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| RZ > SEC Filings for RZ > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
Certain information set forth in this report contains "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions or dispositions and other information that is not historical information. In some cases, forward-looking statements can be identified by terminology such as "believes," "expects," "may," "will," "should," "anticipates" or "intends" or the negative of such terms or other comparable terminology, or by discussions of strategy. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements.
All forward-looking statements, including without limitation management's examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but there can be no assurance that management's expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. Any forward-looking statements should be considered in light of the risks set forth in Part II "Item 1A. Risk Factors" and elsewhere in this report.
Unless the context requires otherwise, all references in this annual report to "Raser," "the Company," "we," "us," "our company," "Raser Technologies" or "our" refer to Raser Technologies, Inc. and its consolidated subsidiaries.
Overview
Our Company
We are an environmental energy technology company focused on geothermal power development and technology licensing. We operate two business segments: Power Systems and Transportation & Industrial. Our Power Systems segment develops clean, renewable geothermal electric power plants and anticipates also developing bottom-cycling operations in the future. Our Transportation & Industrial segment focuses on using our Symetron family of technologies to improve the efficiency of electric motors, generators and power electronic drives used in electric and hybrid electric vehicle propulsion systems. Through these two business segments, we are employing a strategy to produce a positive impact on the environment and economically beneficial results for our stockholders. By executing our strategy, we aim to become both a producer of clean, geothermal electric power as well as a provider of electric and hybrid-electric vehicle technologies and products.
We are incorporated in Delaware. We are the successor to Raser Technologies, Inc., a Utah corporation, which was formerly known as Wasatch Web Advisors, Inc. Wasatch Web Advisors acquired 100% of our predecessor corporation in a reverse acquisition transaction in October of 2003. Prior to that transaction, our predecessor corporation was a privately-held company.
We have initiated the development of eight geothermal projects in our Power Systems segment to date, and we are currently in the development stage of well drilling and geothermal power plant construction to further develop viable geothermal resources. We have accumulated a large portfolio of geothermal interests in four western continental states and a geothermal concession in Indonesia. These geothermal interests are important to our ability to develop geothermal power plants. We continue to seek and accumulate additional interests in geothermal resources for potential future projects.
We have incurred substantial losses since inception and we are not operating at cash breakeven. Our continuation as a going concern is dependent on efforts to secure additional funding, increase revenues, reduce expenses, and ultimately achieve profitable operations, any of which may be challenging given the current economic environment. If substantial losses continue, or if we are unable to secure sufficient additional funding on reasonable terms, liquidity concerns may require us to curtail or cease operations, liquidate or sell assets or pursue other actions that could adversely affect future operations.
Liquidity, Capital Requirements and Market Conditions
Our ability to secure liquidity in the form of additional financing or otherwise remains crucial for the execution of our business plans and our ability to continue as a going concern. Our current cash balance, together with cash anticipated to be provided by operations, will not be sufficient to satisfy our anticipated cash requirements for normal operations, accounts payable and capital expenditures for the foreseeable future. Obligations that may exert further pressure on our liquidity situation include the obligation to repay the remaining amounts borrowed under our Unsecured Line of Credit Agreement and Promissory Note, dated January 27, 2009 and amended on July 22, 2009 (the "Line of Credit"), among Radion Energy, LLC ("Radion"), Ocean Fund, LLC ("Ocean Fund"), Primary Colors, LLC ("Primary Colors") and R. Thomas Bailey, an individual (collectively, the "LOC Lenders"), which are due in July 2010 but may need to be repaid as early as November 2009. The principal balance of the Line of Credit and any accrued interest
thereon, can be paid in the form of cash or equity securities at our sole discretion, subject to any regulatory limitations on our ability to satisfy these obligations through the issuance of equity securities. Although the outstanding borrowings under the Line of Credit of $5.3 million is due in July 2010, the remaining LOC Lender is a related party and has informed us that he does not intend to exert further pressure on our liquidity situation. In addition to our obligations under the Line of Credit, if we fail to achieve "Final Completion," as defined in the Thermo Financing Agreements, of our Thermo No. 1 geothermal power plant by November 30, 2009, we may incur penalties of between $2.0 million to $3.0 million would be payable immediately to our debt and tax equity providers. However, given our past history and positive working relationship with the debt holders and the Class A Member, we believe that the likelihood of incurring additional penalties is only "reasonably possible" and not "probable" as defined by ASC Subtopic 450-20 "Contingencies-Loss Contingencies". Accordingly, no liability was recorded relating to the estimated penalties at September 30, 2009.
