Form 10-Q for US GEOTHERMAL INC
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve a number of risks and uncertainties. We caution readers that
any forward-looking statement is not a guarantee of future performance and that
actual results could differ materially from those contained in the
forward-looking statement. These statements are based on current expectations of
future events. You can find many of these statements by looking for words like
"believes," "expects," "anticipates," "intend," "estimates," "may," "should,"
"will," "could," "plan," "predict," "potential," or similar expressions in this
document or in documents incorporated by reference in this document. Examples of
these forward-looking statements include, but are not limited to:
our business and growth strategies;
our future results of operations;
anticipated trends in our business;
the capacity and utilization of our geothermal resources;
our ability to successfully and economically explore for and develop
our exploration and development prospects, projects and programs, including
construction of new projects and expansion of existing projects;
availability and costs of drilling rigs and field services;
our liquidity and ability to finance our exploration and development
our working capital requirements and availability;
our illustrative plant economics;
market conditions in the geothermal energy industry; and
the impact of environmental and other governmental regulation.
These forward-looking statements are based on the current beliefs and
expectations of our management and are subject to significant risks and
uncertainties. If underlying assumptions prove inaccurate or unknown risks or
uncertainties materialize, actual results may differ materially from current
expectations and projections. The following factors, among others, could cause
actual results to differ from those set forth in the forward-looking statements:
the failure to obtain sufficient capital resources to fund our operations;
unsuccessful construction and expansion activities, including delays or
incorrect estimates of required capital expenditures;
increases in the cost of drilling and completion, or other costs of
production and operations;
the enforceability of the power purchase agreements for our projects;
impact of environmental and other governmental regulation, including delays
in obtaining permits;
hazardous and risky operations relating to the development of geothermal
our ability to successfully identify and integrate acquisitions;
our dependence on key personnel;
the potential for claims arising from geothermal plant operations;
general competitive conditions within the geothermal energy industry; and
financial market conditions.
All subsequent written or oral forward-looking statements attributable to us or
any person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. We do not
undertake any obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this document or to reflect the occurrence of unanticipated events, except as
may be required under applicable U.S. securities law. If we do update one or
more forward-looking statements, no inference should be drawn that we will make
additional updates with respect to those or other forward-looking statements.
The U.S. dollar is the Company's functional currency; however some transactions
involved the Canadian dollar. All references to "dollars" or "$" are to United
States dollars and all references to $ CDN are to Canadian dollars.
General Background and Discussion
The following discussion should be read in conjunction with our unaudited
consolidated financial statements for the period ended June 30, 2010 and notes
thereto included in this report.
U.S. Geothermal Inc. ("the Company") is a Delaware corporation. The Company's
common stock trades on the Toronto Stock Exchange under the symbol "GTH" and on
the NYSE Amex LLC under the trade symbol "HTM."
For the quarter year ended June 30, 2010, the Company was focused on:
1) Completing the temperature gradient drilling program at the Neal Hot
2) planning drilling and field development activities at Neal Hot Springs;
3) planning and permitting for drilling at the Gerlach Joint Venture;
4) negotiating a fully financed EPC and a PPA for the San Emidio Project;
5) optimizing the operation of the San Emidio power plant in Nevada, and
planning for start of construction on the Phase I repower of the
existing well field;
6) optimizing the operation of the well field at the Raft River project in
Idaho ("Raft River Unit I"; and
7) the evaluation of potential new geothermal project acquisitions.
The following is a list of projects that are in operation, under development or
under exploration. Projects in operation have producing geothermal power plants.
Projects under development have at least a geothermal resource discovery or may
have wells in place, but require the drilling of new or additional production
and injection wells in order to supply enough geothermal fluid sufficient to
operate a commercial power plant. Projects under exploration do not have a
geothermal resource discovery occurrence yet, but have significant thermal and
other physical evidence that warrants the expenditure of capital in search of
the discovery of a geothermal resource. Due to inflation and marketplace
increases in the costs of labor and construction materials, previous estimates
of property development costs may be low.
