McDonald's Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the ARMIT Technologies Third Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Alex Steinberg with Alpha IR.

Operator

Please go ahead.

Speaker 1

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

Speaker 1

For a discussion of such risks and uncertainties, See risk factors as described in Ormat Technologies' Annual Report on Form 10 ks and quarterly reports on Form 10 Q that are filed with the SEC. In addition, during the call, the company will present non GAAP financial measures such as adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures And management's reasons for presenting such information is set forth in the press release that was issued last night as well as in the slides posted on the website. Because these measures are not calculated in accordance with GAAP, they should not be considered in isolation from the financial statements prepared in accordance with GAAP. Before I turn the call over to management, I'd like to remind everyone that a slide presentation accompanying this call may be accessed in the company's website atormat.com under the presentation link that's found on the Investor Relations tab.

Speaker 1

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

Speaker 2

Thank you, Alex. Good morning, everyone, and thank you for joining us today. Robust reported another quarter of strong financial results and achieve significant milestones that emphasize its commitment to growth and sustainability. The strong results in the 3rd quarter As demonstrated by the company's significant top line expansion of 18.3%, which was successfully translated Into 15.8% growth in adjusted EBITDA and 84.4% growth in earnings per share. All three of our segments showed revenue growth in the quarter.

Speaker 2

The Product segment Continues to impress as our backlog has consistently grown throughout the year with year to date revenues more than doubling versus 2022. In the Store segment, we overcame lower energy rate at PGM and Keiser and delivered growth from the new facilities that came online in the Q2 this In the Electricity segment, this quarter revenues and margins were impacted by lower generation And lower energy rates at Puna compared to last year. We are making progress in our ongoing drilling efforts at Puna and Olkaria, With Puna now generating over 30 megawatts and Ulcarea steadily increasing its capacity. Both are to support our future performance in the electricity segment. In October, we announced a strategic acquisition 3 geothermal and 2 solar power plants for Menel in the U.

Speaker 2

S. We expect to close this acquisition by the Q1 2024. We are confident that this accretive acquisition will support both our short and long term growth plan. After the end of the quarter, we raised $166,000,000 through a combination of tax equity transaction To monetize PTC, commercial paper and the long term corporate loan that strengthens our balance sheet and solidifies our financial position. We've achieved significant growth in 2023, adding 127 Megawatts year to date, Expanding global demand for renewable resources and established our market position as one of the largest providers of geothermal energy global.

Speaker 2

We continue to be confident in our ability to achieve our long term capacity expansion growth and our financial targets for 2023 and beyond and expect to increase our capacity for approximately 1.9 to 2 gigawatts by year end 2025. Now before I provide further update on our operation and future plans, I will turn the call over to Assi to review the financial results. Assi?

Speaker 3

Thank you, Doron. Let me start my review of our financial highlights on Slide 5. Total revenue for the 3rd quarter It was $208,000,000.1 up 18.3% year over year reflecting Strong growth demonstrated across each of our operating segments with notable revenue growth in our product segment during this period. 3rd quarter 2023 total gross profit was $60,000,000 versus $61,100,000 This resulted in a gross margin of 28.8 percent, down approximately 600 basis points from a very strong gross margin 34.7 percent in the Q3 of 2022. In 2022, gross margin included $4,000,000 Business interruption income related to Tiber 1 and was impacted by a better performance of our Puna power plant This generated $5,600,000 higher revenues than in Q3 2023.

Speaker 3

In addition, during the Q3 of 2023, our product segment delivered significantly higher revenue versus last year, which due to the lower overall margin of the segment is negatively impacted our combined reported gross margin. Since the end of the quarter, we improved performance at our Puna power plant following a successful drilling campaign And in general, with the higher backlog of the product segment, we expect to see improvement in margins going forward. Net income attributable to the company's stockholders was $35,500,000 or $0.59 per diluted share In the quarter, compared to $18,100,000 or $0.32 per diluted share delivered in the Q3 of the prior year. The increase was driven by higher contribution of our product segment as well as higher benefits within the IRA, including PTC benefits recorded under income attributed to the state of tax benefit and ITC benefits recorded under income tax provision. In addition, we recorded a $9,400,000 tax income related to a recent change in the Kenya tax law.

