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Operator
Good morning, and welcome to the ORMOT Technologies second quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Rob Fink of FNK IR. Please go ahead.
Rob Fink
Thank you, Operator. Hosting the call today are Jerome Blachar, Chief Executive Officer, Ossie Ginsberg, Chief Financial Officer, Madar Lavi, Vice President of Corporate Finance and Investor Relations. Before we begin, 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, or 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. For discussion of such risks and uncertainties, please see risk factors as described in ORMAT Technologies' annual report on Form 10-K and quarterly reports on Form 10-Q that are filed with the SEC. In addition, during the call, the company will present non-GAAP financial measures such as adjusted EBITDA. Reconciliation is 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 would like to remind everyone that a slide presentation accompanying this call may be accessed on the company's website at ormont.com under the presentation link that's found on the investor relations tab. With all that said, I'd now like to turn the call over to Jerome Blachar. Jerome, the call is yours.
Jerome Blachar
Thank you, Rob, and good morning, everyone. Thank you for joining us today. This was a productive quarter for OMAP as we are progressing with our plans to grow our electricity and energy storage segments. The quarter was highlighted by execution of our organic and M&A growth strategies. We completed the expansion of the McGinnis Complex in Nevada with higher generating capacity than originally planned. and made significant progress ramping up generation of the Puna plant in Hawaii. Simultaneously, we closed a significant acquisition of two operating power plants and two other assets that should contribute to our future growth. In the energy storage segment, we continue with our BD effort to secure new interconnection and land positions to support our pipeline, and we recently released two storage assets for construction. The progress in our growth reinforces our belief that we can achieve our stated goals of increasing our mass combined geothermal, energy storage, and solar generating portfolio to more than 1.5 gigawatts by 2023. While we continue to view 2021 as a build-up year in which we lay additional groundwork to accelerate our growth, the increased backlog and sales pipeline, along with the regulatory tailwinds and significant portfolio growth, coming from our electricity and energy storage segment, support our target of an annual run rate of more than $500 million in adjusted EBITDA towards the end of 2022. I will turn the call over to Asi to review the financial results before I provide further updates on our operations and future plans. Asi?
Rob
Thank you, Doron. Let me start my review of the financial results on slide five. Total revenue for the second quarter were $146.4 million, down 16% from the prior year. The driver for the decrease was the product segment, which was impacted by low product backlog. Second quarter 2021 consolidated gross profit was $52 million, resulting in a gross margin of 35.4%, 200 basis points lower than in the second quarter of 2020. mainly driven by the reduction in the electricity segment. This quarter, we experienced mostly temporary issues related to the Olkaria, Steamboat, and Broly complexes. These issues reduced our electricity gross profit by approximately $8 million. For the six months, gross margin was 40.1%, similar to the same period last year. We delivered net income attributed to company stockholders of $13 million, 23 cents in the quarter, compared to $23 million or 45 cents per share for the same quarter last year. Our effective tax rate for the second quarter of 2021 was 22.6%, which is lower than the 33% effective tax rate from the second quarter of 2020, mainly due to the movement in the valuation allowances for each quarter. we now expect the annual effective tax rate to stand by approximately 33% for the full year 2021, assuming no material one-time impacts. Adjusted EBITDA decreased 13.6% to $84.5 million in the second quarter, impacted mainly by gross profit reduction and higher G&A expenses driven by increased legal costs. Moving to slide six, Bracking the revenue down, electricity segment revenues increased 4% to $134 million, supported by contributions from new added capacity at our steamboats and McGuinness Hill complexes, as well as Puna's resume operation. As Doron mentioned in the opening remark, this new added generation was offset by lower generation in Olkaria due to a combination of low resource performance that caused a capacity reduction and continued curtailment by our local customer, K-PLC. In addition, our steamboat complex had a mechanical issue that was resolved a few days later. And in Broly, we experienced a surface leak in one of the injection wells, which reduced generation. In the product segment, revenue declined 83% to $7.4 million, representing 5% of total revenue in the second quarter. The decline year-over-year is expected to continue throughout 2021 due to the lower backlog from the beginning of the year. Energy storage segment revenues increased nearly 124% year-over-year to $5.6 million in the second quarter, representing 4% of our total revenue for the quarter. The growth was mainly driven by revenues from the acquired Pomona energy storage assets and The contribution of our Valesito facility in California, which started commercial operation in April of 2021. Let's move to slide seven. Gross margin for the electricity segment for the quarter decreased year over year to 37.4%. This was a result of a higher cost related to the repair of the recovery of the Olkaria, Steamboat, and Broly complexes. In addition, in the second quarter last year, we did record a business interruption insurance recovery of $2.7 million related to Puna Complex compared to zero this year. In the product segment, gross margin was 20.1% in the second quarter compared to 20.6% in the same time last year. The energy storage segment reported again a positive gross margin compared to a negative gross margin in the second quarter last year. The improvement was primarily driven by the acquisition of the Pomona energy storage assets. Turning to slide eight. Adjusted EBITDA decreased 14% to $84.5 billion in the second quarter, impacted mainly by gross profit reduction and higher G&A expenses, driven by increased legal costs. The electricity segment generated 94% of the total adjusted EBITDA in the second quarter, and the product segment generated 4%. The storage segment reported adjusted EBITDA of $2 million, which represents 2% of the total adjusted EBITDA. Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide. On slide nine, our net debt as of June 30, 2021 was $1 billion and $40 million. Cash and cash equivalent and restricted cash and cash equivalent as of June 30 was approximately $330 million compared to $537 million as of year end. In addition, we had $46 million of marketable securities. Slide nine breaks down the use of cash for the six months and illustrates our ability to reinvest in the business service debt, and return capital to our shareholders in form of cash dividends, all from cash generated by our operation and our strong liquidity position. Our long-term debt as of June 30, 2021, was $1.4 billion, net of deferred financing costs, and its payment schedule is presented on slide 30 in the appendix. The average cost of debt was 4.9%. During July, we closed two new corporate loans, raising approximately $175 million, out of which $50 million are green bonds provided by HSBC banks. Funds were used to finance the Terrigen acquisition. On August 4, 2021, the Company Board of Directors declared approved and authorized payments of quarterly dividends of $0.12 per share pursuant to the Company's dividend policy. The dividend will be paid on September 1, 2021. to shareholders of record as of the close of business day on August 18, 2021. In addition, we expect to pay dividends of $0.20 per share in the next quarter. That concludes my financial overview. I would like to turn the call over to Doron to discuss some of the recent developments in our growth band for the next three years. Doron?
Jerome Blachar
Thank you, Asi. Turning to Slight Wealth for a look at our operating portfolio. Power generation in our power plants increased by approximately 2.4% compared to last year. In the second quarter, we see the continued contribution of Steamboat Hills that started operation in mid-2020, the incremental contribution of McGuinness Hills for approximately one month, and the generation from Puna that is operating still in partial capacity. These were partially offset by continuous curtailment and low performance of the field at our Volcaria power plant and other operational issues in the U.S. that I will elaborate shortly. We recently completed the expansion of our McGuinness Hill facility and are now providing electricity for approximately 6,000 homes while offsetting approximately 63,000 tons of CO2 emissions, delivering the highest level of efficiency and safety in the geothermal industry. With the addition of the acquired operating assets, we are running one gigawatt electricity portfolio, an increase of 83 megawatts in the second quarter. As noted on slide 13, Puna resumed operation in November 2020. We have ramped Puna generation to approximately 28 megawatts following the repair of a turbine, up from 20 megawatts in our last quarterly report. We expect to reach 30 megawatts by year-end. We have continued discussions with HELCO and the POC about our new PPA, and continue selling electricity under our existing PPA, which is in effect until the end of 2027. Turning to slide 14, let me discuss some of the challenges we experienced this quarter in a few of our opening assets, and I will start with a known one in Kenya. Our revenue in our carrier complex was down year over year as a result of continued cartelment and a reduction in the performance of the resource. the combination of which has resulted in approximately a reduction of generating capacity of 25 megabytes. This reduction in capacity reduced our quarterly gross margin by approximately $2.7 million. We are operating to restore the complex generating capacity through our continuous drilling campaign in Kenya, and are optimistic we will see an increase in production through and by the end of the year. We expect a similar quarterly reduction in revenues until capacity is fully restored. We also experienced a mechanical failure at our steamboat complex, resulting in revenue loss and increased expenses that reduced gross margin by approximately $2 million. The steamboat complex is now back to full operation. In the Brawley complex, we had a leak in one of the injection wells and a pump failure in one of the production wells that caused a reduction of the generating capacity to 3 megawatts. we are working to restore full production at Brawley. The second half of 2021 will be impacted by the lower performance of the Olkaria and Brawley power plants, and we have updated our annual guidance accordingly. Turning to slide 15. In July, we closed the accretive acquisition of detergent assets. This acquisition added a total net generating capacity of approximately 67.5 megawatts to our portfolio. In addition, we bought a greenfield development asset adjacent to Dixie Valley with high resource potential and an underutilized transmission line capable of handling between 3 to 400 megawatts on a 230 kilowatt electric, connecting Dixie Valley to California. With this acquisition, we now own 10 operating plants in Nevada, generating a total of 443 megawatts. The proximity of these plants to population centers in both Nevada and California is important. California remains at the forefront of driving the adoption of renewable energy, with supportive mandates and requirements already in