Projects in Operation
Project Location Ownership Capacity (MW)(1) Power Expiration
Raft River Idaho Power
(Unit I) Idaho JV(2) 13.0 Company 2032
San Emidio Sierra
Nevada 100% 3.6 Power Corp. 2017
(1) Based on the designed annual average net output. The actual output of the
Raft River Unit I plant currently varies between 7.1 and 10.0 megawatts and
output of the Empire plant is approximately 2.6 megawatts.
(2) As part of the financing package for Unit I of the Raft River project, we
have contributed $16.5 million in cash and approximately $1.5 million in
property to Raft River Energy I LLC, the Unit I project joint venture
company. Raft River I Holdings, LLC, a subsidiary of The Goldman Sachs
Group, contributed $34 million to finance the construction of the project.
Additional investment may be required for Unit I to operate at design
Projects Under Development
Target Projected Capital
Development Commercial Required Anticipated
Project Location Ownership (MW) Operation Date ($million) Power
(Repower) Nevada 100% 5.4 1st Quarter 2012 $30 NV Energy
(Expansion) Nevada 100% 26 3rd Quarter 2012 $127 TBD
Springs 1 Oregon 100% 22 2ndQuarter 2012 $119 Idaho Power
Springs II Oregon 100% 28 3rd Quarter 2013 $154 TBD
I (Repower) Idaho JV 3 3rd Quarter 2010 $7 Idaho Power
(Unit II) Eugene Water
Idaho 100% 26 4th Quarter 2013 $134 and Electric
Raft River Board
(Unit III) Idaho 100% 32 2nd Quarter 2015 $166 TBD
Project Location Ownership Target Development (MW)
Gerlach Nevada 60% To be determined
Granite Creek Nevada 100% To be determined
El Ceibillo Guatemala, S.A. 100% To be determined
Property Size Temperature Potential
Property (square miles) (F) (MW) Depth (Ft) Technology
Raft River 10.8(1) 275-302 (2) 127.0(1) 4,500-6,000 Binary
San Emidio 35.8 289-305 (2) 68.0(4) 1,500-2,000 Binary
Neal Hot Springs 9.6 311-347 (3) 50.0(5) 2,500-3,000 Binary
Gerlach 5.6 338-352 (3) 18.0 TBD Binary
Granite Creek 8.5 TBD 25.0(6) TBD Binary
El Ciebillo 38.6 410-446 (3) TBD TBD Steam
(1) Geothermex Inc.'s assessment of 94 MW was based on 6.0 square miles. The
Company acquired additional acreage. The resource estimate of 127.0 MW is an
(2) Actual production temperatures for existing wells.
(3) Probable reservoir temperature as measured with a geothermometer.
(4) Black Mountain Technology Resource estimate with respect to 49.0 MW,
remainder is an internal estimate.
(5) Geothermal Science, Inc. resource estimate with respect to 22.0 MW,
remainder is an internal estimate.
(6) Internal estimate.
Raft River Update
Raft River Energy Unit I is located in Idaho and has a 13 megawatt geothermal
power plant in operation.
Raft River Unit I operated through the first fiscal quarter at 94.5%
availability which includes 4.2 days for the annual scheduled outage. Raft River
generated an average of 8.7 net megawatts during the three month period ended
June 30, 2010. The reduction in output for the period compared to planned
generation was due to the loss of temperature from production well RRG-7 and the
shutdown of production well RRG-2.
In early January 2009, production well RRG-7 underwent a temperature decline
that has reduced the inlet fluid temperature to the power plant by approximately
4 degrees Fahrenheit. At the same time of the temperature change, fluid flow
increased. Power generation has been reduced by an estimated 1 megawatt due to
the lower temperature fluid. It was determined that the cement in a lap joint
had failed and a mechanical packer was installed to reduce the cold water
inflow, but was unsuccessful. A remediation program has been planned for a cost
of $813,300 that will "squeeze" cement into the lap joint and plug off the cold
water flow to return the well temperature and increase power plant generation.
Production well RRG-2 was shut down on June 10, 2010 due to a reduction in flow
and increased motor load which indicates an impending pump failure. A repair
program, which includes a well stimulation procedure, has been planned for a
cost of $512,750.
Until the repairs are completed, the plant output will continue at about 7.8
megawatts. Plans for repair of both RRG-7 and RRG-2 are under discussion with
Raft River I Holdings, the joint venture partner for Raft River Unit I.