During 2008 and 2009, economic conditions have weakened significantly and global financial markets have experienced significant liquidity challenges. Despite these challenges, we were able to obtain a limited amount of financing during 2009. Earlier in the year, we established the Line of Credit. During the year, we borrowed a total of $13.4 million under the Line of Credit. In July 2009, we completed a $25.5 million registered direct offering. In October 2009, we sold shares of our common stock and warrants to acquire shares of our common stock to three of the LOC Lenders for a total purchase price of $5.4 million. We received the purchase price in the form of promissory notes, which were then used as an offset to settle our outstanding obligations to the participating LOC Lenders under the Line of Credit and reduce our outstanding borrowings under the Line of Credit to $5.3 million. This transaction reduced our liabilities, but did not change our available cash. Although the outstanding borrowings under the Line of Credit of $5.3 million is due in July 2010, the remaining LOC Lender is a related party and has informed us that he does not intend to exert further pressure on our liquidity situation.
The cost of raising capital in the debt and equity capital markets has increased substantially while the availability of funds from those markets generally has diminished significantly. Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties, the cost of obtaining money from the credit markets generally has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at maturity on terms that are similar to existing debt, and reduced, or in some cases ceased, to provide funding to borrowers. If we are unable to secure adequate funds on a timely basis on terms acceptable to us, we will be unable to satisfy our existing obligations, or to execute our plans. In such case, we would be required to curtail or cease operations, liquidate or sell assets, modify our current plans for plant construction, well field development and other development activities, or extend the time frame over which these activities will take place, or pursue other actions that could adversely affect future operations. We intend to continue to seek financing arrangements from a variety of sources to fund our development activities, which may include the issuance of debt, preferred stock, equity or a combination of these instruments. We also continue to evaluate a variety of alternatives to finance the development of our geothermal power projects. These alternatives could include project financing and tax equity financing, government funding from grants, loan guarantees or private activity bonds, joint ventures, the sale of one or more of our projects or interests therein, entry into prepaid power purchase agreements with utilities or municipalities, or a merger and/or other transaction, a consequence of which could include the sale or issuance of stock to third parties.
Federal and state governments have recognized the financing challenges faced by many businesses and have established programs to help companies engaged in the development of renewable energy projects. These programs include loan guarantee, government grant and other programs. As a result, part of our short-term strategy to obtain additional funding includes applications for loan guarantees and various government grants. For example, we have made or are in the process of making applications for funding under several stimulus programs established by the American Recovery and Reinvestment Act of 2009 (the "Recovery Act") and other pre-existing programs. However, one of our applications for loan guarantees was denied. In addition, we were not awarded three small grants for innovative exploration activities. We cannot predict whether we will be able to successfully obtain loan guarantees or grants under these new government programs.
The amount and timing of our future capital needs will depend on many factors, including the timing of our development efforts, opportunities for strategic transactions, and the amount and timing of any cash flows we are able to generate. We cannot be certain that funding will be available to us on reasonable terms or at all.
Current Geothermal Power Projects
We have initiated the development of eight geothermal projects in our Power Systems segment to date. In April 2009, we began selling electricity generated by the Thermo No. 1 geothermal power plant to the City of Anaheim pursuant to a power purchase agreement we previously entered into with Anaheim, and we have either obtained or are in the process of obtaining permits for the development of the other seven geothermal power projects we have initiated. The current status of development for each of these eight projects is described below. Other than certain permitting activities and engineering work currently being performed, the continued development of each of our projects is dependent on additional financing. While we would expect to seek project-specific financing arrangements for plant construction at these projects, including the forms of financing described above, we anticipate that we will need to fund some or all of our well field development activities from general corporate funds, which would typically be obtained through financing at the parent company level, if available. Due to uncertainties associated with the current economic environment, we cannot be certain that financing will be available to us on reasonable terms or at all. As a result, the timing for continued development at each of our projects is highly uncertain.
Thermo No. 1 Plant (Utah): We completed major construction of the cooling towers and transmission lines and installed the power generating units at the Thermo No. 1 geothermal power plant, located in Beaver County, Utah, in the fourth
During the second and third quarters of 2009, we delivered 14,695 MW hours of electricity to the City of Anaheim. The Thermo No. 1 plant is currently producing and transmitting approximately 5 MW of electricity, which represents approximately half of the plant's designed capacity. Thus far, we have been unable to operate the plant at full capacity due to insufficient heat and flow from the production wells that provide geothermal water to the plant. As more fully described below, we believe that additional wells we have drilled, together with some of the existing wells we are reworking, have the potential to increase the net power production to full capacity by the end of the fourth quarter of 2009. However, we have not completed all of the necessary drilling, stimulation work and testing, and we cannot be certain the additional wells will allow us to operate the Thermo No. 1 plant at full capacity. While we expect the plant to be generating power at or near full capacity of 10 megawatts available for sale by the end of this year, we do not expect to complete all of the steps necessary to achieve "Final Completion" under the Thermo Financing Agreements until the first quarter of 2010.