Speaker 3

On an adjusted basis, net income attributable to the company's stockholders was $28,200,000 or $0.47 per diluted share with adjusted net income attributable to stockholders up 50.4% And diluted adjusted EPS up 42.4% versus the same period last year. Net income attributable to the company's stockholders and diluted EPS were adjusted to exclude A $9,400,000 one time benefit associated with changes in the Kenya Finance Act 2023 and a $1,800,000 after tax write off and successful exploration activity. Adjusted EBITDA of $118,300,000 increased 15.8% in the 3rd quarter compared to 1 $102,200,000 in the Q3 of last year. The double digit increase was largely driven by the product segment recovery As well as higher tax equity contribution from PTC Credit and a lower G and E expense versus the prior period. Moving to Slide 6.

Speaker 3

Breaking the revenue down at the segment level. The revenues in our electricity segment Increased 2.9 percent to $157,200,000 compared to the prior year period. The increase was driven by the COD at the North Valley facility and the resumption of operation at Eagle 1. The increase in revenue was partially offset by lower electricity prices and generation at Pune. In the product segment, revenues increased 180.2 percent to $38,800,000 Representing over 19% of our total consolidated revenue in the 3rd quarter compared to only 8% in the same period during 2022.

Speaker 3

The growth in the product segment revenue was primarily due to new signed contract We successfully secured, which also increased our product backlog. Energy Storage segment revenue increased by 24.5 percent to $11,000,000 This increase was driven primarily by the Startup operation of 5 new facilities since the beginning of the year, including Pomona II, which came online this quarter. Coupled with a very strong prices at Trevid Hill and our new Upton facility in Texas. This increase was partially offset by lower energy rate Moving to Slide 7. The gross margin of the electricity segment was 31.8%.

Speaker 3

Electricity gross margin were impacted mainly By the low revenue at Puna and the absence of business interruption at Cable 1, this quarter I discussed earlier. In the Products segment, gross margin was 18.7% this quarter compared to 18% in

Speaker 4

the same period last year.

Speaker 3

The Energy Storage segment reported a gross margin of 22.9% compared to a gross margin of 31.5% in the same period last year. The decline in margin compared to the prior year period was mainly due to a significantly higher energy rate on the East Coast last year. However, this year we saw a more normalized rate environment with higher prices in aircon. Looking at Slide 8. Electricity segments generated 90% of our total consolidated adjusted EBITDA in the 3rd quarter.

Speaker 3

The Products segment generated 6%. In the Energy segment, we reported adjusted EBITDA of $5,000,000 representing almost 4% Total adjusted EBITDA. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide. Moving to Slide 9. In the Q3, we recorded $14,900,000 in income related to tax benefit, Of which $12,500,000 was income related to 5 active tax equity transactions, Well, the remaining $2,400,000 is related to transferable PTC, which were recorded in 2023 under the provision of the Inflation Reduction Act.

Speaker 3

Also, in the Q3, we reported $6,600,000 ITC benefit in the income tax line, mainly related to the Pomona II storage facility That came online in July and is eligible for 40% ITC. We don't anticipate additional ITC benefits during Q4 2023, but as we said before, in the next few years, In line with our growth plan to increase our energy storage portfolio, we expect to continue reporting a lower tax rate overall. Looking at Slide 10, our net debt as of September 30, 2023 was approximately $1,800,000,000 Cash and cash equivalents and restricted cash and cash equivalents as of September 30, 2023 was approximately $186,000,000 compared to $227,000,000 as of December 31, 2022. The slide breaks down the use of cash for the 9 months, illustrating the company to reinvest in the business and service our debt. We note that these uses of cash have been funded from our equity offering, cash generated by our operation And the strong liquidity profile we maintain.