Raft River Operating Agreement
We hold a 50% interest in Raft River Energy I LLC, which owns Raft River Unit I
("Unit I"). Construction of Unit I required substantial capital, and partnering
with a co-venturer allowed us to share the risks of ownership. The joint venture
has also allowed the project to take advantage of production tax credits which
would not otherwise have been available to us. When Unit I operates at full
capacity of 13 megawatts, we estimate we will receive cash payments totaling
approximately $1.6 million for the first four years of its operations. While
Unit I generates at less than full capacity, our annual cash payments from the
Raft River I project will be lower. If insufficient cash is generated to satisfy
all joint venture obligations, the management fees will be deferred. See Note 5
"Investment in Subsidiaries" in the financial statements for detail of cash
payments from RREI.
The Company's interests in the RREI as defined in the partnership agreements are
summarized as follows:
Years 1 - 4 Years 5 - 10 Years 11 - 20 Years 20 - 25
RECs 70% (1)
GAAP Income 1% (2) 49% 80%
Cash Flow Lease Payments, O&M 100%
Services & Royalties
Distributions Guaranteed 1% (3) 49% 80%
Tax Benefits 1% (2) 49% 80%
(1) U.S. Geothermal allocates 70% of income and receives 70% of available
cash from RECs sold to third- parties. After year 10, REC income is
shared with Idaho Power Co. For additional details, see U.S.
Geothermal's Form 10-Q filed on August 10, 2009 (Exhibit 10.36).
(2) Flip to next tier occurs after the later of 10 years or Raft River I
Holdings' target IRR is achieved.
(3) Flip to next tier occurs after Raft River I Holdings' target IRR is
Neal Hot Springs Update
Neal Hot Springs is a promising geothermal resource located in Eastern Oregon.
On February 26, 2009 U.S. Geothermal submitted an application for the Neal Hot
Springs project to the DOE's Energy Efficiency, Renewable Energy and Advanced
Transmission and Distribution Solicitation loan guarantee program under Title
XVII of the Energy Policy Act of 2005. The Company was notified that its project
application is complete, the power plant technology choice qualifies as new or
improved under the program, and the project has been selected to proceed in the
project loan process. Although we have not yet received approval, the DOE
guaranteed loan is expected to provide up to 75% of the $120 million estimated
capital cost of Stage I up to a maximum loan amount of $102.2 million. The
capital cost has increased to $120 million from prior estimates of $106 million
due to costs of labor, updated vendor pricing and construction materials,
project loan costs and contingencies. Detailed design of a binary cycle power
plant utilizing significantly improved technology is currently in progress with
construction expected to begin in mid 2010. The new plant, designed to deliver
approximately 22 MW of power net to the grid is scheduled to begin commercial
operations in early 2012. The DOE guaranteed loan is anticipated to be a
combined construction and term loan and provide the project with a low cost
annual interest rate. We expect that we will be required to drill up to 8
additional wells as a condition precedent to drawing on the DOE guaranteed loan,
if it is approved.
The new plant, designed to deliver approximately 22 MWs of power net to the grid
is scheduled to begin commercial operations in early 2012. The DOE loan is
anticipated to be a combined construction and term loan and provide the project
with a low cost annual interest rate. We expect that we will be required to
drill up to 8 wells as a condition precedent to drawing on the DOE loan, if it
An infill geophysical program was carried out to increase the density of data to
highlight suspected geologic targets and structures. Applications for four
additional exploration wells to further delineate the geothermal resource with
production and injection targets were approved by the state of Oregon on
September 11, 2009 and drilling of the second production well, NHS-5, began on
September 18, 2009. October 15, 2009, the Company successfully completed well
NHS-5, the second full size production well at the Neal Hot Springs project
located in eastern Oregon. NHS-5 encountered several lost circulation zones
within the targeted horizon and intercepted a large aperture fracture at 2,796
feet resulting in a total loss of circulation. The well was completed to a depth
of 2,896 feet. An initial 16 hour flow test completed using air lift produced
fluid at a rate of 1,500 gallons per minute and resulted in a down hole flowing
temperature of 286 F (141 C).
