Form 10-Q for US GEOTHERMAL INC
Quarterly Report
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
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
geothermal resources;
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
activities;
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
cancellations;
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
energy;
our ability to successfully identify and integrate acquisitions;
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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 quarter ended December 31, 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 ended December 31, 2010, the Company was focused on:
1) Conducting a long term flow test on the Neal Hot Springs reservoir;
2) Starting construction of the San Emidio Unit 1 power plant in Nevada;
3) negotiating final documents for the Department of Energy Loan Guarantee
for the Neal Hot Springs project;.
5) redrilling the Peregrine test well at the Gerlach Joint Venture;
6) optimizing the operation of the San Emidio power plant in Nevada, and
planning for a plant shut down to tie in the new, Unit 1 brine
pipelines;
7) optimizing the operation of the well field at the Raft River project in
Idaho ("Raft River Unit I"; and
8) the evaluation of potential new geothermal project acquisitions.
Project Overview
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.
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Projects in Operation
Project Location Ownership Generating Power Contract
Capacity Purchaser Expiration
(megawatts)(1)
Raft River (Unit Idaho JV(2) 13.0 Idaho Power 2032
I) Company
San Emidio Nevada 100% 3.6 Sierra 2017
(Existing) Pacific
Power Corp.
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(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 San Emidio 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 $34 million to finance the construction of the project.
Additional investment may be required for Unit I to operate at design
capacity.
3) The repower below includes repairs to operating power plants.
Projects Under Development
Estimated
Target Projected Capital
Development Commercial Required Anticipated
Project Location Ownership (Megawatts) Operation Date ($million) Power
Purchaser
San Emidio
Phase I
(8.6 MW
Repower) Nevada 100% 5.0 December 2011 $32 TBD
San Emidio
Phase II
(Expansion) Nevada 100% 8.6 2nd Quarter 2013 $50 TBD
San Emidio
Phase III Nevada 100% 17.2 4th Quarter 2013 $100 TBD
Neal Hot
Springs I Oregon 100% 23 3rd Quarter 2012 $129 Idaho Power
Neal Hot
Springs II Oregon 100% 28 TBD TBD TBD
Raft River
I (Repower) Idaho JV 3 TBD $8 Idaho Power
Raft River Eugene
(Unit II) Water and
Electric
Idaho 100% 26 4th Quarter 2013 $134 Board
Raft River
(Unit III) Idaho 100% 32 2nd Quarter 2015 $166 TBD
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Additional Properties
Project Location Ownership Target Development (Megawatts)
Gerlach Nevada 60% To be determined
Granite Creek Nevada 100% To be determined
El Ceibillo Guatemala, S.A. 100% To be determined
Resource Details
Resource
Property Size Temperature Potential
Property (square miles) (F) (Megawatts) 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
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(1) A third party's assessment of 94 megawatts was based on 6.0 square miles.
The Company acquired additional acreage. The resource estimate of 127.0
megawatts is an internal estimate.
(2) Actual production temperatures for existing wells.
(3) Probable reservoir temperature as measured with a geothermometer.
(4) A third party estimate with respect to 49.0 megawatts, remainder is an
internal estimate.
(5) A third party resource estimate with respect to 23.0 megawatts, remainder is
an internal estimate.
(6) Internal estimate.
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Raft River Update
Raft River Energy Unit I, located in southern Idaho, is a binary cycle
geothermal power plant with 13 net megawatts of installed capacity. The power
plant achieved commercial operation in January 2008.
Raft River Unit I operated at 99.3% availability and generated an average of 8.1
net megawatts during the third fiscal quarter. For the 2010 calendar year, the
plant averaged 8.39 net megawatts of generation with 97.7% availability. The
plant is operating at reduced output due to the continued 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 now reduced the inlet fluid temperature to the power plant by
approximately 11.8 degrees Fahrenheit. Power generation has been reduced by an
estimated 1.5 megawatt due to the lower temperature fluid. It was determined
that the cement in a lap joint (an overlap of well casing) had failed and washed
out thereby allowing lower temperature fluid to enter the wellbore. 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.
The project does not generate sufficient revenue to complete the repairs out of
cash flow so the repairs must be completed by additional capital investment by
the partners. Until the repairs are completed, the plant output will continue at
an estimated annual average of about 7.8 megawatts. Plans for repair of both
RRG-7 and RRG-2 are under a continuing discussion with Raft River I Holdings, a
wholly owned subsidiary of Goldman Sachs Group Inc and the majority joint
venture partner for Raft River Unit I.