Speaker 3

Our total debt as of September 30, 2023 was approximately $2,000,000,000 Net of deferred financing costs and its payment schedule is presented on Slide 33 In the appendix, the average cost of our debt portfolio stands at 4.15 percent With all of our debt liabilities carry fixed rate, which we believe will help continue position our math competitively In the rising global interest rate environment. Moving to Slide 11. As Doron mentioned, In October, we raised $166,000,000 which includes a $43,000,000 State of tax benefit related to the North Valley through a tax equity transaction. Dollars 73,000,000 short term commercial paper And $50,000,000 long term capital. The process from these sources will enable us to finance the newly announced acquisition As well as support our CapEx requirement to continue with our growth plan.

Speaker 3

With respect to the new acquisition, we are planning to raise Additional long term corporate debt by the closing of the transaction. Year to date in 2023, we invested $450,000,000 in profit To advance our growth initiative, we have $673,000,000 available of liquidity through our cash and available undrawn lines of credit. Our total expected capital expenditure for the last quarter of 2023 It's $110,000,000 and it's detailed on Slide 34 in the appendix. Overall, Oramat is well positioned from a capital research perspective With access to capital, liquid resources and additional capital to opportunistically fund accelerated growth. On November 8, 2023, our Board of Directors declared, approved and authorized payment of a quarterly dividend of $0.12 per share to all holders of the company issued and outstanding shares of common stock on November 22, 2023, Pavell on December 6, 2023.

Speaker 3

That concludes my financial overview. Would like now to turn the call over to Doron to discuss some of our recent developments.

Speaker 2

Thank you, Assi. Turning to Slide 13 for a look at our electricity segment operating portfolio. Generation growth was positively supported By the inclusion of North Valley, the higher generation in our Guadalupe power plant and the resumption of operation at Hibergua. This increased generation was partially offset by lower generation at Puna. We added 45 megawatts since the beginning of the year to the electricity Segment portfolio reflecting a 4% increase in total generation capacity.

Speaker 2

Moving to Slide 1450. In October, we signed the accretive acquisition of Enel Assets in the U. S. Upon closing, we will acquire the Corfogeothermal Power Plant in Utah, The Salt Wales Geothermal Power Plant in Nevada and the Stillwater Triple Hybrid Geothermal Solar PV and Solar Thermal Power Plant in Nevada. These 3 power plants sell approximately 43 megawatts to Degrees.

Speaker 2

In addition, We will acquire 2 solar assets with a total nameplate capacity of 40 megawatts and 2 greenfield development assets. For all of these assets, we will pay approximately $271,000,000 The acquisition is expected to close by the Q1 of 2020 Subject to regulatory approvals and customary closing conditions. These assets Have collectively generated an annual revenue of approximately $35,000,000 and an annual EBITDA of approximately $24,000,000 For the year 2020 to 2022, our immediate plan is to enhance and optimize the 3 geothermal assets By installing Ormont equipment, we expect that the plant on surface upgrade, which will require approximately $55,000,000 capping, We'll add approximately 17 megawatts and generate an additional 15 megawatts of EBITDA by the end of 2025. In the long term, our plans are to expand the Corfoil power plant by 20 megawatts and to explore and potentially develop another greenfield project. Turning to Slide 16 for an update on our product segment backlog that is currently standing at $192,000,000 The backlog increased 60% compared to the Q2 this year and 40% compared to the Q3 of 2022.

Speaker 2

We were able to sign contracts and orders totaling approximately $150,000,000 since the beginning of the year, Including a large contract for the North America project in New Zealand, bringing our backlog to pre COVID level, A testament to the resilience and adaptability of our business. Moving to Slide 17. The Energy Storage segment delivered another strong quarter, supported by the new facilities that came online during the year. This quarter, we commenced the operation of Pomona II in California. We currently have 6 projects under construction that will contribute 2 75 Megawatts or 7 40 Megawatt Hour.