place and more being considered. Utility companies in California are increasingly looking for affordable and reliable renewable energy. This dynamic makes the acquired transmission line increasingly important. Turning to slide 16 for an update on our backlog. While the results of our product segment continue to be impacted by the lower backlog at the beginning of the year, we are starting to see encouraging signs of recovery. We have seen clear signs of improvement in this business, including an expansion of our backlog, reinforcing our confidence that this is a short-term phenomenon. As of August 4, 2021, our product segment backlog increased significantly 59% by $22 million, to reach $59 million, compared to $37 million in early May this year. We signed a few contracts during the quarter, including a new contract with Star Energy Geothermal to supply products to a new 14-megawatt Salat geothermal power plant in Indonesia, and another contract to supply equipment to a project in Japan. Despite the recent improvements in this segment, We anticipate continued weakness in our product revenue during 2021 and have adjusted our annual guidance accordingly. Partly offsetting the weakness of the product segment has been a consistent improvement in our energy storage statement. As I mentioned earlier, and as discussed at slide 17, this business continues to become a more important part of our consolidated results. This quarter, our projects in both the East Coast and Texas enjoyed higher revenues due to higher market prices. The storage segment again generated positive EBITDA and released two new projects for construction in Ohio and California. Moving to slide 18, I previously mentioned the supported mandates being implemented in California and the increasing demand for affordable and reliable renewable energy in this state. One example is the recent ruling by the CPUC requiring electrical load service entities, LSEs, to procure 11.5 GW of new clean electricity by 2026. One GW of this procurement must deliver firm power with an 80% capacity factor, produce zero on-site emissions, and be weather independent. No form of renewable energy generation is more poised to fill this need than geothermal energy. With a 95% capacity factor and a firm and flexible generation, geothermal energy is not only an excellent complement to intermittent resources, but a natural replacement for baseload fuel and nuclear generation. California efforts to achieve its goal of 100% carbon-free electricity by 2045 through massive deployment of renewable energy and energy storage resources enabled us to sign new contracts for geothermal, and we did this quarter with CPA for our 14-megawatt Heber South geothermal power plant in the Imperial Valley, California. We also issued our first-ever request for bids for the 26-megawatt Heber II and actively look for opportunities for our storage pipeline. Moving to slide 20 and 21. As we have communicated, 2021 will be a significant build-up year, comprised mainly of geothermal projects. This build-up supports our robust growth plans, which is expected to increase our total portfolio by almost 50% by the end of 2023. Our medium-term goal in the electricity segment is to add an additional 240 to 260 MW by year-end 2023, above the 80 megawatts added since the beginning of 2021. And in our rapidly growing energy storage portfolio, we plan to enhance our growth and to increase our portfolio by 200 to 300 megawatts by year-end 2022. Achieving this growth target is expected to help us reach an annual run rate of more than $500 million in adjusted EBITDA towards the end of 2022 that we expect to continue to grow as we move forward with our plans in 2023 and onwards. Slide 22 displays 13 projects underway that comprise the majority of our 2023 growth goals. While we are experiencing some delays in the permitting process, we are still on track to meet our growth targets for the end of 2023. Moving to slides 23 and 24. The second layer of our growth plan comes from the energy storage segment. Slide 23 demonstrates the energy storage facilities we have announced for started construction. We released two new projects for construction, Bowling Green and Pomona II. The other projects, including our growth plans, are in different stages of development, and their release will require site control and execution of an interconnection agreement, all obviously subject to economic justification. As you can see in slide 24, our energy storage pipeline stands at 2 gigawatts and currently includes 36 names of potential projects, mainly in Texas, New Jersey, and California. Moving to slide 25, the significant growth in both our electricity and storage segment will require robust capital investment over the next couple of years. To fund this growth, we have over $750 million of cash and available lines of credit. Our total expected capital spent for the remainder of 2021 includes approximately $280 million for capital expenditures as detailed on slide 31 in the appendix. Overall, ORMAC is well positioned with excellent liquidity and ample access to additional capital to fund future initiatives. Please turn to slide 26 for a discussion of our 2021 guidance, which has been revised to account for our recent acquisition and other developments previously discussed. We expect total revenues between $650 million and $685 million, with electricity segment revenues between $585 million and $595 million. We expect product savings revenues between $400 million and $60 million. Guidance for energy storage revenue are expected to be between $25 to $30 million. We expect adjusted EBITDA to be between $400 and $410 million. We expect annual adjusted EBITDA attributable to minority interest to be approximately $31 million. As noted in previous quarters, Adjusted EBITDA guidance for 2021 includes insurance proceeds of approximately $10 million. This concludes our prepared remarks. Now, I'd like to open the call for questions. Operator, if you please.
