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HTM > SEC Filings for HTM > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for US GEOTHERMAL INC

Form 10-Q for US GEOTHERMAL INC


14-Nov-2012

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 timing and cost of 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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the failure of the geothermal resource to support the anticipated power capacity;

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 have 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 periods ended September 30, 2012 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 MKT LLC under the trade symbol "HTM."

For the quarter ended September 30, 2012, the Company was focused on:

1) Commissioning and operation of the new San Emidio Unit 1 power plant in Nevada;
2) Construction and commissioning the Neal Hot Springs power plant in Oregon;
3) Operating the Raft River Unit I power plant;
4) Negotiating long term financing for the San Emidio Unit 1 power plant and for a potential future Phase II, and discussing development funding for Phase III;
5) Conducting negotiations on a power purchase agreement and discussions with potential equity partners for the El Ceibillo project in Guatemala; and
6) The evaluation of potential new geothermal projects.

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 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
                                            Generating
                                             Capacity                      Contract
    Project       Location    Ownership   (megawatts)(1) Power Purchaser  Expiration
  Raft River       Idaho        JV(2)          13.0        Idaho Power       2032
   (Unit I)                                                  Company
San Emidio (New    Nevada        100%          9.0       Sierra Pacific      2038
   Phase I)                                                Power Corp.

(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.
(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.

                                      Projects Under Development
                                                                             Estimated
                                                 Target       Projected       Capital
                                               Development    Commercial     Required
               Project  Location    Ownership  (Megawatts)  Operation Date  ($million)  Power Purchaser

San Emidio Phase II      Nevada       100%         8.6         TBD (2)          $50        NV Energy
(Expansion)
San Emidio Phase III     Nevada       100%        17.2         TBD (2)         $100           TBD
Neal Hot Springs I       Oregon       JV(1)        22      4th Quarter 2012    $143       Idaho Power
Neal Hot Springs II      Oregon       100%         28            TBD            TBD           TBD
El Ceibillo             Guatemala     100%         25      4th Quarter 2015    $118           TBD
Raft River (Unit II)      Idaho       100%         26            TBD           $134           TBD
Raft River (Unit III)     Idaho       100%         32            TBD           $166           TBD

(1) In September 2010, the Company's wholly owned subsidiary (Oregon USG Holdings LLC) entered into agreements that formulated a strategic partnership with Enbridge (U.S.) Inc. ("Enbridge"). As of September 30, 2012, Enbridge has contributed approximately $32.8 million to the Neal Hot Springs geothermal project. The Company and Enbridge have not yet determined Enbridge's current equity interest in the project, but current estimates show that Enbridge could own up to 44% of the project.

(2) Due to the delays experienced with bringing San Emidio Phase I on line, development dates for Phase II and Phase III at San Emidio have been affected and will be determined after Phase I has reached final completion.

                            Additional Properties
                     Project Location Ownership Target Development (Megawatts)
Gerlach                       Nevada     60%           To be determined
Granite Creek                 Nevada    100%           To be determined


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--------------------------------------------------------------------------------

                               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)   64.0(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         TBD         TBD       Binary
   El Ceibillo         38.6      410-446 (3)   25.0(6)       TBD       Steam

(1) A third party's assessment of 94 megawatts was based on 6.0 square miles. The Company has since acquired additional acreage. The resource estimate of 127.0 megawatts was provided by a third party.
(2) Actual production temperatures for existing wells.
(3) Probable reservoir temperature as measured with a chemical geothermometer calculation.
(4) A third party resource estimate with respect to 44.0 megawatts, remainder is an internal estimate.
(5) A third party resource estimate with respect to 22.0 megawatts, remainder is an internal estimate.
(6) Internal estimate.