Speaker 2

This quarter, we also signed a multiyear battery supply agreement With Gaucher to secure batteries for up to 7 50 Megawatt Hour. This contract solidifies our supply chain And gives us confidence in our ability to successfully advance our project, including the projects that are currently under construction and achieve our long term capacity goals. Moving to Slides 19 and 20. The demand outlook for our electricity and storage segments remains strong, and we are well positioned to achieve our multiyear growth plan. We still expect to increase our total electricity portfolio generation by roughly 69% year over year.

Speaker 2

Additionally, our approximately 1.9 to 2 gigawatt portfolio target for the year end of 2025 is well on track. Slide 21 and 22 displays the 6 geothermal and 6 solar PV projects currently underway. We completed the repower of the Heber complex that currently is running at 89 megawatts. We are progressing with the Bivawi And agent that will come online next year. In our solar PV portfolio, we expect Steamboat and Steamboat Hills solar facilities To come online by the end of the year and the North Valley solar is now expected in the first half of twenty twenty four.

Speaker 2

Moving to Slide 23 and 24. The 3rd layer of our growth plan comes from the Energy Storage segment. Slide 23 demonstrates the energy storage facilities that have started construction. Please turn to Slide 25 for a discussion of our 2023 guidance. In the 1st 9 months of 2023, format has delivered meaningful year over year growth across our revenues and adjusted EBITDA.

Speaker 2

Heading into the close of the year, We are narrowing our guidance ranges to reflect our performance through 3 quarters and expectations for the 4th quarter. We now expect full year revenue to range between $825,000,000 to $838,000,000 Electricity segment revenue is expected to be between $670,000,000 to $675,000,000 Following Puna running at lower capacity and lower energy rate in Q2 and Q3 this year. Product segment revenues are expected to be between $125,000,000 to $130,000,000 and storage revenues Between $30,000,000 to $33,000,000 We are also slightly narrowing adjusted EBITDA guidance With the previous communicated range, anticipating results to be between $480,000,000 to $495,000,000 We remain confident in our ability to manage our business and assets to deliver on our guidance And to drive further growth in 2024 and beyond as we execute our integrated business model. Moving to Slides 27 to 29. We are proud to announce the release of this quarter of our 2022 Sustainability Report.

Speaker 2

In 2022, our renewable energy portfolio effectively prevented a 2,200,000 metric ton of CO2 emissions. This number of avoided emissions is expected to increase every year as we plan to add new clean power plants. North noteworthy is the impressive 19% reduction in our annual average scope and scope to greenhouse gas emissions when compared to our 2019 baseline. We have also initiated a comprehensive climate risk analysis And the TCSB Task Force on Climate Related Financial Disclosure, GAAP Analysis Process. Our aim is to identify and address Material climate related risks creating mitigation strategies for which.

Speaker 2

Simultaneously, we are formalizing an action plan and expect to fully align with the TCFD recommendation. This strategic approach underscores our commitment to responsible climate management. We invite you to explore our complete sustainability report that is readily available on our website. Moving to Slide 31. While the global markets are experiencing some economic challenges, We continue to benefit from the acceleration in demand for renewables in the U.

Speaker 2

S. And globally. We are encouraged to see growth throughout To all our businesses, and we are confident in our ability to use EBITDA growth, strong returns and a healthy balance sheet to fund potential and highly accretive acquisitions. Now before I close, I want to briefly touch Upon the war currently taking place in Israel. As you all know, while the majority of our revenues and EBITDA are outside Israel, We do have approximately 550 employees in Israel and our main product segment manufacturing facility and engineering department is in Israel.

Speaker 2

While the war has had a profound impact on everyone living in the country, including our employees, I want to assure you That we currently see no impact to the operations of our Electricity and Storage segment operating act. We have reprioritized Some of our projects to accommodate our fluids in Israel were being pulled up to military reserve duty, primarily in our engineering department. But we believe any resulting delays will be minimal. The situation in the region is unsettled and we will continue to monitor closely and adjust as necessary. I do want to publicly acknowledge and thank our employees in Israel and all around the world for their tremendously hard work during this month's time.