Operator
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. And at this time, we will pause momentarily to assemble our roster. And our first question will come from Noah Kay of Oppenheimer. Please go ahead.
Noah Kay
Good morning. Thanks for taking the questions. I guess to start, it looks like you raised your 2023 goal geothermal portfolio target size for the TerraGen acquisitions that you just completed. And please correct me if I'm wrong. So your organic growth targets kind of remain the same there. Should we think about that roughly 250 megawatts of further additions as just being an organic target? In other words, is M&A at any part of that or would further M&A be upside?
Jerome Blachar
I know. I think for the question, the growth targets are organic. So, TerraGen was on top of that. And similarly, if we have additional acquisitions, they will be on top of that.
Noah Kay
Okay. Can you talk a little bit about plans for using that underutilized transmission line What in the initial planning stages seems most likely, you know, a geothermal expansion and, you know, a new, you know, solar facility? What would make the most sense and when might that transpire?
Rob
Good morning. This is Asif. So basically we have two options. The first option is to continue and develop more assets in Nevada, like we are planning to, and to add them to and move more – electricity to California with this line. Although, as we mentioned during our calls before, there is a bottleneck in control in California that we have to take into consideration. The second option is to allow third parties to use this line while keeping our capacity to ourselves. And that's something we're also looking into, either doing it by offering capacity to others or by joint venturing the assets to third party. And I would say this is a very good asset, especially knowing the fact that the PUC now is requiring the utilities in California to increase the amount of renewable and baseload renewable in California. And that's why we think there will be a lot of demand over time. All of it, of course, is subject to permits and the ability to either a increase the capacity of the bottleneck in the control area or to bypass it by using third-party T-lines.
Noah Kay
Okay. Thanks, Asi. That's helpful. The next question is really around operational focus. You know, I think what we're trying to understand is, you know, are there any common threads to some of the issues that you called out here specifically? You know, the service leak at Brawley, the transformer issue at Steamboat. You know, you talked with us before about Olkaria. You mentioned permitting delays for some of the new project. It does look like the timing has been pushed out a little bit for a couple of those. Is there any kind of common thread? You know, because certainly we've seen a lot of companies struggle with everything from labor availability to logistics issues. I just want to understand, you know, if there's a common thread for you right now and, you you know, what your pain points are and how you're working to overcome those?
Jerome Blachar
No, the simple answer is no. We don't see any similar trend between all of these. And, you know, you look about, you know, different states, different countries, different technologies somewhat. So I think each one has its own unique situation. Geothermal acid is unique. an asset that we've been operating for many years and needs to be maintained and operated. This quarter, some of the items happened together, but usually they don't happen in one, but there's no common thread to all of them. These are different items in different locations. And the only one that maybe does have some... Related is the last one on the permitting that you said that is causing delays in projects, and that's related to COVID, you know, the fact that the BLM and the other regulators, not all of them are working from the office, so not working too much. So that's the only, I think, common denominator across projects is the permitting issue.
Noah Kay
Okay, thanks. And I think last quarter you touched briefly on the independent board committee review, you know, and some of the dialogue you were having with some of the regulators. Can you just give us an update there?
Jerome Blachar
The only thing, you know, I can update, and I think that's quite common, is that we continue to cooperate with the regulators. We don't have any time frame for this investigation as is customary, and we can't elaborate immediately. on it until they finish what they're doing.
Noah Kay
You mean what they need, the committee, or what the regulators are doing, I apologize.
Jerome Blachar
Both of them. The one other thing I would say is that And you probably know this is quite common, you know, the fact that you cannot comment until they finish, but you should not infer anything from this anyway.
spk02
Okay?
Noah Kay
Yep. Okay. Thank you very much. Appreciate it. Thank you.
Operator
And our next question will come from Julian Dumoulin-Smith with Bank of America and Securities.