The $10.2 million DOE cost-shared thermal fracturing program continues on
schedule. Eight solar powered seismic stations were installed in June and will
be used to monitor potential impacts from the test. Construction is complete on
the injection pipeline that extends from the Unit 1 power plant to well RRG-9. A
detailed, 3-D magnetotelluric survey was completed during the 3rd fiscal quarter
of 2010. It is now expected that a drill rig will be mobilized to set casing
down to the geologic formation targeted for the thermal fracture test, and the
first phase of cold water injection will commence during the 2nd quarter of
2011.
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 tax partner allowed us to share the risks of ownership and
monetize valuable tax credits and benefits. The joint venture partner structure
allowed the project to monetize 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.
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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
Cash Flow RECs 70% (1)
GAAP Income 1% (2) 49% 80%
Lease 100%
Payments, O&M
Services &
Royalties
Distributions Guaranteed 1% (3) 49% 80%
min. payment
Tax Benefits 1% (2) 49% 80%
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(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
achieved.
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 project was selected to proceed into
the loan process and was offered a conditional commitment for the loan in June.
Final documentation for the loan is being prepared. The DOE guaranteed loan is
expected to provide up to 75% of the $129 million estimated capital cost of
Stage I up to a maximum loan amount of $97 million. The total capital cost has
increased to $129 million from prior estimates of $124 million due to costs of
labor, updated vendor pricing and construction materials, project loan costs and
contingencies.
Detailed design and construction of a binary cycle power plant utilizing
significantly improved technology is currently in progress. The new plant,
designed to deliver approximately 23 megawatt of power net to the grid is
scheduled to begin commercial operations during the fourth calendar quarter of
2012. The DOE guaranteed loan is a combined construction and 22 year term loan,
and it is anticipated that it will provide the project with a low annual fixed
interest rate compared to existing commercial loan rates. We are required to
drill sufficient production wells for the 23 MW net plant as a condition
precedent to drawing on the project loan. Currently we have drilled four
substantial production wells and we believe they are sufficient to meet the
condition precedent.
A long term reservoir test was initiated on November 16, 2010 with two
production wells flowing brine at an average of 1,800-2,000 gallons per minute.
Two injection wells were operated in tandem with the production to dispose of
the fluid and to provide additional reservoir data. The flowing portion of the
test ran until December 20, 2010 when the production wells were shut in and
injection was halted. For a following 30 days, temperature and pressure
instruments were maintained in the wells until January 24, 2011 when they were
pulled and data downloaded.
Geologic information, flow, temperature and pressure data from the production
and T/G drilling programs and the long term reservoir test is being incorporated
into the ongoing development of a numerical reservoir model of the Neal Hot
Springs geothermal system. This reservoir model and subsequent reservoir
certificate is a condition precedent to the loan.
In early September, a production drilling program commenced with well NHS-8, the
third production well on the Neal Hot Springs project. The completion of NHS-8
at a depth of 3,604 feet was announced on October 13th. NHS-8 flowed under
artesian pressure at a rate of 2,315 gallons per minute ("gpm") with a
temperature of 286.5 F (141 C). Subsequent to the end of the quarter,
production well NHS-2 was drilled and completed to a depth of 2,983 feet. Well
NHS-2 intersected the reservoir fracture system and flowed at 3,047 gpm under
artesian pressure. Production wells NHS-8 and NHS-2 bring the total number of
production wells to four.
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These four wells may provide the total number of production wells needed for the
23 net megawatt project. Two existing production wells have previously been
drilled and tested in 2008 and 2009. Well NHS-1 intersected the reservoir at
2,287 feet and flows under artesian pressure at a rate of 2,315 gpm with a
production temperature of 286.5 F (141 C). Well NHS-5 encountered the
reservoir at 2,796 feet and flows at a rate of 1,500 gpm with a production
temperature of 286 F (141 C).
The temperature gradient ("TG") drilling program, utilizing a small diameter
drill hole, was concluded in June with eleven TG wells, ranging in depth from
500 to 1,060 feet, completed. The TG wells provide valuable temperature gradient
data for the overall area that hosts the Neal Hot Springs reservoir. The drill
used for the TG program was redirected to drill injection wells for the project.