Speaker 2

In closing, we remain confident in our business and our growth targets. Our focus for the remainder of the year and beyond We'll be to execute against our capacity target goal, deliver strong results to close out the year and further expand our geothermal And energy storage portfolio. We are confident we will achieve each of these goals. This concludes our prepared remarks. Now, I would like to open the call for questions.

Operator

Your first question is from the line of Noah Kaye with Oppenheimer.

Speaker 4

Great. Thanks for taking the questions. And I should start by acknowledging that in a very challenging Operating environment in many respects, you guys have executed really well. So congrats on the strong quarter, The M and A and some of the other initiatives you have going. I wanted to actually start with Puna and Hawaii, so good to see that capacity is increasing there.

Speaker 4

Can you, A, remind us where you think that can get to, over coming quarters in terms of total output, And what timeframe? And then, it looks like there is an increasingly constructive environment for development Additional assets in Hawaii, can you comment on the development environment there? Thank you.

Speaker 2

Thank you, Noah. Hawaii, as we said, had a lower Q23, we finished drilling the last welder kit 'twenty two, and today we're generating about 30 megawatts. We have finished the drilling campaign at this stage, And we are monitoring the resource and the wells to see how it is going forward. And These days, we're working on the work plan for next year. And obviously, dealing with Puma is part of that and what kind of Workover or dealing we need to do with the well.

Speaker 2

So at this stage, we are very happy that we passed the 30 megawatt Mark, we hope that we'll be able to maintain it over time. Other projects In Hawaii, at this stage, we are mainly focusing on our facility. We haven't Try to develop another one in Hawaii this time.

Speaker 4

Okay, thanks. I wanted to switch gears and talk a little bit about tax credit transferability. You had a nice slide there on the benefits this quarter. Can you talk a bit more about the benefits that tax credit transferability has brought to you in terms of Financing and capital recycling, and what you might expect to see in coming quarters and perhaps next year in terms of Additional proceeds from the credit transfers. Thank you.

Speaker 3

So Noah, this is Asse. Good morning. When we look at this quarter, we see the benefit on the tax transferability in 2 places. One is on the income attributed to Tax Equity Transaction, where we generated the PTCs That we later on we already signed and entered them into a tax equity transaction. But at this point, we can sell them.

Speaker 3

And as I told you before, we are recording them at $0.90 per dollar. And this quarter, it was slightly over $2,000,000 benefit. The bigger benefit is coming through the impact on the Tax rate. This quarter, we recorded $6,600,000 of ITC benefit. All of those transferable ITCs, right now we are in final negotiation to sell them and collect money before year end.

Speaker 3

If we'll do so, we'll collect somewhere around $25,000,000 of ITC and PTC that are transferable. In addition to the tax equity proceeds that we already have in Q4, when we look at Q4 through the P and L, We expect not to have any ITC benefit because there is no new storage facilities coming online. We do expect to have additional PTC transferable benefit of approximately $2,000,000 As a result of Heber One operation, when we look at the next year, 2024, The biggest project that is coming online is the bottleneck project that has a total cost of over $100,000,000 We're still looking today to see what's the better usage of the tax benefit under this asset. Is it better to enter into a tax Transaction or is it better to do an ITC transferable? It depends on the bids that we'll see Because we basically offer it to few places.

Speaker 3

I think bottom line, in the past, tax benefits that Ormat had, we could not utilize them Unless it was a tax equity transaction and storage had no tax benefit at all. And as we look at it now, This year, only the storage brought us close to $20,000,000 Next year, it should bring us over $40,000,000 just the storage benefit. So bottom line, the ITC benefits are bringing us cash and improved net income. And the PTC just allow us to continue and develop assets at much better return than otherwise. So IRS for us is quite big.

Speaker 4

Very helpful. I'll leave it there. Thank you.

Speaker 2

Thank you.