Julian Dumoulin - Smith
Please go ahead. Hey, good morning, team, or good afternoon as it may be. Thank you for the opportunity. I wanted to start first off on California here and just talk about, one, the repricing opportunity. Admittedly, some of your peers have pointed to some of the sharpest revisions upwards in pricing in your geographies in, frankly, a couple decades. So I'm curious, perhaps not necessarily where the status of those negotiations are to the extent to which that you have some repricing opportunities, but maybe speak to some of the near-dated contract expirations and or any ability to blend and extend, if you will, to preemptively address some of these contract expirations in the future, as well as, if you don't mind, some of the opportunities derived out of the latest transmission line acquisition in Nevada and associated geothermal expansion opportunities therein.
Jerome Blachar
Okay, thank you. Well, I can definitely confirm what you said. We see an uplift in pricing. We see a much greater demand for renewable energy in California, and obviously that leaks to other states surrounding California. This is something that happened over the last few weeks, actually, and got much more intense with the CPUC decision. and requirements that I mentioned before. We are in various discussions on various PPAs, and we actually feel much stronger today in the discussion. I also mentioned in the call the fact that we issued a request for a bid. Basically, we are offering our HBR to Complex, to Utilities, and CCAs to bid for it. The market is definitely, after quite a long time, changing to our benefits. And regarding the transmission line, I think as Ati mentioned, it's a unique asset connecting Nevada to California. The current situation is that it gets to the control substation, which is jammed. And we are discussing and we've been approached by various transmission companies to see how we can combine forces in order to utilize this line and transfer electricity from Nevada to wherever is required.
Julian Dumoulin - Smith
Got it. And maybe on balance, as you look at the pricing across your portfolio, whether it's the Huber Complex or Steamboat or Brady, I mean, do you see a net increase in pricing here based on where the current market is over time? I know that this may be somewhat transient, and obviously you can't say it until the contract is signed, but just understanding on repricing as you think about over time here, and obviously it's not tomorrow, but any comments therein?
Jerome Blachar
It's very hard because it's site-specific. I would say some sites might enjoy a higher pricing, others lower, you know. Prices are still not as high as they were in 2010 and 2012, you know, when we signed Don Campbell I for $99. And that price is not coming back, I think. But it's very, very much site-specific. And also, it depends on the time that when it started negotiation and agreed on the terms of the PPA as well.
Julian Dumoulin - Smith
Got it. Excellent. And if I can pivot back to the focus abroad in Kenya, and some of their cost-cutting efforts here. Can you comment on the status of that and to what extent, and if you are engaged in conversations directly with them around curtailment relief and or any other potential relief here? And perhaps, shall we say, any other updates on the investigation more broadly? But I suppose specifically here on the Kenyan side of just their cost-cutting efforts.
Jerome Blachar
Okay. We can start with the basic, you know, the basic that we have a signed contract with the Kenyan KPLC, which is the government-owned utility company. The project is financed by DSC, previously OPIC, a U.S. government bank. And that's, you know, the basic. We have seen in the press and in other places discussion about trying to reduce prices. There have been committees that... in Kenya to look at this. And I think as you mentioned, you know, ORMAT is very well looking for always to win-win situation with its customers. We're in Kenya for the long term. We've been operating in Kenya for more than 20 years and we expect to operate there longer. And we have been discussing with some of these committees that were set and whatever we will find will be a win-win situation for OMAD and for Kenya because we do see us as a long-term player there supporting the renewable energy and in general the energy in Kenya and there's always room to make agreements for both parties although at this stage some discussions are there but it's very very early discussions
Julian Dumoulin - Smith
Right. Do you mind clarifying that on the timeline? I know that the Canyon Gazette, I suppose it was supposed to be something of a six month process, but as you say, it's early still and it's been ongoing for a bit. Any, any broad sense of timeline? Is it a this year kind of resolution you think?
Jerome Blachar
No, we, we don't have any sense of any timelines from them. You know, obviously we are in no rush. Uh, so there's no way any sense of timeline.
spk02
Uh,
Jerome Blachar
As I said, we had a very, very early general discussion that they started with us as well as with other IPPs, not targeted at OMAD, but a general discussion last month.
Julian Dumoulin - Smith
Got it. And sorry, just the last one here. I apologize. With respect to your storage efforts here, there's just been availability questions as people have been scaling their efforts. pricing impacts, et cetera. Any comments therein on your specific efforts underway in terms of just being able to execute on time and on budget? Any material deviations?