The net power produced by the Thermo No. 1 plant is purchased by the City of Anaheim, California pursuant to a renewable power purchase and sale agreement (the "Thermo PPA"), which we entered into on March 10, 2008, before the plant was constructed. Subject to certain conditions, the Thermo PPA provides for the delivery by the Thermo No. 1 plant of up to 11 megawatts of geothermal renewable power for 20 years. The Thermo PPA provides for a selling price of $78 per megawatt hour with a two percent per annum increase over the term of the Thermo PPA. Under the Thermo PPA, the City of Anaheim is also obligated to pay for the "wheeling costs," or cost for transmission, of the electricity from the Thermo No. 1 power plant to the City of Anaheim. The is no penalty under the Thermo PPA for delivering less than 11 megawatts of geothermal renewable power.
As noted above, we completed the major construction of the cooling towers, transmission lines and setting of the power generating units at the Thermo No. 1 geothermal power plant in October of 2008. Commissioning testing of the power generating units was completed in the first quarter of 2009 using two production wells and one reinjection well that we had connected to the plant. Once a plant has been placed in service, we reclassify the cost of the related leases, wells, transmission lines and substations and construction in progress as "Geothermal property, plant and equipment" on the balance sheet. Since our Thermo No. 1 geothermal power plant was placed into service in the first quarter of 2009, we reclassified these costs as "Geothermal property, plant and equipment" accordingly.
At September 30, 2009, the total capitalized costs of the Thermo No. 1 project were $107.7 million, consisting of $64.3 million in plant construction and transmission line and interconnection costs, $42.4 million in well field development costs, $2.4 million in land and lease acquisition costs and accumulated depreciation totaling $1.4 million. These costs will be amortized over the estimated useful life of the geothermal power plant, which is expected to be approximately 35 years. Amortization of the Thermo No. 1 geothermal power plant began in the second quarter of 2009. We have assessed the additional construction and drilling costs that we expect to incur so that the power plant will be able to operate at or near full capacity to be approximately $8.0 million.
We have drilled five production wells and two reinjection wells that we expect to utilize for the plant when it is operating at full capacity. We recently finished drilling two additional wells and we expect to use at least one of these wells as a production well pending the completion of well testing. We believe that when the plant is operating at full capacity, it will utilize five to six production wells and two to three injection wells at the Thermo No. 1 geothermal power plant. In addition to the completion of drilling, stimulation work and testing of these two newest wells, we expect to rework some of the existing wells in order to isolate cooler waters that may be entering the wells.
The expected production wells have demonstrated flow temperatures in commercially productive ranges of approximately 240 degrees Fahrenheit to 300 degrees Fahrenheit, with bottom-hole temperatures in excess of 350 degrees Fahrenheit. The geothermal resources utilized by the plant are believed to be renewable so long as; (i) the plant is operated at or below the maximum level studies indicate that the resource will support, (ii) all of the geothermal fluids are recycled without losses, and (iii) the hydrological balance of the geothermal resource is properly maintained.
In addition to the wells described above, we have drilled two wells that we, in consultation with our drilling and geothermal consultants, have determined to be non-commercial wells. However, we may conduct further testing of one of these wells in the future to determine whether it can be stimulated to increase its production through a variety of commonly-used well stimulation techniques. We may also use one of these wells as a reinjection well.
Our ability to operate the Thermo No. 1 plant at full capacity depends significantly on the characteristics of the additional production wells we expect to use for the plant. The wells need to provide sufficient heat at flow rates that can be maintained without a significant increase in the parasitic load associated with the plant. The parasitic load refers to the amount of electricity used by the plant to maintain operations and typically refers to loads associated with cooling towers, cooling water pumps, turbine pumps, and other plant loads. This type of parasitic load is satisfied by utilizing power generated by the plant itself. A significant load can also result from geothermal well pumps and other equipment used to maintain the flow of geothermal water from the earth through the plant and back into the earth through reinjection wells. Generally, water with a higher temperature will allow the plant to operate with a lower rate of flow, which results in a decrease in the parasitic load because less electricity is required to maintain the necessary flow rate. Water with lower temperatures, on the other hand, requires a higher flow rate to operate the plant, which increases the parasitic load. Unless the water produced by a well is hot enough to increase the amount of power generated by the plant and available for sale, and the increase is sufficient to compensate for the cost of purchasing power to satisfy any resulting increase in parasitic load, the well will not result in a net increase in the revenue from the plant. Therefore, the overall temperature of the water produced by the production wells is critical to our ability to operate the plant at full capacity.