The reservoir-hosting fracture zone intersected in NHS-5 is 509 feet deeper in
the geologic system than the large producing fracture intersected by NHS-1 which
is located approximately 600 feet to the southeast. Both wells were instrumented
with pressure and temperature equipment during the flow test. Geologic
information and flow data from the drilling and flow test has been incorporated
into the ongoing development of a reservoir model of the Neal Hot Springs
In addition to the drilling program for production-sized wells, the company has
continued a temperature gradient ("TG") drilling program utilizing a small
diameter drill hole. Eleven TG holes ranging in depth from 500 to 1,060 feet
have been completed, and are providing valuable temperature gradient data for
the overall area that hosts the Neal Hot Springs reservoir. Currently, several
TG holes are being deepened and another three to five new TG holes will be
drilled with a number of the holes planned to reach a depth of 2,000 feet as the
size of the geothermal anomaly is defined.
The Company received the Conditional Use Permit from the Malheur County Planning
Commission for construction of its proposed 22 net MW power plant at Neal Hot
Springs in eastern Oregon. The Conditional Use Permit received unanimous
approval at a September 24, 2009 Planning Commission meeting and was issued on
October 28, 2009. All of the Federal Energy Regulatory Commission ("FERC")
mandated transmission studies have been completed by Idaho Power Company. An
interconnection agreement was signed with the Idaho Power Company in February
2009. Private right-of-ways for the transmission line have been acquired, the
line route is surveyed and the final engineering design has reached
approximately 99% completion.
The PPA for the project was signed on December 11, 2009 with the Idaho Power
Company. The PPA has a 25 year term with a starting price of $96 per MW-hour and
escalates at a variable percentage annually. Idaho Power Company submitted the
PPA to the Idaho Public Utilities Commission on December 28, 2009. IPUC
authorized a Modified Procedure for review of the PPA on March 17, 2010 which
calls for a 45 day public comment period and 10 day reply period. The Idaho
Public Utilities Commission approved the PPA with no changes to the terms and
conditions on May 20, 2010.
Two mineral ownership interests in the Neal Hot Spring project were acquired
during the quarter. A 25 % mineral interest for 600 acres of property was
acquired from a private estate. An option to purchase a separate 25% mineral
interest in 2,110 acres of the project was executed with GCO Minerals Company, a
subsidiary of International Paper.
San Emidio Update
The San Emidio geothermal power plant has been producing power since 1987 and
sells electricity to Sierra Pacific Power Corporation under an existing power
purchase agreement that extends through 2017. Deeper wells with higher
temperatures were drilled in 1994 to supply the plant after output declined due
to cooling of the original, shallow production wells. The current configuration
of the plant consists of four 1.2 gross MW Ormat Energy Converters ("OEC"), five
production wells (two wells in use and three on stand by), and four injection
wells (three wells in use and one on standby). A cooling tower was added in 1998
to improve summer peak power generation. A cooling tower was added in 1998 to
improve summer peak power generation. During the first fiscal quarter ended June
30, 2010, the San Emidio plant operated at 99.4% availability and generated an
average of 2.5 net megawatts during the period.
Two System Feasibility Studies were initiated in July 2008 with Sierra Pacific
Power Corporation to begin the FERC mandated transmission study process for the
development of the San Emidio resource. The studies are examining two levels of
power generation, 15 MWs and 45 MWs, several transmission routes and the costs
associated with each level of generation. The System Impact Study for the 15 MW
Phase I repower, the second phase of interconnection study process, was
completed in July and confirmed that the existing transmission system was able
to handle up to 15 MWs. The third phase study, the Interconnection Facilities
Study for the 15 MW option, was completed in October. A draft interconnection
agreement is expected from Sierra Pacific Power before the end of the third
calendar quarter of 2010.
Subsequent to the end of the year, the System Impact Study for the 45 MW option
was received in April. The third phase study for the 45 MW option, the
Interconnection Facilities Study, will be contracted during the second calendar
quarter and is expected to be completed before year end.