Jerome Blachar
No. Our plans that are on the presentation are on time. We have all the required or expect all the required batteries. We have a long-term agreement with battery suppliers, with contractors, commitments on delivery and pricing. So as long as they stand with the contract, you know, we should be on time with all the projects as we announce them. Excellent.
Julian Dumoulin - Smith
All right. Well, I will leave it there. Thank you all for your patience today. Thank you.
Operator
And again, if you would like to ask a question, please press star then one. Our next question comes from Jeff Osborne with Cowan & Company. Please go ahead.
Jeff Osborne
Yeah, good afternoon. Just a couple on my end. I was wondering if you could give us a walk on the old guidance to the new guidance and some of the moving parts. So you've obviously had the acquisition, and then you have the underperformance at the three sites. I was wondering if you could sort of bridge the gap of what the acquisition is adding relative to the deficiencies of the three locations.
Jerome Blachar
Okay, look, so basically there's two items that worked through the guidance. On one hand, the addition of detergent in the announcement of the TerraGen closing, we said that in 2022 we expect $35 million of EBITDA. Obviously, we don't have the full six months, and we need to upgrade a bit the system. So that's, you know, the positive. On the negative side, we have the issues that we mentioned in Kenya, mainly in Brawley. and also the GAA and the legal expenses that we had significantly higher this quarter.
Jeff Osborne
So is it a safe assumption without the acquisition, but with the legal expenses in the Brawley and Olkaria facility, that guidance would have been down, or no?
Rob
If you don't take into consideration the changes in Brawley, Olkaria, and Stimmo, the projection would not have come down, besides the fact that we lower by 10 million the guidance of the product segment. But on the electricity segment, all of the, I would say, what was offsetting Terragen is the issues that we had. Now, as we said on the script, steamboat is already back to full capacity, and we do expect by the end of the year all carrier to go back to normal.
Jeff Osborne
Got it. And just a couple of follow-ups on Julian's question. So on Kenya, can you touch on the payment capability or the terms? Are they becoming current on their past few payments?
Rob
As I said in the last few quarters, KPLC has been very good on making ongoing payments. They are actually making all the ongoing payments, but they are not making a lot of progress. in paying the due payments as of the end of the year. But I would say in general, since July of 2020, they've been making all the payments.
Jeff Osborne
That's good to hear. And then can you touch on what the M&A pipeline looks like? Do you anticipate any other sizable acquisitions similar to TerraGen in the coming quarter or two or not?
Jerome Blachar
Honestly, we cannot comment on any specific M&A. I can say that we are looking at various M&A opportunities, mainly in the energy storage and storage for solar acquisition. That's, I think, the most we can say at this time.
Jeff Osborne
Got it. And the last question was just following up again on Julian's question around pricing. Is there any contracts that are up for renewal? in 2022 of existing facilities other than the Habertooth RFP that you have outstanding for the September response?
Jerome Blachar
I think the first one is in 23, not in 22. Got it. Thank you. That's all I have. Thank you.
Operator
And our next question comes from David Loesch with Atlas. Please go ahead.
David Loesch
Hi, David here from Atlas Impact Partners. Just a quick question, if I may, just on Hawaii and your comment about the new PPA being suspended. Can you sort of talk me through what does that mean in terms of specific financial implications for you now and in 2022? Sure.
Jerome Blachar
The new PPA that the PUC has suspended included refurbishment of the existing facility that would have taken us about two years. And following that, we would have had an increase of the PPA and generation to about 46 megawatts. We have a PPA today for 38 megawatts. until the end of 27. So specifically for 2022 and 2023, this doesn't have any impact. The suspension of the PPA might have a delay of a year or something once it is approved. But again, the real impact is about 8 megawatts of additional PPA.
Rob
If I may add, on the other side, David, And the current prices in Pune are actually higher than the new PPA. You know, oil prices are somewhere between 68 to 70 bucks right now. And therefore, what we are actually getting as revenue is more than what we would have made otherwise in 2021 and 2022. So at this point, it has a positive impact on us. And that's why we think that there is a very good reason for our customer over there to try and push this decision because it will lower the average price of the PPA. And what we will get in return is more capacity on one hand and many, many more years of extension of the PPA.
David Loesch
And sorry, could you just clarify again, what is the problem that the PUC has with that PPA?