Operator

Your next question is from the line of Justin Clare with Roth MKM.

Speaker 5

Hi, thanks for taking our questions. So just wanted to follow-up on the improvement you're seeing at Puna as well as the capacity expansion at Heber and then it sounds like you're increasing the Kathy at Ulteria as well. Can you give us a sense for how this could impact the margin profile, Whether in Q4 or just on a kind of run rate basis, what kind of uplift is possible as a result of the improvements here?

Speaker 2

Hi. So I will touch each one of them separately. So, Altaria, we have been steadily increasing the capacity and the generation over there. We've done a new capacity test in Olkaria. The PPA there is split between capacity and energy.

Speaker 2

As time passes, we're able to increase revenue. And as you can expect, when we increase revenues, the cost Associated with the marginal revenue increase are very low, so the impact to gross margin is very high. And the same goes with Puna. So the same amount of people can Generate 20 Megawatts or 30 plus Megawatts, and that's what we're seeing today. We're almost in the middle of The quarter and Puna is performing very well.

Speaker 2

Even the 89 megawatts that we mentioned, So the last part of the construction in Heber came online The beginning of September, so we expect to enjoy Q4 the full year.

Speaker 5

Got it. Okay. And then just on Olkaria, I think earlier in the year, it was At 127 Megawatts, can you share where the capacity stands today? And Based on your drilling campaign, where do you think the capacity could go for Okaria and over what timeframe?

Speaker 2

Stelier has been delivering over the last few weeks Between 130 to 135, 136 megawatts depends on the ambient temperature and other, so this is where it Moving along, we are drilling today unlike Puna that we finished the drilling campaign in Orcayo, we'll still drill Another well that we plan to finish in Q1 of next year, then it needs We have a 3rd well Yes, that we are also in the process of drilling. I believe that in the second half of next year, we'll see Another improvement on top of what we see already now.

Speaker 5

Okay, okay. Got it. And then maybe one more just on the product segment. The backlog moved up meaningfully here to 192,000,000 I was wondering if you could just give us a sense for what is the timeframe in which you could deliver that backlog and recognize the revenues? And then is the margin profile there in a 15% to 20% range?

Speaker 5

I think that's what you've Previously talked about, but wanted to check-in there.

Speaker 2

In general, I would say that the backlog should translate to revenue Over 18 months, there might be some projects that will be shorter or later, but in general, it should be over 18 months. And margins can be a bit higher than the 15% to 20% that you alluded to.

Speaker 5

Okay. Thank you.

Operator

Your next question is from the line of Mark Strouse with JPMorgan.

Speaker 4

Yes. Thank you very much for taking our questions. I just had one kind of clarification question. The 1.9 to 2 gig 2025 portfolio target, that didn't increase from last quarter despite The acquisition, I would assume that that's just a function of the acquisition not closing yet, but just wanted to make sure that's Okay. And something else hasn't slipped out maybe?

Speaker 2

Obviously, as you said, until the acquisition doesn't close, it's Not counted in any of our numbers and we usually update unless something Changes in February the guidance on the megawatts that we will have. So in February, we will update. I hope that by that time we've already closed Enel acquisition. So the numbers we'll give in February will include the impact of Enel.

Speaker 4

Okay. Yes, that makes sense. Okay. I'll take the rest offline. Thank you.

Speaker 2

Thank you.

Operator

Your next question is from the line of Julien Dumoulin Smith with Bank of America.

Speaker 6

Hey, good morning team. Thank you guys very much for the opportunity. Hey, just following up on a couple of different questions here. First off, tax credit transferability, just to clarify this, When you think about the opportunity created there, are you rethinking how you think about leverage and appropriate leverage? We've seen some of the folks in the renewable space Kind of capitalizing on the credit rating agency Latitude, but not sure it's necessarily the same direction for you guys.