Neal Hot Springs Update
Neal Hot Springs is located in Eastern Oregon near the town of Vale, the county seat of Malheur County. A commercial geothermal resource has been defined at the site, and a 22 net megawatt power plant, consisting of three separate modules, has been constructed. The facility is scheduled to begin selling electricity on a commercial basis before the end of 2012. On February 26, 2009, the Company submitted a loan 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 financial closing for the DOE loan guarantee took place on February 23, 2011 which secured a $96.8 million loan guarantee from the Department of Energy and a direct loan from the U.S. Treasury's Federal Financing Bank. The $96.8 million loan represents 67% of the total project cost which is now estimated to be $143.6 million for the project, a $14.6 million increase from the previous estimate. The DOE loan is a combined construction and 22 year term loan. The interest rate on the loan is set at 37.5 basis points over the current average yield on outstanding marketable obligations of the United States of comparable maturity as determined on each date that a draw is made on the loan. As of September 30, 2012, nine draws totaling $71.87 million have been taken on the DOE loan, which have a combined annual interest rate of 2.622%. The project qualified for, is currently preparing its application for and expects to receive an estimated $34 million cash grant under Section 1603 Specified Energy Property in Lieu of Tax Credits. Subject to certain DOE loan covenants, the planned use of the grant proceeds is to: 1) fund an $8.5 million cash reserve at the project level, 2) pay down approximately $14 million on the DOE loan and 3) the balance to reimburse equity investors.

In July 2010, the Company applied to the Oregon Department of Energy for the Business Energy Tax Credit ("BETC"), which allows an income tax credit for up to $20 million in qualifying expenditures for a renewable energy project. The Neal Hot Springs project has qualified for the credit which can be sold to a pass-through partner and monetized at a cash value of $7.36 million. It is anticipated that the BETC cash will be available within the first six months of 2013.

After a long term flow test was completed in January 2011, a computerized numerical reservoir model was constructed on March 24, 2011 by the Company's consulting reservoir engineer, and after review, the DOE's independent reservoir engineer issued a reservoir certificate on March 31, 2011. The final reservoir report and certificate confirmed that the reservoir is able to sustain the production necessary for the planned 22 megawatt project from the existing four production wells.

Over the course of the ongoing construction, the budget was increased by $14.6 million in equity contributions by the partners. The first increase of $7.0 million was to cover additional drilling costs and modifications in plant controls and the cooling mechanism. Enbridge Inc., our partner at Neal Hot Springs, provided the additional investment in exchange for increased ownership interest in the project from 20% to approximately 27%. A second increase of $6 million was a contingency fund established for potential additional drilling program to complete the wellfield. Enbridge Inc. also provided this additional investment in exchange for increased ownership interest in the project from 27% to approximately up to 44% depending on the final calculations to be made upon the project achieving commercial operation. Only $2.0 million of the $6.0 million contingency fund was used and the balance may be returned to Enbridge thereby adjusting the final Enbridge ownership accordingly. The project now has 100% of the required production and injection capacity drilled and proven.

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Notice to proceed for design and construction of the supercritical cycle power plant was issued to both the EPC contractor (Industrial Builders Inc.) and equipment supplier (TAS Energy) on February 24, 2011. The new plant, which consists of three separate power modules, is designed to deliver approximately 22 megawatts of power net to the grid on an annual average basis. The first module is scheduled to begin commercial operations during the fourth calendar quarter of 2012 and the full plant is scheduled to achieve its commercial operation date before the end of the 4th quarter of 2012. As of September 30, construction of the total project is estimated to be 98% complete.

On May 27, 2012, the Company was notified by the EPC contractor that mechanical completion was achieved on the first of the three units. On June 28, 2012, the construction contractor provided notice of mechanical completion for the second of the three modules and on July 31, 2012 notice of mechanical completion was received for the third 7.3 net megawatt, air cooled power plant module. Units 1 and 2 have undergone commissioning operations over the past 3 months and have been synchronized to the grid on numerous occasions. Additionally, all three modules have received upgraded bearings in the turbine gearbox, swirl brakes have been installed behind each of the three module's turbine wheels, and each module's silencers have been replaced. These modifications were identified at the Company's San Emidio project to address unwanted vibration. Unit 3 was the last unit to be retrofitted and begin commissioning in early November. Continuous operation of the units has not been achieved due to control system programming issues with the air cooled condenser fans and because fine debris material left behind from construction in the system has plugged protective screens in front of the high pressure refrigerant pumps on several occasions. All production and injection pipelines are complete. Four production pumps are installed and tested, and are supplying fluid to the plant during commissioning of the units. Injection wells are operational and accepting fluid during the commissioning process.