Jerome Blachar
The POC doesn't have a problem with the PPA. They've actually reached out to the DLNR and the local county and asking them or required them to see if we need to do an environmental impact study or not. So the power plant is operating for many years. The POC raised the question. We have been discussing with the DLNR and the county and the We do not think there is a need for such a study. But we also don't think this study will change the decision of the POC because there is a geothermal power plant operating over there. And the new power plant will be a newer power plant, a smaller size facility, less emission and more efficient. So actually, from the environmental perspective, it's a positive, but still the POC... suspended it and asked whether or not we need to do an environmental impact study.
David Loesch
Okay, gotcha. Can I just, thank you, that's clear. Can I just come back to the, I guess, the sort of technical issues at Steamboat Raleigh? Would you characterize these as sort of, you know, that you're to some extent just unlucky that these have both happened at the same time? Or is this something that you think is sort of, we should think of as sort of recurring on a regular basis, you know, how should we sort of think about this as, as investors? Cause it's, I mean, it's, you know, 8 million effectively means that you're having to, you're offsetting that with, with an acquisition. Um, but you know, it is, it is a bit of a hit. I'm just trying to understand how do you, how do you sort of think about, you know, what's happened and, and how should we sort of think about the potential frequency of that?
Jerome Blachar
No, this is, uh, the fact that they were combined in one quarter is unlucky, uh, I can tell you that I'm here for eight years, and I think we had only one quarter, I don't know in which year, in 17 or something, that we had a similar item, that we had a few mechanical issues, but this is very unlucky that they occurred in the same quarter. And they occurred at all, because we do try to maintain the power plants to avoid any issues like that that might happen, but having both of them in the same quarter is unlucky.
David Loesch
Yeah, okay. Okay, thank you.
Operator
Thank you, David. And our next question comes from Ella Freed with BankLumi. Please go ahead.
David
Hello and good afternoon. Well, I have a couple of questions left. The first one is a broader question or request to discuss, if you could, the more... broader look at the geothermal energy and the commercial aspect of the product segment. As the return on assets in the more mainstream sectors like wind and solar has decreased in many countries, do you see the return of the product sector to the pre-corona levels like a few years ago, or you think it will be a very slow increase if to the levels that are closer to the current levels, or you see the demand coming actually for the energy in general and for the product sector specifically?
Jerome Blachar
Thank you, Ella. So we see a move to more renewable everywhere. We see a move to more geothermal everywhere. Over the last few months, we've seen actually a recovery on the product segment, on more projects being tendered, and more developers globally trying to develop products New geothermal power plants, our backlog went up this last quarter, but also this quarter, and we hope that this trend will continue when we look at the pipeline that we have and the contracts that we are tendering and negotiating today. On the geothermal in general, I think we see this is an outcome of the basic demand for geothermal, Any country outside of the U.S. that has geothermal potential wants to develop geothermal. This is the only baseload renewable energy. And in the U.S., we see increased demand with the CPUC requirements of 11.5 gigawatts of renewable energy, and out of that, 1 gigawatt of 80% availability, which basically is geothermal. Only?
David
Only.
Jerome Blachar
So we see this demand increasing. We have been approached following, I think, a day after this CPUC ruling, we've been approached by some of the CPAs looking to sign PPAs. So we see a greater demand for geothermal. We don't see a change in the returns globally or in the U.S. in geothermal. and we are actually looking for the new Biden Administration Act that will continue to support the renewable energy, including geothermal and the energy storage market.
David
So if we look at the levels of over $100 million, $120 million a year, Is it feasibly possible in the next, let's say, two, three years, or you think it will be slower demand?
Jerome Blachar
Look, I think you need to follow the backlog. If the backlog grows, I would expect the revenue of the product segment to grow. I don't know to say now that it will reach 200 or anything like that. We give guidance. one year ahead, but the backlog increase I think is a good sign that we'll support revenue as we go into future years.
David
Okay, thank you. And the next question is regarding Japan. If I'm not mistaken, that's the first time actually you mentioned Japan, and I remember that you had a historical agreement with OREC, about, I don't know if it's still existent, about having their priority actually in the Japanese territory. So if you could say a few words about this Japanese project that you mentioned.
Jerome Blachar
The project in Japan is not connected to Oryx. It's a different company. It's not a large project. Most of the projects in Japan that we see are smaller ones. We've done a few in the past. The agreement with ORIS is still in effect, so we do have priority. But at this stage, we don't have any soon-to-go projects. If they will have a project, I assume we will have priority, but hopefully we'll be able to do it.