Speaker 6

Love to hear your thoughts on that In terms of retaking leverage, A. And then B, just as you think about the backdrop of the market on financing, How do you think about financing the latest acquisition here? Just obviously with the cash balance at quarter end, the latest acquisition and the projections over the next few months, just How do you think about just the timing of capital raises here? And how do you think about the levers,

Speaker 2

if you will, over the next 6 months?

Speaker 3

Julien, this is Assi. Good morning. I'll start with the second part of the question. Since the end of the quarter, we already raised the $166,000,000 Of which $73,000,000 which is the commercial paper at the rate of around just over 6%. We raised $50,000,000 of commercial sorry, of corporate loan at a rate of around 7% And we also closed the tax equity transaction for $43,000,000 Basically, we So the PTCs of North Valley Facilities, so basically out of the $270,000,000 $166,000,000 was already financed.

Speaker 3

The remaining will be done to 2 corporate loans that we plan to take before closing of the Enel transaction. And those will be at similar rate the loans that I spoke before. I think because of the lower leverage This is many of our U. S. Peers that are currently at 5 and 6 times debt to EBITDA and the fact that our Future cash flow, the next 14 to 15 years is already tied to a known PPA, Allow us to be very aggressive on the financing of the acquisition and do the financing even before Year end, if we close the deal before year end.

Speaker 3

With respect to your first question, when we sell and do tax equity transaction, It does reduce our leverage as it was before. On the other hand, the ITCs that we sell through ITCs, Those are basically reducing our overall debt. They are not part of our EBITDA. We have seen some of our peers Adding ITC's benefit to the EBITDA calculation, we did not do it so far. We are looking into it, but that's not part of what we're doing so far.

Speaker 3

That's why we don't have any disagreement with the rating agencies because we never included ITC benefit is part of our EBITDA. So overall, we are lower leverage. The financing for the acquisition is Most of it is already done and the remaining is on track. And we will still be in the 4 time leverage, which is Significantly below our U. S.

Speaker 3

Peers.

Speaker 6

Indeed, I get your lower leverage strategy. That's why I asked you if any of this matters, right? You guys Just maintaining leverage. Now with that said, just to clarify, on the acquisition, it sounds like you're going to do this fully levered. There's not necessarily an expectation for To rebuild the equity balance for the time being from what I hear in your response, right?

Speaker 3

Correct. Correct. As you see, our EBITDA this year is up significantly over last year, which allow us to continue and borrow under the current business. And that's why the area equity raise that we did already this year allow us to do this transaction without any additional equity plan.

Speaker 6

Excellent. If I could just squeeze one more in on contracted storage just real quickly. I mean, we're seeing some of your peers in the Really pushing forward on the strategy of co located geothermal and storage like Cozo the other day. How do you think about Potential opportunities to expand, interconnect and add storage at existing sites. Just obviously very, very robust contracting environment in the West.

Speaker 6

And you have any comments around that?

Speaker 2

Thanks, Julien. It's Doron. So I would say the same. One, there's definitely a very, very strong demand For renewable and specifically geothermal assets in the West, today all of our assets are 100% contracted. Whatever electricity we are able to generate from our geothermal facilities, we are able to sell under our existing TPA.

Speaker 2

Effectively, there's no benefit to store and then to sell later. So this is something that we haven't combined think that there's always some place on the table to look into, but so far economic wise, we haven't seen the benefit if we can sell Whatever we generate and playing between the hours with storage doesn't seem to us very economic. I would say that what we do see on the energy storage in the West are many RFPs for tolling agreements or PPA agreements for Storage facilities like the bottleneck that we've signed the PPA. And we are building into these RSPs, and I hope And we plan to win some of them. And once we win, we'll obviously update the market.

Speaker 6

Thank you, guys. I get what you're saying.

Operator

Your next question is from the line of John Wyndham with UBS.

Speaker 3

Perfect. Thanks for taking

Speaker 7

the questions and I hope you and your team are doing well. Maybe the question would be, I'd be really interested to Your thoughts on how ongoing conversations are going with incremental PPAs both on the geothermal and storage So I'd basically trying to get out the willingness of off takers to take on higher rates, given the higher financing environment. Appreciate it. Be well.