Six large diameter injection wells (NHS-3, NHS-4, NHS-9, NHS-11, NHS-12, and NHS-13) and four slim hole injectors (NHS-10, T/G 16b, NHS-14 and T/G 3) have been completed. NHS-11 and NHS-12, both planned as deep injectors, did not find the capacity that was expected when they were drilled. NHS-14 encountered modest permeability and has not been connected to the facility. Additional reservoir testing is scheduled after all three modules are operating on a continuous basis. Colorimetric tracer will be introduced into three injection wells to map the flow of the geothermal fluid through the reservoir. Data from the test will be incorporated into the numerical reservoir model.

The Company received a Conditional Use Permit from the Malheur County Planning Commission for construction of the 22 net megawatt power plant on October 28, 2009 after unanimous approval from the Planning Commission at a September 24, 2009 meeting. All of the Federal Energy Regulatory Commission ("FERC") mandated transmission studies were completed by the Idaho Power Company. An interconnection agreement was signed with the Idaho Power Company in February 2009. Idaho Power completed the transmission line and substation during the first quarter ended June 30, 2012 and has taken power deliveries as test energy from the plant during commissioning.

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 $96.00 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. Test energy delivered prior to declaration of commercial operation is paid for at 90% of the monthly average, non-firm, Dow Jones Mid-Columbia Index. Once commercial operation is declared, the full price of $96.00 per megawatt-hour will be paid.

San Emidio, Nevada Update
The new Phase I power plant at San Emidio achieved commercial operation on May 25, 2012. The plant produced 4,340 megawatt-hours in July, zero power generation in August, and 3,940 megawatt-hours in September. During the quarter, the plant operated at 47.6% availability due to commissioning activities and averaged 7.97 net megawatts per hour.

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On July 27th, the plant was shut down by the EPC contractor to make repairs that were required to fix unwanted turbine/gearbox vibration. During the shutdown, the EPC contractor discovered a problem with the turbine silencer and developed a replacement unit that is now installed. The repairs were extended because of the time needed to resolve the silencer issue that required a total of 44 days of plant downtime. The plant restarted on September 10th. Subsequent to the end of the quarter, another outage was taken by the EPC contractor to address a number of punchlist items in October that totaled 9 days. Repairs to the turbine/gearbox have resolved the vibration issue and the plant runs at full load within the turbine manufacturers' specifications. Subsequent to the end of the quarter, the Phase I plant completed its capacity testing, and as a result of the test exceeding the design, the plant has been up rated to 9.0 net annual average megawatts per hour from the design point basis of 8.6 megawatts.

The San Emidio expansion is planned to take place in three phases. Phase I is the completed Unit I repower, and Phases II and III are planned to be expansions. Phase I utilizes the existing production and injection wells with installation of a new, more efficient 9.0 MW net power plant which achieved commercial operation on May 25, 2012. Phase II is a planned expansion within the bounds of the existing San Emidio geothermal reservoir and is subject to the successful development of additional production wells through exploration and drilling activities. Phase III is planned as a further expansion for 17.2 MW net utilizing two additional power modules similar to Phases I and II.