On October 30, 2009, the Company was awarded $3.77 million in Recovery Act
funding for the exploration and development of its San Emidio geothermal power
project using advanced geophysical exploration techniques. This award was
categorized under the "Innovative Exploration and Drilling Projects" section of
the American Recovery and Reinvestment Act. The project at San Emidio will apply
innovative, seismic and satellite imagery techniques along with state-of-the-art
structural modeling, to locate large aperture factures that represent
high-productivity geothermal drilling targets. Initial geologic mapping under
the program has been initiated, permitting has advanced, and the seismic team
has been contracted.
On July 14, 2010, the Company entered into a memorandum of understanding
regarding a construction loan agreement with an engineering, procurement and the
construction company ("Contractor") to construct an 8.6 net megawatt power plant
at San Emidio, Nevada. The agreement calls for the Contractor to provide a
non-recourse project loan for $30 million. The construction loan is expected to
be repaid with long term financing from available sources such as the Section
1705 loan guarantee program from the U.S. Department of Energy. Final documents
are currently being compiled.
The San Emidio 35 MW development in planned for execution in two phases. Phase I
will be a repower and Phase II will be an expansion. Phase I will utilize the
existing production and injection wells with a new, more efficient power plant.
As shown in the table above, the repower is anticipated to cost approximately
$30 million and the expansion is anticipated to cost $127 million, 75% of which
we believe may be funded by a Department of Energy loan, with the remainder
funded through equity financing. The Phase I repower is anticipated to begin
construction in the third calendar quarter of 2010 with commercial operations
commencing in the fourth calendar quarter of 2011 or first calendar quarter of
2012. The Phase II expansion is anticipated to begin construction in the second
calendar quarter of 2010 with commercial operations commencing in the third
calendar quarter of 2012. The Company expects to be granted about $40 million in
ITC cash grant in connection with the $157 million 35 MW development. The 35 MW
development will require an amendment to the existing Sierra Pacific Power
A geothermal energy rights concession located 14 kilometers southwest of
Guatemala City was awarded to U.S. Geothermal Guatemala S.A., a wholly owned
subsidiary of the Company in April. The concession contains 24,710 acres (100
square kilometers) in the center of the Aqua and Pacaya twin volcano complex.
The concession contains the El Ceibillo geothermal project which has nine
existing geothermal wells that were drilled in the l990s and have depths ranging
from 560 to 2000 feet (170 to 610 meters). Six of the wells have measured
reservoir temperatures in the range of 365F to 400F and have high conductive
gradients that indicate rapidly increasing temperature with depth. Fluid samples
and mineralization from the wells indicate the existence of a high permeability
reservoir below the existing well field.
An office and staff have been established and planning is underway to advance
the project with a detailed geophysical program, geologic mapping, sampling of
hot springs, and to redrill one or two of the existing wells to test for deep,
high temperature permeability.
Permitting has been completed and bonding submitted for a drill site on the
Gerlach joint venture property located adjacent to the town of Gerlach in Washoe
County, Nevada. A 2,000 foot deep temperature gradient well is planned that will
test an identified fault zone.
The Granite Creek assets are comprised of three BLM geothermal leases totaling
approximately 5,414 acres (8.5 square miles) located about 6 miles north of
Gerlach, Nevada along a geologic structure known to host geothermal features
including the Great Boiling Spring and the Fly Ranch Geyser. A first stage
gravity geophysical program was completed in the third quarter of 2008 and will
be used to evaluate the resource potential, and help determine where to drill
temperature-gradient exploration wells.
For the three months ended June 30, 2010, the Company reported a net loss of
$1.4 million dollars ($0.02 loss per share) which represented an 18.2% decrease
over the same period in 2009. Notable favorable variances were noted for San
Emidio operations and stock based compensation. Unfavorable variances were noted
in corporate administration; professional and management fees; salaries and
wages; and travel and promotion costs.
San Emidio, Nevada Plant Energy Sales and Plant Operating Expenses
For the three months ended June 30, 2010, the San Emidio plant reported a net
loss of $72,625 ($589,082 net loss in 2009). This was primarily due to higher
energy revenues and lower repair and maintenance costs. Energy production
revenues increased $327,894 (134.5%) in the quarter ended June 30, 2010 from the
same period in 2009. This favorable variance is due to both higher production
. . .