decision and start construction during '27, '28, bringing the commercial operation of these projects by 2032. With that, I finish the commercial side, and I hand it over to Anna for the financials.

Thank you, Giora, and good morning, everyone. We are very pleased to report a strong second quarter with EBITDA increasing by 46% to $131 million, adjusted net income up to -- up by 580% to $34 million and a very strong FFO rising by 58% to $90 million. The group's robust free cash flow generation, evidenced by our strong FFO, provides a solid foundation to fund and support our continuous growth, as Giora just presented. On Slide 18, we can see our results in Israel. We continue to deliver stable and strong results. We are also seeing a gradual improvement in the operational availability of our Zomet power plant, which is expected to turn to normalized availability levels by the end of this year. On Slide 19, turning to our U.S. energy transition gas-fired assets. The EBITDA has increased by 39%, reflecting supportive PJM market conditions and the benefits for our portfolio and activities. The EBITDA bridge highlights 3 principal drivers: an energy margin increase, net of our hedging activity increased by $13 million year-over-year. The capacity revenue contributed additional $14 million and the increase in our ownership interest following the Shore and Maryland consolidation initiatives added additional $6 million to our results this quarter. These positive developments were partially offset, as you can see here, by a planned maintenance outage at our Maryland power plant during the second quarter, which reduced our operational availability compared with prior year quarter. Looking ahead, market fundamentals remain highly supportive, driven by growing power demand and constrained reliable generation capacity. The forward energy margins remain high and the capacity pricing under the PJM price collar is providing increased visibility all the way through to 2030. As shown on the right hand of the slide, our hedge position for 2027 remains relatively light at 33%, preserving meaningful exposure to the strong forward market while allowing us to continue adding hedges selectively. We remain very disciplined in optimizing the timing and volume of our hedging activity, balancing marketing opportunities with prudent risk management, particularly around weather-driven volatility during winter and summer seasons. On Slide 20, we can see our Renewable Energy segment. During this quarter, as Giora mentioned, we successfully completed the construction of Rogue's Wind project, 114 megawatts. With this milestone, we reached an important inflection point in our renewable strategy. The first phase is now completed, and we have established an operating asset platform with a total capacity of 755 megawatts. As shown on the right hand of this slide, we expect this segment to generate approximately $19 million of EBITDA as early as 2027. At the same time, we continue to accelerate the development of our next wave of growth with a focus on our 1.9 gigawatts of projects that are eligible for tax benefits under the applicable Safe Harbor rules. On Slide 21, we can see the consolidated net income. As you can see, we have increased significantly our adjusted net income from $5 million in the prior year quarter to $34 million this quarter. This increase is driven primarily by the strong growth in EBITDA. The reported net income, the accounting one for the quarter was affected by several items which are outside of the ordinary course of business. As you can see, $19 million of a loss. The most significant of this resulted from the transition from the equity method accounting to the first-time consolidation of the Maryland power plant. Slide 22, turning to our financial policy, leverage and debt profile. As you can see, we remain very committed to prudent financial management. We continue to maintain substantial liquidity and diversify the funding sources available to support the growth strategy Giora outlined, both in the U.S. and in Israel. During the quarter, we received strong vote of confidence from both rating agencies. S&P upgraded our rating to A+ in Israel and Midroog, the affiliate of Moody's assigned a positive outlook to our A1 rating. As shown on the slide, we currently maintain substantial liquidity reserves, while our leverage ratio remains below our long-term financial policy range of 4.5 to 5x debt to EBITDA. These liquidity reserves, together with our strong cash flow generation and the broad range of financing channels available to us in Israel and internationally will support our planned investment in Ramat Beka and Shay over the coming quarters. With that, we will now open the call for questions.

[Operator Instructions] The first question, could you provide an update on Shay and the key milestones to FID? How does it advance position in the PJM interconnection to support its potential participation in the RVP (sic) [ RFP ] ? And could you provide some color on timing, CapEx and financing?

Sure. So in terms of the RFP, the -- I think the critical -- maybe something to highlight is that the precondition is that the commercial operation of the plant has to be by 2032. And in order to achieve that, there are several fundamental issues that have to be progressed, and that will basically, I would say, impose the timetable of who is qualified to participate. In order to be able to operate in 2032, maybe the -- one of the top things is the interconnection. In that sense, I mentioned we are in a very strong position. We expect to sign an interconnection agreement by beginning of '27. We have -- we're in the TC2 process, a very strong indications on the cost and the timing of this interconnection. So that is a critical part, which is, I would say, is funneling the construction or the participation in this project. Second is equipment. In today's environment, securing the environment, securing the equipment -- the main equipment for a project like this is on a critical path. We were able -- we signed a slot reservation agreement with the global equipment manufacturer a few months ago and that is on -- that should bring us to be able to operate this plan to participate in the RVP with this time line. On top of that, we have possession of the site. We have already -- in terms of the commercial, that's our, of course, view. But our commercial arrangements, as I mentioned, we signed the gas agreement. So all geared in to be able to operate and to start construction of this plant by early '27 and reach commercial operation under the RVP timetable. I think that in this -- looking at the other, I would say, the requirement for if you transit to actual megawatts, 10 gigawatts of shortage of capacity, the amount of projects we see participating is limited. So we definitely think we are in a very strong position and we intend to participate as soon as the dates of this auction are finalized.

There are no further questions. If your questions weren't addressed, please reach out to Anna Bernstein, OPC Energy's CFO at anna.bernstein@opc-energ.com or Miri Segal of MS-IR, Investor Relations for OPC Energy in the U.S. at msegal@ms-ir.com. This concludes the OPC Energy Ltd investor meeting. Thank you for your participation and have a nice day.