On November 9, 2011, the Company's wholly owned subsidiary, USG Nevada LLC, entered into a bridge loan agreement with Ares Capital Corporation. The bridge loan monetized the Section 1603 ITC cash grant associated with the new Phase I power plant at San Emidio. The loan agreement provides for borrowing of up to 90% of the total expected cash grant and consisted of an initial funding of $7.5 million which has been received by the Company. No additional borrowings are expected at this time. The funds were drawn from a loan facility that includes commercial terms for the payment of interest and associated fees. An application for an $11.7 million ITC cash grant was submitted to the United States Department of the Treasury on July 17, 2012. Subsequent to the end of the quarter, the United States Department of Treasury notified the Company that it will allow $10.65 million in cash grant and is processing the payment. An additional $1.05 million of cash grant items are under review. The cash grant proceeds will be used to repay the Ares Capital bridge loan facility, with the remaining balance payable to USG Nevada LLC.

The Phase I repower began construction in the third calendar quarter of 2010 and was delayed in the startup due to EPC contractor's delay in completing Unit I and certain technical issues related to the new plant. The Phase II expansion is delayed due to the extended time it has taken to get Phase I online, and we are not able to accurately determine when Phase II will be completed at this time. Due to the EPC contractor's delay in completing the Unit I repower plant and the impact the delay has on future Phases, the Company expects to utilize the ITC cash grant in lieu of the Production Tax Credit only in connection with the Phase I repower, unless Congress extends the incentive to allow inclusion of Phase II. The Phase II expansion is still dependent on successful development of additional production well capacity.

The capital cost of the Phase I repower is estimated at approximately $32 million, with Phase II at approximately $50 million and Phase III approximately $100 million. We expect that approximately 75% of the Phase I and Phase II development may be funded by project loans, with the remainder funded through equity financing.

Phase I achieved mechanical completion in December 2011, and following performance testing of the power plant which began in early May, and Phase I and achieved commercial operation on May 25, 2012. Commissioning was extended due to a series of mechanical issues that include defective capacitors, the mechanical failure of the 2,500 horsepower process pump, excessive vibration in the turbine gear box, and failure of the silencer. The EPC contractor is providing its services under a fixed price contract that includes financial guarantees for the original completion date and power output of the plant. Discussions with the EPC contractor are underway to determine the final settlement for the contractual delay issues and to close out the construction loan.

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On June 1, 2011, an amended and restated PPA was signed with Sierra Pacific Power Company d/b/a NV Energy for the sale of up to 19.9 megawatts of electricity on an annual average basis. The PPA has a 25 year term with a base price of $89.75 per megawatt-hour, and a 1 % annual escalation rate. The electrical output from both Phase I and Phase II will be sold under the terms of the amended and restated PPA. The PPA was approved by the Public Utility Commission of Nevada on December 27, 2011.

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, SAIC Energy, Environment & Infrastructure LLC, constructed the 9.0 net megawatt power plant at San Emidio, Nevada. TAS Energy of Houston, Texas supplied 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 a long term project loan. A long term permanent loan is currently under negotiations with a lender and is expected to close in the fourth quarter of 2012. The long term loan proceeds will be used to repay the SAIC construction 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 cost associated with each level of generation. The 15 megawatt study, which was directed at providing transmission for the Phase I and Phase II plants, 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.

An additional System Impact Study was initiated on September 8, 2011 for an additional 3.9 megawatts of transmission to increase the transmission capacity to match the maximum limit of the new PPA. The 3.9 megawatt System Impact Study was completed in April 2012. Both the 3.9 megawatt study and the 45 megawatt study have been withdrawn until future transmission needs are identified.

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 has applied innovative, seismic and satellite imagery techniques along with state-of-the-art structural modeling, to locate large aperture fractures that represent high-productivity geothermal drilling targets. Two zones along the 4.5 mile long San Emidio fault structure were identified as high quality targets for drilling during the first phase of the DOE program.

The second stage of the DOE program is a cost shared drilling plan that follows up on the targets identified in the first stage. In order to meet construction targets for Phase II plant construction, the drilling stage of the program commenced prior to DOE approval, and two observation wells were completed by the Company. The proposed drilling program was approved by the DOE in early November . . .

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