David
I see. So it's kind of stand-alone at this point. Okay, and the financial question also quite general, but if you could relate about the development of net debt during... You spoke about the resources that the company has, but the net debt, can we assume that there will be an increase of... let's say, 15% in the next two years or kind of in this area because when I just put the numbers together, I expect, when I'm modeling the numbers together, there seems to be an increase of about at least $200,000 If I'm not mistaken.
Rob
So, Ella, this is Asya. I will answer. As of the end of the quarter, it was roughly $1 billion. We do expect, as you know, we closed the transaction in July of the TerraGen assets for a total of $380 billion. So that will immediately increase our net debt to roughly $1.4 billion. And then if you look from now until the end of the year, we did give guidance of roughly $275 million of capex. Net of our free cash flow, this should result in additional increase in net debt of roughly $7,200 million. When you take it all to consideration, our net debt towards the end of the year will be closer to $1.5 billion. I will say, though, that at that point, we already invested the majority amount to, if you look at the page of the assets that we are building, Most of them will start during 2022, but the majority of the amounts for CD4, for Dixie Meadow, for North Valley was already invested. And that's why when you look at the net debt to EBITDA, our EBITDA at that point will be closer to the $500 million. And that will put us back to roughly three times the debt to EBITDA.
David
Okay. I see. And thank you very much for the clear answer. And thank you for taking my questions.
Jerome Blachar
Thank you. Thank you.
Operator
And our next question is a follow-up from Julian Dumoulin-Smith of Bank of America Securities. Please go ahead.
Julian Dumoulin - Smith
Sorry, guys, to have so many today, but I just want to go back to this because at the top of the call, perhaps, you all talked about your organic targets here, the year-end 22 run rate, and you talked about Terrigen being incremental to that target. I just want to make sure we're crystal clear about that, right, because you've had a number of puts and pulls, whether it's the Hawaii PPA, the product segment, et cetera. I just want to be very clear. that despite the use of your balance sheet, that Terragent transaction is indeed incremental to that year-end target you all approved or that run rate target you all put out there recently?
Jerome Blachar
Look, the number that we said last quarter was a little bit approximately $500 million. Today we believe it will be more than $500 million. We're saying more than $500 million, including Terragent, Some of the delays in the permitting have impacted 2022 potential EBITDA, full planned EBITDA. So we do expect to be above 500. But at this time, we cannot say that the full impact of Terrigen will be on top of the 500. Okay. All right.
Julian Dumoulin - Smith
Excellent. Yeah, I just wanted to make sure I heard you right there. And then, sorry to clarify this, the transmission investment you talked about earlier, you all have this transmission interconnect already, right? You talked about higher interconnect costs, but you all already own this transmission line as part of the transaction. That's a valuable piece here, right? I just want to clarify this in terms of putting that to work in timeline here.
Jerome Blachar
Yes, that's correct. We own the transmission line. What you said, this is an underutilized asset because of the control substation and today the only generation that can be wheeled over the transmission line is the Dixie output of 60 megawatt PPA. And we are working with other transmission companies that have approached us to see how we can fully utilize this line and either upgrading the control substation or bypassing it to other substations and connecting Nevada to California with an additional line an additional capacity. So this is an additional asset that is not utilized and in the next few years will be utilized.
Julian Dumoulin - Smith
Yeah, just to clarify that, it's the transmission interconnect into the CAISO that's the incremental cost because you already have the transmission line itself.
Rob
Yes, yes. The added capacity above the 60 mega that we already connected to CAISO. Julian? Hello?
Julian Dumoulin - Smith
Did you hear me there?
Rob
We didn't hear you, Julian.
Julian Dumoulin - Smith
Oh, I apologize. Yeah, it was just with respect that once you resolve the transmission interconnect upgrade costs into California, not the fact that you own a transition line, then that will unlock your ability to scale up the capacity on-site. And I suppose just to summarize that, the expectation that you will be participating in this upcoming California RFP
Rob
I will say that there is also a way to bypass control to utilizing third-party T-lines, and that's why I will not say that for sure we will go and try and increase the capacity of the control system. So I think this is to be discussed in future calls.
Julian Dumoulin - Smith
Excellent. Okay, well, best of luck. Thank you again for all the time.
Rob Fink
Thank you.
Operator
And this concludes our question and answer session. I would like to turn the conference back over to Duran Bashar for any closing remarks.
Jerome Blachar
Thank you. Thank you, everyone. This was, as you've seen, a very productive quarter. We are continually focusing on increasing and investing in our portfolio in the geothermal and the energy storage in order to grow the business and to meet the enhanced demand that we see today in California and outside of the U.S. Thank you.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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