Speaker 2

What we see today is exactly what you said. There's 2 factors, 2 vectors operating in the same direction. On one hand, the demand for renewable energy and the requirement by the CPUC in California To add geothermal energy and to bring energy storage, that's on one hand. On the other hand, increased interest rates are pushing all developers to go with higher to bid higher pricing. And that's what exactly what we see today.

Speaker 2

We see on the tolling agreement or the PPA agreement for storage, We see higher numbers in the bids that we compete in, in the bids that we are shortlisted or Some of these were not shortlisted, but we see the different numbers which are higher than what has been over the last year or so. And in the geothermal, there aren't any new facilities coming online. So whoever has a new facility, it can actually Make a reverse bid and bid the facility between the different utilities to get very high pricing. Believe that $80,000,000 is

Operator

Appreciate

Speaker 6

it.

Operator

Your next question is from the line of Jeff Osborne with TD Cowen.

Speaker 8

Yes, good afternoon. Most of the questions have been So far, but 2 that I wanted to dig into was 1 on the Goshen supply arrangement. I think there's certainly been some controversy around the Michigan factory for them. In the recent election this week, the entire Board of the town was removed. I'm just curious, is the output that you'll be receiving from that facility?

Speaker 8

Or is there Other backup plans in the event that the controversy around that site in rural Michigan were not to be built?

Speaker 2

So as far as we know, Goshen is planning to have its facility operating at the end of 2024. We are planning Our sites will be operating earlier or during the beginning of 'twenty five. So all the projects that we released for construction That are listed on our presentation will be supplied from Goshen facility in Mexico. I hope that once they will get the relevant approval and fill in building their facility in the U. S, the Future projects will be from the U.

Speaker 2

S. And will be entitled to an additional 10% ITC. But this is, as you said, it's in construction. So we don't have the facility yet there. But the current ones are not from there.

Speaker 8

So for 2024 and 2025, you wouldn't get the 10% adder for domestic batteries, but you could get it for energy communities. Is that the right way to think about the storage business?

Speaker 2

Yes, definitely.

Speaker 4

Got

Speaker 8

it. And lastly, are you folks testing or have any thoughts on some of the new Drilling techniques that are out there that might expand the addressable market for geothermal?

Speaker 2

We follow very closely all of these new drilling techniques. It is something that every few years Come back into play. People are looking into investing money into it. At this stage, We haven't seen the right technology that can expand significantly the geothermal market Without other limitations that they have, but we're definitely looking closely. We hope it will be one of them will be successful.

Speaker 2

We are in discussions obviously and meeting with all of them in the different conferences. And if any of them would be successful, we'll be very happy to utilize it in our product, In our future development projects as well as in our product segment.

Speaker 8

Perfect. Appreciate the thoughts. That's all I had.

Speaker 2

Thank you.

Operator

Your next question is from the line of Ryan Levine with Citi.

Speaker 6

Hey, everybody. A couple of more specific questions. In terms of the West Coast generation, in terms of the capacity Utilization factor, are you noticing any trends in terms of what that capacity factor is over time or what that will be on a go forward basis?

Speaker 2

As we said, we're operating our assets 20 fourseven. The main time that they have downtime is through The maintenance things that we have, and these are big Power plants, a lot of mechanical items. We do issue every year on our 10 ks the specific availability of each Region, Hebrew that came online will increase obviously The generation that we've been we will show this year, because it was off almost all of last year. But the specific facility, we don't see anything different this year compared to previous year.

Speaker 6

Okay. That's it for me today. Thank you.

Operator

At this time, there are no further questions. I will now hand the presentation back over to presenters for any closing remarks.

Speaker 2

Thank you all for joining us today. Q3 was a very strong quarter for us with growth in the revenue, the adjusted EBITDA and our earnings, and we look forward to deliver on our growth target as the year passes going to

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Earnings Conference Call
McDonald's Q3 2023
00:00 / 00:00