Injection well NHS-10 was completed to a depth of 2,465 feet and successfully
tested. Initial injection test analyses indicate that the well will sustain
approximately 1,100 gpm of fluid injection for the life of the project. A second
injection well, NHS-13, was completed to a depth of 2,302 feet and is able to
sustain approximately 625 gpm of injection. Equipment procurement and pipeline
fabrication has been completed, and the 30-day reservoir test began in
mid-November, 2010. The test is designed for continuous, multi-well production,
injection, and monitoring to provide data across the well field that will be
integrated into the numerical reservoir model of the Neal Hot Springs geothermal
system.
The Company received the Conditional Use Permit from the Malheur County Planning
Commission for construction of its proposed 23 net megawatt 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 is complete. Idaho Power
Company is responsible for the construction of the transmission line with the
cost paid for by the project. Construction will be authorized once funds are
available from the DOE loan.
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
megawatt-hour and escalates at a variable percentage annually. On May 20, 2010,
the Idaho Public Utilities Commission approved the PPA with no changes to the
terms and conditions.
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 megawatt 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. During the third
fiscal quarter ended December 31, 2010, the San Emidio plant operated at 99.3%
availability and generated an average of 2.7 net megawatts during the period.
The San Emidio development plan has been changed to conform to requirements of
the DOE Section 1705 loan guarantee program and is now planned for execution in
three phases. Phase I will be the Unit 1 repower of approximately 8.6 net annual
average megawatts (5.0 new megawatts). Phase II is a second 8.6 megawatt Unit 2
being added in the second quarter of 2012. Phase III will be an expansion of two
additional power plant units of approximately 17.2 megawatts. Phase I and Phase
II were submitted with John Hancock as the lender to the DOE Section 1705 Loan
Guarantee program. The application passed the Part A review, and John Hancock
and DOE are currently involved in detailed due diligence on the project.
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Phase I will utilize the existing production and injection wells with a new,
more efficient power plant. The existing, historic power plant will be
decommissioned when the Phase I plant comes on line. As shown in the Project
Development table above, the Phase I repower is anticipated to cost
approximately $32 million, with Phase II at approximately $50 million and Phase
III approximately $100 million. We believe 75% of the Phase I and Phase II
development may be funded by project loans backed by a Department of Energy loan
guarantee, with the remainder funded through equity financing.
The Phase I repower began construction during the third calendar quarter of
2010, with commercial operations planned to occur in December 2011. Phase II
began construction in the second calendar quarter of 2010 with commercial
operations commencing in the first calendar quarter of 2013. The Company expects
to be granted about $28 million in ITC cash grant in lieu of PTC in connection
with approximately $82 million Phase I and Phase II megawatt development. The
Phase I development will require an amendment to the existing Sierra Pacific
Power Purchase Agreement, and Phase II will require a new PPA.
Subsequent to the end of the quarter, a draft amendment to the existing PPA was
submitted to Sierra Pacific Power for review and comment. Negotiations are
underway with several potential purchasers for the power from the Phase I and
Phase II projects.
The Company entered into agreements with Science Applications International
Corporation ("SAIC") for a project loan and an engineering procurement and
construction contract for the San Emidio Phase I power plant. SAIC's
design-build subsidiary, the Benham Companies LLC, will execute the construction
of an 8.6 net megawatt power plant at San Emidio, Nevada. TAS Energy of Houston,
Texas will supply a modular power plant to the project. The financing agreement
calls for the contractor to provide a non-recourse project loan for the
estimated $32 million dollar project. The construction loan is expected to be
repaid with long term project loan.
Two System Feasibility Studies were initiated in July 2008 with Sierra Pacific
Power Company to begin the FERC mandated transmission study process for the
development of the San Emidio resource. The studies examined two levels of power
generation; 15 megawatts and 45 megawatts, several transmission routes and the
costs associated with each level of generation. The 15 megawatt study, which is
directed toward the Phase I repower and Phase II, has completed the study
process and resulted in an increase of available transmission to 16 megawatts. A
Small Generator Interconnection Agreement for 16 megawatts of transmission
capacity was executed with Sierra Pacific Power Company on December 28, 2010.
The 45 megawatt study, which is directed toward the full build out of San Emidio
with the addition of the 17.2 megawatt Phase III project, completed the second
phase System Impact Study in April. A draft Interconnection Facilities Study,
the third and final study, was received on November 22, 2010 and we are awaiting
the final study.
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.
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