We satisfy the power requirements of the geothermal well pumps at the Thermo No. 1 plant by purchasing electricity from the local electrical utility. We are able to purchase this power at rates lower than the rates we are able to sell the power generated by the plant under the applicable Thermo PPA. This allows us to economically sell all of the power resulting from an increase in the amount of power generated by the Thermo No. 1 plant as long as the value of that power exceeds the value of the power we purchase to satisfy any related increase in the parasitic load. We are also limited by the amount of water our reinjection wells can return to the earth. Additional reinjection wells may be required if the current wells exceed their capacity to reinject water to the geothermal source. While we believe the additional production wells we expect to use for the plant have the potential to increase the net production at the plant to full capacity, we cannot be certain that the wells will increase net production until the wells are brought online and the impact to the parasitic load at the plant has been determined. Similarly, we may elect to rework marginal wells where we estimate we may be able to increase the temperature by blocking off zones where the water is cooler. We cannot be certain that this rework will generate an economic return and net production increase until the wells are brought online and the impact to the parasitic load has been determined.
Assuming we are able to increase production at the Thermo No. 1 plant to full capacity, we are also currently evaluating the expansion of the Thermo No. 1 plant by including a bottom-cycling operation. In the bottom cycling operation, the discharged geothermal water from the main plant would be cascaded through a second set of power generating units, extracting more heat to generate additional power. The expanded project is referred to as the Thermo No. 1A project. The economics of the Thermo No. 1A project would benefit from the transmission infrastructure, cooling towers and established well field already in place at the Thermo No. 1 plant. The Thermo No. 1A project may be able to generate up to an additional 5 MW of power. We expect that, if feasible, Thermo No. 1A will enhance the economics of Thermo No. 1 because of project cost savings from eliminating drilling, transmission upgrades, and cooling tower costs. Unless we are able to increase the production of Thermo No. 1 to full capacity, however, it is unlikely that the bottom cycling operation will be viable.
We have experienced certain delays and cost overruns on the Thermo No. 1 project. The Thermo No. 1 geothermal power plant is the first ever large-scale commercial application of the Pratt & Whitney Power Systems ("PWPS") Pure-Cycle power generating units and the first plant built under our rapid-deployment approach so such delays and overruns are not entirely unexpected. Some of the key drivers of the delays and cost overruns are as follows:
Well Field Development:
Increased costs to broaden previous well field plans.
Complications encountered by drilling contractors.
High demand for drilling services and related materials due to the rapid increase in the price of oil.
Construction:
Wider than necessary step-outs for injection wells, which increased piping costs, due to concerns of lenders.
Additional costs incurred relating to establishing the greater Thermo area.
Increased prices for steel, concrete and other commodities due to high demand.
Payment of overtime and other additional costs in order to accelerate the construction schedule.
Equipment:
Expenses associated with installing PWPS power generating units for the first time, which allowed us to identify design changes for the benefit of future plants.
Transmission:
In anticipation of future plants, we built a larger transmission infrastructure.
Lightning Dock Plant (New Mexico): We acquired the Lightning Dock project in 2007 in an acquisition transaction. Pursuant to the transaction, we purchased a United States Bureau of Land Management ("BLM") lease and other miscellaneous assets totaling $4,140,000 (the "Purchase"). Numerous exploratory wells and two production wells were drilled prior to our acquiring the site. Subject to obtaining adequate financing, we intend to build a geothermal power plant at Lightning Dock with an estimated generating capacity of approximately 10 to 15 MW. For more information regarding the background, geological studies, geothermal leases and geothermal resources relating to the Lightning Dock project, please see our Annual Report on Form 10-K.
We are in the process of obtaining the final, necessary permits for the Lightning Dock plant. We have received the bulk of the permits we need for the project and are in the process of finalizing the last few permitting items. However, to date, we have not drilled production or reinjection wells on this site. We are awaiting final approval to proceed with the final permits from the local government officials, pending a ruling relating to a protest filed by a nearby land owner.
The power generated from the facility is expected to be sold to the Salt River Project Agricultural Improvement and Power District ("SRP") in Phoenix, Arizona pursuant to a 20-year power purchase agreement.
We are evaluating various generating equipment for the Lightning Dock project. We anticipate that the Lightning Dock project will produce between 15 and 20 MW of power for sale to SRP. We estimate that the total costs of the completed Lightning Dock geothermal power plant will range from $75 to $85 million, including the costs of well field development and transmission line construction, depending on the equipment selected. Continued development of the Lightning Dock plant, other than the permitting work currently performed, will be dependent on additional financing.
The initial lease term of the assigned BLM lease began in January 1979 and has been extended based upon certain conditions in the lease until January 2024. Annual delay rental payments of $5,000 are required on each anniversary date until geothermal power production has begun. If a geothermal power plant is constructed which utilizes geothermal resources covered by the lease, royalties are owed to the BLM based on a percentage of electrical sales from the plant. We have capitalized certain legal fees directly associated with completing the Purchase and obtaining the BLM lease. We also capitalized the obligations we assumed to plug certain abandoned wells located on the property.
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